COVID-19 Perils and Opportunities

According to Neeraj Sanghi, CEO, Highway Concessions One Private Ltd, once we are able to go through the current tough times, we could expect a turn-around for the road infrastructure sector in the coming years.

In 2019-20, traffic growth remained low to even negative in some cases. As the concessionaires were looking for a better 2020-21, they are stuck by COVID–19 right at the beginning of 2020-21. The traffic continues to be around 60% of normal traffic even after a month of restart of operations from April 20. Also, there is some worry about the stability of this traffic because much of the present traffic could be in the nature of (a) movement of migrant workers across districts or states and (b) filling the pent up demand pipeline for various goods. Therefore, the worry is that even when lockdown is fully lifted traffic, may reach say 80%-90% and not 100% because demand would have reduced in long term and Work From Home may extend in medium term. Other major concern has been the availability of adequate tolling manpower at toll plazas. It was unclear as to whether concessionaire could recruit manpower replacing the unavailable manpower. Also, toll collector and lane attendants are at front line of dealing with the risk of Corona. While concessionaires are taking all precautions, if any of them unfortunately catch the virus, it is very likely that a whole shift or even whole toll plaza may be asked to quarantine.

Operations face serious issue with regards to cash shortfall to service debt. The current situation seems to have impacted certainly the profitability of current year but perhaps of next year as well seriously impacting valuation the road assets.

NHAI offers COVID-19 Relief Measure equivalent to Non Political Force Majeure under MCA based Concession Agreements. While industry was expecting Political Force Majeure at least for the suspension period from March 26 to April 20, 2020, provision of minimum extension of three months is a welcome relief. Industry is also trying to seek that relief for non MCA based Concession Agreements be similar to MCA based Concession Agreements.

COVID-19, while being a serious peril also provides several attractions for road construction, operating and investing communities.

Minister for Road, Transport and Highways is taking initiative to complete road works and initiate new alignments as a part of kick-starting the economy. Accordingly, significant number of EPC and HAM packages are expected to be announced in coming days. This is also aided by the fact that (a) Bitumen is available at a low price, (b) banks have considerable cash and would be willing to provide working capital facilities, (c) Steel and cement is abundantly available and at reasonable prices and (d) Construction equipment is available at low hire rates, even if, manpower availability may be a concern in some regions of the country. Accordingly, work on some of the EPC packages has started in right earnest.

Even before the current crisis, most projects had reached an ETC penetration of about 60%. Post resumption of tolling most plazas are witnessing ETC penetration of around 70% primarily because during lockdown period most traffic traversing the roads is commercial traffic. However, it is very likely that car owners will quickly buy the Fastag once the lockdown conditions are lifted. Also, several options of mobile based tolling are under development which may not require RFID interface and ease movement to free flow even further. Converting to electronic toll collection will further help maintaining social distancing.

2019 was a great year for road mergers and acquisitions and many of the closures were expected to take place in 2020. These closures while delayed will eventually happen as also many investment options in road sector will emerge during the year 2021 by way of M&A as well as by asset monetization programme such as Toll Operate Transfer (TOT). Even BOT (Toll) may re-emerge both because of the need to the government as well as private sector in 2021 or 2022.

According to Neeraj Sanghi, xxxxxx, once we are able to go through the current tough times, we could expect a turn-around for the road infrastructure sector in the coming years.