October 2022

Although there has been a slowdown across the road sector in 2022-23, there have also been positive developments. Financial models have stabilised and funding constraints eased. Smarter construction methods allied to use of better equipment, more eco-friendly construction materials and better monitoring systems should enable the pace to pick up again, and result in a national network that is more cost-effective and sustainable. Policy tweaks have led to more aggressive competition amongst infrastructure developers and construction companies. More state governments are also evincing interest in enhancing road networks, which should complement central efforts in this direction.

After registering a record average 37 km of road construction per day in 2020-21, the pace eased to 28.6 km per day in 2021-22 and has further slowed to 19.4 km in 2022-23. The causes of the slowdown include high input and raw material costs, extended monsoons, delays in land acquisition, and pandemic-related disruptions. In 2021-22, MORTH awarded 12,731 km of road length, an advance of 16 per cent over the 10,964 km awarded in 2020-21. But in 2022-23, awarding activity has also slowed with 4,092 km being awarded in April-September 2022, compared to 4,609 km in April-September 2021. The target of highway construction is 12,000 km for 2022-23. The 2022-23 target is unlikely to be achieved since the construction pace would have to increase to 46 km in the second half of the fiscal year.

In the longer term, the flagship BharatmalaPariyojana is seeing delays. The programme is now expected to be completed by 2026-27 at an escalated cost of Rs 10.63 trillion, which is almost double the original estimate of Rs 5.35 trillion.

On the financing side, the InvIT model has become popular. Sophisticated institutional investors such as CPP Investments, Ontario Teachers’ Pension Plan Board and GIC have invested in InvITs of private developers. The NHAI InvIT has raised Rs 14.3 billion for part-funding the acquisition of three additional road projects from NHAI. When it was launched in November 2021, the NHAI InvIT raised Rs 73.5 billion in its maiden round, with an initial portfolio of five operating toll roads spanning 390 km.

Over Rs 380 billion has been raised across the sector via asset sales during January-July 2022, which is thrice the amount of Rs 125 billion raised during calendar 2021. In terms of project structures, the hybrid annuity model (HAM) and EPC dominate. HAM has seen changes in the model concession agreement to encourage private participation with a reduction in bid eligibility criteria encouraging mid-sized players to enter. This, in turn, has led to aggressive bidding.

Timely asset monetisation is crucial. The reduction in the lock-in period for BOT projects from two years to one year helps developers’ capital to be freed faster. A HAM amendment that no longer mandates O&M costs to be factored in during the time of project bidding ensures equal footing for all bidders and reduces bidding abnormalities. The reinstatement of EMD/bid security should reduce competitive intensity in the EPC space by ensuring developers bring sufficient resources to the table.

On the technical side, the industry is using better equipment; it has become smarter at monitoring ongoing and operating projects; designs, including bridge designs, have been improved to take local considerations of terrain, etc. into account. The use of more eco-friendly materials that incorporate waste should enable cost reductions as well as being more eco-sustainable.

States too are attempting to develop their own road networks. This includes ambitious projects like expressways, and state highway and major district road networks. All these projects are both capital intensive and present employment opportunities. Measures such as e-invoicing truck cargoes, FASTags (and successor systems) for tolling, and GST (which reduces the need for state excise departments to hold up cargo movement) have helped reduce travel times substantially. In turn, that means a drop in logistics costs. The long-term benefits should be considerable.