Crisil projects higher road toll charges, more inflation pain this year
Moneylife Digital Team 23 June 2011

Rating agency expects toll revenues to grow by 20% in 2011-12; positive impact on ratings of toll road projects in the short term

If rising food prices and loan rates are not enough to shake your budget, prepare to spend more on account of higher road toll tax.

Rating agency, Crisil has projected road toll revenues to grow by 20% in the current financial year, mainly due to growing inflation. This suggests that consumers should expect an increase in toll payments through the current year. The concession agreement in the road sector allows hiking the toll rates, linked to inflation movements, which in the past 12 months was at an average 9.5%.

"The revenues of operational toll-road projects stand to benefit from the prevailing high-inflationary environment, given that revisions in toll rates are linked to movements in inflation indices, and traffic growth is relatively inelastic," Crisil said in a statement on Thursday.

This is bound to have a major impact on consumers, who are already reeling under high interest costs and inflation, as they will have to pay more for increased road tax charges.

According to the rating agency, this high growth in revenue along with low operation costs for toll roads, will improve the cash flow and debt repayment capacity of toll roads. Subsequently, this could positively impact ratings for toll road projects in the short term. But at the same time prices of tolls would be increased. Maintenance and upgradation are the two primary expenses for toll roads, which generally range between 25%-30% of revenues.

Crisil studied the impact of the present inflationary environment on revenues of 21 toll road projects already in operation. Accordingly, the cumulative toll revenue for the previous fiscal 2010-11 for these projects stood at Rs10 billion. The projects include GVK, GMR, IL&FS Transport, Ashoka Buildcon and Nagarjuna Construction.

Pawan Agrawal, director, Crisil Ratings, said "Crisil believes that revenues for these road projects will grow by 20% in the current year 2011-12. This growth will be contributed almost equally by revisions in toll rates and an expected rise in traffic volumes based on our estimates of nearly 8% growth in the Indian economy."

Crisil also expects a 10% growth in road traffic. "The growth in traffic on India's roads so far has been largely inelastic, primarily on account of monopolistic features of roads (given the paucity of quality alternative roads), and its close linkage with economic activity. Road traffic should, therefore, continue to grow at nearly 10% in 2011-12."

The rating agency remains cautious on the outlook of toll road projects due to long- term risks, mainly a slowdown in economic activity, which can affect the traffic growth as they are interlinked. Another reason is that consumers' may resist paying more, as so far they have accepted the increased rates.

Crisil also believes that the increasing interest rate environment can put pressure on the cash flows of roads, as most infrastructure projects are usually of high leverage. "Tapping the debt capital markets can provide operational road projects with an effective avenue to refinance their variable rate bank loans, with long-tenure, fixed-rate bonds," Mr Agrawal says.

Recently, the toll charges on the Pune-Mumbai Expressway (now called Yashwantrao Chavan Expressway) were increase by 18%, from Rs140 to Rs165 (for cars). Moneylife columnist and Pune-based Right to Information (RTI) activist, Vinita Deshmukh exposed how Ideal Road Builders, awarded the contract of operation, maintenance and toll collection of the e-way (and NH-IV), has been allowed to collect tolls till the end of its contract, despite having already recovered its investment amount, with a hike in the toll charges at regular intervals of three years. (Read, "The grand Expressway robbery: How much toll is IRB allowed to collect and who monitors this?")

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