October 2018

The road sector was in deep trouble some five years ago. Bidders were highly optimistic during the 2010-12 period and made bids (including offering negative grants) that more or less guaranteed financial trouble. Indeed, many of those projects stalled, as developers headed for bankruptcy.

But the sector has seen a revival in interest although access to long-term funding remains a source of concern. A series of proactive policy and process changes have helped turn things around. Activity increased substantially in 2017-18. During the year, there was double-digit growth in highway construction with the daily rate of construction picking up by 25-30 per cent. The rate of awards also shot up.

The innovative hybrid annuity model (HAM), the toll-operate-transfer (TOT) model and the conceptualisation of the Bharatmala programme have helped turn things around while many cash-strapped developers have successfully deleveraged by selling off assets.

HAM has become popular because the government ensures that it obtains requisite clearances prior to project award. The TOT model is attractive since there is low (or zero) construction risk, relatively stable cash flows, a long concession period and revenue optimisation via O&M on offered stretches. The first TOT bundle attracted strong interest. NHAI’s asset recycling concept also looks viable. Meanwhile, technology induction such as the FASTag programme is achieving substantial growth in penetration.

Bharatmala indicates that the already substantial opportunities in the sector could scale up by another dimension. Given programmes such as Bharatmala, Setu Bharatam, and Char Dham Connectivity and the proposed economic corridors, some Rs 7 trillion could be absorbed in investments over the next five years.

Problems remain, although there have been improvements in sorting out bottlenecks such as land acquisition, clearances and approvals. But dispute resolution and arbitration continue to be areas of concern. The rising price of raw materials such as sand and aggregates and the quality of consultancy available are serious issues.

There has been some improvement on the financing front but there are new causes for concern here. Bank credit to the sector is slow although NHAI has raised a large Rs 250 billion loan from the State Bank of India and also placed thirty-year maturity bonds worth Rs 20 billion with the Life Insurance Corporation of India. The Ministry of Road Transport and Highways has listed rupee-denominated masala bonds on the London Stock Exchange.

But the recent collapse of IL&FS rings alarm bells. IL&FS is a major player in the sector as both a developer and financier, and this puts many projects at risk. It has also led to a sharp spike in bond market yields and led to renewed caution about infrastructure projects on the part of lenders. This has led to temporary disruptions in raising funds. There has also been a slowdown in tapping overseas sources due to weakness in the rupee, which makes masala bonds unattractive. The next six months could see a slowdown in awards, given electoral politics. Overall, however, the sector seems to be on a much firmer footing, given the evolution of successful models. Once these hiccups are over, road building activity is likely to see a graph of continuous acceleration.

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