India Infrastructure Research recently hosted its 17th annual conference on “Road Development in India”. The conference highlighted the emerging trends and recent progress in the sector, identified new opportunities and discussed future strategies to fast-track project implementation. The following are the key takeaways from the conference…
The road sector has made significant progress in the past couple of years, despite disruptions on account of the Covid-19 pandemic. Construction and award of projects have been at an all-time high and asset monetisation has emerged as a key source of raising long-term capital in the sector.
The Ministry of Road Transport and Highways (MoRTH) constructed over 13,000 km of national highways in 2020-21, which is about 37 km per day. About 11,000 km of road projects were awarded, an increase of 20 per cent from 2019-20. During 2021-22, 12,000 km of highways are targeted for construction. As of October 2021, about 40 per cent of this target has been achieved.
The National Monetisation Pipeline has identified 6,800 km of operational roads for monetisation. The National Highways Authority of India (NHAI) has so far leased out three toll-operate-transfer (TOT) bundles, thereby raising around Rs 170 billion.
Meanwhile, infrastructure investment trusts (InvITs) have gained immense popularity. The sector has five InviT platforms, with over 5,500 km of assets. Recently, NHAI’s InvIT comprising a portfolio of five toll assets was launched.
Developers have also been monetising assets to deleverage their balance sheets. In the past seven to eight years, the monetisation of over 50 assets has generated an investment of over Rs 500 billion.
The next few years will offer abundant opportunities to developers, contractors and investors. The aim is to develop a national highway network of 200,000 km by 2025. The Task Force for the National Infrastructure Pipeline (NIP) has highlighted an investment requirement of Rs 20.34 trillion for the sector by 2025.
With such ambitious targets to meet, the sector is looking at ways to fast-track execution and development of good quality roads. There has also been an increased focus on reducing the cost of construction and enhancing quality through the use of new technologies, innovative equipment and alternative materials.
Current scenario
Traffic recovery in the sector has been swift. It recovered to pre-Covid levels from June 2021 after the second wave of Covid-19. Moreover, the impact of Omicron on traffic movement has been negligible. However, a sharp increase in commodity prices, if sustained, can impact contractors’ profitability by 1-4 per cent in financial year 2022-23.
The overall traffic volume is expected to witness year-on-year growth of 5-6 per cent in 2022-23. Further, growth in the overall toll collection is expected to be 17-20 per cent in 2022-23. Although the award activity has improved over the past few years, it still remains significantly lower than the peak achieved in 2017-18. Execution is expected to increase to around 11,000-12,000 km in 2022-23.
In terms of investment creation, NHAI has raised Rs 243 billion through monetisation (InvIT and TOT). The government is currently evaluating bids for three TOT bundles.
The sector has seen a lot of competition among industry players to bag projects. In February 2022, MoRTH reinstated the requirement of Earnest Money Deposits and other relaxations, viz., PBG (performance bank guarantee) increase are expected to be removed in the near term. This is expected to reduce the competitive intensity to some extent.
NHAI’s targets, achievements, new focus areas and financing strategies
Under the Bharatmala Pariyojana Phase I, around 13,000 km of length is yet to be awarded. This is expected to be awarded in the next two years. Bharatmala Phase II is in the approval stage.
As against a target of 5,000 km, around 3,600 km have been awarded in financial year 2022 by the authority. There has been a significant focus on project execution. Around 3,200 km of length has been constructed as of February 2022, as against a target of 4,500 km in financial year 2022. FASTag penetration is currently over 96 per cent. Pilot projects have also started for GPS tolling.
Going forward, all highways will be equipped with advanced traffic management systems. Over 500 wayside amenities will be provided on national highways by 2024.
However, relaxed bidding criteria, which led to aggressive bidding, is a cause for concern. Multimodal facilities and Parvatmala are new focus areas for NHAI. The focus has shifted from highway engineering to provision of services on national highways. NHAI also undertakes whole lifecycle cost analysis for projects under Bharatmala.
Industry perspective: Experience, outlook and best practices
The shortage of skilled labour, availability of raw materials and high input costs are some of the key issues being faced by contractors/developers. The rising petrol and diesel prices are also a cause for concern. There is a high competitive intensity for engineering, procurement and construction (EPC) and hybrid annuity model (HAM) projects. Award and construction activity is expected to continue at the current pace.
Developers are looking at state-level opportunities such as those in Uttar Pradesh and Maharashtra. Expressways are emerging as a lucrative construction opportunity.
Digitalisation is a key driver in construction, ensuring timely execution and cost effectiveness. Equipment is now connected digitally, thus enhancing efficiency.
There was substantial movement in the realisation of arbitration claims in 2021 post the formation of conciliation committees. EPC is expected to dominate the modal mix, followed by HAM. Going forward, BOT (build-operate-transfer) is likely to witness bidding from investors. Contractors expect the government to provide cushion against the unprecedented hike in material costs. A greater push to green technologies is also required.
Hybrid annuity model: Experience and challenges
Financial closure is difficult for weak sponsors. Land acquisition, shifting of utilities, cash flow issues due to GST (goods and services tax) and availability of quality manpower continue to remain key challenges.
The falling interest rate regime has had a bearing on the margins of developers. However, the shift to MCLR (marginal cost of funds-based lending rate) has mitigated the risk to some extent. Around 5-6 per cent is the uncovered escalation on account of the material price hike. Delay in approvals and descoping of project in case land is not available are issues that need to be addressed.
Competition is less in HAM vis-à-vis EPC. There are 10-12 bidders on an average for HAM projects as compared to 20-25 bidders for EPC projects. The timely issuance of COD (commercial operation date) is required. Also, 100 per cent land must be available to developers. In case land is not available, relocation must be done, rather than descoping of the project.
Lender viewpoint
Aggressive bidding for HAM projects poses a challenge. Lenders are cautious in funding such projects and hence, conduct a thorough due diligence.
The rating of contractors should be done for gauging the construction expertise and financial strength. NHAI must allow tripartite agreements. The downside for lenders needs to be protected.
An integrated study of all transport modes being planned is the need of the hour. NHAI had formed DME Development Limited for the Delhi-Meerut Expressway project. More DME-like structures are expected to come up in the future.
Bonds are becoming popular as a means of refinancing. There is sufficient headroom for lenders to finance developers, participate in InvITs and fund the NIP.