'Absence of enough maintenance reserve puts lenders at risks'

Absence of adequate major maintenance reserve (MMR) for road projects based on build, operate and transfer (BOT) model has exposed lenders to default risks, Icra today said in its latest study on the Indian road sector.
According to Icra, concerted efforts to address execution bottlenecks have yielded positive results, as reflected in the 39 per cent increase in the pace of national highway execution at 5.39 km per day during April 2015-February 2016.
"Icra's assessment of major maintenance costs across several national highway projects reveals that the median cost per lane km was Rs 1.8 million. If lenders do not enforce creation of MMR immediately on commissioning of projects and instead allow tail periods to shrink through loan top-ups at the time of the first major maintenance, they could be exposed to default risks," it said in a statement.

Major maintenance (MM) is the largest expense item during the operations phase of a BOT road project, with each cycle involving expenditure of about 12 per cent of initial construction cost, it said.
As per Icra estimates, the total estimated expenditure towards major maintenance during the project life could be as high as 60 per cent of the initial construction cost as a BOT project goes through 3-5 MM cycles depending on the length of the concession period.
The study on 15 NH road projects, commissioned between 2005 and 2009, suggests that MMR was not created in 60 per cent of the operational BOT projects whereas it was not adequate to fund the MM cost in the remaining 40 per cent.

Although the common loan agreements stipulate the creation of an MMR, lenders have not been proactive in enforcing the same, thereby allowing temporary surpluses, if any, to leak out of SPVs, it said, adding that adherence to MMR creation is higher in the case of debt raised in the form of bonds or NCDs.

Rohit Inamdar, Senior Vice-President, Icra, said, "In the absence of adequate MMR, road SPVs are either dependent on sponsors for funds infusion or have to fall back on its tail period to raise additional debt. Therefore, the credit profile of most operational BOT projects are crucially linked to sponsors' ability and willingness to fund MM cost and the sufficiency of tail period."

Inamdar, added that while high growth in commercial traffic boosts toll collections, it also increases major maintenance frequency and pushes up costs due to higher and faster wear and tear.
The Ministry of Road Transport and Highways (MoRTH) plans to increase both awards and execution in the current fiscal by 2.5 times, from those of the 2015-16 levels.
For NHAI, the targets are more steep with target execution of 8,000 km (21.92 km/day) and awards of 15,000 km. The target for 2016-17 is almost four times higher than what was achieved during 2015-16.