The Road to Prosperity

road prosperity 500

Road stocks are getting as bullish as the accelerated pace of road construction. And NHAI, along with its new buddy NHIDCL, are doing a splendid job. From road contractors to OMTs, all are revving up for the great road race. However, the road ahead is still full of potholes, and quite a few speed breakers on the operational and Policy front. And only clever fiscal juggling will keep contractors out of the Cash Flow vortex.

As India's trillion dollar budget begins to modernize its infrastructure to global standards, it's the road sector that will get maximum allocation of funds. And yet due to the sheer size of India's road network what is being allocated is not enough to modernize the entire network. Although the focus to achieve this should be on networking rural India which is a geographical challenge (especially in the North-East and other hill sates) it is the freight routes of commercial value which need to be modernized, widened, and upgraded. The government has targeted awarding 8,500 km per year over the next two years, of which 10,000 km of roads will be awarded in the current financial year. However, the most critical issue of funding these road projects needs to be looked into immediately. The government might have underestimated how much money is needed to build that many kilometers. Just planned road projects alone will cost $17 billion this year compared with a budget allocation of about $7 billion. To bridge this gap, the Road Ministry plans to raise a $7 billion loan. Also, the highways sector saw a 48 per cent increase in outlay at Rs 42,913 crore in the Union Budget 2015-16. The planned allocation for the Ministry of Road and Highways has increased significantly to Rs 42,913 crore for the year 2015-16, compared to Rs 28,881 crore allocated in 2014-15. For 2015-16, the increased provisions have been made for the development of national highways, including projects relating to expressways and six-laning of crowded stretches of Golden Quadrilateral and two-laning of highways works under National Highways Development Project. Despite doubling this budgetary allocation of funds, they are still far short of the total amount of funds required to finance road projects currently on the anvil. Therefore there's an urgent need to attract private equity in the road sector, and currently few road contractors have shown any interest in a sector plagued with stalled projects and pending arbitrations.

Building risk appetite
Right now the balance sheet of road contractors are weighed down with heavy debt, having posted their worst results in the last five years. Their finances are so strained that most of them have a liquidity crunch and severe cash-flow problems are making them averse to bidding for new projects, especially big-ticket projects. For example, Delhi's Eastern Peripheral Expressway is part of a six-lane ring-road for the Capital. The project was first mooted nine years ago but failed to attract private bidders. Unwilling to wait any longer, the Road Ministry now intends spending almost $1 billion building the 135 km loop.

To attract private equity in road construction, the government recently took a series of important measures. The Cabinet recently approved a policy that will provide private developers with a $470 million bailout in order to complete 16 highways. The government will also provide $3 billion in seed capital for a new infrastructure fund, with the hope of attracting up to $30 billion of private equity. Also in future, public tenders will only be launched after all approvals have been secured, eliminating major hurdles like environmental clearance and land acquisition which stalled many road projects in the past. But the most important is reform is that some rules have been eased for the private sector, and financially stressed companies will now be allowed to exit projects, unlocking scarce capital for new projects. But the most important reform needed to attract private equity in the road sector is tweaking the business model for EPC road contractors and minor fine tuning the BOT and OMT models to make them more lucrative for road contractors. In fact a clear and consistent policy on tolls needs to be put in place for the private sector to become more active by creating an environment where investors and lenders are assured of consistent returns on their investment.

Plenty of opportunities will be generated in road construction in the near future. According to available data the value of roads and bridges infrastructure in India is projected to grow at a compound annual growth rate (CAGR) of 17.4 per cent over FY12–17, and is expected to touch $19.2 billion by 2017. The financial outlay for road transport and highways grew at a CAGR of 19.4 per cent in the period FY09-14. For FY14, India’s Planning Commission provided an outlay of $6.9 billion for the roads segment.

Policy and reforms
It's a welcome step that the government has finally launched several initiatives and reforms in the road sector. While the entire contract bidding procedure is being refined by the NHAI the most important initiative is fast tracking arbitration of pending cases between the NHAI and the contractors, and reviving and rescuing stuck projects. To that extent the joint initiative SAROD, launched by all stakeholders is proving very successful in limiting disputes under arbitration.
However the most important imitative is setting up the National Highways & Infrastructure Development Corporation Limited (NHIDCL), which is focused on developing road networks in difficult terrains like mountains and hilly regions. The NHIDCL has already begun finalising tenders in a phased manner for awarding 8,500 km of roads and highways for fiscal 2015-16, the process for which could commence in the beginning of next fiscal itself. Anand Kumar, Managing Director, NHIDCL says “We have already issued four tenders for building roads and highways in Arunachal, and Jammu & Kashmir including some other strategic locations and many more tenders would fall in the public domain shortly as the new government is committed to build huge network of roads and highways in fiscal 2015-16.” He also announced that fresh tenders would be rewarded for projects on which the building works have either discontinued or stopped due to negligence arising on part of contractors and sub-contractors. Underlining their new approach he also adds that, “The company is adopting a fresh approach and methodologies approach for detailed project reports to ensure that once DPR for infrastructure laying is completed, its implementation is ensured as per its provisions so that no tampering is done by contractors and sub-contractors and such projects executed to their logical conclusion.” According to him, the company in consultation with government is working out with the dispute less mechanism so that no disputes arise among those responsible and project implementation takes off as scheduled.

Apart from streamlining the implementation process and switching from the PPP mode to EPC mode for awarding road contracts, the Ministry of Roads and Highways and the NHAI are also fine tuning the MCA model to make projects more lucrative to attract private equity.

Key Investments/Developments

  • The cabinet committee on economic affairs (CCEA) has approved six highway projects totalling 712 km with an investment of Rs 12,646 crore (US$ 2 billion). These projects, to be awarded under the EPC model, are divided into 10 packages under the national highways development project in states such as Uttar Pradesh, Madhya Pradesh, Odisha, Himachal Pradesh and West Bengal.
  • The Delhi-Panipat stretch of NH-1 would be expanded to an eight-laned dedicated highway in the next three years. To meet the increasing demand of traffic growth, NHAI is set to award this project on toll mode by the end of March.
  • Chhattisgarh is planning to invest Rs 9,500 crore (US$ 1.5 billion) to upgrade 44 roads in the state.
  • The government is set to offer the final batch of road projects for this financial year. A total of nine, with a cumulative length of 895 km and project cost of Rs 17,815 crore (US$ 2.82 billion), are to be offered soon. Three are expected under a Build-Operate-Transfer (BOT) model. The other six are understood to be put out under Engineering-Procurement-Construction (EPC).