Roads & highways – The road ahead: Challenges and possibilities

While the focus is on sprucing up national and state highways, and rightly so, the government must not forget about city, district and rural roads that need to be upgraded to address the burgeoning traffic.

As per the latest projections on GDP growth of the International Monetary Fund (IMF), India is expected to record the highest growth rate of over 7 per cent, as compared to all major developed and developing nations. This growth has to compulsorily be supported by long-term infrastructure planning and development or else the country will be constrained by bottlenecks like what we recently witnessed in Chennai and in Delhi. One of the key areas is the development of roads in the country, both highways and state and district roads.

Some key facts about the road sector:

• India has a total road length of about 5 million km, of which about 2 per cent constitute the national highways; about 3 per cent constitute the state highways and the balance about 95 per cent are the district and rural roads.
• Roads bear about 85 per cent of the country´s passenger traffic and 60 per cent of the freight traffic.
• The government investment in the roads sector is expected to be about `9.2 tn in the 12th Five Year Plan (2012-17) as compared to `3.6 tn in the 11th Five Year Plan (2007-12)

The current government has placed a very ambitious target of constructing 30 km per day by March 2016, as compared to about 3-13 km per day during the last five-year tenure of the previous government. This is certainly a difficult target to achieve by March 2016 going by the challenges plaguing this industry. While 8,000 km of roads were awarded in the previous year, the target this year is 10,000 km, which, if carried out on a sustained basis, can lead to about 30 km per day target in 2017-18. The growth in the next two-three years will primarily be driven by resolving the constraints and easing out the system´s challenges.

Land acquisition & approvals
With the current preference towards EPC and probably hybrid models (as being planned), the government will be placing the land acquisition and approvals on priority since the project awards will have to be preceded by 80 per cent land acquisition and all requisite approvals in place. Already, over 4,500 hectare have been acquired in the first half of FY16. However, at the same time, the challenge is the escalating cost of acquisition which is up from an average of about Rs.78 lakh per hectare in FY13 to about `135 lakh per hectare in FY15. This is further expected to be higher at over `200 lakh per hectare in the current year.

Liquidity in the industry
100 per cent exit of the projects has now been permitted which will definitely help. However, what is required as a follow-up is ease and clarity on Infrastructure Investment Trusts (InviTs), whereby the toll-earning projects can be listed for the benefit of investors. This will help developers to release their equity. There are an estimated 80 Build, Operate and Transfer (BOT) projects awarded prior to 2009 that have been completed and the locked-in equity in these projects is estimated to be Rs.4,500 crore. Investors like Piramal Enterprises are joining hands with investors with a long-term horizon like the Dutch Pension Fund and APG Asset Management to invest $1 billion in Indian infrastructure over the next three years. On the government funding front, the government has also budgeted Rs.42,000 crore for highways, while NHAI is allowed to raise Rs.70,000 crore through tax-free bonds. Moreover, `8,000 crore comes every year from toll collection that can be securitised.

Quality of roads
After all, about 95 per cent of the roads are district and rural roads which are the key to the last mile connectivity and reduction of congestion and pollution levels. This is a major area of concern with issues arising even on the highway sector, especially if the projects are vide the EPC mode or Hybrid mode, going forward. Even under the toll mode, where the maintenance is with the developer, there have been challenges. Recently, a large highway developer was fined for poor quality of roads constructed.

Stalled projects
There are about an estimated Rs.3.8 lakh crore worth of stuck projects on account of land and environmental disputes. This has resulted in defaults in debt servicing and the problem has been further compounded by the fact that 30 per cent of all loans are to the infrastructure sector. Of this, about 19 per cent are to the roads sector. The government has to speed up resolving these issues for the developers to be able to work out debt restructuring or exits.

Conclusion
Finally, while the focus will be primarily on sprucing up the national and state highways, the governments and municipalities must also not forget that city/district/rural roads that constitute about 95 per cent of the total road network have to be upgraded and maintained to address the burgeoning traffic. Arterial roads, especially in metros, have to be de-congested with proper and advanced planning. If India has to progress at a growth rate of over 7 per cent and with a large focus on Make in India, an efficient last mile connectivity will ensure minimal bottlenecks.

This article has been authored by Sapna Seth, Associate Director, Singhi Advisors.