Interview with B.K. Choudhary: “The road sector has so far been the biggest beneficiary of the government’s thrust on infrastructure”

“The road sector has so far been the biggest beneficiary of the government’s thrust on infrastructure”

The road sector has certainly achieved major breakthroughs in recent times. The turnaround in activity has been quite conspicuous. Stakeholders across the board have recognised the government’s efforts in reviving their interest in the sector. While there are still some unmet expectations, investors too need to undertake sound due diligence to avoid problems that cropped up in the past. In a recent interview with Indian Infrastructure, Bajrang Kumar Choudhary, managing director, Bharat Road Network Limited, shares his views on the state of the road sector, unresolved issues, and the way forward…

How do you rate the progress of the road sector in the past one to two years?

Over the past few years, we have been seeing a lot of proactive measures being taken for reviving the infrastructure sector and thankfully the roads and highways sector has so far been the biggest beneficiary of the government’s thrust on infrastructure. Today, developers, investors and lenders are once again looking at the sector with a lot of interest.

While the goods and services tax-led uncertainty affected project award activity, with merely 950 km of projects being awarded during the initial months of 2017-18, the trend reversed towards the end of the fiscal year with the award of projects spanning about 830 km and 920 km in December 2017 and January 2018 respectively.

As project award activity set new records in terms of picking up pace and construction activity simultaneously inched closer towards 30 km per day, it would only be fair to acknowledge that we are taking giant strides on the road to progress and prosperity despite a few unwarranted speed barriers with regard to the dispute redressal mechanism and on-ground challenges with land acquisition.

What are some of the most crucial and noteworthy steps taken by the government to resolve financial as well as pre-construction issues?

The highway sector has undoubtedly witnessed accelerated growth with increased investment opportunities both in the primary and secondary markets, thanks to the positive policy announcements made in the past two years. Aided by various policy measures, road project awards in 2016-17 crossed 16,000 km, about 350 per cent higher as compared to 2013-14, while road construction nearly doubled between 2013-14 and 2016-17.

The biggest contributor to the revival of the sector has been the decision to revitalise the public-private partnership (PPP) model through the hybrid annuity model (HAM), which is aimed at reducing the risks faced by developers and lenders alike through capital grants from the National Highways Authority of India (NHAI).

Besides, the decision to pay 75 per cent of the arbitral award amount to an escrow account against a margin-free bank guarantee provided the much- needed relief to infrastructure players facing difficulties due to the pendency of claims with government bodies.

Another step in the right direction was the approval of the exit policy framework permitting concessionaires or developers to divest 100 per cent equity two years after the completion of project construction. This helped unlock capital to be deployed in new/stalled projects.

Fund infusion on a loan basis at a predetermined rate of return to salvage languishing projects is another major step. This loan is to be recovered along with interest as the first charge from toll receipts immediately after completion of construction. However, the effectiveness is yet to be seen as the priority of the charge over senior lenders may be difficult under the existing framework.

Rationalised compensation to concessionaires for languishing national highway projects under the build-operate-transfer (BOT) mode for delays not attributable to concessionaires has also reaped gains for the sector.

Meanwhile, an increased focus on cash contracts has allowed contractors to focus on their core competencies rather than competing with developers.

What are some of the unmet expectations of the stakeholders?

Though the government has been quite supportive through a series of reform measures, the lack of lender confidence continues to

remain a pain point for the sector. The uncertainty over lenders’ confidence is more evident from the fact that today even when the government has come up with HAM with reduced risk for developers and lenders alike, lenders remain overly cautious and apprehensive about the viability of the model.

The government is therefore expected to make a concerted effort to bring back lender confidence in the sector and once we see that happen, we can expect a big turnaround.

Therefore, the need of the hour is to streamline the execution of stalled infrastructure projects. This would not only help private developers improve their cash flow but also revive lender confidence in the sector.

There is also a serious need to explore alternative modes of resource mobilisation, both equity and debt. The development of a robust infrastructure bond market as well as the creation of a favourable institutional mechanism for bringing in long-term capital from pension funds and insurance companies may also help address the funding woes.

In addition to the financing woes, the lack of a dispute redressal mechanism continues to be an area of concern. We immediately require an independent dispute redressal mechanism to monitor, act upon and provide solutions to all the disputes arising from concession agreements. Though NHAI set up two independent panels last year for dispute resolution, the existing framework still does not have the provision to amicably resolve and settle minor issues which are sometimes pushed towards arbitration, thereby resulting in project delay and cost escalation. The existing mechanism of the authority acting as both the jury as well as respondent does not augur well for the concessionaire and acts as a major deterrent for institutional investors who look for transparency in the project execution mechanism.

Furthermore, land acquisition remains a perennial problem for infrastructure developers as policymakers continue with their piecemeal efforts and do not provide a comprehensive solution. Though there have been some notable changes at the policy level which include increased compensation, setting up of land acquisition cells and increased delegation of authority to give an impetus to land acquisition, the ground realities are yet to reflect any visible changes. Even though it is now imperative to acquire more than 80 per cent of the land before allotting construction work for a highway, the provision of encumbrance-free right of way (RoW) along a continuous stretch of land remains a grappling issue.

What is your take on the recent award of the first bundle of toll-operate-transfer (TOT) projects? Do you regard the move as a game changer for the industry?

The success of the road monetisation programme under the TOT mode is clearly one shot in the arm by NHAI that augurs quite well for the road sector as it will not only help in attracting large pension funds, insurance companies and global funds with “patient” capital to invest in the sector but also help NHAI raise upfront capital to fund new projects on an engineering, procurement and construction (EPC) and HAM bases. With such a massive infrastructure creation programme on the anvil, bringing in private capital will surely reduce the burden on government coffers to finance infrastructure creation.

The initial success of the TOT model has opened up a new set of business opportunities for both PPP developers as well as new entrants into the sector. Moreover, with NHAI gradually shifting the road awarding mode from EPC to HAM over the past two years, TOT would act as a natural corollary within the infrastructure value chain as most of the projects awarded under HAM are more likely to come up under TOT in the near future.

Even though we at Bharat Road Network Limited remain quite optimistic about the success of TOT, we do believe that future success depends largely on pricing viability.

What in your view is the future of PPPs in the road sector?

The future of road development in India lies only in the PPP model. Even though the execution mode may keep changing from BOT (toll), BOT (annuity), HAM and TOT in the future, the need and importance of PPP remains strong.

As we know that India is standing at the cusp of a major economic transformation aiming to accelerate its growth to a 9 per cent compound annual growth rate over the next few decades, there is an urgent need for a massive infrastructure ramp-up commensurate with the growing economic activities. As physical infrastructure is the key driver for a country’s economic growth, it is imperative to continue the focus on revitalising PPPs to ensure time-bound creation of world-class infrastructure, since, apart from attracting investment in infrastructure, the biggest benefit of PPP is its ability to draw on the asset management skill set of the private sector. We are therefore quite optimistic about the future growth of PPP through the HAM and TOT modes.

Besides revitalising the primary market bidding in PPP, there is another trend which we foresee in the coming years, that is, the growth of an aggregator platform through portfolio consolidation. We do believe that going forward there will be a lot of activities in the secondary market in PPP as developers are continuously looking to exit from existing BOT projects for value unlocking. Additionally, EPC contractors are also looking to sell assets to pare debt. We therefore sense a huge secondary market opportunity for acquisition of assets and consolidation of BOT assets by creating a growth platform for asset aggregation.

How will the sector progress in the near to medium term?

With the commencement of the Bharatmala programme and the road asset monetisation programme, investments in the sector will grow significantly going ahead. Furthermore, the government’s 40 km per day road construction target and a large project pipeline are expected to ensure that NHAI’s project award over the next couple of quarters remains robust. Though both the central and some key state governments are heading towards election next year, we do believe that the capex allocation for infrastructure will remain encouraging and will continue to drive growth for road-focused companies.

However, I would like to add a word of caution here over the execution mechanism, which may act as a deterrent unless some of the unmet expectations of the sector are looked at with adequate attention and care. The most critical factor among various issues would be streamlining the execution mechanism to translate positive policy reform into changed ground realities.

Amid the recent euphoria over the huge uptick in project award, the execution capability and the expertise of contractors sometimes get overlooked. As companies compete aggressively to increase their order book and wallet share, due diligence on the supply chain mechanism, a detailed evaluation of project viability and the non-availability of manpower and material often go unnoticed.

Hence, it is imperative that the infra push by the government must not remain confined to increasing the road spending and awarding activity but should also extend towards augmenting the supply chain for smoother project execution. Once we agree to realign ourselves with the objective of infrastructure creation, streamlining the execution mechanism and creating the framework, we can safely predict a smooth ride towards sector prosperity.