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Low Traffic Growth and Cost Overruns Plague Road Developers

April 9, 2014 by Admin Leave a Comment

  • Mirroring a slide in the economy and industrial production, the traffic growth on national highways recorded a steep decline. This, coupled with cost overruns has severely affected the debt- servicing ability and returns of national highway projects.
  • Overall traffic growth which was estimated at 7-8% between fiscals 2008-2011 slacked to 3-4% in 2012 and to 2-3% in 2013. In fiscal 2014 too, the traffic growth has been weak due to sluggish economic activity. While passenger vehicle traffic increased by 15% commercial vehicle traffic recorded a slowdown.
  • Revenues special purpose vehicles (SPVs) operating under the build-operate-transfer (BOT) mode grew by about 12% in the past couple of years. Toll rates, which are linked to wholesale price, also increased by 8-9%, but the benefits were negated by poor traffic growth.
  • Road traffic is directly linked to industrial growth. Even if IIP recovers to 4% from the present 1%, road traffic will remain below average. Overall traffic growth on NHs will remain at 3-5% in fiscal 2015 directly affecting project returns.
  • Base traffic (in the first year of a highway’s operation) is also much lower than estimates. Besides, delays and cost overruns also pose problems. Of the 78 BOT projects completed between fiscals 2000-2013, 61 faced delays, with an average overrun at 10.5 months. 33 projects in fiscal 2012 also face delays.
  • The average debt-service coverage ratio during the first five years of operations is estimated to be less than one. Equity infusion is essential to ensure timely servicing of debt, especially since tying up for additional debt will be difficult in the current scenario.
  • Based on NHAI traffic and estimates, returns for these road projects have also decreased from 22-26% to 8-14%. Relaxation in exit norms and allowing for premium deferment in the case of stressed projects might not suffice to alleviate problems suffered by road developers.

Exams Perspective:

  1. Build-Operate-Transfer (BOT)
  2. Special Purpose Vehicles (SPVs)
  3. Equity
  4. National Highway Authority of India (NHAI)

Filed Under: Current Affairs, National Tagged With: Build-Operate-Transfer (BOT), Equity, Equity infusion, National Highway Authority of India (NHAI), Special Purpose Vehicles (SPVs)

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