Home » GovernmentÂ’s focus on road sector yields positive results: ICRA

GovernmentÂ’s focus on road sector yields positive results: ICRA

GovernmentÂ’s focus on road sector yields positive results: ICRA

Effective policy measures by the Government over the last 36 months have revived the Indian road sector and supporting the execution pace. According to ICRA, these include steps like awarding projects after securing 80 per cent right of way; expediting projects stuck midway, delegating the power to grant forest clearances to regional offices, online filing for clearances to construct ROB and RUBs and increasing the limit on sand mining. Earlier the sector was marred by execution delays, project cancellations, stalled projects, loss of lender confidence, leveraged balance sheets of developers and sluggish traffic growth.

According to Shubham Jain, VP and Sector Head, Corporate Ratings, ICRA Ltd, “Most of these measures were fully implemented by the end of FY2015 and therefore FY2016 saw a sharp pick up in execution pace by about 37 per cent, followed by 35 per cent growth in FY2017."

Other policy measures such as back-ending premium payment, compensating concessionaires for delays not attributable to them, relaxing exit norms and one-time fund infusion by the NHAI are expected to address liquidity-related concerns faced by the developers. Further, to make encumbrance-free land available more speedily, the NHAI has delegated power to regional officers to demolish structures on the right of way and to shift utilities as and when needed. These initiatives will help the road sector regain the confidence of developers and lenders over the long term.

Asset sales in the road sector have picked up over the last 30 months with the relaxation in exit policy. Sponsors in around 20 road assets involving a total cost of Rs 123.27 billion have monetised their assets as opposed to around Rs.70 billion in the preceding 50 months.

Till FY2014, projects were awarded either on BOT (Toll) or BOT (Annuity); or on the basis of engineering, procurement and construction (EPC) in that order, depending on the traffic density along the project stretch. These led to slow down in project awarding as private sector participation was low.

As a result projects were  shifted to the EPC mode thereby restarting the award process which being time led to low awards in FY2013 and FY2014. Subsequently a committee, headed by the Secretary of the Ministry of Road Transport and Highways (MoRTH) took over to decide on the mode (BOT/EPC) of awarding projects. Since then upfront land acquisition, clearances from the Ministry of Environment and Forests (MoEF) and more number of EPC contracts have spiked the interest of developers and contractors in road projects.

A new model was introduced – Hybrid Annuity Model (HAM) in FY2016, which is a mix of EPC and BOT (Annuity) models, wherein the Government and the private enterprise share the total project cost in the 40:60 ratio.

The HAM is currently the most preferred mode of awarding projects and has garnered a favourable response from both the EPC and the BOT players. Around 53 per cent of the awards in FY2017 by NHAI were through the HAM route, compared to 8 per cent in FY2016; and this is likely to increase further in FY2018.

Till March 2017, 43 projects, covering 2,641 km, have been awarded through the HAM (34 in FY2017 and nine in Q4 FY2016) route. However, given the low equity requirement of HAM, lenders are concerned about the developersÂ’ commitment till the end of the concession period, as many developers have limited experience. Therefore, many projects are struggling to achieve financial closure

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