Bharatmala will raise debt issues for some

Indian roads are usually characterized by poor infrastructure and congestion which affect travel time and road safety. This is a big hindrance in economic development and leads to inefficiency in the transportation of goods and services across the country.

To address this, the government has embarked upon a massive overhaul of the country’s road network through Bharatmala Pariyojana—an umbrella highway development programme involving 34,800 km of road network at an investment of Rs5.35 trillion, to be completed by 2022. The programme focuses on optimizing the efficiency of road traffic movement across the country by bridging critical infrastructure gaps through shorter routes. The end goal is to create economic corridors (ECs) along the path—new industries, more employment and new markets—thereby bringing socio-economic change and upliftment of the underdeveloped regions of the country.

The programme, however, will have a negative bearing on the existing road network because it will compete directly with some of the existing build-operate-transfer (BOT) toll road projects. Out of the 44 ECs, about 21 would partially or fully affect the existing alignments, while the remaining 23 that involve upgradation of existing alignment will not result in any deviation. Among the 21 corridors affected, eight have a totally different route (which is shorter) while the remaining 13 have some deviations from the existing alignment. Overall, there are 24 BOT projects and one operate-maintain-transfer (OMT) project whose traffic could be affected by the proposed ECs.

What worries bot operators

The Bharatmala programme may result in traffic diversion from the existing road network to new roads, thereby affecting the toll collection and, consequently, the debt servicing ability of some of the BOT and OMT projects. This has raised the risk of default on 25 national highway toll projects which involve Rs19,435 crore of debt. The risk of such loan defaults will add to banks’ and financial lenders’ stressed assets and non-performing assets.

In terms of risk, 12% of the projects have a high risk of leakage in traffic, if a completely alternative route is available, 16% of the projects have moderate risks, and 72%, low risks. To arrive at the debt at risk, the debt outstanding for each of these special purpose vehicles (SPVs), their repayment tenure, concession end date, credit profile of the SPV and its sponsor credit risk profile, are considered.

Out of the total debt at risk for the 25 affected projects—Rs19,435 crore—about Rs6,536 crore, which accounts for about 34% of the total debt at risk, is high-risk. Projects with debt at a moderate risk have an aggregate debt of Rs3,483 crore, while about Rs9,416 crore of debt is considered to be low-risk.

Remedial measures available to bot operators

The stretches under ECs of the Bharatmala Pariyojana are either longer by more than 20%, or traverse a new route completely. Therefore, they do not fit into the description of the additional toll ways, as defined in Article 30 of the concession agreement. Thus, there would be no compensation payable for traffic loss on account of the Bharatmala programme.

In such cases, the concessionaire may opt for termination of the concession agreement, in which case the termination payment is payable by the Authority (under Authority Event of Default). The termination payment is equivalent to 90% of the debt due (here, debt due is calculated as if the capital cost was restricted to total project cost as per the National Highways Authority of India, or NHAI). At present, in around 40% of the BOT projects, the debt sanctioned is higher than the total project cost as per NHAI, resulting in a shortfall in termination payments when compared to the actual debt due.

To ensure that the existing BOT projects that are at risk of default do not turn bad for the financial institutions, swift and adequate measures are needed. The Kelkar committee had observed that since infrastructure projects span over 20-30 years, a private developer may lose bargaining power owing to abrupt changes in the economic or policy environment. It has thus recommended that the private sector must be protected against such loss. This could be ensured by allowing renegotiation of the terms of the concession agreement.

Financial institutions are already reluctant to finance the infrastructure sector, given the rise in non-performing assets (NPAs). Add to this the probable difficulties that would arise in the case of 25 BOT projects, which would put additional stress on the road infrastructure exposure. The need of the hour is to realign the terms and conditions of the model concession agreement to ensure that banks do not end up accumulating NPAs. Alternatively, the NHAI can compensate the affected BOT operators and account for it in the total outlay of the Bharatmala programme. Having an appropriate remedial mechanism for BOT operators will help retain interest for investments in new projects; for the lenders, it will help curtail the number of stressed assets from the risk of default.

Shubham Jain is the vice-president, sector head-corporate ratings, ICRA Ltd.

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