Until there is a realignment of development models, there is a high chance that the award of projects may remain muted for the current year as well. If that happens, India is likely to witness a dip in road capacity addition over subsequent years.
In recent years, the government has been very aggressive in adding road capacity and the result was visible in the average kilometre addition per day. As per industry experts, the addition per day is close to 36 km and, in the current year, the government is targeting to achieve an addition of 11,000 km.
When the government allocated Rs 1 trillion for infrastructure development and Rs 820 billion for rural road development in Union Budget in June 2019, it added new vigour to the segment. But the news of a dip in the global economy took the sheen off. Marred with global slowdown and delay in project awarding from the last quarter of the previous year, which continued through the first two quarters of the current financial year, makes one think whether the envisaged capacity addition would be realised?
In an article in the 16th-anniversary issue of INFRASTRUCTURE TODAY, Kshitish V Nadgauda, Senior Vice President & Managing Director, Asia, Louis Berger, said, "The target is ambitious, but not impossible. The government is taking the right steps towards establishing a well-planned road map that would be key to achieving this goal. Efficiently planned and implemented road connectivity saves time, fuel and money, and ensures last-mile economic development. The government has plans to spend Rs 15 trillion on developing highways over the next five years, with a target of constructing 12,000 km of national highways every year until 2024."
It is a fact that the construction sector or infrastructure development has a positive multiplier effect on the overall economy. Given the current situation, it is expected that the government would focus more on speeding up infrastructure execution or capacity building to keep the economy afloat as any movement in the construction or infrastructure development would also revive the dependent sectors, leading to employment generation in the unorganised sectors.
However, sector experts believe that roads may temporarily undergo some amount of slowdown in terms of awarding activity going by the prevailing economic situation. One should remember that it is not just about roads. There are a good number of urban infrastructure projects happening. For instance, metro rail projects, inland waterways development, water and irrigation projects, state-level road projects and so on. To cite an example, the states of Uttar Pradesh and Maharashtra are coming up with large expressway projects. Similarly, some Asian Development Bank (ADB)-funded, or multilateral agency-funded projects are underway in some of the states.
If one looks at the project award mix in the past, both with the Ministry of Road Transport & Highways as well as National Highways Authority of India (NHAI), the contracts were made through Engineering Procurement and Construction (EPC), which is an item-based contract along with the Build-Operate-Transfer (BOT) and Hybrid Annuity Model (HAM). The problem with these two models is that dependence on government funding is substantially higher. In HAM, the funding is 40 per cent upfront and the balance 60 per cent is contributed over 15 years.
With the rising debt burden on the implementation body, NHAI, suggestions were made to consider the BOT toll as the preferred projects awarding mode. However, there are specific challenges to this. Firstly, the overall equity commitments have to come from private developers as compared to the HAM model. Given the current situation, it is difficult to infuse such high equity. Secondly, the overall dynamics of road infrastructure is changing and is likely to continue to evolve over the next couple of years. The dedicated freight corridors of western and eastern regions are expected to be operational in the next three to four years and national waterways are also likely to be on stream. This will result in the shift of some of the commodities to rail and water modes.
Delay in awarding projects, land acquisition, financial closures, and the announcement of project appoint-ment delays significantly impact the execution of projects. As per available data, in FY2020, India has awarded only 600 km. RK Pandey, Member Projects, NHAI, refuted this by saying, "No, we don't see any shortfall as we have awarded 1,600 km of road projects so far. Even if we proceed at the current pace, the total award would be over 3,000 km by the end of the financial year. We intend to award 4,500 km and we are in the process of appraisal, approval and land acquisition."
Practically no awarding was recorded in the fourth quarter of FY2019 and the first two-quarters of FY2020 owing to the general elections. However, industry stakeholders are optimistic that this can be covered in the fourth quarter of the current financial year. In the past, the country has seen high-volume awarding, especially in March to cover up for the shortfall. However, if that volume awarding does not happen, then India will surely see a dip in capacity addition in the following years.
Rajeshwar Burla, Vice President & Associate Head, Corporate Ratings, ICRA Ltd, has a similar hunch. "Fiscal 2019 was anyway muted because of the general elections and land acquisition. Now if another year of awarding activity remains muted then it means two years of back-to-back slowdown in terms of awarding projects. This will have an impact and will result in some decline in terms of execution."
The second key issue the sector faces is land acquisition. According to Burla, "The developers are ready, but the NHAI, because of delays in land acquisition, is unable to commence the project."
Devendra Kumar Sharma, Vice-president & Business Unit Head, Roads, Bridges & Ports, Tata Projects Ltd, saw some positive signs on the land acquisition front. "Land acquisition and funding were important issues for the road segment in the past, but now the government has intervened to resolve these issues. For example, the government is ensuring that at least 80 per cent of land acquisition along with utility shifting and environmental and forest clearances are done or received before any road project takes off," he averred.
Burla agreed with Sharma by saying, "The good thing to be noted is that, unlike in the past, NHAI is adhering to the contractual terms in the construction agreement. Now, at least from the NHAI side, they are very clear that unless they get up to 80 per cent, they will not declare the appointed date. Plus, there is a termination clause in these projects. If NHAI fails to provide the required 80 per cent of the land within a year of the project award date then the developer can ask for the termination of the project."
To make the road and highway segment to accelerate from the current levels, industry stakeholders sug-gest that NHAI needs to bring in certain changes in the BOT toll to make it more lucrative. Changes can be in line with what is being done with BOT HAM wherein a certain amount of funding comes from the government. Secondly, a provision for renegotiation of the contract in the future needs to be factored in.
NHAI's Pandey elaborated on the way forward by suggesting, "The only way to do that is through consultation. For example, when we wanted to revive BOT projects, we invited all stakeholders. We heard them out and tried to dispel their apprehensions. We are modifying the model concession agreement to that extent." In the past (FY2012) also, India witnessed a higher number of cancellations owing to the right of way or land acquisition which resulted in a time extension, cost escalation, etc. All these projects were sanctioned through the BOT toll model. After 2012, because of developers' lack of confidence in the BOT toll, NHAI was forced to go back to the drawing board to come up with a new model, i.e., BOT HAM.
In FY2014, the awarding was at an all-time low. NHAI tried BOT toll first, but lack of investor interest forced them to move to BOT HAM, which also didn't work. Finally, they used the Engineering Procurement Construction (EPC) route. The trial and error method resulted in significant time loss. In 2019, the situation is very similar.
The annual allocation for road, railway, waterways, irrigation and urban infrastructure put together is around Rs 3.5-4 trillion, of which one of the segments may witness some slowdown. But that does not mean the central government is going to curtail or downsize the Bharatmala programme. But NHAI is revisiting the funding mechanism that may result in some delays in its overall execution.
Furthermore, to facilitate land acquisition, NHAI is examining the possibility of getting the parties affected during the process to invest in land bonds. "Land bonds are at the stage of conceptualisation. We are simultaneously working on several other options," informed Pandey.
It is expected that India will be back on track by next year, provided the revised BOT toll model is right. NHAI is seriously contemplating to tap other funding avenues such as Infrastructure Investment Trust (InvIT) route. For NHAI, it is very important to pursue asset monetisation, which it is currently doing through toll-operate-transfer (TOT).
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"Given the current situation, it is expected that the government would focus more on speeding up infrastructure execution or capacity building to keep the economy afloat as any movement in the construction or infrastructure development would also revive the dependent sectors."