Gaining momentum

The Ministry of Road Transport and Highways (MORTH) has made significant efforts to put the sector on a growth trajectory. While there has been noticeable improvement, a more collaborative endeavour is sought to bring about the desired effect.

In order to rejuvenate the Highway Development Programme which had experien¡ced a roadblock in terms of land acquisition, environmental clearances and lack of adequate liquidity among private promoters of PPP projects, the Ministry of Road Transport and Highways (MORTH) has made major efforts to remove project logjams, settling disputes, getting environmental clearances and stream¡lining cash-traps of stalled projects. However, the government still has a daunting task of addressing issues such as availability of long-term financing of infrastructure projects. It is also imperative to make the sector more conducive for low-risk-predictable-return PPP models to attract domestic and foreign private investment and also institutional investment.

Considering the initial momentum with the successful implementation of the Golden Quadrilateral Project, the last decade witnessed significant private participation in the form of investment through PPP. However, the recent past (from 2012-13 to 2014-15) also witnessed substantial slowdown with stalled projects and reduced responses to PPP model for development of highways due to various reasons stated before. The MORTH was faced with major challenges in reviving the sector.

Intervention by ministry
There have been initiatives on both sides, (i) process and (ii) policy side, aimed at improving business interest in the sector. The process improvement initiatives have been focussed on areas such as decentralisation of approval process, decision making and faster clearances. The policy oriented initiatives include hybrid annuity model, exit policies, etc. Relooking at MCAs has been on the cards. Aspects like additional performance security introduced in the hybrid annuity model to reduce aggressive bidding cases show pin-pointed efforts. Recent initiatives by MORTH suggest that they have identified problems in the sector.

Interim Strategy
The policy and process initiatives take time to implement and in turn show the result. In the interim, one can´t stop building roads. Therefore, during the year 2013-14 and 2014-15, we saw a major shift in procurement route from PPP to traditional item-rate or EPC route because many developers were not ready to undertake projects on PPP.

Other Developmental Schemes
The government´s ´Make in India´ policy for the manufacturing sector is likely to have added positives for the sector. Increased manufacturing can essentially lead to increased commercial traffic on the roads. Areas around corridor projects are likely to see a traffic boost in coming years because several large industrial cities are being planned in these corridors, which are likely to generate large traffic volumes.

Signs of Recovery
While it is too early to say how the initiatives pan out; to an extent the data suggests that MORTH has been able to tackle the challenge head on. There has been significant improvement in project award as well as construction progress.

Investor Perception
We have not seen many M&A activities in the past couple of years in this sector and the underlying reason for low deal activity is more of mismatch between buy-side and sell-side expectations. With signs of improving traffic, deal activity may seem improvement in the short to medium term. In addition, we also believe that IDF´s activity is on the rise, and may pick up further in the short term. However, it will be crucial that the recent initiatives lead to the targeted improvements in the sector. Also, some recent PPP projects have seen good response from private sectors, which are likely to be bid based on past experience and favourable risk reward ratio. Private sectors are not likely to undertake undue risks which they may not be able to manage efficiently.

Upward Trajectory
Schemes like hybrid annuity, one-time fund infusion, etc., are yet to test waters. While the private sector sentiments are still more around ´wait and watch´, it will be important for the sector to see through the impacts of all initiatives, make adjustments as and when necessary and follow on. And there are precisely two angles of looking at such follow-ups.

The private sector perspective: For example, let´s take the 5/25 rule. It is important to see whether it is helping the sector at all? If no, why and what adjustments need to be made? Similarly, is there a relook needed The government perspective: For example, let´s take the recent hybrid annuity model.

It is important to see whether the focus on efficiency is being retained or will it turn out to be a game of bid strategy?
The government´s focus on such follow-up is somewhat reflected in the revised decision of government on 26th August 2015 on exit policy. Hopefully, the sector will see more such follow-up in recent future to keep the momentum going.

This article has been authored by Vikash Kumar Sharda, Director- Capital Projects & Infrastructure (CP&I), PwC India.