Lack of coordination between the various government agencies that are involved in the road/highway construction business and improper policy initiatives hamper the prospects of roads sector, experts feel.
Experts:
M Murali, Director General, National Highways Builders Federation
Satish Parakh, Managing Director, Ashoka Buildcon
Kuldeep Kumar Srivastava, Chief Engineer, URRDA
SV Rajadhyaksha, Advisor, Leighton Welspun Contractors
Sachin Bhatia, Director & CEO, Metro Infrasys
Why are private players shying away from further investment in roads sector? Do you think only bigger players will stay afloat in the present scenario?
Murali
Private funding of infrastructure has become a mainstay of the Government of IndiaÂ’s policy towards infrastructure deveÂlopment. The success of the ongoing 11th Five-Year Plan for infrastructure critically depends on private investment. This is especially true of the road sector. The private sector is expected to finance more than 80 per cent of the ambitious National Highways Development Project (NHDP), undertaken to develop highways and expressways across the country.
A look at the geographical distribution of Public-Private Partnership (PPP) projects shows that while the investors have shown preference for some states, they have almost totally neglected some other states. This means, most of the projects located in some select states have been taken up on PPP basis. In contrast, in some other states very few projects have attracted private investment. On its face, this outcome may appear somewhat intriguing. Since, the NHDP is sponsored by a single agency, that is, NHAI. Moreover, this programme is governed by the laws and policies that are uniform across the country.
It is important to remember that PPP projects are long-term projects and face several risks such as political, construction, maintenance, commercial and financial risks, among others. The profitability or otherwise of investment in PPP projects depends on several factors such as traffic density at the project highway, the toll rate, availability of supporting infrastructure, etc. These variables differ from state to state and project to project within a state.
The regulatory framework for PPPs, legal and reguÂlatory risks are important considerations for the inveÂstors. Therefore, depending on whether the governing contract laws and regulatory rules are ‘goodÂ’ or ‘badÂ’, they can encourage or discourage the investors. In fact, there are other local legal factors that have bearing of the risk-return profile of PPP projects. For instance, the state governments have a crucial role to play in the implementation of the PPP contracts. Starting from land acquisition to shifting of utilities to providing police protection at the project site, the support of the state government is very crucial for successful impleÂmentation of the PPP projects. The situation of law and order in a state also has significant bearing on the profitability of a BOT contract. If law enforcement and protection of property rights are poor, a concessionaire may fail to realise all the benefits from the toll contract, since in that case users of the facility may not pay the toll fee. Alternatively, the concessionaire may be forced to employ private security agents. The latter option is a costly affair. Therefore, private participants may be reluctant to enter into BOT contract in a state where law enforcement is perceived to be poor.
Although lenders indicated that times are tough, none of the road project so far has approached corporate debt restructuring which is a positive for the sector, however they did not rule out such a possibility considering a lot of projects have missed revenue targets vis a vis earlier expectations. Promoters have so far bailed out troubled projects by bringing in additional capital which led to respite for lenders.
Parakh
As smaller road developers who rely primarily on bank financing have been the hardest hit by the stringent lending requirements. This coupled with subdued equity markets would intensify funding constraints for smaller players restricting active/aggressive participation by them.
Srivastava
I differ that only the big player will sustain. This is because their capacity and skill may support during the procurement process, but during the execution, firms/subcontractors of even lesser capacity are part of business. Sometimes where the constraints are higher or the project size is low, small firms perform better because of lesser establishmentsÂ’ expenditure.
Rajadhyaksha
Delays in build-operate-transfer (BOT) projects due to land handover, Row & encroachment issues, utilities shifting, forest & environment clearances etc, are beyond the control of contractor/developer. This reduÂces the level of comfort with the developer. Not only small players but the big players are also finding it difficult to sustain in the above given circumstances. It is therefore necessary to immediately rectify the process, whereby the developers will feel confident in regards to their participation. This is true for both small as well as big developer.
Bhatia
In my opinion the crisis is related to the poor global situation, the concessionaire was expecting the project to have foreign buyers mainly from Europe. But due to the poor fund situation in Europe the secondard market did not take off.
What is your take on a toll-free road parallel to a toll road (expressway)?
Murali
Demand estimation for a road/national highway project cannot be accurately forecasted. Catchment area future development affects the demand of a road to a great extent and is beyond the control of the private player or concessionaire or even in few cases, the government.
It may appropriate to have the policy support to private investment if any loss of toll from the anticipated level due the parallel state and national highways.
Owing to these peculiar characteristics, it is imperative that roads and national highways as an infrastructure sector needs strong institution building and comprehensive concession structure. Weak instiÂtution will lead to recurrent delays. In addition, complete dependence on tolling revenue to recover project cost and service non-recourse debt is not a feasible solution to increase private participation. Private sector partiÂcipation is typically through construction or manageÂment contracts and BOT contracts.
Rajadhyaksha
Policy shall be based on such a way that expressways to cater long distance traffic by connecting major metropolitan cities and state highways shall cater for internal traffic within state by connecting main cities as well as tier I/II cities where toll road may not be an appropriate solution.
Bhatia
Yes. I dont see many state highways affecting the situation as of now, may be they will have an impact in the future.
What is the major role of technology in enhancing capacity?
Murali
The time period of construction (generally assumed to be two years) is included in the concession period itself. An earlier completion of project enables the concessionaire to increase the total toll revenue from the project. In case of annuity contract, the concessioÂnaire receives a bonus for an earlier completion. If there is any delay in the completion of the project, he is penalised in the form of reduced annuity payments. These along with the other above mentioned provisions penalties encourage the concessionaire to complete the project sooner and avoid time overrun.
The above provisions also induce the concessionaire to use better technology in order to complete the project ahead of the agreed time. In addition, technological capabilities of the bidders are taken into account while selecting the concessionaire. The innovations in the road machinery sector, especially by the foreign players are increasing in the recent years along with growth of the road sector.
Parakh
Ashoka Buildcon has been experiencing the growth of this sector since the past 15 years. It is a known fact that during the past decade there has been a significant improvement in the technology deployed for roads and highways construction. This has happened because of participation of private organisations that have the capability to procure and develop technology from various resources. Expensive machines, environment-friendly practices, sustainable developments etc, from the keystones for the new technologies are being introduced by various companies in this sector.
Yes, indeed international players are entering this segment in India. Most of them are doing so by forming joint venture partnerships with local infrastructure companies. This improves the sustainability of the proÂjects because having a local partner is helpful in underÂstanding regional laws, mobilising resources etc. Such partnerships also help in bridging the gap between the regional sentiments and the work culture of the interÂnational organisations, thereby building better environÂment for mutual interactions and combined efforts.
Srivastava
Certainly introduction of new techÂnology has increased the speed, quality and economy of the projects. There is no participation of any international firm in road sector in Uttarakhand. However, firms from the Uttrakhand as well as from other
states are facing the same problem in reference to the material availability.
Rajadhyaksha
New expressways are being built to international standards and technology is being absorbed by Indian companies. International players are still interested in this segment, and do participate. They do have a contingent of Indian personnel, who are used to tackle the material availability, India specific issues etc.
Bhatia
I feel that NHAI needs to bring in more action on this account, while there is a lot of talk going on for many years action on ground is very slow.
Why did BOT road projects take a backseat in favour of EPC?
Murali
In the road sector private investment nonetheless has exhibited a willingness to step up to the challenge. While banks and financial institutions have supported a number of such projects, the debt capital market too has responded in some measure debt market has provided capital with varying risk profiles. The equity markets, on the other hand, are perhaps not yet ready to assume too much risk. This is because the risks in road projects are not well understood, especially policy changes that come in the wake of political risk. Equity investors are probably not very excited about the financial risk for the expected returns from investment associated with these projects. Alternate, market-based financing of highways in India mature industries, provide/promise higher returns for these levels of risk.
Infrastructure funds – fashioned after private equity funds – have stepped up to fillip equity participation, a role that public financial institutions had performed in the past. The investment in these funds belongs to large diversified portfolios of their sponsors who have better capability to assume the risks.
In the current structure, the annuity and BOT concessions awarded by NHAI are at the two extremes of risk sharing by the public and the private sector. The difficulty in reaching the financial closure of BOT concessions and the ease with which annuity projects closed is an indication of the marketÂ’s ability to absorb the financial risk. The proposal of Whole Business Securitisation is a financial engineering technique that allows the equity risk to be moderated into acceptable levels by parceling part of the risk to the debt market.
Parakh
The slowdown in the BOT sector is not without reason. The balance work in this segment has been found to be unviable on BOT format and therefore they are being now taken up on EPC basis. We feel that both the NHAI and government are carefully planning ahead, which is good because there would be no point in rushing into BOT projects and realising later that they were unviable projects. So this slowdown is definitely in the interest of the private participant, the government and also the public at large.
The infrastructure development companies are keen on EPC projects but there is a significant interest in BOT segment also, provided that the BOT project is viable. So whenever such projects are brought forward by the government, developers would definitely prefer to participate in them.
Srivastava
As we know, BOT project is based on viability which depends on the volume of traffic but at the same time paying capacity of road user should also be considered. In our country only 3 per cent persons are paying income tax and this can be taken as parameter of paying capacity.
Also the availability of lands and resources are the factors affecting the project. Our country has very high density of population as compared to other countries. We are trying to copy without considering the factual situation of per capita income and the resources available. I have the opinion that BOT projects have limited scope (about 3 per cent of the total road length). Annuity based BOT projects can also sustain in low potential, however EPC is only the solution for the rest 95 per cent road length (approx). Some persons are of the view that the end of the concession period is the death sentence for any toll project. My opinion is that after the concession period, toll may be continued for the performance-based road maintenance.
Rajadhyaksha
EPC is preferred over BOT, as the interest rates on the loans in case of BOT are higher and risk of collecÂtion of toll is there. In case of EPC, risk is limited and receipt of money is ensured. However, it is believed that BOT market will also be matured in road sector.
What are the major issues that road developers facing today? According to you what kind of policy measures should the government take for speedier implementations of road projects?
Murali
Road projects are capital intensive and long gestation projects and are thus exposed to certain complexities. After series of literature reviews and discussions with industry experts, issues such as land acquisition, environÂmental clearances, shifting of utilities, railways approÂvals, local law and order problem have been identified which impact the growth of the overall sector.
Some of other issues in the road sector are: capacity of construÂction industry, need for long term funds, incorrect proÂject cost calculation in concession agreement, inconÂsistency in policy making, number of clearances – no proÂvision of single-window clearance available, lack of avaiÂlability of professional consultants, and lack of co-ordination between various ministries within the government.
It is imperative that roads and national highways as an infrastructure sector needs strong institution building and comprehensive concession structure. Weak instituÂtion will lead to recurrent delays. In addition, complete dependence on tolling revenue to recover project cost and service non-recourse debt is not a feasible solution to increase private participation. Private sector particiÂpation is typically through construction or management contracts and BOT contracts. BOT contracts permit tolling on stretches of the NHDP by the private operator or may also be based on the lowest annuity payment from the government and EPC mode.
In view of India’s future economic growth and development, enormous opportunities exist within this sector. In response to sector’s risk exposure to certain risks – from a developer’s or investor’s perspective, it is suggested that the government’s proposal of creating the National Investment Board (NIB) may speed up to resolve the issues pertaining to certain clauses in MCA like land acquisition, environmental clearances, force majeure, etc are addressed more effectively.
The sector can progress multifold if the coordination and communication links between the government agencies and private investors can be strengthened by learning from the past PPP projects and a comprehensive risk framework can be developed and all the unintended barriers can be removed. A synergic effort from the policy makers and the investment community citizens can serve as the panacea for roads and highways sector ailments in order to develop and promote efficient, effective, safe and eco-friendly road transportation.
Parakh
The problems faced by road developers mainly include the lack of coordination between the various government agencies that are involved directly or indiÂreÂctly in the road/highway construction business. Also, there are several project specific issues that sometimes become major hindrances and need to be solved on case to case basis by the combined efforts of the government, the private player and other related parties.
The good thing is that the NHAI has identified such issues and are working seriously to find ways and mean to solve them. Forest clearances, land acquisitions, shifting of utilities are some of the major concerns. The authoÂrities are working on these issues and we are sure that soon they would be able to place systems that will help the road developers to complete the projects faster.
We propose that the authorities should find ways to ensure that when a project is awarded, all the related government and semi-government bodies should work in conjunction to ensure that there are no communication gaps between them. We also feel that the price deterÂmined for land acquisition should be reasonable. Most importantly there should be a fast track process to address project-specific problems as they are unique to each project and need to be addressed individually.
Srivastava
Basic issues being faced by the road developers are the land acquisition, environmental clearances, mining rules and availability of the material. These issues only can be addressed by the elimination of conservative rules of pre-independence/third world country days.
Rajadhyaksha
The single-window clearance will help in reducing the time of clearances and construction, ultiÂmately creaÂting interests among developers. Policy needs to be based on following parameters: single-winÂdow clearance, enÂcroaÂchment-free handing over of Row, reduction of inteÂrest rates on loans used for road infrastructure, balanced conditions of contracts / FIDIC based works.
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