As compared to the past few years, 2018 has been quite a good one for both developers and investors in the road sector. They have reported rising traffic and increasing revenues. Setting aside sector-specific issues, their experience with the existing assets has been quite good so far. While stakeholders are of the view that road quality has certainly improved in recent years and that the National Highways Authority of India’s (NHAI) functioning has improved, they believe that there are still several roadblocks that need to be cleared.
Tolling is a challenge as users show an unwillingness to pay for using highways. This challenge is encountered particularly in the case of local vehicles. Electronic toll collection (ETC) is a key government initiative to address this issue. ETC deployment is on the rise and FASTag penetration has reached 25 per cent in value terms (as of July 2018). It is a welcome change for developers and investors, but they are of the opinion that ETC is still at a nascent stage.
ETC has contributed towards revenue improvement of toll plazas. It has also increased the efficiency of toll collection, decreased cash utilisation, reduced pilferage, checked exemptions and non-paying users, led to savings by reducing the need for cash management and saved manpower.
Notwithstanding the advantages offered by ETC, some losses have been incurred due to its deployment. Major losses have been incurred either due to blacklisting (when someone is on the blacklist but the gate still opens) or violation (when a 3-axle vehicle has a 2-axle tag). The other resultant losses are almost negligible.
Besides ETC, another important area of focus has been the deployment of the weigh-in motion technology. Weigh-in motion has also helped improve revenues. It has also contributed, albeit marginally, towards controlling overloading and heavy traffic on roads.
Industry opinion on outsourcing of tolling varies widely. Whereas some prefer not to outsource tolling at all, others are in favour of outsourcing completely. While outsourcing tolling operations, some players follow the approach of dividing a project into parts and entrusting these parts to multiple service providers. There is unanimity amongst players regarding outsourcing of maintenance operations as most of them generally do so.
Toll-operate-transfer (TOT) model
The broad construct of the TOT model has been much appreciated by investors and developers alike. However, the long concession period of 30 years offered under the model has received a mixed response. On the one hand, it is believed that the 30-year duration is extremely important for infrastructure investors. Yet, there are some who disagree and argue that it is extremely difficult to optimise upfront debt for such a long period of time. However, if NHAI can help in resolving this issue, then the 30-year duration might not be untenable. Since a very short concession period too does not appeal to the investor community, a concession period of 15-20 years appears to be the ideal middle path.
According to developers and investors, TOT is ideal for long-term investors and pension funds that have funds available to be blocked for a 30-year period. As for construction companies and contractors, they would prefer to deploy funds in construction rather than managing assets.
The TOT auction process conducted by NHAI was very transparent, giving as much information and data to investors as possible so that they could save time in conducting due diligence. Further, the view regarding the first bundle of the TOT programme is that it was well executed. However, there have been some concerns regarding the quality of data furnished by NHAI for the projects bid out under the second bundle of the model. As per developers, stretches bid out under the second bundle are not as good as the ones in the first bundle in terms of their operational performance.
Overall, though, investors have taken a positive view of the TOT programme. It has been termed as a good move as it is likely to improve the roads owned by NHAI.
While the investors’ stance on operation, maintenance and tolling in the road sector is encouraging, there are still many issues and challenges that need to be resolved. Overloading has surfaced as an issue that is the root cause of many problems. Added to that, some roads have heavy traffic along with overloading.
While NHAI has formulated several good policies, their implementation has not been very well thought through. At the developer and investor end, the pressure to implement these policies leads to wastage of time and money. Further, policies change every now and again. This becomes a big challenge faced by concessionaires. Though the polices are aimed at enhancing user satisfaction, there is scope for improvement in terms of their implementation. Industry needs to work closely with NHAI to frame new policies and ensure their proper implementation. Another major challenge pertains to the states. Exemption of tolls for vehicles by states is a worrying sign for the industry as a free state road potentially takes away traffic from highways.
In addition to these crucial challenges, there are numerous others too. While the top level of decision-makers is receptive to new technologies, this has not filtered down to the lower levels. This derails the smooth deployment of innovative technologies. Taking into consideration the hybrid annuity model, very few banks have been forthcoming. Closures on bilateral deals have become tougher due to the possibility of litigation. Over the past few years, increases in the minimum wage have significantly impacted operation and maintenance costs. These issues faced by developers and investors can likely be resolved by joint efforts on the part of the industry and authorities.
The revenue numbers for developers and investors are currently in line with the sectoral average of 25-28 per cent. If the portfolio of roads and road networks is chosen prudently, good growth rates can definitely be expected. A well-developed and active bond market is a prerequisite for long concessions. Thus, there is a definite need for increasing bond market activity.
Investors and developers are rooting for dedicated ETC lanes instead of hybrid lanes. Further, stakeholders are of the opinion that better digitalisation is the need of the hour.
Based on inputs from a panel discussion between Vivek Rastogi, Chief Executive Officer, Oriental Tollways; Neeraj Sanghi, Chief Executive Officer, Roads, IDFC Alternatives; and Vinay Sekar, Senior Vice President, Cube Highways and Transportation Assets Advisors, at a recent India Infrastructure conference