The road sector has been on a high-growth trajectory in the past few years. The government effectively spent its first term initiating and implementing course correction measures to bring the sector back on track. This led to a substantial pickup in project award and the construction rate too rose manyfold. The investment scenario also improved and both the government and private players switched to new and innovative sources of funding road infrastructure. It is hard to assess whether the sector is potentially in the grip of a slowdown. That said, a relook at the actions of the government and industry is certainly required to avoid past errors.
Recent progress, solutions and unresolved concerns
From 2014-15 to 2018-19, a total length of about 57,000 km was awarded. Project awards peaked during 2017-18 when the Ministry of Road Transport and Highways (MoRTH) reported award of road projects spanning a length of over 17,000 km. The construction rate also increased from about 12 km per day during 2014-15 to about 30 km per day during 2018-19. The ministry notably overachieved its construction target for 2018-19, when the highest ever length of 10,855 km was constructed. Between 2014-15 and 2018-19, the National Highways Authority of India (NHAI) acquired about 47,000 hectares of land, incurring an expenditure of about Rs 1.1 trillion. The authority is targeting the acquisition of 10,000 hectares during 2019-20.
Noteworthy amendments regarding fixation of appointment date after provision of 80 per cent right of way, 75 per cent upfront payment to the contractor in case of arbitration, reduction in the time period of dispute resolution to 12 months (plus six months), and introduction of new models such as the hybrid annuity model (HAM) have resulted in renewed private sector interest.
Land acquisition though continues to be an area of concern. Moreover, issues such as large sums of money stuck in arbitration, delayed land acquisition, shifting of utilities, challenging of arbitration decision in higher courts, unwillingness of banks to give bank guarantees, and a large number of players facing arbitration in the National Company Law Tribunal remain unresolved.
Issues with HAM
Launch of HAM has contributed significantly to growth in project award. The model constituted 46 per cent of the total project awards in 2017-18 and 40 per cent in 2018-19. Close to 50 per cent of the HAM projects achieved financial closure, albeit with a delay on account of a lending freeze on public sector banks and tight liquidity.
A few mid-sized companies have bagged most of the contracts under HAM. Their order books have swollen up to four times their revenues, raising concerns of timely project execution, the key reason why banks are reluctant to lend to them. Lenders are also taking time to understand the model’s nuances since the developer’s risk exposure has shrunk further under HAM. The concessionaire is now expected to bring in only 12 per cent of the project cost (20 per cent of the 60 per cent project cost not financed by NHAI) as equity. As a result, HAM is also likely to witness a moderation in interest from stakeholders, given the huge order inflow in the past three to four years.
Back to basics
NHAI is planning to tweak the build-operate-transfer (BOT) framework of awarding road projects in an effort to revive private investor interest in the model. The authority has initiated consultations with various industry stakeholders on the kinds of changes that can be brought about in the framework. As per recent reports, NHAI has identified 950 km of highway projects that will be built at a cost of Rs 300
billion on a BOT basis. The projects are spread across Andhra Pradesh, Haryana, Maharashtra, Karnataka, Tamil Nadu, West Bengal, Chhattisgarh and Madhya Pradesh.
TOT – The way out?
Asset monetisation is being viewed as the most suitable way to generate funds to support the ambitious Bharatmala programme. NHAI has finalised five TOT bundles for asset recycling, of which three are under technical due diligence. It is targeting Rs 49.95 billion from the monetisation of the third TOT bundle and has extended the deadline for receiving bids by a month to October 2019 acquiescing to the demand by investors. It plans to monetise nine highway stretches totalling 566.27 km in Uttar Pradesh, Bihar, Jharkhand and Tamil Nadu in the third tranche under the TOT model.
Besides, secondary sales of assets to asset managers and transfer of assets to infrastructure investment trusts (InvITs) has been on the rise. In recent times, in addition to operational revenue generating assets, private equity investors have expressed interest in under-construction assets.
In the grip of a slowdown?
With India’s macroeconomic growth estimates being revised downwards by the International Monetary Fund and signs of a slowdown becoming visible, there are tough times ahead for the road sector. At the micro level, while NHAI has allayed concerns surrounding its financial soundness, exercising fiscal prudence will be a step in the right direction. The authority is already planning to float an InvIT soon.
The ministry has set an award target of 15,000 km under the Bharatmala programme for the current fiscal year, while the construction target stands at 10,000 km. In a nutshell, there is a need to bring down construction costs through new technologies and innovative means. While there is enough availability of funds for construction of national highways through various sources, it is necessary to cut down construction costs through the use of new materials and innovative technologies in order to improve the economic viability of projects. In this regard, the MoRTH has recently directed its officials to speed up project implementation through faster decision-making and stricter monitoring.