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The Impact of COVID-19 on the monetisation of India’s Transportation Assets

6 MIN READJune 02, 2020
The primary points discussed were the lifecycle road assets, primarily the non-availability of production factors. As well as the lack of working capital in the primary market, financing issues for the INR 13 Lakh crore (US$1.7 trillion) requirement in the National Infrastructure Pipeline, reduction in traffic volumes which have decreased attractiveness of toll projects, the impact and types of compensation provided by government in the post-COVID scenario and issues in asset recycling in the secondary market.

Limited Labor Available

Currently, due to the labor migration, there has been a steady decrease in the availability of laborers. Migrants who were staying in the project camps for the last two months have started going back to their homes in the last fortnight. This has not been on account of unavailability of food or social security, but rather a mix of emotional longing for their hometowns, and fear of staying in large cities which have more coronavirus cases. With the monsoon due to start in the next three weeks, labor unavailability will reduce work speeds and will resume post monsoon (2.5 to 3 months later).

A requirement of caution is that the movement of traffic has been one directional to UP, Bihar and Jharkhand. Till the time resumption of traffic in both directions starts, it would be difficult to allay the solution of paucity of labor. However, states restricting the movement of labor and demanding work permissions may not be possible as it restricts the labor constitutional rights, which is the right to work anywhere in India.

Traffic on the Roads

Traffic is increasing and has reached 70 percent of pre-COVID levels. Those which have predominant commercial traffic are seeing up to 95 percent pre-COVID rates, whereas for others, mostly private vehicles , they reach around 60 percent of pre-COVID traffic. Patterns for resumption of traffic have been observed in urban and rural roads as well.

Projects which run interstate are facing issues due to some states putting restrictions on travel. In the medium term, it may be seen that the road sector is resilient and is expected to bounce back stronger than before.

The Future of Secondary Markets and Transaction

The existing Public Private Partnership (PPP) space will continue to grow in the future. Although in the short term, it is difficult to say whether there will be a convergence of buyer and seller, in the medium term the growth for the secondary market is likely to be good.

There is currently an expectation mismatch between buyer and seller. The timelines for approvals (currently six months) are too long. These need to be rationalized depending on the market. Further, a sudden drop in bank rates has adversely affected the interest payment in Hybrid Annuity Model (HAM) projects. Interest rates have not seen a direct transmission of reduction in bank rate and hence valuations have abruptly dropped in the last year. Post resumption of business, toll projects would see a better position for transactions.

After the tax structure has been clarified by InvIT structure, it has become easier for investors to choose investments in InvIT. However, InvIT are not cash retention vehicles and they distribute 90 percent of their cash flows to investors. Therefore, their reserves and surpluses do not support putting a dry fund for a rainy day.

The Success of Toll Operate Transfer (TOT) Model

The toll regime in India is pretty standardized and user behavior for payment has been regular in such projects. As a result, the TOT mechanism will definitely be successful in India as compared to the US, where there was a user behavior shift due to privatization of toll roads.

The road sector in India has been a success story. Availability of good quality data on past toll collected from a particular road project plays an important role in the success for TOT bid. Hence TOT-1 was more successful than TOT-2 and TOT-3, as good quality information about the toll for TOT-1 was able to garner interest from private participants. Going forward, transparency in information availability is required for garnering the trust of the market for the contract.

India’s National Highway Authority (NHAI’s) Role in Stalled Projects

There was a discussion on whether NHAI should identify market participants for stalled projects that are under construction. Most members agreed that NHAI should continue constructing projects and should leave the idea of marriage of companies to market forces only. NHAI's leveraged balance sheet poses some concern for market participants; however since NHAI is a central governmental entity it has a strong backing. Hence the leveraged balance sheets of NHAI may not pose any major issue.
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