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Government’s Focus On Road Sector Yields Positive Results, Outlook Stable: ICRA
It further added that, earlier the sector was marred by execution delays, project cancellations, stalled projects, loss of lender confidence, leveraged balance sheets of developers and sluggish traffic growth
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Effective policy measures by Indian government over the last 36 months have revived the Indian road sector and supporting the execution pace, according to a report released by Indian credit ratings agency ICRA.
It further added that, earlier the sector was marred by execution delays, project cancellations, stalled projects, loss of lender confidence, leveraged balance sheets of developers and sluggish traffic growth.
Shubham Jain, VP and Sector Head, Corporate Ratings, ICRA Ltd, “FY2016 saw a sharp pick up in execution pace by about 37 per cent, followed by 35 per cent growth in FY2017.”
“Policy measures such as back-ending premium payment, compensating concessionaires for delays not attributable to them, relaxing exit norms and one-time fund infusion by the NHAI are expected to address liquidity-related concerns faced by the developers. Further, to make encumbrance-free land available more speedily, the NHAI has delegated power to regional officers to demolish structures on the right of way and to shift utilities as and when needed.”
Asset sales in the road sector have picked up over the last 30 months with the relaxation in exit policy. Sponsors in around 20 road assets involving a total cost of Rs 123.27 billion have monetised their assets as opposed to around Rs 70 billion in the preceding 50 months.
Till FY2014, projects were awarded either on BOT (Toll) or BOT (Annuity); or on the basis of engineering, procurement and construction (EPC) in that order, depending on the traffic density along the project stretch. These led to slow down in project awarding as private sector participation was low. As a result projects were shifted to the EPC mode thereby restarting the award process which being time led to low awards in FY2013 and FY2014.
Subsequently a committee, headed by the Secretary of the Ministry of Road Transport and Highways (MoRTH) took over to decide on the mode (BOT/EPC) of awarding projects. Since then upfront land acquisition, clearances from the Ministry of Environment and Forests (MoEF) and more number of EPC contracts have spiked the interest of developers and contractors in road projects.
A new model was introduced - Hybrid Annuity Model (HAM) in FY2016, which is a mix of EPC and BOT (Annuity) models, wherein the government and the private enterprise share the total project cost in the 40:60 ratio.
Around 53 per cent of the awards in FY2017 by NHAI were through the HAM route, compared to 8 per cent in FY2016; and this is likely to increase further in FY2018, said ICRA.
“The government’s focus on addressing execution bottlenecks and improving developer’s liquidity position have yields positive results. However, ICRA, outlook on the sector continues to be stable, firstly because developers find it difficult to achieve financial closure with lenders exercising more caution while taking on additional exposure and secondly because of the leveraged balance sheets of developers,” says Jain.