After the United Progressive Alliance (UPA) won a second consecutive term in 2009, minister of road transport and highways Kamal Nath caught everyone by surprise when he said 20 km of roads would be built per day.The figure was over three times what was achieved in 2008-09, and the execution since the announcement has not been much better. The average length of national highways built per day between 2009-10 and 2013-14 was just under 8 km.One of the most promising sectors of the economy, roads have been hobbled by land acquisition issues, crippling competition, poor traffic growth as a result of a tame economy and pricier loans.The Narendra Modi-led National Democratic Alliance (NDA), which won the general elections in May, had to show some intent to fix the sector without much delay, and that is exactly what it has done; for good measure it has its own target for road construction, too: 25 km a day in the short term and, starting 2016, 30 km a day. Rating agency Crisil projects the figure to be just 11.5 km a day between 2013-14 and 2017-18.

Changing Tack

Rohit Inamdar, senior vice-president at Icra, another rating agency, believes it will be difficult for the government to achieve the execution target of 8,500 km this fiscal. “Execution in April and May was less than 4 km a day,” he adds.Vinayak Chatterjee, chairman and managing director (CMD) of Feedback Infra, a consultancy, says one should not make much of the target as “targets by their definition have to be stretched”. The seemingly impossible goal aside, road builders and experts find reason to cheer the government’s actions and words so far.The most significant of the announcements made by road transport minister Nitin Gadkari was that the government would focus on awarding projects through the engineering, procurement and construction (EPC) route for the next two years rather than the buildoperate-transfer (BOT) model under public-private partnership (PPP). “The shift to EPC mode is due to the fact that PPP modes are economically not viable at this moment,” Gadkari was quoted as saying in June.In EPC, the government awards a road project to a contractor whose job ends with constructing or upgrading a stretch. In case of BOT, the government awards the project in a competitive bid and the winner will build the road, maintain it, earn revenues through toll or annuity from the government for up to 30 years and return it to the government. In case of a toll-road project, the government gives up to 40% of a project’s cost in viability gap funding (VGF) to make the project attractive to developers.In an annuity project, the government reserves the right to toll the road. Since BOT is much less of a strain on the government’s finances than EPC, the former’s share in the National Highway Development Project (NHDP), less than half of which is complete, has risen from 12% and 33% in phases I and II to 100% in phases V and VII (phase VI is yet to be awarded). Now, the trend is likely to reverse, with over 30% of the NHDP’s total length yet to be awarded.Finance minister Arun Jaitley alluded to the problems plaguing PPP in the budget when he proposed setting up an institution called ‘3P’, with a corpus of Rs 500 crore, to fine-tune PPP models.“PPPs have delivered some of the iconic infrastructure like airports, ports and highways which are seen as models for development globally. But we have also seen the weaknesses of the PPP framework, the rigidities in contractual arrangements, the need to develop more nuanced and sophisticated models of contracting and develop a quick dispute redressal mechanism,” he said in his speech.“This [the shift from BOT to EPC in roads] is the most logical thing to do. With the EPC model, the buzz in the sector will be back and, in two-three years, once the institutional rejuvenation of PPP has happened, we should move back to BOT,” says Chatterjee.But it is going to be easier said than done, for the government will have to find new sources of funding beyond the Rs 37,880 crore set aside for national highways and state roads in the budget.The government is reportedly planning to securitize NHAI’s toll revenues to raise funds and set up a corporation with a corpus of Rs 1 lakh crore and minority foreign investors to finance road projects.Hemant Kanoria, CMD of Srei Infrastructure Finance, believes the government should award projects through both the routes: “There are still a large number of companies with the experience and intent to develop BOT roads.”Srei is involved in equipment and project financing, and also co-owns 14 road projects. There are also arguments against the EPC model. M Murali, director general of National Highway Builders Federation, says there is more accountability in BOT than EPC.“In case of a BOT project, the developer will ensure the quality of the road is very high because if there is a problem later he will have to spend,” he adds.Questions sent to the road transport ministry and NHAI remained unanswered at the time of going to press. While there is no disagreement on why PPP is the way to go in infrastructure in the long run, among the key reasons for the decline in interest in BOT seems to be the increasing difficulty in financing projects. Developers bear 70-80% of the cost of a project with the rest coming from banks or other financial institutions.The share of infrastructure in total bank loans has risen to 15% from just 3.5% a decade ago. Within infrastructure, roads account for 19% of banks’ outstanding infrastructure loans, while the power sector’s share is three times as high. Infrastructure has been one of the worst affected areas in the economic downturn and about 30% of the total stressed bank loans are in this category.While data for defaults in individual infra sectors is not available, private power producers are in worse shape than road projects. “The cost of building a highway is about Rs 5-6 crore per km. So even a 200-km project comes up to just Rs 1,000-1,200 crore, but a power project will not be less than Rs 5,000 crore,” says MS Raghavan, CMD of IDBI Bank. It costs Rs 10 crore to build one megawatt of thermal power capacity, India’s largest source of electricity.Keeping in mind the financing woes of infrastructure companies, Jaitley in the budget said that banks would be encouraged to adopt a ‘5/25 structure’ to finance infrastructure projects, where banks can extend 25-year loans, compared to a tenure of 15 years now, and refinance them every five years. The RBI followed suit by announcing that banks can issue long-term infra bonds with a minimum maturity of seven years and no cap on the amount, which would be exempted from mandatory reserve and priority sector lending requirements.



Virendra Mhaiskar, CMD of IRB Infrastructure Developers, says now that a conducive environment has been provided by the government and the RBI, banks will have to revisit their sectoral caps for roads. “Otherwise, the initiatives taken by the government will not precipitate beyond announcements. Even when banks like a project they can’t fund it because of the cap,” he adds. These caps are decided by the banks themselves. While Raghavan concurs with Mhaiskar, he adds that banks will have to keep in mind the ‘concentration risk’ before tweaking sectoral lending limits.

K Ramchand, MD of IL&FS Transportation Networks (ITNL), India’s largest highway developer, with 13,161 lane km in its portfolio, says interest on loans should come down as a result of exemptions from reserve requirements. “Banks did not pass on their savings to infra companies in earlier instances,” he adds. IRB and ITNL have seen their shares rise by 175% and 64%, respectively, this year in comparison to the Sensex’s 22.5% increase.The importance of roads to the economy cannot be overstated. Road transport accounts for around 5% of India’s gross domestic product and is India’s second biggest infrastructure sector after power. It will account for under a fifth of the Rs 51.5 trillion in infrastructure investments in the 2012-2017 period (see Total government infra...). India has the second largest road network in the world after the US and its roads are responsible for 85% of its passenger traffic and 60% of its freight traffic. National and state highways form just 5% of the total road network in the country.Gadkari has said land acquisition and environmental and forest clearance hurdles to 189 projects costing Rs 1.8 trillion will be cleared by August 15 and that four-fifths of the requisite land for a project would be acquired before it is awarded, a promise made by the previous government too. While the Right to Fair Compensation, Transparency in Land Acquisition, Resettlement and Rehabilitation Act, 2013, has increased the compensation to be provided to landowners, the consent of only 70% of the affected families is required for a PPP project compared to 80% for a private project.Land acquisition aside, one of the thorniest issues in highway development is the underpricing of projects. “Sometimes, the total project cost [TPC] is 30% lower than the actual cost,” says Ramchand. This complicates matters if the project is terminated since the NHAI’s termination payments are linked to the TPC and not the actual cost. Moreover, aggressive bidding over projects in the recent past had made projects unattractive. In January 2013, GMR Infrastructure and GVK Power & Infrastructure surrendered two projects worth over Rs 10,000 crore as they were unviable. But lately, most projects are seeing only 3-4 bidders compared to over 20 bidders two years ago, say developers.The lack of growth in traffic in the past 18-24 months and the tight liquidity scenario have forced many developers to put their road assets on the block. Piramal Enterprises is reported to be in talks to buy majority stakes in six road projects for Rs 2,000 crore. Earlier this week, Piramal joined hands with Dutch pension fund APG Asset Management to invest $1 billion in Indian infrastructure over the next three years. The head of the infra development arm of a conglomerate, requesting anonymity, says the company is planning to divest stakes in some of its projects not because of poor traffic or lack of funding but to raise money for new projects. “We want to churn our equity,” he adds.The one other issue road builders are drawing attention to is disputes between them and the NHAI. Presently, a three-member arbitration panel rules on their conflicts which, according to a developer, seldom goes in the agency’s favour. Icra’s Inamdar says the NHAI has since December 2012 paid Rs 910 crore toward settlement of claims. “Any dispute settlement should be fair and quick. The award should come within seven months and the money settled in two months,” says the head of the conglomerate’s infra development unit.These cannot be achieved overnight and the government will keep its interests — and finances — in mind as much as it does private companies’. The UPA government was shown up in the last five years for the vacuity of its policy pronouncements in infrastructure, coming as they did on the back of a high growth-enabled dream run in its previous stint. Now, when even incremental initiatives might attract attention, Modi, Gadkari and Co should pull out the stops and help India realize its potential in road-building which has so far seemed better on paper than in action.