Pessimism Recedes: NHDP records impressive growth

NHDP records impressive growth

Several recent policy measures initiated by the government have led to a modest pickup in project award and completion under the National Highways Development Programme (NHDP). Between April 2015 and February 2016, the National Highways Authority of India (NHAI) awarded 62 projects worth more than Rs 500 billion. Notably, this is about 81 per cent of the number of projects and 67 per cent of the length targeted for award during 2015-16.

In terms of completion, NHAI has achieved about 88 per cent of the construction target (for 2015-16) between April 2015 and February 2016. NHAI’s construction rate stands at almost 5 km per day. Meanwhile, as per the Ministry of Road Transport and Highways (MoRTH), NHAI has completed 14 national highway projects as compared to 10 projects completed in 2014-15.

The speeding up of award of road projects has been made possible due to a number of  policy interventions. Some of these are steps to empower the MoRTH to decide the mode of delivery, increased threshold for project approval, enhanced interministerial coordination, approval of the Exit Policy, promotion of innovative project implementation models (like the hybrid annuity model), amendments to the model concession agreement (MCA) for build-operate-transfer (BOT) projects, segregation of civil cost from capital cost for national highway projects for appraisal and approval, rationalised compensation to concessionaires for languishing BOT-based national highway projects for delays not attributable to them, delegation of powers to chief engineers regarding periodic renewal of contracts, and delegation of powers to MoRTH’s and NHAI’s regional officers (ROs) with respect to shifting of utilities and delegation of powers to ROs to evaluate and award tenders.

The story of unmet targets

cover (Page 1)

NHDP’s progress has witnessed several troughs and crests. During 2006-09, the pace of award declined considerably as a result of the introduction of standard processes and the teething issues that accompanied this. Public-private partnership (PPP)-based project awards declined sharply from a high of 6,380 km in 2011-12 to 223 km in 2013-14. In 2012-13, only about 14 per cent of the award target of 8,100 km was met. As a result, the MoRTH decided to switch to the engineering, procurement and construction (EPC) mode of implementation. In 2013-14, about 36 per cent of the targeted length was awarded under NHDP. In 2014, with the change of government at the centre, several measures were initiated to reinvigorate investor confidence in the sector and deal with pre-construction issues.

Completion of length between 2005-06 and 2014-15 averaged about 1,815 km per year. From 2.1 km per day in 2005-06, the rate picked up in 2007-08 and increased to 6 km per day in 2008-09. NHAI reported the highest construction rate of about 8 km per day during 2012-13.The construction rate in 2013-14 declined to 5.2 km per day and further to 3.8 km per day in 2014-15. Meanwhile, of the 35 projects awarded during 2014-15, construction work on 13 projects had started as of May 2015. As of November 30, 2015, about 98 national highway projects being implemented by NHAI were running behind schedule.

Thus, 2014-15 proved to a better year in terms of targets and achievements. NHAI awarded road works covering about 3,000 km which was close to 50 per cent of the target. EPC emerged as the dominant mode of project award. However, there was a slight improvement in awards through the PPP route during 2014-15 with the award of five projects covering 732 km of national highways.

cover (Page 1)

Current state of affairs

cover (Page 1)

Fiscal year 2015-16 witnessed a substantial surge in the award of projects in contrast to 2014-15. From April 2015 to February 2016, NHAI awarded 62 contracts spanning a length of about 3,500 km. In addition, as per India Infrastructure Research, at least four projects spanning over 270 km and worth Rs 32 billion were awarded in March 2016 (these are projects which were awarded by NHAI and reported in the media). The maximum number of these 66 projects was awarded in Uttar Pradesh, followed by Bihar and Maharashtra. In terms of investment, too, these states outperformed their counterparts.

Phase wise, the maximum number of projects was awarded under Phases III and IV. Phase VI, which entails the development of a greenfield expressway, also reported substantial activity with the award of six contracts for the development of the Eastern Peripheral Expressway (six packages) and the Delhi-Meerut expressway (Packages I and II).

The modal split favours the EPC mode since the PPP mode is only now making a gradual comeback. In terms of number of projects, about 83 per cent of the projects were awarded on an EPC basis, 11 per cent on a BOT basis and the remaining 6 per cent on a hybrid annuity basis. About 23 per cent of the length awarded between April 2015 and March 2016 was on a BOT basis, 3 per cent was awarded on a hybrid annuity basis while the rest was awarded on an EPC basis. About 20 per cent of the projects awarded during 2015-16 are contracts which were awarded between 2012 and 2014 but failed to take off. These have now been reawarded, mostly on an EPC basis.

The newly launched hybrid annuity model has also managed to find takers. During 2015-16, four projects based on this model were awarded under NHDP. These include two packages (I and II) of the Delhi-Meerut expressway project awarded to Welspun Enterprises and a joint venture of APCO Infratech Private Limited-Chetak Enterprise Limited respectively; four-

laning of the Rampur-Kathgodam section awarded to Sadbhav Infrastructure Projects Limited; and four-laning of the stand-alone ring road/ bypass for Nagpur city (Package I) awarded to MEP Infrastructure Developers Limited.

The bidding scenario has witnessed a slight improvement in the past one year. New and regional players have secured a large number of orders and outbid the traditional and large ones in the market. Dominance of the EPC mode is reflective of the government’s strategy to tap the potential of asset-light small contractors. EPC bids received by NHAI have been fairly aggressive. This is a result of regional players trying to grab orders in the national highway segment. The average number of bids ranges between five and eight. However, the number of companies bidding for BOT projects has slipped to three-five from about 20 in 2011-12. Moreover, the gap between the lowest and second lowest bids has also raised concerns.

cover (Page 1)

Future outlook

The outlook for the road and highway sector undoubtedly looks positive on paper. However, sound implementation of projects awarded in the last two fiscal years will be a game changer. While the government has been successful in infusing the required momentum in award activity, there is an urgent need to ensure that the errors committed in the past are not repeated. As per a report of the Ministry of Statistics and Programme Implementation, about 80 per cent of the ongoing projects are running behind schedule and have reported substantial cost escalations.

The ministry has fixed a 2.5-fold increase in the target for the award and construction of national highways for 2016-17. It has set a target of 25,000 km of national highways to be awarded in 2016-17 as against the 10,000 km awarded in 2015-16. Of the total length of national highways targeted for award, 15,000 km will fall under NHAI’s target and 10,000 km will come under the target for the MoRTH and National Highways and Infrastructure Development Corporation Limited (NHIDCL). The construction target has been set at 15,000 km as against the 6,000 km constructed last year. The construction target for NHAI has been fixed at 8,000 km while that for the ministry and NHIDCL together is 7,000 km.

Going forward, concerted efforts on the part of the government and controlled bullishness on the part of investors and developers will be essential to avert the history of missed targets repeating itself.