The road sector has witnessed a surge in activity in the past three years. National highway projects covering about 34,000 km were awarded between 2014-15 and 2016-17, almost double the length awarded in the preceding three fiscal years. The launch of innovative implementation models such as the hybrid annuity model (HAM) has contributed significantly to the increase in activity. Stakeholders are eagerly awaiting opportunities under the toll-operate-transfer (TOT) model. However, lenders continue to be wary of lending to the sector. At a recent conference on “Road Development in India” organised by India Infrastructure, industry experts share their views on the sector’s progress, expectations from the government and the key issues and challenges that remain to be addressed…
What has been the progress in the road sector in the past one year?
Earlier, new players were not willing to enter the market. It is, however, encouraging to see that new players are coming forward and bidding for projects. This indicates that players are interested in investing in the highways sector.
The road sector has developed a lot. About a decade ago the condition of Indian roads was very bad. However, the condition has improved now. There is a mismatch between the concession period and the loan tenure. The entry of foreign pension funds in the market will partially ease the problem of non-availability of long-term funds. The central government too is looking at involving pension funds from India like the Employees’ Provident Fund Organisation, etc. to finance projects with a long tenure.
The road sector has evolved over time and has settled in the past two decades. Stakeholders are going through the process of learning and unlearning. The government has realised that if it had continued with the way the public-private partnership (PPP) model existed in the past, sector growth would not have taken off. All the major players in the road sector had stopped bidding for projects or had at least become very cautious. However, the sector also saw the discovery of new players like Dilip Buildcon and MEP Infrastructure Developers.
What are the key expectations from the government?
The government should award only those projects which can be completed, and those for which the scope is clearly defined and clearances are in place.
The number of contractors and concessionaires who want to participate in the sector has gone up. Interest rates play a key role due to the capital-intensive nature of infrastructure projects. The recent changes by the Reserve Bank of India in the repo rates and reverse repo rates have not yet been fully transmitted to the end consumers. This is expected to happen in the next few quarters.
The key expectations from the government include a faster dispute resolution mechanism. There is a need for the development of access-controlled highways to reduce travelling time. Toll plazas have to become far more efficient in their operations. If projects are completed and assets are distressed, then clearly the government is not only a commercial partner. It has to give directions to bring the project out of distress. The country fundamentally needs more road developers and contractors. Information sharing is an important aspect which the government needs to focus on. Ranking outstanding performers is crucial.
What are the sector’s key challenges that remain unaddressed?
The perennial issues which led to the failure of the engineering, procurement and construction (EPC) and build-operate-transfer (BOT) models and cash contracts are yet to be resolved. These include land acquisition and the provision of encumbrance-free land. In some cases, the contractors or concessionaires complete 80-90 per cent of the project and make huge investments. The project gets stranded if 100 per cent of the land required is not available. The authorities need to clearly define the scope of work as per the detailed design and detailed project report at the time of contract award.
Decision making needs to be fast-tracked. Within the framework of the contract, decisions need be taken by the consultant or the authority’s engineer with respect to all that is required to be done to ensure good project progress.
The biggest challenge is that of financing. Financiers are facing a hard time funding road projects. Earlier, bankers were very flexible in financing these projects. As a result, many loans turned into non-performing assets. However, now they have become very stringent. Besides, the negative wholesale price index has impacted the financial viability of projects which were bid out in the past. The first level of the dispute resolution mechanism goes through the independent engineer. Independent engineers are not allowed to act independently. They act as an agent of the authority. Disputes should be handled in time and independently.
Punishments imposed on contractors or developers should be proportionate to the mistakes they commit. While vehicle breakdowns have come down, travel times have not really come down. Capacity building is very important. In addition to tackling the issue of land acquisition, utility shifting needs to be focused on to allow the provision of unencumbered land.
What is the sector outlook for the next one-two years? What is the potential for PPP going forward?
The issues need to be resolved in totality to ensure that projects are completed within the stipulated time so that all the stakeholders benefit. There is no dearth of private players willing to invest in the sector. The number of players bidding for projects is huge.
Long-term players should enter the sector. It is difficult for short-term entrants to sustain themselves in the sector. The government is planning to set up an independent regulator for the road sector. This will enable faster tweaking of clauses in the concession agreements to deal with contract-specific issues. I am optimistically cautious about the sector and am hoping things will improve in the next few years.
The government should just stay the path. The private sector is certainly keen to invest in the sector. It has recalibrated the growth assumptions and yield expectations. Players have now become more cautious and less aggressive. I think there is a dearth of opportunities for the private sector to invest. While the EPC model involves no investment, HAM is more of an EPC and annuity play. Meanwhile, the TOT model is yet to come about. There are no good BOT-based projects happening.
A.K.S. Chauhan, President and Head, Contract Management, GR Infraprojects
S.C. Mittal, Chief Executive, IL&FS Transportation Networks Limited
Rohit Modi, Chief Executive Officer, Essel Infra & Smart Utilities