Over the past year, the road sector has experienced expeditious growth. A number of projects were completed and awarded despite various pandemic pitfalls. National highway development progressed exceptionally well. Connectivity to isolated and inaccessible areas, decongestion of major road network nodes, and an integrated multi-modal national transportation and logistics network have been the top priorities for the sector. Indian Infrastructure presents the views of leading experts on the progress, digital initiatives, key challenges and the future outlook for the road sector…
What has been the progress in the road sector over the past one year?
During 2021-22, the Ministry of Road Transport and Highways (MoRTH) awards stood at 12,731 km, increasing by 16 per cent over the previous year’s levels, supported by significant awarding activity in March 2022 (5,113 km). The awards are likely to improve to 13,500-14,000 km for 2022-23, on the back of a strong impetus to the road sector. The National Highways Authority of India (NHAI) has an awarding target of 6,500 km in 2022-23 as against 6,306 km awarded in 2021-22. The Hybrid Annuity Model (HAM) and engineering, procurement and construction (EPC), together accounted for most of the NHAI awards in the past five years, while the build-operate-transfer (BOT) (Toll) awards accounted for less than 5 per cent of the orders during this period and are expected to remain at similar levels in 2022-23.
Meanwhile, the execution pace has been subdued in 2021-22, owing to the prolonged monsoon, which affected the productive days for an extended period. The execution stood at 10,457 km in 2021-22 against 13,327 km in 2020-21. Given the healthy order book of road sector players and moderation in key input prices, execution is expected to improve to 13,000-14,000 km for 2022-23. NHAI has a target of constructing 5,000 km in 2022-23 at 13.69 km per day.
Traffic recovery has been swift and traffic growth has remained positive in the third and fourth quarters of 2021-22. The impact of Omicron on traffic movement remained negligible, as reflected in the collections, which remained above Rs 36 billion for January and February 2022. Overall, toll collections witnessed a 12 per cent growth in 2021-22 despite the second wave of the pandemic.
“Given the healthy order book of road sector players and the moderation in key input prices, project execution is expected to improve to 13,000-14,000 km in 2022-23.” Rajeshwar Burla
The government’s policy to increase private sector participation has proven to be a boon for the infrastructure industry, with many private players entering the business through the public-private partnership (PPP) model. In 2020-21, there were 125 PPP projects worth $23.25 billion in India. The government has allocated Rs 111 trillion ($1.4 trillion) under the National Infrastructure Pipeline (NIP) for financial year 2019-25. The road sector is likely to account for 18 per cent capital expenditure during this period. NHAI plans to construct 25,000 km of national highways (NH) in 2022-23, at a pace of 50 km per day.
“With the government permitting 100 per cent foreign direct investment in the road sector, several foreign companies have formed partnerships with Indian players to capitalise on the sector’s growth.” Sudhir Hoshing
Yogesh Kumar Jain
If we go by numbers discretely, the progress of road construction at 28.6 km per day during 2021-22 reduced by over 20 per cent from 36.4 km per day during 2020-21. However, we need to consider the adversities and headwinds encountered during the implementation of projects throughout the year. From the deadlier second wave of Covid-19 in the first quarter to geopolitical conflict in the last quarter, 2021-22 faced many challenges including disruptions in supply chains and a sharp rise in the price of key construction materials.
“The Gati Shakti National Master Plan is a landmark initiative by the government to seamlessly integrate
seven key sectors with concomitant support infrastructure. This will boost the pace of infrastructure development.” Yogesh Kumar Jain
The road sector has progressed tremendously in the past year. Around 5,835 km of national highways were constructed in the first nine months of 2021-22 itself. India’s national highway construction slowed down to 28.64 km a day in 2021 as compared to 34 km per day in 2020. The delays can be attribute
d to the disruptions caused by the second surge of the Covid-19 pandemic and a longer monsoon season in parts of the country. Better targets in terms of both award and construction of road projects have been achieved by NHAI and NHIDC this year. NHAI has awarded projects of 6,306 km and constructed around 4,218 km in 2021-22, which is higher than the projects constructed in the past two years. In terms of disputes, in 2021-22, NHAI settled over 60 disputes worth Rs 40.76 billion against claims of approximately Rs 145 billion, effectively settling 28 per cent of the claimed amounts. The settlement of disputes is a positive step in the growth of the sector as it will free up investment that was stuck in protracted disputes and companies will ultimately re-channel these funds back into the road sector.
“There is a steady movement towards sustainability in the road sector.” Dinesh Pardasani
There has been a significant influx of investments and projects, with 6,895 km of road projects and 6,968 km of national highway corridors across the country during the past one year. The road sector has benefited from the policy initiatives taken by the government for institutional integration of transport departments, addressing issues of land acquisition, asset monetisation, revival of stalled projects, flexible road pricing initiatives and affordable redressal of disputes. In fact, the road sector has benefited immensely from increased government expenditure and the move towards permitting 100 per cent foreign direct investment has also been a smart decision to capitalise on this sector’s growth.
Despite a major lockdown, Indian roadway and highway construction has spanned over 13,298 km. Moreover, the new quadrilateral economic forum comprising India, the US, Israel, and the UAE aims to focus on infrastructure development. Hence, not only is the progress in the road sector encouraging from a developmental standpoint for India, but the international cooperation witnessed over the past year has also ensured that this sector will play a significant role in the years to come.
“India has a world record of constructing 38 km per day and the target is going up to more than 100 km
per day.” Ravi Singhania
What has been the impact of the key initiatives taken by the government?
Relaxation of technical and financial eligibility requirements for bidders, along with the relaxation in the earnest money deposit (EMD) requirement during 2020-21 has resulted in increased competition for MoRTH/NHAI projects. All the NHAI EPC projects have been awarded at a discount to base price during 2020-21 and 2021-22.
ICRA expects the competitive intensity to moderate, going forward, with reinstatement of the bid security/EMD deposit and collection of additional performance security for abnormally low bids. Shift from milestone-based billing to monthly payments, lower performance security and release of retention money are likely to support the cash conversion cycle of contractors/developers.
Linking operations and maintenance (O&M) payments to bid project cost (BPC) is an extremely positive move for hybrid annuity road projects. HAM projects account for more than 50 per cent of the NHAI awards in the past two years and are estimated to account for 45-50 per cent of the NHAI awards in 2022-23. Earlier, bids were awarded on the basis of the lowest assessed bid price, which is a summation of the NPV (net present value) of the BPC during the concession period and bid O&M during the operations period. MoRTH, through a circular dated May 23, 2022, changed the bid parameter to BPC alone, while doing away with the quoting of the O&M cost. In lieu of this, the bidder would be paid a fixed percentage of BPC as O&M during the operations period. O&M is a critical aspect in HAM projects as the future annuities depend on the proper upkeep of the road and its failure is a serious risk for lenders as well as the NHAI.
The need to book profits upfront, along with the increasing competition, has resulted in some of the developers resorting to quoting abysmally low O&M bids. Based on our sample study of HAM projects, the quoted O&M cost as percentage of BPC varies from a low of 0.07 per cent to 3.13 per cent. The median O&M
cost as a percentage BPC stood at 0.38 per cent and cashflows for median O&M cost are 47 per cent lower than the proposed fixed O&M payments. A developer has to bid at 0.72 per cent of BPC as O&M cost for receiving the same O&M payments as the proposed fixed O&M schedule. Further, fixed payments are in line with the maintenance requirement of the project and are likely to enable the special purpose vehicle (SPV) to maintain the project stretch. From this perspective, linking O&M payments to bid project cost is an excellent move and a win-win for all stakeholders. The skin in the game for developers also gets addressed for them to stay committed to these projects for a longer tenure.
With the government permitting 100 per cent foreign direct investment (FDI) in the road sector, several foreign companies have formed partnerships with Indian players to capitalise on the sector’s growth. Cumulative FDI in construction development stood at $25.93 billion between April 2000-December 2020. The government’s move to cut GST rates on construction equipment from 28 per cent to 18 per cent is expected to give a boost to the industry. In the Union Budget 2022-23, the government has planned for an increase in the allocation for the central road fund by 19 per cent; the total fund was Rs 2.95 trillion ($38.86 million).
India’s Gati Shakti programme has consolidated a list of 81 high impact projects, of which road infrastructure projects were the top priority. The major highway projects include the Delhi-Mumbai Expressway (1,350 km), Amritsar-Jamnagar Expressway (1,257 km) and Saharanpur-Dehradun Expressway (210 km). The main aim of this programme is a faster approval process, which can be done through the Gati Shakti portal and digitised the approval process completely.
Yogesh Kumar Jain
On the economic front, the government took several key initiatives and relief measures under the Atmanirbhar Bharat Abhiyan to mitigate the adverse impact of the pandemic and catalyse the economic growth. The key relief measures for the infrastructure industry included a three-month moratorium on both term and working capital loans, and a reduction in the cash reserve ratio among other alleviations. All these measures positively impacted the infrastructure sector, with the availability of credit at substantially lower interest rates and adequate liquidity in the system, and saved developers from loan repayment defaults and delinquents. Further, specific relief measures for the construction industry such as reduction in performance security guarantee from 5 per cent to 3 per cent, release of retention money and relaxation in payment terms also greatly helped in easing the liquidity stringency and maintaining the progress.
The policy and regulatory initiatives by the government have propelled investment and growth in the road sector. Delays in the land acquisition process are the main reason for the stalled construction of road projects. Hence, the Bhoomi Rashi Portal developed by MoRTH for digitalising the land acquisition process for NHAI is a welcome move that will reduce the time period for publication and increase transparency in the process. The reduction of the goods and services tax (GST) rate to 18 per cent from 24 per cent for certain construction materials is also expected to give a forward push to the industry. Although there has been around five years of delay under Phase I of the Bharatmala Pariyojana, which aims to build and upgrade 134,800 km of national highways and was originally targeted for completion in 2022, the work is progressing well now, and all projects are likely to be awarded by 2024.
The largest impact has been superior inter-state connections across the national capital, state capitals, major ports, rail junctions, link border roads and foreign highways. This has direct implications for multiple development
goals, ranging from rural accessibility to employment. The imbalance in regional development is an issue for India. Widespread connectivity through initiatives such as the Bharatmala Pariyojana would alleviate this.
The Gati Shakti programme led to significant road infrastructure projects such as the Delhi-Mumbai expressway, the Amritsar-Jamnagar expressway and the Saharanpur-Dehradun expressway, establishing end-to-end connectivity across major locations. Another major impact was roads being made weather-resilient in Agartala.
Under Phase I of the Bharatmala Pariyojana, the government has approved the implementation of 34,800 km of national highways in five years, with an outlay of Rs 5,350 billion. Further, 22 greenfield projects worth Rs 3.26 trillion, spanning 8,000 km, are being constructed under the scheme.
With its series of initiatives, the government is garnering major investor interest in the sector. The vision is to construct 20,000 km of national highways by 2022, and NHAI is expected to generate Rs 1 trillion annually over the next five years. Hence, this sector can contribute significantly towards the economy’s recovery after the pandemic.
What are the sustainable practices being adopted?
Recycling asphalt and concrete for the construction of roads and parking lots is one of the sustainable practices now in use. Other approaches include the application of porous pavements, a bio-based asphalt sealant, the use of permeable pavers and the reliance on soy-based striping paints.
Yogesh Kumar Jain
Sustainable practices should be adopted religiously in design, engineering, procurement, construction, and operation of infrastructure assets to ensure that what we develop is not at the cost of environment and future generations. These should be undertaken at the policy level by the government authorities and at the implementation level by the entities responsible, right from design to commissioning and operation of projects. The government authorities have already started permitting the use of innovative materials, technologies and practices that will conserve natural resources and save time and cost of construction.
Construction companies, including us, are also earnestly working towards this objective through value engineering, recycling of materials and deployment of modern machinery that save both time and cost. The implementation of electronic tolling through FASTag for user fee collection is a breakthrough initiative. With meticulous planning, the adoption of modern technologies and deployment of state-of-the-art machinery, our company has set two new world records at one of our EPC projects, Package 29 of the Delhi-Vadodara Greenfield Expressway. It has constructed the longest length of flexible pavement (over 50 lane-km) in 100 hours and laid the highest quantity of bituminous mix (42,66 mt of DBM) continuously in 100 hours.
There is a steady movement towards sustainability in the sector. The implementation of the Vehicle Scrapping Policy, 2021 will improve fuel efficiency and reduce pollution by scrapping over 10 million end-of-life vehicles that are over 15 years old and fail the fitness test. The reduction of 15-20 per cent of emissions from vehicles is expected when the old vehicles are discarded. Another interesting development is the trial run of the upcoming Delhi-Jaipur e-highway, a 278 km national highway for electric vehicles, which is scheduled for September 2022. This highway will have battery recharge facilities for e-vehicles and is an important step towards reducing the carbon footprint. Other government initiatives include building national green highway corridors, for which MoRTH and the World Bank recently signed a $500 million pact.
Eco-friendly roads are being made using noise-reducing asphalt, eco-friendly ingredients, water-saving pavements and full-depth reclamation. A Green Highway Division has been set up by NHAI to carry out plantation along highways and medians. The Eastern Peripheral Expressway (EPE) is the first smart and green highway of the country. It has significantly reduced traffic congestion in Delhi with its automatic traffic management system, landscaping and wayside amenities. EPE is also the country’s first highway to be lit by solar power. It boasts solar pumps for watering plants, arrangements for rainwater harvesting on both sides every 500 meters, and drip irrigation for plants all along the expressway. EPE has set a benchmark in highway construction by being environment-friendly with world-class safety features and smart/interactive infrastructure. In fact, 75 lakh trees have been planted and geo-tagging of saplings done to track the progress of plants.
The government is aiming to build 26 green expressways by year 2026 under the Bharatmala Pariyojana, which would reduce the travel time from Delhi to Dehradun, Haridwar or Jaipur to two hours. In fact, a 20 km project comprising an elevated road and tunnel is being built from Rajaji National Park, which will be Asia’s longest elevated highway wildlife corridor. NHAI has taken utmost care in deciding the project elements, considering concerns of flora and fauna in consultation with expert Wildlife Institute and State Government Forest departments, which has resulted in the cutting of a fewer number of trees, avoiding the cutting of hills to great extent, and enabling the crossing of animals beneath the highway.
What are the key challenges that remain unaddressed?
The slow progress on the National Monetisation Pipeline in 2021-22 has been a concern. During the year, nearly 684 km of road length (14 per cent of the target in terms of length) and Rs 158.79 billion (53 per cent of the target in monetary terms) was monetised through two successful toll-operate-transfer (TOT) bundles and the NHAI Infrastructure Investment Trust (InvIT). Of the eight TOT bundles floated so far, four were successful and the remaining four were cancelled due to bids lower than the IECV (initial estimated concession value). The NHAI was able to raise a total of Rs 232.22 billion through four successful TOT bundles and Rs 73.5 billion through InvITs. The NHAI has currently invited bids for two packages (9th and 10th), comprising one stretch each, with a cumulative length of 198 km in the states of Uttar Pradesh and Madhya Pradesh.
The completion cost of Bharatmala Pariyojana Programme (BMP) is estimated at Rs 10.63 trillion after factoring in the cost escalations up to December 2021. This is 99 per cent higher than the initial estimates, owing to substantial rise in land acquisition cost and a steep increase in input costs. Hence, timely asset monetisation remains critical to fund the BMP programme.
In PPP projects, collection of toll becomes difficult as toll plazas have often been the site of many national-level strikes. Prior land acquisition is still an impediment. Other unaddressed obstacles include the poor quality of detailed project reports and utility shifting.
Yogesh Kumar Jain
Timely handing over of unencumbered and vacant land for project execution still remains a key challenge. As we all know, land being a state subject, it would be a challenge for the central government authorities to peacefully acquire the required land in a timely manner without constructive and timely support by the respective state governments. The payment of GST dues to developers has been another challenge that needs to be addressed for sustainable cashflows. There is a sizeable number of pre-GST era highway projects that are being implemented on the hybrid annuity mode and other fund-based implementation models, where additional financial costs are to be reimbursed under change-in-law and other contractual provisions to developers. The recent increase in the rate of GST from 12 per cent to 18 per cent on construction contracts and the consequent additional financial burden on the industry is another challenge.
The road sector has the maximum number of delayed projects, with delays in 300 out of approximately 825 ongoing projects. As discussed earlier, the time taken in land acquisition and obtaining environment and forest clearances remains the main driver for delays. Therefore, initiatives such as the Bhoomi Rashi Portalmay will reduce delays to some extent. The other challenges are economic slowdown affecting the performance of concessionaires, addressing the difference in actual revenue vis-à-vis the modelled/projected revenue in tender documents, debt servicing and private financing. As of 2021, the cost overrun of projects in the road sector is estimated to be more than Rs 81.20 billion. Increased diligence on the part of NHAI and private players along with government intervention is required to push through the projects. Another problem is that NHAI challenges the majority of the arbitral decisions against it even if the award in favour of the contractor relates to justifiable claims. This leads to additional litigation, and funds that could be reinvested remain tied up longer.
As per the Ministry of Statistics and Programme Implementation, 888 projects worth Rs 5.45 trillion are underway in the road and highway sector. Delays have been witnessed in 97 projects, while 144 projects have suffered a cost overrun. These lapses may be due to several reasons, such as lack of equity with developers, unavailability of land for the expansion of national highways, higher cost of financing, land acquisition issues, shortfall in funds for maintenance, and bottlenecks and checkpoints on national highways adversely impacting the benefits of the goods and service tax. The Standing Committee on Transport (2016) has observed that several long-term loans disbursed for the road sector have turned into non-performing assets. This issue stems from project bids made without proper study, and hasty award of projects.
Banks and other infrastructure lending institutions have also been reluctant to finance the highway sector. This has led to difficulties in debt servicing, putting additional stress on road infrastructure portfolios.
What is the sector outlook for the next one to two years?
The BMP awards are expected to be completed in 2023-24, assuming the yearly NHAI awards of 6,000-6,500 km in 2022-23 are completed. However, as observed in 2018-19, any significant decline in awarding in 2023-24, it being an election year, may push award completion to 2024-25. Assuming an annual execution of 4,500-5,000 km from 2022-23 onwards, the BMP is expected to be completed in 2027-28, a delay of six years from the initial envisaged completion date of 2021-22. This can be attributable to the delay in land majorly attributed and the Covid-19 pandemic.
The decade-high toll rate growth will likely improve toll collections in 2022-23. Historically, the change in Wholesale Price Index (WPI) in December has varied between -2.41 per cent and 5.88 per cent since 2012. However, the December 2021 WPI witnessed a healthy growth and stood at 13.46 per cent (against 2.0 per cent in December 2020) and the March 2022 WPI increased by 14.5 per cent. The toll projects linked to the December WPI witnessed 8.4 per cent growth in toll rates and projects linked to the March WPI saw 14.5 per cent growth. This is expected to result in a healthy growth in collections for toll road assets in 2022-23. The toll collections are expected to increase by 17-20 per cent in 2022-23 (considering the loss of revenues in Q1 of 2021-22 due to the Covid second wave).
High input prices are likely to exert pressure on the profitability of road contractors. The composition of various raw materials in a construction contract varies, depending on the segment and the scope of work. Typically, steel, cement, bitumen, aggregates, sand and fuel are major raw materials used in construction. However, there can be a lag in the translation of the price variation as per the billing cycle. A sharp increase in commodity prices, if sustained, can impact an EPC contractor’s profitability by 1-4 per cent in 2022-23.
In the near future, numerous PPP initiatives are envisaged. The number of BOT and TOT projects is expected to increase as they are more cost-effective for MoRTH and the NHAI. With initiatives such as PM Gati Shakti Yojana and Bharatmala Pariyojana, the roads sector can witness a pipeline of projects worth Rs 1 trillion annually. As the Indian government is very receptive to infrastructure growth, all developers and construction companies may anticipate a tremendous growth, going forward.
Yogesh Kumar Jain
The sector outlook for the near future is bright. The allocation for infrastructure development increased by 35 per cent in the Union Budget 2022-23, which testifies to the government’s commitment to the sector. Various initiatives including the NIP and the Bharatmala Pariyojana, with a focus on the development of a large number of greenfield expressways and economic corridors by NHAI, provides a promising business landscape for the sector in both the short and long terms. The Gati Shakti National Master Plan is another landmark initiative taken by the government to seamlessly integrate seven key sectors — roads, railways, airports, ports, mass transport, waterways and logistics infrastructure — with concomitant support infrastructure, including energy transmission systems, an IT network, water and sewerage systems, and social facilities. This will boost the pace of infrastructure development and is expected to significantly reduce the overall logistics costs, which are otherwise much higher compared to developed countries.
The transport sector is geared up to be the fastest growing infrastructure sector in the coming years with an expected CAGR of 5.9 per cent. Of this, the highest sector-wise sub-opportunities have been identified for roads and bridges as part of the NIP for financial years 2020-25. The industry is moving towards a future-driven approach. Adding fuel to the growth is the PM Gati Shakti Master Plan for Expressways that will be formulated shortly for coordination of 16 different ministries including roadways to secure faster approval of roadway plans (including 22 greenfield expressways).
For 2022-23, MoRTH and highways have been assigned nearly Rs 680 billion more than the allocation in 2021-22. The majority of these funds have been allotted to NHAI. NHAI will rely on budgetary resources instead of borrowings for the first time in several years and the expansion of the national highway network expected for this year is 25,000 km. An additional fund infusion is anticipated with the monetisation of brownfield assets such as national highways as part of the National Asset Monetisation Pipeline by engaging the private sector. Increased transfers from the Central Road and Infrastructure Fund – 61 per cent more than in 2021-22 – and a 51 per cent annual increase in funds are expected from the National Investment Fund. It is expected that the road sector will generate the highest opportunities for infrastructure growth in India by spearheading the PPP movement. As potholes are getting plugged in national highways, the goal of last-mile connectivity to villages and state highways should also be a part of the future vision.
The outlook for this sector in the coming years is bright and enabling. NHAI is planning to convert the NHAI InvIT into a public one and approach the capital market. Investors can invest their money and get 4.5-5 per cent returns. MoRTH is also planning to remove toll plazas on national highways and instead use Automatic Number Plate Reader cameras. In financial year 2022-23, it is anticipated that 40 km of new national highways will be constructed daily.
The government’s plan to build 26 green expressways will facilitate last-mile connectivity and have a great impact on India’s overall urban and rural growth. Connectivity with remote and tough terrains will result in decongestion of major points in the road network via the creation of an integrated multi-modal national network of transportation and logistics. Investments in this sector from private entities, through national as well international collaborations, promises high-quality road construction, strengthening infrastructure in the nation.
Recently, the Union Minister of Road Transport and Highways said that India’s infrastructure will be as good as the United States by 2024. I not only concur with what he said, I also believe that with a major shift in focus to developing the economy and mainstreaming sustainability, the infrastructure of Indian roadways is soon going to be globally recognised.
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