Slow progress in project execution coupled with subdued interest in bidding for new projects under current policy frame may give alternative option to call for revaluation or fresh bids for already allocated road projects. In order to avert this situation, a Performance Review Unit (PRU) proposed by the Planning Commission needs to be endowed with power to gather information from nodal agencies on clearances and incentivise or to regulate, writes Sumantra Das.The arterial system of the country is witnessing severe blockage due to longer delays in clearances at various levels. With uncertainty soaring in road development projects, sector analysts have started carving out the possibility for even cancellation of the projects awarded in the last 2-3 years and calling fresh bids for the same by the nodal authority for highway projects in the country, NHAI.“Slow progress in project execution coupled with subdued interest in bidding for new projects under current policy frame is likely to give alternative option for calling fresh bids for already allocated projects,” says Rohit Chaturvedi, Transport Head, CRISIL Risk and Infrastructure Solutions. Many road developers not ruling this out are not expecting in near future.In present situation, execution of allocated road projects scenario is not very bright. Thus, NHAI may opt out for other option such as re-valuation or re-biding. “NHAI may go for re-bidding as several projects have not initiated yet. They have already started revaluation of some projects. Thus, re-bidding (2011-12 road projects) in future cannot be ruled out,” says Sudhir Hoshing, CEO, Road Projects, Reliance Infrastructure.Sector analysts say about 50 projects awarded in the last five years have been delayed by more than three years or cancelled on various grounds. Of these, 15 large projects worth over Rs 211,000 crore have low probability to materialise.This has created a serious concern in the sector hurting private investment sentiments. It was also reflected in the results of contract awarding by NHAI so far this fiscal. According to official documents this fiscal, NHAI has awarded contracts of less than 600 km of the targeted 9,500 km for 2012-13. When concerned authorities were contacted, the common comment was lack of interest for bidding road projects among private investors.A series of negative factors such as deteriorating investment sentiment, delay in decision making, dismal new orders, high leverage and difficult macro-economic scenarios has suppressed the euphoria for road projects, which was upscale two years back. This led to a significant slowdown in investments for new projects. “Projects of 2,500 km, whose bidding witnessed tepid response from developers, and also few projects did not attract any takers,” says Rajaraman Venkataraman, Senior Analyst, India Ratings.Despite massive investment opportunities and establishment of a framework for private sector participation in highway infrastructure development programmes in India, private investment, including foreign direct investment is still lagging. Land acquisition, unavailability of long term fund, number of approvals, time and cost overruns, absence of adequate government guarantees, and incorrect project valuation by NHAI are some of the major issues hitting the road sector badly. However, JN Singh, Member – Finance, NHAI, says environment clearance is a major concern as 77 projects are waiting for approval from Ministry of Environment and Forest (MoEF).Meanwhile, bank’s overexposure to infrastructure sector has made the banks over cautious in lending for highway projects leading to difficulty in financial closure of the proposed projects. Hence, of late, the bidders have been quite guarded in their approach for bidding newer projects. Apparently, some consolidation appears to be settling. Many developers are wary of taking operating risks and are in the process of re-balancing their risk-return in their portfolio and hence are satisfied with the relatively low-yielding EPC model. “By EPC, we mean cash contracts with NHAI or successful bidder for construction of highways,” says Venkataraman.Also, the acknowledgement of EPC model by the highways ministry is advantageous at this point of time, compared to the high cost-high interest rate regime. However, statistically it has been seen that BOT projects have seen lower delays than EPC projects managed directly by NHAI. “Moreover, the BOT projects too are facing delays due to financial closure and land acquisition issues,” says K Subrahmanian, Managing Director, Afcons.Pressure on PPPPublic private partnership (PPP) in the roads sector has set a role model for other infrastructure and construction businesses in the country. However, that is no longer the case as high interest rates coupled with tight liquidity conditions have put breaks on easy funding that was available to the sector. This, along with aggressive bidding to secure projects, has shown us first signs of stress in the roads sector. Dwindling interests among developers give a clear indication that certain changes in the system could sustain the sector. “Unless a relook into the viability of the projects including cost, actual traffic and proper assessment, it would be difficult for the private players and investors to be involved in the new projects,” says Virendra D Mhaiskar, Chairman, IRB Infrastructure.The financial year 2011-12 saw tremendous appetite from developers for new projects, as new orders from other infrastructure sectors were minimal. The competition that ensued led to aggressive bidding to secure projects by quoting high premium to be paid to NHAI. However, that is no longer the case as high interest rates coupled with tight liquidity conditions and aggressive bidding to secure projects have put cramped up easy funding that was available to the sector.Hoshing believes that leveraged balance sheet, high competition, shrinking internal rates of return (IRRs), and difficult macro-economic conditions will ensure cautious bidding for new road projects. The continuous high rates and slow growth have forced developers to moderate their assumptions and put reasonable bids. However, analysts suggest that competition for new projects will remain strong although aggression may simmer down, bringing much needed caution in bidding for new projects.Moreover, high overall leverage and equity commitment for under construction projects will lead to dilution in stake due to funding constraints and will also result in consolidation of the sector, as players with sound balance sheet are looking to buy out stressed assets.Overcoming roadblocksThe government has tried reforms, but initiatives taken were not comprehensive. Existence of multiple roadblocks adversely affects infrastructure development in the country. Most of them are common across the infrastructure sector. Land acquisition, which has been at the centre stage, needs to be addressed to accelerate the implementation of projects.The proposed Land Acquisition and Rehabilitation and Resettlement Bill (LARR) is aimed at expediting the land acquisition process and minimising project delay. However, it is also expected to increase land acquisition cost significantly.The government should also issue clear guidelines for sponsoring agencies on land acquisition. For example, acquisition of 90 per cent of total land or 70 per cent of contiguous land is mandatory before offering projects for bidding. This will help agencies to be more rigorous in their project planning and diligence processes before initiating bidding, and thereby, avoiding delays at a later stage. However, banks have also mandated 100 per cent land acquisition before financing any project.Project monitoring body on anvil: An institutional mechanism to monitor and enforce provisions in PPP and/or EPC projects should be established to enable faster regulatory approvals. Government agencies often function independently and are minimally obligated to cooperate with sponsoring authorities to expedite the approval process. In order to eliminate this issue, a Performance Review Unit (PRU) proposed by the Planning Commission needs to be endowed with power to gather information from nodal agencies on clearances and incentivise or regulate these.The road aheadIn view of India’s future economic growth and development, enormous opportunities exist within this sector. In response to exposure to certain risks, from a developers or investors perspective, it is recommended that issues pertaining to certain clauses in Model Concession Agreement (MCA) like land acquisition, environmental clearances, force majeure, etc, are addressed more effectively.The formation of an Independent Regulatory Authority for the sector can possibly address the pricing and award of project issues raised by the private investors. Enhancing domestic bond market for long term infrastructure bonds would be one of the possible steps for improving private investments in the sector. All of these issues are secondary and can be solved provided we have availability of skilled personnel at both government and private institutions level. Major shortage of skilled managerial and technical personnel leads to firms poaching on each other’s trained resources. This has also put constraints on building up capacity to execute construction projects in-house with high efficiency. Institutions offering specialised courses are the right steps in this direction. The sector can progress better if coordination and communication link between government agencies and private investors can be strengthened by learning from past PPP projects. A comprehensive risk framework can be developed and all unintended barriers can be removed. A synergic effort from policy makers and investment community 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.