Shifting Gears: Indian Road Sector on Make-over Drive

BELGAUM MAHARASHTRA ROAD

Stung by the lackluster performance of the Indian road sector in the last fiscal, which led to the dwindling down of GDP growth to the lowest in a decade, the Central government has initiated multi-prong measures to fast-track the project delivery mechanism. In fact, policy makers have realized that road connectivity is not just the lifeline of the economy but also helps country to achieve higher GDP growth as was the case in the past one decade when India recorded an average growth rate of 8 percent during which country's GDP growth rode high on the back of the Indian road sector. In view of this, in its quest to achieve quicker results, the government streamlined the coordination of various agencies, implemented curb on number of clearances, initiated easier project awarding norms including premium rescheduling and lax exit norms. In its entirety, it is only due to the heightened pace of project clearance and fast tracked delivery mechanism that in the past couple of months projects worth about Rs.81,257cr have either been cleared or contracted indicating that the Indian road sector has started showing signs of upward momentum and is gradually trudging back to its pristine glory. Jeet Singh looks at the inside scenario in the Indian road sector.

Stats and Facets

Matching its commitment to award 3,800km of road and highways projects in the first six months of the current fiscal, has recently prepared detailed project reports (DPR) for the eastern peripheral and Vadodara-Mumbai expressways involving an investment of Rs.30,000cr and the entire bidding process would be completed before October this year. In addition, road projects worth Rs.4,500cr have already been cleared for Bihar Rs.2,687cr, for Madhya Pradesh Rs.1933cr, Assam Rs.2,200cr Delhi; Rs.430cr, Uttarakhand Rs.822cr, and for Moist hit areas of West Bengal Rs.822. That apart, it has also cleared Rs.3,500cr more for Bihar including the four-lane 95-km stretch on NH-82 connecting Gaya, Rajgir, Nalanda and Biharsharif at a cost Rs.1,500cr apart from clearing the upgrade of a 127-km length of NH-83 costing about Rs.2,000cr and both these projects are moving to the tendering stage at an hastened pace. The transport ministry has also cleared a new six lanes 266km long expressway connecting Delhi with Ludhiana at an investment of Rs.20,000cr. NHAI has recently cleared a combined four-laning of the Parwanoo-Shimla section of the NH-22 into a single project, instead of two planned earlier, entailing an investment of Rs.1,786cr. Adding to the momentum, the transport ministry has cleared the widening of the 79km stretch passing through the toughest terrain at a cost of Rs.11,000cr. This stretch of the road falls on the on-going 286km long four lanes Udhampur-Banihal highway project being built by NHAI. While in Punjab, the state government has also initiated the process of building 175km long Amritsar-Bhatinda highway project involving an investment of Rs.1,900cr.

Jaipur Road

The high powered group has directed the transport ministry to award the eastern peripheral expressway project by 31st December this year and the Mumbai-Vadodara expressway by 1st March next year. The eastern expressway, which would connect NH-2 (Palwal Haryana) with NH-24 (Ghaziabad, Uttar Pradesh) and NH-1 (Kundli, Haryana), has been aimed at decongesting the vehicular traffic flowing into the national capital. Starting construction work on these projects is very crucial for the highways ministry to meet the 7,300 km road length targeted for the fiscal. Out of the award of 3,800 km in the first half of this fiscal, 1,654 km will be awarded by the ministry and 2,147 km by NHAI. In the process, 1,200-km will be awarded on the basis of Engineering Procurement and Construction EPC module and 1,400 km via Build-Operate-Transfer (BOT) model. In an attempt to revive the interest of builders in road projects, the transport ministry is currently on an overdrive and has decided to award maximum number of road projects through the Engineering Procurement and Construction (EPC) module.

Silver Lining

In its attempt to make up for the loss, the government has launched a massive make over drive by initiating multi-pronged steps like setting up separate cell overseeing speedy clearance, delivery and implementation of road projects, initiated a curb on the number of project clearing agencies, easier project award process, lax exit contractual norms, coercing states to ink SSA or face consequences and awarding the projects to the next eligible bidder in cases the winning bidders back out from the projects. In addition, it has also implemented an out of court settlement for resolving disputes and engaging multilateral funding agencies for fast tracking finance, speed up land acquisition process and the initiatives have already started paying rich dividends. Moreover, road projects with a length of 100km have been exempted from environment ministry's clearance as against 30 km earlier. Similarly, Cabinet has also pushed the limit of exempting environmental clearance for highway projects which need additional 40 meters for further widening as against 20 meters earlier. With the exemption over 70% of projects being awarded this fiscal under EPC model won't need green approval and that of the 9,500 km roads and highways projects targeted for this year about 80% would be bid out on EPC mode and even large number of BOT projects would also fall in this category.

UP UTTRAKHAND

Apart from this, the government has recently taken a decision on premium rescheduling, which will neither adversely impact the net revenue for the nodal agency over contract period of project, nor will result in any "material enhancement" of returns to developers. The proposal is simply an attempt to help the developer manage cash payment better in early years of the contract period to prevent road projects from falling into a liquidity trap. Initiating a similar measure, the central government is contemplating to award road and highway projects on the annuity basis as it apart from helping the beleaguered road builders will also enable the government to limit its fiscal deficit. The main advantage with annuity-based public-private-partnership model is that the question of making payments would come up only after a particular project is completed as the payment can be spread over a period of 20 years or more.

According to official sources, the proposed method will also be extended for any kind of infrastructure projects in railway, ports and even in highways. The advantage with annuity is that the burden of annuity payments would arise on completion of projects and would spread over in years. In addition, the Department of Financial Services has tweaked funding norms whereby banks can start lending to public-private partnership (PPP) road projects if at least 80% of the land is made available by the national highways authority. Under the prior practice, lenders had been insisting that the developers take complete control of the land before getting funds. Ensuring sufficient funds for the sector the Parliamentary Panel has asked the Road Transport Ministry to enhance the gross budgetary support to Rs.2,64,080cr in mid-term review of 12th Plan period (2012-2017) as against Rs.1,44,769cr GBS provided for the period earlier.

pk3 Ahmadabad

In yet another initiative, the government approved the proposal to facilitate an amicable exit of the concessionaire in ongoing and completed highways projects the move is aimed at expediting speedy implementation of road infrastructure projects across the country. The existing concessionaires both in case of completed and on-going projects have been permitted to divest their equity in totality. The decision was triggered by the lack of interest among bidders for highway projects under the PPP mode and difficulties faced by them in securing financial closure for such projects. In the changed scheme of things, road builders will not be blamed for delays in regulatory procedure but have to take responsibility for their own faults and may have to pay up to one per cent of total project cost as penalty for exiting. The ministry of road transport and highways has reportedly firmed up this clause after consultation with the law ministry.

Cascading Impact

The recent relaxation in the exit norms in the road sector is set to accelerate the pace of deal in the highway sector, increase the size of disinvestment, bring about liquidity, aid in debt swap and infuse fresh equity into new projects, apart from increasing the pace of stake sale, the move will also offer more flexibility to the road builders, says Executive Director, Finance IVRCL, R Balram Reddy. Until recently, National Highways Authority was empowered to divest up to 74% stake in the project two years after the date of commissioning and the developer had to retain the rest during the concessional phase. But in the changed scenario, the government has permitted infrastructure players to sell their stakes in road projects soon after the date of commissioning. Making the most of the recent changes in the exit norms scores of road builders are currently in an advanced stage of concluding deals, revealed the Chairman and Managing Director of Transstroy (India) Ltd. Echoing similar view point, Chief Operating Officer, Finance, Lanco Infratech Ltd, T. Adibabu, explained that the infrastructure sector has been waiting anxiously for regulatory changes as it would help infuse liquidity for developers. By disinvestment of stake in mature projects, companies can pass on debt to the buyer. It releases the promoter's equity, which can be redeployed into new projects enabling the developer to strike new loan deals by way of freeing up high-cost debt, retorted another builder, adding that scores of pension funds and overseas investors are keen to invest in completed road projects and the government move will pave way for such investment as a result of which the internal rate of return on investments is also expected to go up.

Concluding Remarks

Given the current economic scenario, constructing roads and expressways via EPC model appears to be the most pragmatic approach as by doing so the government can raise long-term debt by way of bonds and low-cost foreign loans from multi-lateral and bilateral institutions alongside the revenue can also be generated by collecting tolls from vehicles at entry and exit points. Apart from this, the state governments should be persuaded to increase contribution toward these projects, as they will be the key beneficiaries after the completion of these projects. In addition, the government could build the first 50-100 km of the roads and expressway projects to attract private developers, a model being followed by Jaipur metro. Once traffic picks up on the road stretch, developers could construct the remaining stretch and be allowed to collect toll on the entire stretch. In short, if India needs to step into the next stage of highway building, it has to focus on transit efficiency and it could also opt for innovative financial models to make the road and expressway construction a viable business across the country.

"With the implementation of relax norms and reforms in the financial market, India expects that growth in 2013-14 will be much better than in the previous year and will be even better in 2014-15 as country's strategy for growth involves heavy investment in road infrastructure," says Prime Minister Manmohan Singh.


"In its entirety, the country's infrastructure has hit the biggest skid blocking as many as 103 central government infrastructure projects involving a staggering investment of Rs.1.50 lakhcr in the highways and railways sectors, says Ministry of Statistics and Program Implementation," adding that the delays have led to costs escalation of about 85%, or about Rs.70,000cr, over what had been estimated originally.


"With curb on project clearing agencies over 70% of projects being awarded this fiscal under EPC model won't need green approval and that of the 9,500 km roads and highways projects targeted for this year about 80% would be bid out on EPC mode and even large number of BOT projects would also fall in this category."


"Moody, a rating agencies in its analytic study, 'India Outlook', predicted that worst may be over for the Indian economy as it is capable to attain a growth rate of over 7% from 2014 onwards and concluded that the current quarter is likely to be the bottom of the economic cycle and there will be steady acceleration in GDP growth in coming months."


"If there is any fault on the part of the concessionaire, there will be a penalty of a maximum of one per cent of the total project for the developer for exiting the project, says transport minister, Oscar Fernandes. He adds, in case there is delay in land acquisition or environment and forest clearance, the concessionaire will not be held responsible."


"The relaxation in the exit norms in the road sector will accelerate the rate of churn of projects, increase the size of disinvestment, bring about liquidity, aid in debt swap and infuse fresh equity into new projects, apart from increasing the pace of stake sale, besides, the move will also offer more flexibility to the road builders," says Executive Director, Finance IVRCL, R Balram Reddy.


Head Infrastructure & Government Practice at consulting firm KPMG, Arvind Mahajan, exactly sums up the scenario when he says, "The inordinate delays of over Rs.1.23 lakhcr in the road sector have a cascading impact on other projects as well and it results in a vicious cycle of delays and dragging adversely impacting overall sentiment of investors."

NBMCW September 2013

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