Brokerages skeptical of NHAI's stiff target; caution against labour crisis and other challenges

A recent report from Antique Broking indicates that limited participation from private players is expected in FY21 as the cost of debt to fund HAM projects remains higher than the project IRR (internal rate of return). The report also raises concerns over the negative carry causing a cascading impact on the invested value across the industry.

Under the HAM model, the government funds 40 percent of the project cost whereas the concessionaire funds the remaining 60 percent. The authority pays interest on this 60 percent on a six-monthly basis. The interest is calculated as bank rate (policy rate) + 300 bps. As the policy rates have come down much sharply compared to the borrowing cost of the concessionaires, this has put an additional burden on the concessionaires. To boost private participation and revive the BOT model, NHAI has sought stakeholders' comments on the amendments made in the concession agreement.

The concessionaries have also been demanding faster land acquisitions and quicker arbitration proceedings. To reduce the build-up of arbitration cases, the NHAI has asked its project managers to cancel portions of the proposed contracts in case of hurdles in the land acquisition process.  Land acquisition for road projects has come to a grinding halt over the last couple of months owing to COVID-19 lockdown. It’s important to note that almost 30 percent of NHAI’s expenditure goes towards land acquisition and the same has contributed to burgeoning NHAI’s debt.

The total debt of the NHAI went up by nearly 9.5 times to Rs 2.28 lakh crore in February this year, from Rs 24,188 crore as on March 31, 2015. What makes matters worse is the weak financial situation of the state governments which bear a part of the acquisition cost. State-led CAPEX accounts for around half of the total government-driven CAPEX in the country. Over the last three years, it grew by 16 percent to Rs 5.11 lakh crore in FY2020 (RE) from Rs3.73 lakh crore in FY2018, says ICRA.

According to the agency, budget cuts by some states will curtail the allocations to infrastructure spend and thereby slow down the execution as well as new project awarding activity and elongate the receivable cycle for construction contractors.

While NHAI plans to borrow Rs 55,000 – 65,000 crore in FY21, the agency’s monetisation plans have taken a back seat given lack of interest from institutional investors.  The TOT timeline has been extended to July 2020 and the INVIT plans have also been deferred given uncertainty over traffic growth.

While the government has announced measures like an extension of contracts, moratorium, the definition of force majeure, etc., there remain many execution challenges for the infrastructure sector. A government notified policy to clear the ambiguity is expected to be rolled out over the next couple of months.