A significant slowdown in traffic growth over the past couple of years along with cost overruns owing to delays in land acquisition and grant of various clearances have impacted the financial viability of highway projects, according to an analysis by CRISIL Research.

The analysis, covering 15 national highway stretches, found that traffic growth in passenger car unit terms slowed to about 3 – 4 percent in fiscal 2012 and 2 – 3 percent in 2013, compared with 7 – 8 percent in between fiscals 2007 and 2011.

“This is primarily because commercial vehicles traffic, which account for over three-fourths of total traffic, hard-braked, growing at just 2 – 3 percent in fiscal 2012 and by one percent in 2013. On the other hand, passenger vehicle traffic grew a healthy 15 percent in the two years. Our estimate is that overall traffic growth has remained weak in the current fiscal (2014) and will continue to languish around 3 – 5 percent over the next 12 months. Typically, a 100 bps drop in traffic growth over the concession period can result in a 75 – 100 bps decline in project returns,” said Prasad Koparkar, Senior Director – Industry and Customised Research, CRISIL Research.

The analysis revealed that the slowdown in traffic growth was not the only problem facing developers. The inaccurate estimates of the NHAI with regard to base traffic (in the first year of operations) also adversely impact project returns. In the case of 6 national highway stretches studied by the research house, base traffic had been lower by a significant 20 to 40 percent compared with NHAI estimates.

A source associated with the road sector told Projectmonitor that the NHAI routinely and deliberately increased traffic estimates to reduce the concession period.

“The developers and lenders generally don’t agree with estimates of the NHAI on total project cost and traffic. They work out their own estimates. However, in the present scenario even the estimates worked out by developers and lenders have proved to be inaccurate due to the economic downturn,” he said.

As per the analysis, the 6 projects were facing significant delays due to land acquisition and clearance hurdles and seeing an average cost overrun of about 23 percent.

“Clearly the calculations of many road developers have gone awry. Our analysis shows 5 out of 6 projects have an average debt service coverage ratio of less than one in the first 5 years of operations. This means, if there is no additional capital infusion, developers will find it difficult to service loans. Also, project returns today are in the 8 – 14 percent range – less than half the 22 -26 percent arrived at based on NHAI’s traffic and cost estimates,” said Rahul Prithiani, Director – Industry Research, CRISIL Research.

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