There have been several twists and turns in the development of India’s road sector in the past 20 years. From being a purely government-dominated arena till 2005, the sector managed to attract substantial private participation thereafter. In this regard, the evolution of the policy landscape undoubtedly deserves a mention. The journey however has not been hassle free. While PPPs surfaced as green shoots for the sector, financing constraints, a weak dispute resolution mechanism, changes in project scope, land acquisition hurdles, and delays in regulatory clearances hampered project execution. As a result, the sector had to switch between the engineering, procurement and construction (EPC) and PPP modes time and again. In a bid to avert a financial crisis, a number of out-of-the-box measures were initiated. These, to a large extent, have aided the recovery of activity in the sector. While the government continues to learn from the errors committed in the past, private players too have matured with time in their understanding of the sector. The future certainly holds promise provided that the growth momentum is sustained.
Indian Infrastructure analyses the sector’s evolution over the past 20 years highlighting the key game changers, the big successes and the major pitfalls…
While India has the second largest road network in the world, the quality of roads, despite recent progress, is still poor. In number terms, India’s road network grew from 2.7 million km in 1998 to 3.3 million km in 2008 and further to 5.6 million km in 2017-18. The length of national highways has more than almost doubled from over 50,000 km in 2001 to about 122,000 km in 2018. However, the share of national highways in the total road network has continued to stagnate at 2 per cent during the past two decades. Only about 12 per cent of the national highways are four-laned. The condition of the state network is even worse. Only 1 per cent of the state highways are four-laned and only 22 per cent two-laned.
Shaping the policy landscape
The central government took the first step to enable private participation in the road sector in 1995 and amended the National Highways Act, 1956, thus empowering the government to enter into an agreement with any private player to develop and maintain national highways. Later, the National Highways Authority of India (NHAI) was established to develop the national highway network.
The lack of standardised procedures led to the introduction of the model concession agreement (MCA) for the road sector in the mid-1990s. The government also took several initiatives to streamline the award process for PPP projects in 1997. It approved the principles of four-laning, build-operate-transfer (BOT), bidding, government grant, tolling, etc; levied tolls on highways developed through budgetary sources; introduced the BOT (annuity) model; allowed NHAI to partner in special purpose vehicles (SPVs) set up by private players; etc.
The government decided to introduce the new MCA for the award of national highway projects on a BOT (toll) basis post-January 1, 2007.
It also introduced the two-stage bidding process. However, private players raised several concerns pertaining to the lengthy process, issues related to the cross-holding limit, technical capability limit, etc. In response, the government set up the B.K. Chaturvedi Committee in August 2009 to recommend measures to address these concerns and now qualifies bidders annually for all projects.
Launch of the NHDP: A game changer
The National Highways Development Programme (NHDP), touted to be the world’s largest PPP programme, was launched in 1999 with an aim to develop the national highway system consisting of about 55,000 km of roads. In the early years of the NHDP, public sources of funds were heavily relied upon.
The period from 1999 to 2005 was a learning phase for the programme. With the award of the 27.7 km Delhi-Gurgaon expressway project in 2001 and the 90 km Jaipur-Kishangarh highway project in 2002 under the NHDP, the concept of PPPs became popular.
The NHDP has had a history of missed targets and project delays. The GQ project, which was scheduled to be completed in 2006, was delayed by almost six years before it was commissioned in 2012. On an average, the authority has been able to achieve only 50 per cent of the project award targets during the past decade.
Completion of length between 2000-01 and 2017-18 averaged about 1,890 km per year. From 2.45 km per day in 2000-01, the construction rate declined to 1.74 km per day in 2006-07. NHAI managed to construct close to 8 km of road length per day under the NHDP in 2012-13, higher than the 6 km of road length per day constructed in 2011-12, but significantly lower than the target of building 20 km of national highways per day.
Unfolding the PPP story
The advent of PPPs pushed the sector towards a strong growth trajectory during the period 2005-06 to 2011-12. The government could attract negative grants for many of its projects and several contractors became developers to take advantage of the road sector boom. During 2005-12, 162 BOT (toll) projects covering 16,284 km and 42 BOT (annuity) projects covering 2,906 km were awarded. This period also saw the launch of the design-build-finance-operate-transfer format in 2006, when NHAI awarded the Bharuch-Vadodara and the Bharuch-Surat projects under this mode.
The announcement that all NHDP projects post Phase III would be PPPs provided a major fillip to the mode. The sector received another major thrust in 2009. After taking charge as minister of road transport and highways, Kamal Nath, set an ambitious target of developing 7,000 km of national highways every year at an average of 20 km per day. In addition, the prime minister’s call for exceeding the target of awarding 7,300 km in 2011 spurred NHAI to award its highest ever length (6,400 km) in 2011-12. The item rate and EPC contracts almost disappeared from the market during this period.
Pitfalls and dwindling numbers
The era of misplaced expectations did not last very long and what followed next was a burst in the bubble. The aggressive bids placed prior to 2011-12 had resulted in the award of a large number of unviable PPP projects. While several contractors turned-developers had secured projects, they were now finding it difficult to financially close them. The lender fraternity that had once advanced up to 80-90 per cent of a project’s cost, became completely wary of financing projects. As a result, project award and completion activity came to a complete standstill during 2012-13 and 2013-14.
The sector saw many projects turning into non-performing assets and several established developers faced the pressure of overleveraged balance sheets and resorted to either contract renegotiations or corporate debt restructuring. The period also witnessed a lot of developers exiting operational assets to deleverage their balance sheets. This, in turn, increased the inflow of private equity, which had almost dried up in the past. The government then decided to put PPPs on the back burner and switch to the EPC mode of project award.
Course correction: Fine-tuning the PPP model
In May 2014, the newly elected NDA government had inherited 403 stalled projects worth Rs 3.85 trillion. These included projects where only 20 per cent of the required land had been acquired and flawed forest and environmental clearances had been obtained. Issues faced by PPP projects are attributable to one-sided MCAs. While initially the government had opted to bid out projects on an EPC basis, it soon realised that the EPC mode could not be sustained in isolation.
In a bid to reverse the slowdown, the ministry initiated a number of measures. These included rescheduling and deferment of premium payments, a one-time fund infusion, revisions in the MCAs, easing of the exit policy for developers, and streamlining land acquisition procedures. In 2015, attempts were made to modify the PPP model with the Kelkar Committee showing the way in its report on Revisiting and Revitalising the PPP model of Infrastructure Development.
While these initiatives were able to bail out the sector partially, what was needed was a fresh wave of reforms to reignite investor confidence in the sector. This led to the emergence of the hybrid annuity model (HAM) as a new means of project delivery. The model has been successful in increasing the pace of project award during the past four fiscal years and significantly reduced risks and equity requirements for developers. So far, 112 projects worth Rs 1.26 trillion have been awarded under this mode. Overall, the ministry awarded a length of over 50,000 km during the period 2014-15 to 2017-18, almost twice the length awarded during the period 2010-11 to 2013-14.
Road development in states and the Northeast: Steady march forward
Historically, state road development in India has been funded through budgetary allocations. The role of multilateral agencies is also paramount when it comes to financing major road development programmes at the state level. States like Madhya Pradesh, Bihar, Odisha, Andhra Pradesh and Himachal Pradesh have attracted substantial funds from the World Bank and the Asian Development Bank. Meanwhile, a number of big projects such as the Bandra-Worli Sea Link, the Yamuna Expressway and the Agra-Lucknow Expressway were commissioned during the 20-year period.
The success of PPPs in the national highways segment inspired several states to follow the same route. Over 15 states set up PPP cells for mainstreaming private investments in infrastructure projects. States such as Gujarat, Maharashtra, Madhya Pradesh, Rajasthan and Karnataka have been frontrunners in taking up PPP projects. Meanwhile, road development in the north-eastern region has been accorded high priority by the government. The government launched National Highway and Infrastructure Development Corporation (NHIDCL) – a company dedicated to road development in the Northeast. NHIDCL is currently involved in the implementation of 118 projects covering about 3,000 km.
Tackling financing woes: Tapping innovative funding avenues
Commercial bank lending to pure BOT projects continues to be very limited. Recently, the government has changed the way it channelises funds, with the emergence of new and diversified funding avenues such as masala bonds, infrastructure investment trusts (InvITs), and to facilitate fund flow in the sector.
The bond market witnessed the launch of the ministry’s first-ever masala bond issuance. The Rs 30 billion issue, which was listed on the London Stock Exchange, attracted an overwhelming response from investors across the spectrum. The government’s decision to remove dividend distribution tax on InvITs has encouraged companies such as IRB Infrastructure, IL&FS Transportation Networks Limited (ITNL), Larsen & Toubro, and MEP Infra to list their assets under InvITs. In another milestone achievement, NHAI secured a loan of Rs 250 billion from the State Bank of India. While this is the largest loan amount sanctioned by the bank in one stroke, it is also the biggest-ever investment made in NHAI. Meanwhile, the authority is aiming to raise around Rs 620 billion through bonds this year.
Financial closures, especially for HAM-based projects have picked up. As per India Infrastructure Research, between May 2014 and August 2018, 25 road projects achieved financial closure, with most of these being implemented under HAM.
Asset sales have gained prominence in the past six to seven years with players such as ITNL, Hindustan Construction Company [HCC] Limited, NCC Limited, Sadbhav Infrastructure Project Limited, GMR Infrastructure Limited and Gammon Infrastructure Projects Limited offloading stakes in operational as well as under-construction projects. On the buyers’ side, several global investors are eyeing operational and revenue generating assets in India. Developers such as ITNL, Sadbhav, HCC, and Ashoka Buildcon have also refinanced debt to reduce costs.
Thrust on asset recycling: The TOT model
Long-term sources of financing are also being tapped. The launch of the TOT model is one such step. It has been introduced to garner long-term funds for the sector through the monetisation of the existing asset base. The first bundle of TOT projects worth Rs 97 billion was awarded to Macquarie in March 2018. Overall, NHAI’s asset recycling plans are expected to generate funds worth about Rs 1.2 trillion in the years to come.
Big moves: New programmes and expressways
Mega projects such as Bharatmala, Setu Bharatam, Char Dham Connectivity, and the development of economic corridors will be the biggest investment drivers in the sector. Phase I of the Bharatmala Pariyojana entails the development of 35,000 km of highways and economic corridors at an investment of about Rs 5.35 trillion. Expressway development has also gained momentum with 10 expressway projects at various stages of implementation. The Eastern Peripheral Expressway and Phase I of the Delhi-Meerut Expressway are the recent additions to the country’s expressway network.
Next steps: Towards colossal growth
In a nutshell, the sector has seen path-breaking initiatives being taken in the past 20 years. Policies have been formulated, regulations enacted, massive projects launched and innovative funding mechanisms introduced. In addition, the sector continues to enjoy strong political and administrative commitment. The experience gained during the implementation of the NHDP will serve as a blueprint for the sound implementation of new programmes such as Bharatmala.
The government has set tall targets for the next five years, highlighting plenty of opportunities. Overall, about Rs 7 trillion is expected to be invested in the sector in the next five to six years through the implementation of the mega programmes. However, given the past experience, land acquisition and approvals could pose a challenge in achieving the targets. Proper project preparation and due diligence are the much-needed steps to ensure that only viable projects are put on the block. Besides, limited availability of long-term funding sources may be a dampener to the government’s plans. Banks continue to be cautious in lending to pure PPPs in the sector. Nevertheless, TOT is an opportunity which investors have their eyes on.
As per the ministry, what remains to be dealt with is the bureaucratic logjam. The PPP story will continue to unfold, however, at a pace much slower than in the mid-2000s.