If the nascent segment of rural roads must attract private participation to raise the quality bar, it needs to gain the confidence of the companies by doing its tendering processes right and offering government clearances upfront.
Experts
Mahesh M Hiremath, COO, Karnataka Rural Roads Development Agency, one of the better state performers having upgraded nearly 15,000 km of rural roads to all-weather with an expenditure of Rs 3,371 crore under PMGSY.
Sudhir Hoshing, CEO—Roads, Reliance Infrastructure, which builds highways but would like to consider rural roads only when the awards are bundled and the sizes more significant.
PR Rao, Vice President—Highways, Soma Enterprises, the Hyderabad-based roads contractor and developer with 8,000 km exposure, now interested in entering the rural roads segment based on viability.
Rajeev Raju, Director—Marketing, Totem Infrastructure, a Hyderabad based infrastructure contractor that plans to participate as a developer in rural roads through the PURA scheme.
How can private investment be attracted into the rural roads segment?
Hoshing
In 2010-11, rural roads were constructed at the rate of 124 km per day. Around 80,195 km of rural roads were completed as on March 2011. With the thrust on Pradhan Mantri Gram Sadak Yojana (PMGSY), rural roads present a huge opportunity for private sector, which can play an active role in nation building at a reasonable return on capital. The private sector is better positioned to implement aggressive targets of rural roads, which the current strategy of giving contracts to local contractors has not been able to achieve. Below statistics give a snapshot of plan and its achievement of the PMGSY under Bharat Nirman.
For attracting private investment into this oppÂortunity, the government needs to create right enviroÂnment of certainty and consistency. National Highways Authority of India (NHAI) concession agreeÂments evoÂlved over time but are consistent in principle; similarly, rural road contracts should be bundled into sizable investÂments and given out as contracts which are consistent across states.
Raju
Rural road connectivity is not only a key component of rural development by promoting access to economic and social services and thereby generating increased agricultural incomes and productive employment opporÂtunities in India, but also, as a result, a key ingreÂdient in ensuring sustainable poverty reduction. This poverty reduction can be decreased only by introducing private parties in construction of rural road connectivity. The best way of attracting the private parties in the rural roads sector is PPP. There should be broad scope of work for development of livelihood, urban amenities and infrastructure facilities for the people in rural India. We recommend a few tax and duty exemption to the contraÂctors working for development of rural facilities.
Rao
The following practices would make the rural roads sector industry-friendly:
•Single-window clearance for all licences, permits etc required for the project.
•By providing tax incentives to the developer.
•By making the bids more attractive by using innovative approach for making the projects finanÂcially viable.
•Land usage rights along the project corridor can be included as part of the concession agreement, to make the projects more attractive. Perhaps all roads in a district can be made as a single package; however if the road is of a large length may be to be made into 2-3 sections.
•Going forward, the rural roads sector would need a lot of will and effort from the government, as the existing BOT model cannot be replicated, because of the socio-political impact it would have.
How are you planning to augment private participation in rural roads?
Hiremath
The PPP annuity is under proposal. We have to study the feasibility and for this we have assigned the Infrastructure Development Department of Karnataka. They have appointed some consultants and are on job now. However, we tried the model two years ago, connecting the state highways and major district roads (MDRs) with rural roads, in JV with PWD and our department, but it didn't work out. BOT/BOOT (toll) module may not attract the private partnership and this fact is known to the state from past experience.
Viability can be enhanced by clubbing the rural roads with MDRs and State Highways. When the village roads come in between MDRs and from MDRs to state highways, they can act as link roads between these major roads. We may have to consider the traffic density, but once the rural roads are improved part of the traffic can be diverted to these roads. Indeed, it is one the best options for us and can attract the PPP model of participation.
We have already attended a few meetings with our infrastructure development department and have assiÂgned the job to the department. They have fixed a consuÂltant to study the feasibility on this. Once the report is in, I believe we can go ahead with the plan.
Are you in the rural roads segment or are you planning to enter it?
Raju
Although we have constructed national highways, we are not presently into rural roads segment but have planned to enter rural development by expressing our intÂerest for the selection as a developer under the Provision of Urban Amenities in Rural Areas (PURA), the rural-urbanisation scheme under the Ministry of Rural Development. We were one of the qualified bidders but didn't win that bid.
Hoshing
As of now we are not into rural roads segment. We are constantly evaluating business opportunities incluÂding the 'modified EPC' being envisaged. Once we feel that there is an opportunity which fits into our business model we would certainly like to get into it.
What are the main challenges in building and maintaining rural roads? How are they being overcome?
Raju
The major challenges for the contractor will be rehabilitation and resettlement (R&R) of project-affeÂcted persons, and local political agitations. The govÂernment has to be supportive for the contractors in such conditions.
Hoshing
A key issue that rural roads segment faces is financing. Initially, these projects were funded through cess on high speed diesel and loans from multilateral agencies. However, increase in the estimated cost has necessitated additional loans to be sought from NABARD.
In December 2010, World Bank financed projects for improving connectivity especially in economically weaÂker and hilly states like Rajasthan and Himachal Pradesh. This has also brought about a paradigm shift in the way rural roads are mapped, designed, monitored, and built.
Currently, there is dearth of good contractors who can implement the projects in time and maintain the quality of roads. For instance, in Orissa 269 projects got delayed by as much as four years because of incapability of the contractors. On the other hand, in Bihar, the Chief Minister has taken up the responsibility of rural roads development from the central government. This is expected to expedite the construction of roads.
Also, at the institutional level, there is need to enhance the capacity of the authority, National Rural Roads Development Authority (NRRDA). Dedicated manpower is required to speed up the process. There is a need to strategise for planning and implementation of projects.
Rao
The main entry barriers are:
-Connectivity to material resources
-Transparency in mining laws, as a huge chunk of raw material is procured from mining and quarrying
-Availability of skilled manpower
-Overloading of tractors and trucks specially during harvest season, which results in higher wear and tear of the road thereby leading to high maintenance cost
-The roads need to be designed keeping in mind that the roads are to be maintained for a long period. Maintenance may be part of the contract, but payÂments need to be secured and guaranteed for any private player to be really attracted. Secondly, the inflation risk is to be covered if the duration is for a larger period.
Since one of the major complaints with local contractors is quality, how can rural roads projects achieve scale to attract competition from bigger players who can assure quality?
Hiremath
The local contractors are as capable of executing quality works as major contractors after gaining expÂerience and training at KRRDA's workshops. We impart proper training to the agencies or their representatives on constructing roads. The training can be three days for experienced people and five to seven days for newcomers. During this period, they are given theoretical exposure. Along with this, they will be taken to some model sites where good work is under progress and gain an idea about the material and quality aspects. In my experience, the agencies who undertake PMGSY projects should have about 5-10 years' experience, since they offer the optimum quality.
Hoshing
The scale of project is crucial for national players to allocate resource to a project. Hence, rural roads have to be bundled into a sizable stretch to attract large players. For instance, we usually like to look at roads which have an investment size of Rs 1,000 crore. Hence, for rural roads this would translate into 150-200 km.
The other factor is consistency and certainty. By certainty, we mean issues like land acquisition, clearances etc, should be done by the government authorities before projects are given out. This helps in getting finer finaÂncing as the implementation risk is low.
Since quality is often an issue in remote roads, will “Modified EPC”, which is closer to PPP, work better?
Hoshing
The scheme should be made keeping in mind that it is able to attract large players who have access to capital, trained manpower, latest technology and techniques. It is possible that there may be initial lukewarm response. But if policies are well thought out and authority fulfils its responsibilities in a timely fashion, the scheme should do well.
Rao
It would actually work better since it would make the contractor more accountable, as the normal EPC has a short defect liability period which at times leads to poor quality of roads.
How can the tendering process for awarding rural road projects be improved, especially as the segment is starting to attract bigger, national players?
Hiremath
Capacity building measures for contractors have been included in the Standard Bidding Document (SBD), mobilisation advances and machinery advances are being extended to the contractors. Training is also being imparted to the contractors and their engineers along with the department engineers.
Raju
The tenders for the rural road connectivity should be invited globally and the project durations should be more, comparatively. The earnest money deposits should be a reasonable amount and should be flexible for all type of contractors.
Hoshing
It should be kept in mind that bigger national players use international debt and equity markets to raise funds for their projects. Project bidding has to be highly profeÂssional and authorities should showcase their ability to deliver their contractual obligation. This would portray the country as an attractive investment destination and attract the much needed capital. Specifically,
1.There should be pre-defined and clear qualification and winning bid criteria.
2.Risks and responsibilities need to be clearly demarÂcated between concessionaire and authority.
3.We have seen instances where project bids are invited and subsequently get cancelled. This is clearly due to lack of preparedness. It will be ideal that such events do not occur in rural sector.
4.There should be sufficient time for evaluation of projects but timelines envisaged should be strictly followed.
In what ways will enhanced connectivity multiply investments in cold chains and other rural segments? What multiplier effects will rural roads have?
Rao
The basic idea of the rural road programme is to provide connectivity to the urban areas, thereby offering the population residing in rural areas the opportunities which would help improve the overall demographics of the region, thus bridging the socio-economic gap:
-Cold chain industry will grow once rural areas are connected hence reducing the wastage of perishable goods like vegetables, milk etc.
-Improved mobility of people and goods hence saving time and wastage of resource.
-Reducing vehicle operating cost and maintenance cost.
-Increase in rural tourism.
-Improvement in mass transportation in rural areas hence employing more people.
-Easy availability of services like hospitals, banks, schools etc.
-Improvement in social life of people.
Hoshing
Enhanced rural connectivity has helped rural peoÂple to earn more income from their traditional income by making investments in farm related sector. The investÂments in cold chains have helped the locals in preserving the farm produce for a longer period to ensure its quality is retained. In fact, a lot of investments by logistics companies are being held up due to poor road quality.
Also, the connectivity to rural hinterlands has enabled improved access to services, low transport cost. Thus, a new avenue has opened for the service providers and traders. A variety of social and economic benefits arise out of the enhanced connectivity.
For instance, in Nalanda district of Bihar, criminal activity reduced and quality of life improved. There is acÂcess to better quality seeds, shift towards cash crops, inÂcrease in enrollment of girl child, villages accessible duÂring monsoon and prevention of waterlogging in houses.
As per a global study conducted, for every dollar invested in infrastructure development, the multiplier effect gave 75 per cent return on incremental income. Studies in India done by International Food Policy Research Institute (IFPRI) show that the government expenditure on roads had the highest impact on reduction of poverty, followed by that on welfare, health, rural development etc. This fact is reflected in studies globally, be it Indonesia, Bangladesh or Philippines. Provincial roads appear to directly improve the wages and employment of the poor, such that a one per cent increase in road investment is associated with a 0.3 per cent drop in poverty incidence over five years.
What lessons have policymakers learnt from the 11th Plan in infrastructure, and how can they be translated into rural roads sector going forward?
Hoshing
Given that road connectivity can play a large role in alleviating rural poverty, it is essential that focus continues on building rural infrastructure. Rural poverty as an absolute number has been more or less constant and is the main contributor to overall count of people below the poverty line.
In rural roads, it is the execution which has failed leading to achievement being far below targets. Given reasonable success that NHAI has seen, rural roads sector too should be made attractive to private players of national size.
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