Finding the Right Road

The moot question is whether good intent has been accompanied by careful planning.
It was always going to be a difficult job. Roads development, battered and bruised by a heavy load of projects awarded in the recent past, remained stalled for various reasons ranging from land acquisition and bureaucratic red tape to a lack of accountability and transparency in the bidding process.

The public private partnership (PPP) model itself was questioned and many developers who entered the fray without a proper understanding of the business model, burned their fingers. Execution delays were the order of the day and contracts, mired in dispute, occupied all the time available that should have been better utilised in completing unfinished work. Through a process of evolution, however, much progress was made over the years, up to the time of the infamous ´policy paralysis´ that gripped the nation in the latter years of the former ruling government.

The pace of construction slowed down to about two km per day and between April and September 2014, just 1,795 km of roads, including highways, were constructed, according to data from the Ministry of Road, Transport and Highways.

However, with a new government taking over the reins of the country last year, there´s no denying the change that has taken place. In particular, the Roads Transport Ministry has taken it upon itself to resolve huge numbers of stalled projects and clear up all the backlog. Ministerial data shows that between April and September this year, 2,446 km of roads, including highways, were constructed, an increase of 36 per cent over the previous period.

The ministry has been busy not only ironing out the chinks in roads construction, but also charting a new course for their development. However, the moot question is whether good intent has been accompanied by careful, or right planning.

Hybrid Annuity Model (HAM)
Touted as the panache to all that was ailing roads construction, this new approach is yet to live up to its billing. In fact, the model concession agreement (MCA) for HAM has already undergone some minor modifications since it was first announced, based on industry recommendations, in particular, the National Highways Builders Federation (NHBF). Concerns still remain, however, and the various clauses of the HAM MCA are dealt with separately in the next few pages after this story in greater detail in an article ´Hit by the HAMmer´. In a meeting in New Delhi on December 4, the NHBF incorporated a number of points from this article and drew up a list of recommendations which it sent to the Ministry on December 7.

´We are going to give a recommendation to the government on similar lines that unless and until these issues are not addressed, then there may not be any bidders. You have seen that for the last three bids, no bidders were available,´ Murali Menon, Director General, NHBF, told Infrastructure Today.

For now, as with all things new, the industry has adopted a wait-and-watch mode. To start with, there were no bidders at all for the four-laning of the Solan-Kaithalighat section in Himachal Pradesh. This prompted Rohit Kumar Singh, Joint Secretary in the Ministry of Road Transport and Highways, to come out in an interview in The Financial Express newspaper in late November. In the interview, he admitted the government, perhaps, ought not to have put this up as the first project for bidding under the new model, given that the region was a difficult one.

Guruprasad Iyer, Associate Director, CRISIL Infrastructure Advisory, explains, ´There is already an extreme pessimism among private players with respect to the whole sector itself. With this as the backdrop, the government is trying out a new model that is as yet untried, untested and about which developers still have a lot of questions.´ Iyer adds, ´The model has been brought out after a lot of consultation. On paper, it is not a failure model, for sure. However, the problem right now is that the private sector has burned their fingers in the past with the authorities and their default position is ´I want to see some success before I take any major decision´. When this is the underlying premise, you have to be careful about what projects you put up for bidding under any new model.´

Iyer is keenly watching out for the next projects that are up for bidding, i.e., routes connecting the capital city New Delhi with Meerut, which, supposedly, have the ability to generate a higher flow of traffic. However, he may have to wait a while longer as these projects, which were to have been put up for bidding at the end of November, have also been postponed.

With a not so storied past with respect to roads construction and development, developers today would like to see if the model can be properly executed by the authorities, without much legal wrangling. Even then, experts and industry insiders say they don´t expect projects that would be put up under this model to be flooded by a deluge of bids.

´The model doesn´t really excite,´ says Sudhir Rao Hoshing, Joint Managing Director at IRB Infrastructure, one of India´s biggest road developers . He says, ´There are no upsides in this. A businessman always looks for an upside and for growth. Here, the revenue growth is nil. If you go to an investing company, even they would not see any growth. The only growth you have is in annuities and that is only a fixed growth.´ Hoshing adds that the government has tried to remove the major risks through the new model but has also ended up reducing the rewards available to the developer. ´The government thought that the concessionaire should make about 10-12 per cent but such returns mean nothing,´ he says. He reveals IRB may look at projects under HAM at a later stage and at the moment, the company continues to prefer Build, Operate, Transfer (BOT) toll projects. ´We feel that a lot of BOT projects will still be up for bidding,´ Hoshing says.

Moreover, with thousands of crores of rupees already stuck in existing projects that are the subject of dispute between government agencies and developers, there is scant capital available for new projects. ´Previous disputes will have to be cleared to release money,´ says Iyer. ´That will increase capital with the private players and that capital can then flow into the new model and to new projects,´ he adds.

It looks pretty much like a chicken and egg situation because if the government doesn´t solve the existing problems, the recently introduced new measures cannot take care of things on their own. While the government has renewed its focus on the sector, the need of the hour is a parallel focus on the implementation aspect of projects. That will help reach the ambitious targets of 20 projects under the new model, with a total length of 1,400 km and requiring an investment of `55,000 crore. With that particular caveat out of the way, let´s take a look at a few more recent measures introduced by the government to aid roads construction and development.

Recent steps: Exit clause and InvIT
By far among the most lauded initiatives, in May this year, the government took the significant step of allowing the lead developer in a project to make a complete exit, freeing up capital for new projects. Estimates are that this policy move freed up about `4,500 crore in equity, enough to support about 1,500 km of new PPP projects. Notably, Gammon India sold stake in nine projects to a consortium led by Canada´s Brookfield Asset Management, raising Rs.563 crore in the process.

However, Sapna Seth, Associate Director, Singhi Advisors, believes the government needs to go a step further to make it even easier for developers exit their projects. ´Gammon had put up a few projects, but so had IVRCL. There are a lot of people who had wanted to exit performing toll roads but it was not so easy for them,´ she says. Seth adds, ´The government has to make this process much easier. 26 per cent stake was the biggest problem, which has been eliminated. However, this is not the only answer. Providing liquidity and making it more attractive for those who are comfortable with annuity income will help much more. For instance, most pension funds are happy with those kinds of structures or income models and they need to be brought to a table where these projects can be put up as an aggregated model. They can then trade in those.´

To be sure, the Infrastructure Investment Trust or InvIT is a new structure that has been cleared by the capital-market regulator, Securities and Exchange Board of India (SEBI). Akin to real estate investment trusts (REITs), InvITs will also ease access to funds for infrastructure developers. Under this structure, infra¡structure projects can be bundled (50 per cent developed post COD projects) and listed on the exchanges. A number of companies already have plans to list their assets through InvITs.

Unless there is a freedom to enter and exit, liquidity will remain a problem, says Seth. ´Although this is an annuity model, what is wrong in it? Even in real estate, you have leased assets coming into REITs, so it is easier to predict, project, showcase to your investor. They have easy entry and exit procedures,´ Seth sums up.

Premium reschedule
For projects awarded on a premium basis, NHAI has further eased the payment norms. Developers will have to pay premium after the fourth year of a road project´s commencement. Besides this, the premium will increase by 3 per cent per annum until the tenth year and thereafter by 8 per cent until the end of the concession period. Earlier, developers had to pay the premium once the project was operational and the premium would increase by 5 per cent every year. The latest step will significantly improve the cash-flow profile of the projects, especially during the first few years, research firm CLSA said in a recent note on the sector.

The move is also especially welcome given that the toll collections did not increase as expected.

C Venkataramana, Director, Sunil Hitech Engineers Ltd, explains, ´Why people went in for premium at that point of time is we anticipated a normal growth of 7 to 8 per cent. That was an upbeat estimate in the earlier part of the period. Between 2007 to 2010-11, the normal CAGR was somewhere around 7 to 8 per cent plus the additional growth that we anticipated of at least 10 per cent in the toll collections year on year. That didn´t happen for a number of reasons.´

In addition to this, apex bank RBI also relaxed the norms for structuring of existing long-term project loans to the infrastructure sector. ´Introduction of a 5:25 scheme will improve developer cash-flows by elongating the debt-repayment period,´ said CLSA.

Fast-track dispute resolution
Vijay Chhibber, Secretary, Ministry of Road Transport & Highways and Ministry of Shipping, told Infrastructure Today that a three-stage dispute resolution mechanism is now operational at NHAI to expedite the process for settlement. Dispute-related claims worth `1,7524 crore have been settled for `1,404 crore in 84 projects. Further, a Society for Affordable Resolution of Disputes (SAROD) has been created by NHAI along with NHBF for affordable, timely resolution of disputes.

´We find that resolutions are taken care of better by NHAI in the sense they are at least much more receptive today to problems unlike earlier,´ says Venkataramana. He adds, ´They are a little proactive nowadays and sensitive to the needs of the developers unlike the earlier years although much still needs to be done.´

CLSA says the faster approval and decision-making process has led to a small but noticeable upturn in two key indicators of the capex cycle: new project announce¡ments and projects under implementation, as reported by the Centre for Monitoring Indian Economy (CMIE).

Cumulative projects under implementation are up 9 per cent YoY as of June 2015 (quarterly release) to `89 trillion, the fastest growth in the past 13 quarters. New project announcements have risen YoY for four consecutive quarters. For the trailing 12-month period, `9.1 trillion of new projects were announced, the highest in the past 12 quarters.

Other steps
Other initiatives by the government include decentralisation of project clearances, more regulatory power to MoRTH, increased pace of land acquisition, approval for NHAI to issue tax-free bonds and one-time funding for stalled projects. Also, the FY16 budget tripled the cess on fuel to `6/l from `2/l. (A major component of fuel cess goes into the development of national highways and budgetary allocation to NHAI from cess funds has increased significantly over the years).

In mid-November, the government also said it would extend the concession period if it was found delays were caused for no fault of the developer. However, Iyer is sceptical. While he says that the intent is right, ´the variable is who is going to decide whether it is the fault of the developer or not,´ says Iyer. ´There is a lot of ambiguity in reasons for delays. One of the biggest issues in the past is there has been no enforcement from the authorities´ side. If you ask from a developers´ viewpoint, all delays have been due to the authorities. However, the impact has always been on the developer.´

Iyer adds that developers will only feel a sense of confidence if the extension actually acts as a deterrent to the authority to ensure there are no further delays. ´If this accountability is not enforced by the clause, then this step is of no use,´ he adds.

Conclusion
By all accounts, the change has been swift. From two km of construction per day to an average of 18 km awarded and a number of stalled projects cleared, the roads sector has already seen something of a makeover. The dead wood has been cleared. The policy framework is evolving rapidly for the better and the good news is that we´re only just getting started.

However, industry observers expect a slow and steady recovery. Some say the target of 30 km will be difficult to achieve, especially in a year´s time as has been targeted. However, at a recent event in early November, Road Transport and Highways Minister Nitin Gadkari set the bar even higher.

Buoyed by achieving 18 km a day, Gadkari said the government was on track to achieve its 30 km a day target by March 2016. He added that the target was now 100 km a day. ´My unofficial target is to construct 100 km a day, as we need to expand the national highways coverage to 150,000 km from 90,000 km across the country,´ Gadkari said at an event in Bengaluru.

While naysayers may wring their hands and fret about the excesses of the past, what is clear is that there is a difference this time round in the renewed focus on roads construction. The government is willing to engage with the best-in-class technology providers and adopt modern methods. It has already demonstrated its capability with policy changes and a new model under consideration. The latest news emanating from New Delhi is India´s premier space research organisation ISRO-aided satellites and drones are now going to be engaged to monitor roads construction.

A pact is to be signed with ISRO soon to this effect. Reportedly, the Gagan and Bhuvan satellite systems will be used to prepare a 360 degree mapping of road assets. The project is to be funded by the World Bank and will assist in the accurate and scientific planning of road projects, their maintenance, road safety measures and development of the national highways network.

The signs of growth elsewhere in the economy indicate slow but steady progress. For instance, construction, earth-moving and mining equipment manufacturers are boasting sold-out inventories. This is in contrast to the situation a year ago when a ban on mining was in place and equipment orders were at zero levels. Demand for metals is expected to pick up further and a growth in infrastructure creation must necessarily follow.

With so much at stake, the roads development programme has to succeed.