The pace of the construction sector is set to face a decline in FY20 on funding shortage for new projects.
Funding will be constrained by the limited number of banks which are in a position to offer credit outside the Prompt Corrective Action (PCA) framework. That apart, tight liquidity in the NBFC (non-banking financial companies) space will constrain further lending and budgetary support may not be able to compensate for this shortfall, a report by CARE Ratings noted.
Eleven state run banks are under the PCA framework of the RBI. This also has partly led to a slowdown in achieving financial closure of projects. Banks under PCA are mandated to cut lending to corporates and focus on reducing concentration or excess exposure to few sectors. As these banks continue to be under the mandated regulatory clampdown, lending to roads sector from public sector banks would continue to remain strained in the coming months.
Factors like delay in obtaining pre-requisite land for awarding new projects under EPC (engineering procurement and construction) and HAM (hybrid annuity model) and increased financing risks stemming from ballooning order books of a few mid-sized infrastructure developers or concessionaires leading to over leverage, continued risk aversion of public sector banks towards infrastructure projects and private banks' selective funding to infrastructure are likely to act as impediments in achieving the construction target of 45 km per day, the report adds.
Concessionaires are required to mobilize funds in the form of equity and debt in order to achieve financial closure for awarded products especially in HAM model, where the concessionaire mobilizes 60 per cent of the project cost.
The Ministry of road transport & highways plans to award 20,000 km length of national highways during 2018-19. The stipulated target is 17.27 per cent higher than the length awarded in last fiscal. During FY18, 17055 km national highways were awarded of which 8652 km were awarded by the ministry, 7397 km by National Highways Authority of India (NHAI) and 1006 km by the National Highways and Infrastructure Development Corporation (NHIDC).
Construction target for FY19 has been set at 16,418 km, which is 67 per cent higher than the construction achieved in FY18. During 2017-19, 9829 km length of National Highways was constructed. Maharashtra, Rajasthan, Karnataka, Uttar Pradesh, Madhya Pradesh, Odisha and Chhattisgarh were the key states which witnessed over 500 km of national highways being constructed in FY18.
Four out of the top 10 states are coastal states with more than two large ports being situated in each of them. Development of better highways in coastal states is expected to improve hinterland connectivity, thus improving efficiency in transporting goods to and from ports. This, in turn, is also expected to improve some productivity of some major and non-major ports, especially on the eastern corridor.