The road sector has witnessed a higher uptake of projects in the past two years compared to previous years. This is primarily due to the government’s initiatives to fast-track project implementation. Indian Infrastructure talked to some experts about sector activity, the Kelkar Committee recommendations, budget expectations, and other issues pertinent to the highway sector…
How would you rate the performance of the road sector in the past two years?
Jaijit Bhattacharya, Partner, Infrastructure and Government Services, KPMG India
An efficient physical infrastructure is one of the preconditions for sustained economic growth. Over the past two years, a number of issues such as poor project planning, regulatory roadblocks, balance sheet stress and indiscipline by developers have led to the of capital constraints and poor road construction. It is safe to say that the road sector is now gaining momentum due to the corrective actions taken by the government. Though signs of recovery are already evident, more still needs to be done. Given the impending budget announcement, the time is ripe to revisit the sector with a fresh perspective. This becomes ever more important given the thrust on the Make in India initiative and on rural connectivity.
A.K.S. Chauhan, Chief Operating Officer, GR Infraprojects Limited
The performance of the road sector during the last two years can be rated average (during the initial period) and very good (by the end of the two-year period). It is too early to come to a final conclusion; however, there has been positive sentiment in the road sector ever since the new government has come into office. The government has also pleased the stakeholders by taking various initiatives to revive the sector. Of late, the sector has witnessed a surge in activity with the award and announcement of several road projects. Nonetheless, a lot still needs to be done for the revival of the public-private partnership (PPP) mode.
Sudhir Hoshing, Joint Managing Director, IRB Infrastructure Developers Limited
The road sector has been continuously improving after the major downturn during 2012-14. A number of build-operate-transfer (BOT), engineering, procurement and construction (EPC) and hybrid annuity model projects have been taken up by developers and contractors. The sector may not have completely bounced back yet, and more improvements are required, going forward.
Karthikeyan M., Vice-President, Investments Lead, Uniquest Infra Ventures Private Limited
The performance of the road sector has been good over the past two years. The central government has understood the problems correctly – that is, lack of equity with developers and the high risk perception of the tolling model. Therefore, the government has concentrated on the EPC model to build roads in India. In the BOT segment, the Ministry of Road Transport and Highways (MoRTH) has taken several initiatives to directly interact with stakeholders and offer solutions to solve their problems. Nevertheless, the existing issues in the BOT segment pose a challenge and need to be addressed at the earliest.
Parvesh Minocha, Group Managing Director, Transportation, Feedback Infra Private Limited
The first year saw expression of intent and a struggle to resolve the key issues facing the sector. However, nothing much was achieved, perhaps due to the huge challenges and the sheer size of the problem. A number of attempts were made to resolve the issues but the real action started only in the second year, which itself is a minor miracle. During the second year, a number of stuck projects were kick-started, ways were found around the low PPP appetite, government funds were tied up, and EPC projects were awarded. Further, some hitherto unheard of measures such as the National Highways Authority of India (NHAI) putting in equity in stuck projects, cancelling projects beyond redemption, monetisation of projects built using government funding by using the toll-operate-transfer model, launching hybrid annuity projects, etc., were rolled out. For the second year, I would rate the sector performance at 8 out of 10, though many challenges still remain.
Rohan Suryavanshi, Head, Strategy and Planning, Dilip Buildcon Limited
I will give a five-star rating to the performance of the road sector in the past two years under transport minister Nitin Gadkari’s leadership. The government adopted a three-pronged approach in the past two years to push road development. These are: kick-starting stuck projects, improving award activity and overcoming regulatory hurdles. Development had to be kick-started after the systemic lethargy that had crept in under the previous government. To this end, the MoRTH undertook project works on its own and set up project implementation units in states, besides implementing work through NHAI. The government first carefully evaluated the type of road project required and then identified the funding mechanism (EPC or BOT). It is because of this that the government has awarded a record length of road works in the past two years. During 2014-15, the government awarded about 8,000 km, while it aims to award about 9,000 km during the current fiscal year. In addition, several regulatory hurdles were removed and environmental clearances were fast-tracked after the new government came to power.
Devendra Yadav, Chief Executive Officer, Egis Road Operations India
The government has taken a number of initiatives to address structural inefficiencies in the road sector. So, in terms of a policy framework, the performance of the road sector has been good. However, has it resulted in the desired impact and visibility on the ground? The attractiveness of the sector per se still remains at the lower end of the spectrum, due to which large private players are adopting a wait-and-watch approach. The EPC mode of award will always see uptake, as is the case now. But, for sustainable development, we need to have active participation of private players.
What is your take on the recommendations of the Kelkar Committee?
The Kelkar Committee’s recommendations such as instituting an independent empowered regulatory mechanism to address disputes between concessionaries and NHAI could go a long way in reviving stalled projects. Other suggestions such as reviving the 3P India proposal and revamping model concession agreements to account for project-specific risks deserve commendation. In sum, the committee has pointed out what is needed to take the PPP framework to the next level, and the government is now expected to take follow-up action.
The committee has come out with an extremely detailed report on PPPs. It has highlighted the need to form independent regulators; undertake reforms related to arbitration; assess risk allocation to each stakeholder; renegotiate long-term contracts; and restart stalled projects.
It is highly appreciated that the Kelkar Committee has summed up the current problems faced by stakeholders. The expectation in the market, however, is that the solutions to these problems could have been dealt with clearer action points.
The Kelkar Committee is trying to move PPP to the next level by ensuring fair treatment of pertinent issues. It supports enablers, seeks to rebalance risks and kick-start stressed assets. It also encourages continuous improvement in the modes of project implementation, efficient dispute resolution, advocates independent regulators, and finally provides a framework for
ex-ante renegotiation on a case-to-case basis. The committee seeks to address legacy issues and recommends steps to be taken by the government going forward.
It is important for the government to support the private sector, which is best placed to understand industry needs, in developing roads efficiently. The recommendations are very pragmatic and insightful. It is important for the government to act quickly on these recommendations. If India is to be counted as a developed nation, it is important to develop infrastructure through private participation.
The Kelkar Committee has put forward constructive and pragmatic recommendations for the revival of the road sector. If implemented in letter and spirit, these will go a long way in clearing existing policy blocks and putting the sector on to the path of long-term sustainable development. The proposed new models are steps in the right direction, but implementation still remains key. A stable policy is also essential. Earlier, there was overreliance on the PPP model of project implementation, and the results were not very encouraging. In this scenario, the government should use a judicious mix of PPP and EPC modes of project implementation, and not rely exclusively on the EPC mode.
What are your expectations from the Union Budget 2016-17?
Road augmentation is likely to be at the top of the agenda, given the forecast of an 8 per cent compound annual growth rate in freight traffic and 15 per cent per annum growth in passenger traffic during the period 2011-12 to 2031-32. Innovative ways of financing such as the hybrid annuity model and monetising operational assets would also help meet funding needs. As a means to encourage private sector investment, this is also a win-win solution for private participants and the government. As many big players struggle with overleveraged balance sheets, the government needs to increase the allocation for capital expenditure again, as it did last year. It should aim to use potential savings from subsidy rationalisation to finance such expenditure. Investors want to see a predictable regulatory environment given the longer gestation periods. The industry also expects the setting up of an independent road sector regulator (announced earlier but not yet in place). Thus, the Union Budget 2016-17 should pave the way for creating a clear and transparent contractual framework, which could insulate investors in road projects from external pressures such as changes in governments.
One of the key industry expectations is increased budgetary allocation for the highway sector.
The budget expectations include making infrastructure investment trusts (InvITs) more robust; elimination of the dividend distribution tax, especially for InvITs; the removal of commercial bank sector limitation for roads; and granting the road sector priority status.
In the difficult times currently being faced by developers and investors in the highway sector, the following can improve investor sentiment: lenders/financial institutions can reduce interest rates on financially stressed assets to the bank rate (instead of the interest rates agreed upon in the contract), and the government can give priority sector status to the road sector.
Considering that the PPP appetite of private players has not improved, the government will have to allocate more funds to the highway sector. Given the expanding network of national highways and the emphasis on safety and green initiatives for roadsides, the requirement of funds will go up further. While divestment by the original promoters of BOT projects has been allowed, this needs to be institutionalised with more incentives given to developers to spur construction activity. A long-term tax-friendly policy needs to be announced, including the availability of low-cost long-term funds, particularly for projects of national importance.
The infrastructure sector is the backbone of the economy. The government needs to stimulate it to drive growth. There are a number of ways for the government to do so. First and foremost, the government should increase the budgetary allocation for the highway sector. Second, the gov-
ernment should give tax breaks to contractors for these projects as they are built for public use. The government should also do away with the import duties and other taxes on equipment and materials used for public infrastructure projects.
Efforts to develop and modernise alternative means of transportation and infrastructure such as railways, inland waterways, ports and airports is desirable and mandatory for making India an economic powerhouse. However, roads will continue to be the backbone of the Indian economy and overreliance on the road network is only likely to increase in the near future. In spite of having a large road network, the substandard quality of roads remains an impediment to economic development. Therefore, an enhanced budgetary allocation for the development and improvement of the road sector is mandatory. In addition, tax and policy incentives, sharing of risk by the government, a stable and consistent policy regime, and the availability of long-term pension and sovereign funds will go a long way in attracting private participation.
What are the key issues which need government attention?
An interlinked road network is vital to any economy, and there is a need to upgrade the existing road network. Second, road projects typically have large capital requirements. Banks mostly rely on short-term deposits for funding and hence, cannot fulfil the sector’s capital requirements. Therefore, there is a need for the development of a vibrant corporate bond market. The Union Budget 2016-17 could give a fresh momentum to this. Lastly, the government’s intervention is needed to streamline the approval process if the MoRTH is to achieve its target of laying 30 km of roads per day.
In my opinion, all stakeholders need to do their jobs in an efficient manner. For instance, the authority has to provide hindrance-free land and the requisite clearances so as to enable concessionaires/contractors to complete construction work on time. In the past, the authority could not take penal action against erring concessionaires/contractors only because they had not met their obligations.
Going forward, the government needs to take several measures to overcome issues in the sector. These include giving more freedom to banks for funding infrastructure projects; determining total project cost based on banks’ internal assessment through expert valuations; and making project cost estimates dynamic with scope for revisions based on the inflation rate.
There is an urgent need to abolish exemptions in tolling. The exempted category of vehicles should pay toll and get it reimbursed from the respective authorities. Further, providing pragmatic solutions to financially stressed projects (due to cost overruns, actual traffic being below projections, tolling difficulties, etc.) in a time-bound manner can revive investor confidence in the road sector.
The governments – central and state – need to urgently work on various issues. First, state support must be real, consistent and long term, that is, concessionaires should be able to collect tolls from every user and consistently. This can be done with due political will, adequate law and order and deployment of new and advanced technologies. Second, service level benchmarks of commissioned road projects must be adhered to and there should be regular audits and transparent publishing of findings. This is important to ensure that “willingness to pay” does not vanish or diminish. Third, state policies on tolling (including toll exemptions), minor minerals, recycling of waste, land acquisition, etc. must be consistent and long term. Lastly, development of parallel roads must be avoided at all costs. The aim should be to develop a regime and service environment, which entails paying toll as per the time taken to travel while enjoying all the services promised in the concession agreement and not just the length of the road.
Other things which need to be taken care of include a fair and viable bidding process; ensuring only those bidders participate who have the actual bid capacity; overall cost of delivery of the project; the risks faced by the lenders in particular; and ways to increase foreign direct investment or large long-term funding to the sector.
One of the key concerns of contractors and developers are the regulatory hurdles. There is an urgent need to expedite processes and improve regulations. The government should follow a single-window clearance for these projects and award road works only after all the required clearances and land acquisitions are in place. Another major issue is the poor quality of detailed project reports (DPRs). Currently, consultants are appointed on lowest (L1) bidding parameter. This adversely affects the quality of the DPRs, as consultants often cut corners while preparing them. Subsequently, the developer gets stuck in claims from the government. Third, the overall bidding process for projects needs to be overhauled. The current L1 bidding is very crude and does not address several serious issues, which in turn results in projects getting stalled. The sector should have a more holistic bidding parameter where points need to be assigned to companies on qualitative aspects like early completion, equipment and manpower strength, operation and maintenance track record, etc. Lastly, there is a need to foster innovation. Government agencies need to be open to learning and adopting new techniques in road construction.
Infrastructure development and operations requires long-term commitment and is capital intensive in nature. There is a need to ensure participation only of credible, capable and financially stable players in the construction, operations and financial segments.
The government should take initiatives and bear the responsibility of providing due support at the policy, administrative and legal levels to enable efficient operation of the private sector during the construction as well as operational phases. Meanwhile, state governments have neither the stake nor the desired level of commitment towards ensuring the success of operational projects, which invariably get mired in political logjams. Concessionaires also get exposed to undue risks, both financial and
operational, while undertaking project work. Therefore, existing state support agreements need to be strengthened to ensure that the state governments also bear the financial implications of not providing due support, especially for operational road assets. Lastly, a healthy balance of the EPC and PPP models in the award and development of projects should be adopted going forward.
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