Impact of Covid-19 on Roads 1 Roads Initiatives in Light of COVID-19 Key Policy Developments Government may offer relief to highway developers • Reportedly, the Ministry of Road Transport and Highways (MoRTH) has begun consultations on offering major relaxations to highway developers suffering from stressed finances, while also seeking to attract more private investment by settling claims that have been long overdue. • NHAI has been asked to expedite termination payment for cancelled contracts so that banks, largely public sector players, are able to recover their dues which are on the verge of turning into bad debt. • The government is also considering to increase the interest on outstanding annuity payments to highway developers, as the bank rates have decreased from 6.75 per cent per annum in February 2016, when the hybrid annuity model (HAM) was launched. India to ban Chinese companies from highway projects • Amid the ongoing India-China tensions, MoRTH has announced that India will not allow Chinese companies to participate in highway projects, including those through joint ventures. • According to the ministry, a policy will be out soon banning Chinese firms and relaxing norms for Indian companies to expand their eligibility criteria for participation in highway projects. • Qualification norms for projects are being rationalised by the ministry to ensure Indian companies do not require entering into pacts with foreign partners to grab projects. • With respect to existing tenders and future bids, MoRTH has asserted that rebidding will be done in case of any Chinese joint ventures. Government plans to revamp NHAI • To make highway projects more financially viable, the Ministry of Road Transport and Highways (MoRTH) is planning to revamp the National Highways Authority of India (NHAI). The ministry has reportedly asserted that the need of the hour is to devise bankable projects suitable for the market with acute precision and accuracy. 2 Roads Initiatives in Light of COVID-19 Key Policy Developments MoRTH to bid out more projects on EPC mode • Reportedly, MoRTH has planned to bid out more projects on engineering, procurement and construction (EPC) mode. The ministry claims that the number of companies which could arrange finance and take projects is much lower compared to EPC firms. • According to the ministry, the current market conditions may not support build-operate-transfer (BOT) projects but the investor interest level must be gauged. • Besides, delay in financial closures on projects implemented on hybrid annuity model (HAM) has also encouraged MoRTH to focus on impending projects on EPC mode and later monetise them. NHAI to rank roads for quality service • In an effort to improve the quality of roads, NHAI has decided to undertake performance assessment and ranking of the highways in the country. The assessment audit and ranking of the national highways is aimed to take corrective recourse, wherever needed, to improve the quality and provide higher level of service to highway commuters. • The assessment parameters are based on different international practices and studies for benchmarking highway performances in Indian context. The criteria for the assessment have been broadly categorised in three main heads namely, highway efficiency, highway Safety and user services. • Apart from overall ranking of all the corridors, separate ranking for BOT, HAM and EPC projects will also be done. NHAI becomes first construction sector organisation to go 'fully digital’ • NHAI has gone ‘fully digital’, with the launch of cloud-based and artificial intelligence-powered Big Data Analytics platform – Data Lake and Project Management Software in view of the deadly Covid-19 pandemic. • With advance analytics, the Data Lake software will forecast the delays, likely disputes, and will give advance alerts. 3 Roads Initiatives in Light of COVID-19 Key Policy Developments New norm approved by MOEFCC waives major clause for highway projects • The central government has directed state governments to make MoRTH the ‘user agency’, in place of executing state agencies, to be able to get exemption from a clause that makes it mandatory to make available equal measure of non-forest land in exchange for forest land diverted for national highway projects. • With this, MoRTH will now be eligible for the exemption granted under Forest Conservation Act (FCA) to central user agencies. These agencies have to comply with the other stipulation of doing compensatory afforestation on double the degraded forest land. Other Key Developments • Following the notification of its COVID-19 related force majeure measure, NHAI is facing negotiations over several issues raised by road developers. Encashment of bank guarantees, non-payment of maintenance costs and lower estimation of revenue and expenditures are some of them. • Reportedly, most of the 162 BOT (toll) concessionaires, including private equity players, have decided to take the arbitration route to recover about Rs 6.5 billion as interest and operation and maintenance (O&M) costs from NHAI for the 25-day toll collection suspension period. • The concessionaires are allegedly upset with NHAI for not declaring the toll suspension period during the COVID-19 pandemic as a force majeure political event, and thus rescuing itself from compensating the loss to concessionaires on the O&M and interest costs. • Amid the Covid-19 outbreak, fundraising plans for NHAI may be reworked by the central government. The government has already formed a panel to rework financing for NHAI and may invite some unconventional ideas to optimise future investments by the authority. 4 Roads Initiatives in Light of COVID-19 Other Key Developments • The Delhi High court (HC) has issued a notice to Centre, RBI and NHAI on a plea seeking a onetime restructuring of loans by all banks and Nonbanking Finance Companies (NBFCs) to the petitioners in wake of the lockdown in the country and keeping in view the spread of Covid-19. • The plea seeks direction to allow a one-time restructuring of loans as a relief measure to the industries/ companies/ retail customers so they are not classified under non-performing assets (NPA) after the lockdown is lifted. • The plea also seeks direction to the respondents of extending the period of moratorium on payment of all term loans, and working capital facilities till the final disposal of the petition. • The slow transmission of the RBI’s prescribed bank rate cuts in project lending rates will impact debt service coverage ratios in operational HAM based projects, according to a note by ratings agency India Ratings and Research. • Sluggish transmission in project’s interest rate was not originally envisaged by developers during the bidding stage and therefore may also impact their equity returns. • While NHAI bound concessions receive grants on a timely basis, a concession grantor with a weak credit profile, late annuity payments combined with delayed transmission could pose a risk to HAM projects. • NHAI plans to release monthly grants proportionate to the completion of project construction, and the agency believes this will have a salutary effect on the working capital requirements of developers. • Expediting settlement of claims through conciliation, NHAI has settled claims worth Rs 133.49 billion for Rs 37.43 billion, since 2017-18. • In its endeavour for faster settlement of claims and reducing liabilities thereby, NHAI has rigorously started the process of conciliation by constituting three Conciliation Committees of Independent Experts (CCIE) of three members each. Till date, about 108 cases have been referred to CCIE. • An acute labour shortage has hit highway construction in April-May 2020. Reportedly, only about 847 km of highways have been constructed in the country during the first two months of this fiscal, compared with 1,692 km in the year-ago period. • Even assuming a pick-up in the coming quarters, execution of projects in FY21 is estimated to be lower by around 22 per cent against the target of 10,250 km, according to ICRA. • Cumulative awards, however, rose to 747 km in the first two months of the current fiscal from 241 km in the year-ago period. 5 Roads Initiatives in Light of COVID-19 Other Key Developments • According to ICRA, the Bharatmala Pariyojana scheme may get delayed by about four years in the aftermath of the COVID-19 pandemic. The scheme, that was scheduled for completion in 2021-22, is now likely to get completed by 2025-26. • As of February 2020, a total of 246 road projects with an aggregate length of about 10,100 km were awarded under Phase I of the programme at a total cost of Rs 2.38 trillion. According to ICRA, the average cost of the award stood at Rs 238 million per km, 54 per cent higher than initial estimated cost of Rs 155.2 million per km. • The land acquisition cost for the National Highways Authority of India (NHAI) increased at a compounded annual growth rate (CAGR) of 27 per cent from FY2007 to FY2019 from Rs 2.1 million per hectare to around Rs 40 million per hectare. • According to CRISIL, the revenue earned by EPC companies in the roads sector is expected to contract by 8-10% in 2020-21, with the COVID-19 pandemic-driven lockdowns severely curtailing activity. • Besides, the pickup in execution and mobilisation after the lifting of the lockdown will be gradual. • According to ICRA, the extension in concession period by NHAI with the idea of compensating companies for loss in toll collection during the first phase of the nationwide lockdown fails to be adequate, as it does not compensate for loss in net present value terms for majority of BOT (toll) projects. • The recent relief package announced by NHAI for BOT (toll) concessionaires has two parts- the revenue loss during and after toll suspension period will be compensated in the form of extension by three to six months in concession period and, COVID-19 loan is provided for concessionaires to the extent relief is not granted under moratorium under RBI guidelines.