Indian road concessions growing in size and risk

BNP Paribas Securities Asia, the Asian equity research arm of the French bank, argues in a recent report that highway concessions in India are growing in size and will start being awarded in riskier parts of the country.

“We are witnessing an increase in the average project size, tightening of pre-qualification norms and unfavourable geographical concentration of highway projects,” the research note reads.

The latter means that “a significant portion of the projects that are going to be awarded now, especially in the highways sector,” will be located in areas that are vulnerable to terrorist attacks by India’s Naxals – a Maoist communist group.

Namely, BNP Paribas estimates that around 23 percent, or INR280 billion (€4.7 billion; $6 billion), of the National Highways Authority of India’s (NHAI) INR1.2 trillion Work Plan I (in procurement between 2009 and 2010) will include projects in areas vulnerable to terrorist attacks. 

An even larger share of the projects that form part of the NHAI’s Work Plan II (to be procured over 2010 and 2011), comprising 50 percent (IRN600 billion) of the programme, will be located in these areas. But while the report highlights the increased execution risks, it also points out that “on the positive side, profitability in these projects is typically higher than average”.

According to the Indian government, there are 131 districts that are at least marginally affected by terrorist activities. BNP Paribas says the states that are particularly affected are Andhra Pradesh, Chattisgarh, Jharkhand, Jammu and Kashmir, north-eastern states, parts of West Bengal, Orissa, Bihar, Karnataka, Madhya Pradesh, Maharashtra and Tamil Nadu.

Looking at projects tendered by the National Highways Authority of India (NHAI) in May and June, BNP Paribas found that the average project length has increased to 150 kilometres – compared with an average length of 100 kilometres in 2009 – with average project cost above IRN9 billion.

The report also highlights that there are at least five highway projects surpassing IRN20 billion, for which “very few Indian players are likely to qualify for”. This has to do at least partly with a tightening of pre-qualification norms, demanding greater technical and financial scores from competing consortia. 

As such, BNP Paribas concludes that there are only 10 to 15 Indian players that have the necessary requisites to qualify for projects costing INR25 billion, meaning that smaller “players would need to form consortiums with larger players to bid for large projects”.

The report found that in “recent bids […] some smaller players were very aggressive bidders”.