Construction of dedicated rail freight corridor is making investors bid lower for road projects. More and more stretches of railways have started moving trucks on trains.
Crisil Research estimates that the first 75 operational highway projects tendered under the toll-operate-toll (TOT) model may fetch around Rs 40,000 crore, much lower than the government's initial estimation.
This is because investors would factor in the freight-heavy nature of national highway traffic in India, the associated volatility, and the reduction in road freight growth expected after the implementation of the dedicated freight corridor (DFC) by the Indian Railways.
The calculation assumes annual toll revenue growth of 7-8 per cent and return on equity of 14-16 per cent. Theoretically, Rs 40,000 crore can fund the construction of 2,800-km of four-lane national highways, which would be equal to the execution expected in fiscal 2017, it added.
Further, implementation of the Goods and Services Tax (GST) regime, while not necessarily negative for road traffic, may alter the type of vehicles that would be used on certain routes.
Says Prasad Koparkar, Senior Director, Crisil Research: “Variation and volatility in traffic can reduce returns. Investors would take a hard look at this, including the impact of DFC and GST, when placing bids. They would also be wary of latent defects in roads that are not detected during technical examination. Another grey area pertains to competing roads; if an alternate route is built and is longer than the original stretch by 20 per cent then it is not treated as a competing route.”
Crisil Research estimates that between fiscal 2018 and 2020, construction of highways would require investments of Rs 2.2 lakh crore, or more than twice the Rs one lakh crore set to be spent between fiscal 2015 and 2017, with higher execution of publicly funded projects, it said.
Says Ajay Srinivasan, Director, Crisil Research, “Bidding through special purpose vehicles set up by infrastructure investment trusts (InvITs) or transferring ToT projects to InvITs after two years would also aid better management of risks.”
Today, almost 6,500 km of highways are being maintained by the NHAI using public funds and this number is expected to more than double over the next 5 years.
Previous maintenance models such as the operate-maintain-transfer (OMT) did not succeed because there was fixed annual increase in payments to the authority irrespective of traffic. Contract tenures were also shorter, leading to poor maintenance. As a result, only 2,500 km of highways have been awarded on OMT so far with just 6-7 firms participating in such projects.