Improved Outlook: Sector reports impressive growth in numbers

Sector reports impressive growth in numbers

The road sector has certainly started showing signs of recovery after a slowdown of almost three years. The initiatives taken by the central government have begun to show quantifiable results. Notable progress has been recorded in terms of project awards and completion under various government programmes. Launch of innovative models such as hybrid annuity has helped contribute to the increased activity. With the recent approval of the toll-operate-transfer model, the Ministry of Road Transport and Highways (MoRTH) continues to explore new areas of growth. Investor sentiment, however, is still low key. There is thus some time before stakeholders exit the “wait and watch” mode and turn bullish towards the sector.

A record length of about 10,000 km was awarded and about 6,000 km was completed in 2015-16 under various programmes. The construction rate has gone up to about 18 km per day.

The National Highways Development Programme (NHDP) too reported impressive numbers with the award of 79 contracts spanning over 4,300 km. With regard to the mode of implementation, the engineering, procurement and construction (EPC) model was the dominant mode of project award and implementation. Nearly 80 per cent of the projects awarded by the National Highways Authority of India (NHAI) during 2015-16 were on an EPC basis. The hybrid annuity model (HAM) found takers with the award of nine projects. In addition, seven projects were awarded on a build-operate-transfer (BOT) basis. So far during 2016-17, NHAI has awarded 15 contracts, of which 10 have been awarded under HAM.

Road development in the north-eastern region also picked up pace. Since January 2015, National Highways and Infrastructure Development Corporation Limited (NHIDCL) has awarded 24 projects spanning a length of 614 km and worth Rs 66 billion.

During the past 12-15 months, the MoRTH took concrete steps to ease the operating environment. Amendments to the model concession agreement, a one-time fund infusion into languishing projects and the segregation of construction costs from civil costs for project appraisal are some of the initiatives taken. At the same time, attempts are being made to modify the public-private partnership (PPP) model with the Kelkar Committee showing the way in its recent report. On the funding front, new sources are being explored. The government’s decision to remove the dividend distribution tax on infrastructure investment trusts (InvITs) has encouraged companies like IRB Infrastructure Developers and MEP Infrastructure Developers to list their assets under InvITs.

The ministry is also planning to tap Rs 500 billion from the Life Insurance Corporation of India to finance its expressway development programme. Meanwhile, NHAI also plans to issue masala bonds worth $500 million to $750 million in the first tranche and list them on a global stock exchange.

Operational asset sales have become prominent in the sector, especially post the policy change that allowed companies to fully exit their projects two years after construction. This is helping developers deleverage their balance sheets to infuse fresh liquidity into the sector. The companies that divested their assets include Hindustan Construction Company, NCC, Sadbhav Infrastructure Projects and GMR.

Technology continues to be a key focus area of the MoRTH and NHAI. FASTag is now active at more than 330 toll plazas across the country. NHAI is also in the process of introducing advanced highway management systems on national highways.

Online platforms such as e-Pace, INFRACON and an updated version of INAM-PRO have also been launched by the ministry. Recently, the government launched the Indian Bridge Management System to closely monitor the inventory of national highway bridges.

Road safety is another focus area of the government. It has set a target to reduce the number of fatalities due to road accidents by 50 per cent by 2020. It has also constituted a group of ministers to recommend safety-related measures. In order to promote greening of highways, NHAI launched a policy on green highways in 2015, under which 1 per cent of the project cost will be set aside for plantation of trees along highways.

Nevertheless, the road sector continues to face some key issues. Land acquisition is still an area of concern for many projects. There is a need for an effective dispute resolution mechanism, proper project development and preparation, and a more balanced risk allocation. Financing continues to be a problem, especially with regard to the availability of equity, and it has been difficult to achieve financial closure of projects.

Going forward, the targets for 2016-17 are ambitious. The government aims to award 25,000 km and construct 15,000 km of roads during the year. Overall, the national highway segment will offer project opportunity worth Rs 1.5 trillion in the next one year. NHAI plans to award projects in a robust mix of EPC, BOT and hybrid annuity models.

Estimates indicate that projects spanning 50,000 km and entailing investments of about $250 billion will be developed over the next five to six years. Significant opportunities will be offered through programmes like Bharat Mala, Char Dham, District Connectivity and Setu Bharatam. In conclusion, the next two to three years will be critical in terms of shaping the course of road development in the country. Adequate policy and regulatory support is a must to ensure active participation from all stakeholders