The entire government machinery would be required to boost its institutional and financial capacity by leaps and bounds to achieve the aspirational target of 30 km per day.
After experiencing steadfast growth since 2004-05, the Indian road sector has faced a downturn from 2012-13, when the cascading effect of the fall in India´s GDP growth rate started reflecting on traffic movement on National Highways (NH). Consequently, the toll revenues of National Highway projects started falling, rendering some of the toll projects unviable, which forced a few developers to either back out from their contractual obligations or request the National Highways Authority of India (NHAI) to restructure the projects.
Strategy under new government
Over the last few months, the new government has become proactive in implementing policy measures to give an impetus to this sector. One of the most significant policy changes is to shift focus to EPC mode of development from conventional PPP model of Build Operate Transfer (BOT) as the primary mode of implementation for National Highway projects. The government is looking to award projects worth Rs 5,000 crore in the current financial year under Engineering, Procurement & Construction (EPC) mode and the remaining (Rs 3,500 crore) on BOT mode. The change in stance should help the government in gaining back the confidence of the investors in the sector in the near term.
In addition to the change in mode
of development, the Ministry of Road Transport and Highways (MoRTH) has recently clarified that single-stage bidding under the single stage two-part system will be the default mode of bidding for all projects in the EPC mode. The same is intended to speed up the process of awarding road projects. Only in exceptional cases two-stage bidding process shall be adopted. Such measures have resulted in MoRTH setting an ambitious target of constructing 17.26 km of highways per day in FY 2014-15. In order to complement its construction target, MoRTH aims to award an average of 23.28 km per day in FY 2014-15.
The table provides the details of the targets and performance of MoRTH for the period April 2014 to October 2014.
As can be observed from the table above, barring toll collection, NHAI has not achieved 50 per cent of its target in the first six months. However, considering the slowdown in award during election tenure and below-par construction during rainy season, the achievements are still praiseworthy, although, these achievements are still far away from the Ministry´s vision of 30 km/day of highway construction. In fact, NHAI has been aspiring to develop 20 km/day of national highways in the country, over the last decade, but it could not even plan to develop more than 10 km/day, leave alone implementation. The best it could reach was developing 3,519 km in 2008-09.
The actual implementation side has also not been very encouraging, as NHAI has not been able to achieve its construction target, each year over the last decade, except for 2012-13.
Considering the past record, the entire government machinery would be required to boost its institutional and financial capacity by leaps and bounds to achieve the as aspirational target of 30 km per day.
Enhancing investor confidence to finance highway projects
The Indian highways sector has tremendous growth potential considering a fast-growing economy and a rising need for world-class infrastructure for better road connectivity. According to MoRTH, traffic on roads is growing at a rate of up to 10 per cent per annum. These factors combined with the recent policy changes and initiatives taken by the government have made the sector attractive for foreign investors, particularly the investors from countries which are facing a slowdown such as Japan. Even large institutional investors such as the Canada Pension Plan Investment Board have shown interest in investing in the Indian highway sector. However, in order to develop and preserve the confidence of investors, government should work towards:
The recent announcement of the government to set up a finance corporation in collaboration with the Japanese investors is a welcome step and could bring in relief to the sector which has been facing a fund crunch specially debt funding for the past few years. However, the key modalities of the transaction are yet to gain clarity, such as nature of assured return of 9 per cent for the Japanese partnersùwhether it is debt or equityùwhether it is post currency depreciation or before.
Assuming that assistance will be in the form of debt and assured returns are after adjusting currency depreciation, projects funded through such debt would require earnings return of at least 10 per cent p.a. to serve the repayments. If it is assumed that toll rates will grow at 5 per cent p.a. (slightly below the target inflation of 6 per cent p.a.) and road traffic elasticity to GDP holds close to 1.2, with 6 per cent GDP growth, traffic should grow close to 7.2 per cent p.a. In such a scenario, it will be difficult for projects to earn 10 per cent p.a. returns, after paying its operating cost.
Therefore, for investors in Japan where interest rates are currently at zero level, having a 9 per cent p.a. assured return is a safe bet. However, given that government can raise resources from the market at around 8-9 per cent, it needs to be seen whether it would be pragmatic to use money provided by the Japanese partners for funding highway projects.
In addition to attracting investors, it is pertinent to present the investors with an easier exit mechanism and faster dispute resolution. Since highway concessions are for a 25-30 year period, it is quite common that the business scenario may change during this period. Unless concession agreements provide for robust renegotiation framework, there are bound to be disputes between different stakeholders. One of the major causes for such disputes has been land acquisition and the ministry and NHAI are working through internal policy framework towards creating a mechanism to address this issue. As on July 2014, an amount of Rs 26,556 crore was held up in disputes between NHAI and concessionaires as per data provided by MoRTH. The resolution of disputes involving 2,384 km of projects is a good sign and similar efforts in faster resolution will pave way for a new breed of foreign institutional investor.
As far as upcoming projects in the sector are concerned, the 135 km Eastern Peripheral Expressway is an important project. The six-lane expressway which would connect the States of Haryana and Uttar Pradesh is primarily intended to decongest Delhi. The project with estimated project cost of Rs 4,567 crore is currently under bidding process. Under the EPC mode the project has been split into six packages and NHAI has invited applications for qualification from prospective bidders. The project is coming up for bidding for the second time. NHAI has also invited bids for the entire 135 km stretch under the BOT (Toll) mode. Some of the key projects under qualification stage include the four-laning of Ambala-Kaithala section on NH-65, Shimla Bypass on NH-22 and four-laning of Hospet - Chitradurgaon NH-13. As per the NHAI website, the projects currently under bidding stage are provided in the table.
The Delhi-Meerut Expressway which did not find any takers during the earlier bidding process is likely to come up for bidding after being split into different packages.
Road Safety and Transport Bill, 2014
The Road Safety and Transport Bill, 2014 has been proposed with the aim to reduce road traffic accident deaths, through strict implementation of the laws. In the proposed bill, the government has introduced stringent penalties û up to Rs 3 lakh for certain offences, along with a minimum seven-year imprisonment. However, the biggest challenge would be to create a suitable surveillance framework to effectively implement and monitor activities envisaged under the Bill. Success of the Bill will also depend on the level of coordination, effective communication, use of technology and move¡ment of data freely between different States.
Further, implementation of the law post enactment of the bill will require huge capacity enhancement in the area of licensing, issue of certificates, technology for tracking vehicles and erring drivers and maintenance of data gathered from various states etc. Private participation especially in the area of capacity enhancement would be very critical.
To put things in perspective, in the last decade and a half, India did witness a robust growth in its roads and highways sector, with increased private participation. However, the past few years have seen very low level of investments in the sector primarily due to the economic downturn and lack of efforts towards resolving the issues affecting the sector. There has been a shift in the policy and the new government has taken steps in the right direction to renew investor confidence. The strategy with respect to award of projects would possibly put more strain on the government resources in the short term and the government would be required to borrow heavily for implementing projects. It would be interesting to see how prudently these resources are utilised for the projects to build investor confidence in the sector. Speeding up the entire process of project development and implementation along with faster resolution of disputes would provide the much-needed stimulus for the growth of the sector. Further, the Road Safety and Transport Bill envisaged to replace the existing Motor Vehicles Act of 1988, and once enacted, is intended to reduce the number of road traffic accidents and increase the efficiency and safety for road transport in India. However, one needs to see how effectively the envisaged provisions are implemented.