The past few years have been quite eventful for the road sector. The government has not only infused the much desired momentum in the sector, but has also tried its best to be innovative. A sea change can be seen if one looks at the state of the sector today in comparison to about four years ago. The hybrid annuity model (HAM), the toll-operate-transfer (TOT) model, the Bharatmala programme, and FASTag deployment have become the new buzzwords. With several policies in place and a number of projects being put on the block, stakeholders across the board can expect substantial opportunities.
In full swing
Project awards have increased at a never-seen-before pace. The course correction measures taken during the past few years seem to be finally showing results. The length of the projects awarded and constructed increased at a compound annual growth rate of over 45 per cent from 2013-14 to 2017-18. Meanwhile, the decline in cost and time overruns has accelerated construction activity. HAM has met with success primarily due to the government’s proactive approach in obtaining all the requisite clearances prior to project award.
The sector has reported some important developments over the past year. Key amongst these is the award of the first bundle of TOT projects worth Rs 97 billion to the Macquarie Group in March 2018. Further, the National Highways Authority of India’s (NHAI) asset recycling plans are expected to attract funds worth about Rs 1.2 trillion in the years to come.
Another major milestone was the roll out of Phase I of the Bharatmala programme, which entails the development of about 35,000 km of highways and economic corridors at an investment of about Rs 5.35 trillion. The major components of Bharatmala include 44 economic corridors, 66 inter-corridor routes, 116 feeder routes, coastal and port connectivity roads, and border and international connectivity projects. The National Highways Development Programme (NHDP) has been subsumed under the Bharatmala programme. The 10,000 km of road length remaining for award under the NHDP will now be implemented under Bharatmala.
One of the biggest developments in the past 12-15 months was the signing of an MoU between NHAI and the State Bank of India for an unsecured loan worth Rs 250 billion. The loan will be provided for a period of 10 years with a three-year moratorium on repayments. It is notably the largest one-stroke loan to have been sanctioned to NHAI by any institution. Meanwhile, the Life Insurance Corporation (LIC) bought bonds worth Rs 20 billion in the first issuance of NHAI’s 30-year bonds in 2018-19.
NHAI also has plans to announce a buyback policy. Under the policy, the authority plans to buy back 20 national highway and 19 state highway projects spanning 3,160 km from private players.
While access to long-term funds continues to be a problem, steps are being taken to create a favourable financial environment. The Ministry of Road Transport and Highways (MoRTH) listed rupee-denominated masala bonds on the London Stock Exchange in 2017. IRB Infrastructure Developers and L&T Infrastructure Developers Project have listed their infrastructure investment trusts (InvITs) through public offer and private placement respectively. Players such as L&T IDPL, MEP Infrastructure Developers and Reliance Infrastructure have also initiated the process of listing their assets under InvITs. Asset sales are gaining traction with players such as IL&FS Transportation Networks Limited (ITNL), HCC, NCC, Sadbhav Infrastructure Project, Dilip Buildcon and Gammon offloading stakes in operational as well as under-construction projects. Financial closures, especially for HAM-based projects, have picked up. As per India Infrastructure Research, between May 2014 and October 9, 2018, 34 road projects achieved financial closure. Meanwhile, the MoRTH continues to explore innovative ways to build capacity and enhance efficiency in the sector. The country’s first manual on road expansion for scientific planning of highway infrastructure was released recently. Effective technology solutions such as ROMDAS have been introduced for monitoring road conditions. FASTag deployment has registered phenomenal growth with about 2.63 million tags issued so far and the concept of “One Nation, One FASTag” is also gaining prominence.
Industry’s take and recommendations for the sector
On a positive note, a systematic approach to deal with pre-construction bottlenecks such as land acquisition, clearances and approvals as well as financing has made developers optimistic. However, dispute resolution and arbitration continue to be causes for concern. In addition, rising prices of inputs (such as sand, aggregates, etc.) and consultant integrity and quality have also emerged as serious issues. Sub-contractor capacity and resource planning are some of the other problem areas. Moreover, at the time of preparing detailed project reports, NHAI should allocate land for surplus cut soil to ease the execution process. Further, the quality of independent engineers and authority engineers is not up to the mark. The government is conducting third-party quality checks to improve this. There is a need for skill development in order to better the quality of design and safety consultants available in the sector. This can be accomplished through tie-ups with the country’s premier educational institutes.
According to key developers in the industry, the government should mandate that all national highways be at least of four lanes and state highways be two-laned with paved shoulders. With respect to tolling, developers certainly prefer electronic toll collection over cash. In order to enhance toll collection efficiency, all government vehicles should have an exempt FASTag. In addition, the operational FASTags should be linked to the insurance premiums of cars to increase electronic toll collection penetration.
In the financing space, banks continue to be cautious in funding infrastructure projects, particularly engineering, procurement and construction (EPC) projects. They are more interested in taking up HAM projects instead.
A large number of non-performing assets in the sector are on account of under-construction projects. In contrast, operational projects, which are stressed, have found takers.
The majority of HAM projects have been won by large contractors. A number of mid-sized EPC contractors are now beginning to eye opportunities in these projects. With regard to TOT, there is a need to provide at least six months to bidders to submit well-thought- through bids. Further, a rationalised combination of projects in the TOT bundles is required. The TOT model provides an opportunity to developers to partner with global pension funds and private equity firms to bid for projects. While there is a high level of competition in the space, investors are bullish on the model. The second round of TOT auctions is expected to witness aggressive bidding due to a greater diversification of projects.
Future holds promise despite challenges
The government has set tall targets for the next five years, thus creating plenty of opportunities. Mega projects such as Bharatmala, Setu Bharatam, Chardham Connectivity and economic corridors, and the TOT model will be the biggest investment drivers. Overall, about Rs 7 trillion is expected to be invested in the sector over the next five-six years. Meanwhile, road construction in the north-eastern region and the development of rural roads will continue to attract government attention.
However, given the past experience, obtaining approvals could be a challenge in achieving these targets. Availability of long-term funding sources, and balanced risk allocation are still areas of concern. Despite these issues, the outlook seems positive. The sector has a plethora of opportunities for stakeholders across the board. The experience gained during the implementation of the NHDP will serve as a blueprint for the sound implementation of new programmes such as Bharatmala. Proper project preparation and due diligence are the much-needed steps to ensure that only viable projects are put on the block. NHAI has taken steps towards acquiring land before awarding projects and digitising land acquisition. This will augur well for the sound award and execution of projects in the future. In the near term, investors will continue to be interested in brownfield assets, maintaining their cautious stance towards the risks associated with greenfield public-private partnership projects.