Rising cost to hit highway projects
INFLATION seems to have claimed yet another victim. This time it is the government’s ambitious roads and highways project including the northsouth-east-west corridor and golden quadrilateral. With the input cost for constructing roads and highways going up by 40%, funding agencies have pulled back from road projects fearing lower margins and losses in some cases.
Private equity player ICICI Ventures has expressed its reluctance to invest more in highways. “Project execution risk with large cost escalation in input prices will impact project sponsors and promoters as well as private equity players. Lenders usually require cost overruns to be brought in by promoters which would reduce the internal rate of return (IRR) of equity for all equity shareholders,” ICICI Venture senior director (investment) Shailesh Pathak said.
With more than 30 road and highway projects, involving investments of Rs 40,000 crore, to be opened for bidding in the next three months, the industry fears that road construction may become a monopoly of few large players, adversely affecting the medium to small players. “Small players will find it difficult to tie up funding before going in for bids on account of existing projects becoming unviable,” said National Highway Business Federation (NHBF) director general M Murali. “Bigger players have not only sound balance sheets but also are diversified in nature. Hence, it would be small primary bidders of the project that would feel the heat,” AT Kearney principal Debashish Mukherjee said.
“While large players can absorb the cost escalation better, it is the smaller developers that will be hit more,” SKIL chairman Nikhil Gandhi said.
An infrastructure fund official said it will be considered necessary for an escalation clause to be built into the contract between the government and the builder. The clause should factor in cost escalation on account of unforeseen adversities in the future. “It would be preferable to fund projects where the contractor has entered into a compensation clause with the government. This would mean our investments would be safer as anyway these projects have a long gestation,” the official said.
Funding needs to be tied up in advance before going in for a bid. In case the smaller player does not insist on an escalation clause financial institutions may shy away from helping them. While linking the WPI to real prices of steel, cement and bitumen will help in the long run; it is the short-term fate of road and highway projects that are at stake.
Private equity player ICICI Ventures has expressed its reluctance to invest more in highways. “Project execution risk with large cost escalation in input prices will impact project sponsors and promoters as well as private equity players. Lenders usually require cost overruns to be brought in by promoters which would reduce the internal rate of return (IRR) of equity for all equity shareholders,” ICICI Venture senior director (investment) Shailesh Pathak said.
With more than 30 road and highway projects, involving investments of Rs 40,000 crore, to be opened for bidding in the next three months, the industry fears that road construction may become a monopoly of few large players, adversely affecting the medium to small players. “Small players will find it difficult to tie up funding before going in for bids on account of existing projects becoming unviable,” said National Highway Business Federation (NHBF) director general M Murali. “Bigger players have not only sound balance sheets but also are diversified in nature. Hence, it would be small primary bidders of the project that would feel the heat,” AT Kearney principal Debashish Mukherjee said.
“While large players can absorb the cost escalation better, it is the smaller developers that will be hit more,” SKIL chairman Nikhil Gandhi said.
An infrastructure fund official said it will be considered necessary for an escalation clause to be built into the contract between the government and the builder. The clause should factor in cost escalation on account of unforeseen adversities in the future. “It would be preferable to fund projects where the contractor has entered into a compensation clause with the government. This would mean our investments would be safer as anyway these projects have a long gestation,” the official said.
Funding needs to be tied up in advance before going in for a bid. In case the smaller player does not insist on an escalation clause financial institutions may shy away from helping them. While linking the WPI to real prices of steel, cement and bitumen will help in the long run; it is the short-term fate of road and highway projects that are at stake.