<div>India's road sector may be on the path to revival with lots of initiatives being announced to aid the languishing sector, says India Ratings and Research (Ind-Ra). Rescheduling of premiums and the 5:25 refinancing schemes have provided some respite to SPVs with a hope of restoring their financial health. The introduction of the hybrid annuity model and infrastructure debt funds further highlights the government’s focus on addressing the rising need for devising an efficient and flexible financing path.</div><div><p>The budgetary allocation to the road sector for FY16 has also been increased by a staggering 125%; however, channelising these funds in the right direction at the right time coupled with the timely implementation of reforms will be key to the revival of the sector.</p><p>India Ratings and Research (Ind-Ra) believes that policy initiatives in the recent past will act as stepping stones to the revival of the highway sector. Rescheduling of premiums and the 5:25 refinancing schemes have provided some respite to SPVs with a forlorn hope of restoring their financial health. The introduction of the hybrid annuity model and infrastructure debt funds further highlights the government’s focus on addressing the rising need for devising an efficient and flexible financing path.</p><p>The budgetary allocation to the road sector for FY16 has also been increased by a staggering 125%; however, channelising these funds in the right direction at the right time coupled with the timely implementation of reforms will be key to the revival of the sector.</p><p><strong>Improved SPV-level performance:</strong> Ind-Ra's analysis shows that road projects executed on public private partnership (PPP) model generate an average EBITDA margin of 75-80 per cent, but have a high leverage (9x in some cases) due to the compressed amortisation schedule. Cumulatively in FY15, all SPVs of certain sponsors witnessed a 25 per cent yoy spike in toll revenue. While the last two years witnessed declining traffic mainly due to the slow economic recovery, toll hikes driven by high inflation have been a saving grace for most toll road projects. In IndRa's portfolio, annual toll rate growth of 6-8 per cent offset the 2-3 per cent fall in traffic, netting annual revenue growth between 4-5 per cent.</p></div><div> </div><div><strong>Novel Structures to Aid Financing: </strong>Recognising the need for increased and improved financing, the hybrid model was introduced by the government as a hybrid between the engineering, procurement and construction (EPC) and the build, operate and transfer (BOT) models. Acknowledging the need for incremental sources of financing, Infrastructure debt funds (IDFs) were set up to refinance existing bank loans and take over the existing debt. While the former is likely to ease funding risk, the latter mobilises long-term funds with insurance and pension funds to create a secondary debt market for infrastructure assets.</div><div> </div><div><strong>Budgetary Thrust</strong> - A Positive: Recognising the major slippages in the infra space during the last decade, the budgetary allocation for FY16 was increased by a whopping 48% to Rs 429 billion in the Union Budget. Channelising this in the right manner and on a timely basis would be crucial for the sector to witness an uptick in the pick-up of orders.</div><div> </div><div><strong>Rs 2.2 trillion Capital Needed</strong>: An outlay of around Rs 2.21 trillion (at current costs) would be required for the completion of pending projects planned under the National Highway Development Project (NHDP). For a debt/equity blend of 70/30, the estimated investmentwould necessitate a bank borrowing of around Rs 1.55 trillion and an equity commitment of Rs 0.66 trillion. This could however change depending on which model (EPC or PPP) is adopted to award contracts. In essence, the focus on mobilising such quantum of funds in a timely manner will be crucial.</div><div> </div><div><strong>Need for Improved Execution: </strong>It could take a decade to complete the balance road projects targeted under NHDP if road projects are executed at the historical average rate, says Ind-Ra.</div><div> </div><div>The pace of project execution by NHAI was sluggish at 5.6km/day on an average during the past five years. Daily road construction dropped to 4.1km in FY15 from an all-time high of 7.4km in FY13 (FY14: 5.21km).</div><div> </div>
