Toll collections, traffic growth in the context of Indian GDP

Toll collections on India’s roads has dipped considerably in Q2, 2013 due to which the revenue generated by developers has taken a beating. The primary reasons for this situation are due to policy restrictions imposed by the government as well as due to the slowdown in the Gross Domestic Product (GDP) of the country.

NHAI fails to come up with new projects:

The National Highway Authority of India (NHAI) has also failed to come up with any new projects for bidding in the last nine months. As a result, road developers feel that they have reached a dead end with regards to going ahead with any road construction activity. It is felt that the unfavourable business environment for road construction activity is here to stay for a while. Consequentially, it looks like a tough and long road ahead for road developers.

Co-relation between toll collections and GDP growth:

Considering the co-relation between toll collections and the GDP growth rate, a slow down in GDP is expected to have an adverse affect on toll revenues. The present co-relation to GDP growth is 0.8. When the GDP growth is 5%, the toll traffic growth is expected to be in the range between 4-6%. This will also depend on other factors like the area in which the project is.

Revenue expected depends on traffic growth assumptions:

The expectation of revenues that would accrue through toll collections from a road project will depend on the estimation made during the bidding stage. If the traffic growth assumptions has been calculated at 8-10% during bidding, then there is a possibility of there being a deficit of 30-40% compared to the estimated revenue figures. However, a reasonable traffic growth assumption of about 5-6% is likely to rake in the expected revenues.

IRB’s tariff policy linked to inflation:

One of India’s largest road construction companies, IRB Infrastructure Developers Ltd has many road projects like the Bharuch-Surat project and the Surat-Dahisar project. These projects have a tariff policy which is linked to inflation. As a result, the lower traffic growth can be compensated with the higher tariff that is imposed by the company. Two major projects, namely the Mumbai-Pune project and the Surat-Dahisar project contribute about 60-70% of the company’s revenues, with a 5% increase in traffic witnessed.  However, the smaller projects of the company, mostly state projects in the interiors, have witnessed a negative growth in traffic.

Traffic growth not related to growth in economy:

High growth rates does not necessarily result in a simultaneous traffic growth as well as increase in toll collections. Similarly, the slowdown in the economy is also likely to remain for a while. It is expected that there will be a revival in growth in the next one to two years, considering that growth has hit rock bottom. However, the recovery of the economy will depend on various factors like the efforts from the government, investment cycle revival, the actual movement of goods as well as the revival of mining activity

Realistic goals more likely to be met:

This difficult phase with regards to commencement of new road projects is not expected to be overcome in a hurry. The NHAI has a crucial role to play in this context with regards to coming up with new projects. With regards to existing projects, a realistic target for the next couple of years would be to think in terms of a 5% growth in toll collections and a 6-7% tariff growth. Besides, a 10-11% revenue growth would be more attainable compared to the 12-14% growth that was projected earlier.