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Bridging the gap

Business

 BY JAYASHREE MENDES

Last month, speaking on the sidelines of a Confederation of Indian Industry conference, Planning Commission Deputy Chairman Montek Singh Ahluwalia spoke about how the new government will need to revive investments and push infrastructure projects within three months of being elected to bring economic growth back on track.
He cautioned that if these problems are not solved within the first three months, chances of getting back to high (economic) growth would be slim.
His concern was that the new government must maintain the speedy clearance of infrastructure projects that it had chalked out in its 12th Five Year Plan (2012-17) to target an annual average economic growth of 8%.
With the rapid growth of cities, state governments are scrambling to build highways, bridges and flyovers, roads, metros, etc. Simultaneously, as some national highways achieve commercial operations, there is a commensurate increase in the number of bridges and flyovers as they form part of the highways programme under the concession agreements.
Most flyovers and interchanges coming up are an integral part of the national highways and, therefore, under the scope of the concession agreements signed by National Highways Authority of India (NHAI) with the developers.
Venkatraman Rajaraman, director, infrastructure and project finance, India Ratings & Research (Ind-Ra), says, “Bridges and flyovers perform two important functions. They decongest the city and ensure smooth traffic movement and bypass choke points. They are necessary to achieve these objectives.”
Affirming this, Dilip Kawathkar, joint project director, PR, MMRDA, says, “Flyovers have become a vital part of big and small cities alike, giving elbow room for development. With the rapid expansion of urban spaces, majority of cities, including Mumbai, are waking up to this reality.”
One of the main reasons for the construction of flyovers is the necessity to bypass major towns and cities while decongesting the city traffic from the bypassers.
Ind-Ra’s Rajaraman believes that more bridges and flyovers will be made operational this fiscal and next. This is mainly attributed to the development of national highway projects.
For instance, in Mumbai, a recent crucial infrastructure project that transformed the eastern flank of the island city of Mumbai is the Eastern Freeway. The 16.84 km long Eastern Freeway — constructed at a total cost of `1,463 crore — connects the eastern regions of the city to South Mumbai. The Eastern Freeway was conceived under the comprehensive transport study for Mumbai prepared by Lea Associates and completed by the Mumbai Metropolitan Region Development Authority (MMRDA). It consists of all components of civil engineering, including precast segmental elevated construction, creek bridges, flyovers, railway overbridges and tunnels.
The decision to build bridges and flyovers are not random. They precede a detailed study of numerous types of feasibility.
Its importance has to be judged in terms of the function it performs – does it result in saving of time and cost by improving connectivity? In case of bridges and flyovers, the most important aspect is to assess the number of vehicles plying on a particular road on which the bridge or flyover is to be constructed.
A challenge here is to ensure that the bridges and flyovers are structured and developed in a manner that it becomes attractive from the investment community (lenders, multilateral agencies, private developers, etc.) and at the same time benefits the cities in terms of its social and economic growth. The construction of bridges and flyovers follow a particular norm such as standards including length and width of the carriageway, the quality of construction, etc. In many highway projects, new bridges are built alongside older bridges (which are two laned/single laned) to ensure four-lane access. The older bridges are also strengthened as a part of the project.
Rajaraman says, “The question about weak traffic at these flyovers may not actually undermine the importance of bridges and flyovers. These are two different aspects. Highways are the nerves of economic development and contribute to the economy and the GDP. Bridges and flyovers are just ancillary to the highways.”
The underperformance in traffic on the highways (not just the bridges and flyovers) is ascribed to several reasons including poor estimation of base year traffic, higher year-on-year growth rate and the slowing economy. Usually, developers appoint independent traffic consultants to study the traffic. The traffic consultants make a study of the traffic at different points in time, the increase in number of vehicles, the economic potential of the area, major industrial and economic zones surrounding the highway stretches and estimate the traffic factoring in the economic growth expected. That being said, there are too many variables that affect traffic estimation. Traffic study at a particular point in time may not be an accurate measure to estimate the future traffic throughout the concession period.
Nirmal Humbad, managing director, Dorsch Consult India Pvt. Ltd, “Most feasibility studies are driven by cost of construction and not by ‘life cycle costs’. But with PPP practice getting more settled in India, wiser concessionaires would give importance to life cycle costs.”
While current traffic on the road serves as the base, often alternative routes are also looked at and its effect is taken into consideration. An absence of historical traffic data impedes the traffic estimation.
For a successful flyover project, developers take into account proposed toll rates, the speed of vehicular movement on successful completion of the road, especially if it’s a BOT project.
Besides the economic study, industrial/ agricultural potential in the area is also considered. This is not merely confined to the project stretch, but also the entire hinterland served by the highway/flyover.
The nearest cargo carrying stations — port, airport, railways — plays a vital role on the traffic estimation front. The villages and towns on the sides of highway or flyover and their contribution to the economy are counted.
For flyovers coming up in uncharted areas, the developer along with the state government maps out the economic data such as the number of vehicles sold in the area. The GDP growth determines the annual traffic growth rate. “However, we believe that traffic study and future estimation will have to be a continuous process. I don’t think that making a traffic study before signing the concession agreement and using it for the entire tenor of the concession is the correct way. Tolls are standardised and prescribed/ notified by NHAI with annual rate increment fully or partially linked to WPI,” says Rajaraman.
Ravindra Kulkarni, vice-president, J. Kumar Infraprojects, is gung-ho about the new projects that are being thought out in terms of bridges and flyovers. “Especially in a city like Mumbai, more is not enough. The increasing vehicular density only makes the cry for more flyovers louder,” he adds. While state governments are stressing on construction of flyovers, the going is not so smooth. More often than not, there are frequent delays during construction and this could pose a threat to the economic rationale of the projects and to a certain extent investment potential also.
MKR Prasad Rao, managing director, MVR Infra Projects, says, “In most cases, delays are caused due to issues pertaining to land acquisition and right-of-way handover by the grantors/governments or obtaining approvals from government.
In fact, many projects are languishing or delayed by a wide margin and short of completing construction because of land availability issues.”
Very often, promoters find that substantial capital and bank capital (through debt) is locked in all those projects which do not produce any meaningful economic revenues. In some cases there could be clauses emphasising that tolling can commence once a project has achieved a certain level of completion. In such cases, the partial revenue garnered must service the full contracted debt thus squeezing cash flow. “Such problems can be eased only by policy measures — by the highways ministry and the banking system,” says Rajaraman.
Poor financial structuring of projects is another problem faced by developers. The debt is structured to amortise in a shorter time in keeping with the concession.
Most times, the principal moratorium is less than six months which does not give time for the traffic to stabilise.
This situation burdens the operational cash flows of a toll road. Also absence of a fixed-interest rate long term loan market increases the uncertainty on cash flows. Projects that are conceptualised when the interest rates were around 9.50% p.a are paying 14% currently. These financial risks have aggravated the strain on the projects.
S. Nandkumar, senior director, global infrastructure and project finance, India Ratings & Research, offers a few solutions to eliminate inflationary bottlenecks in infrastructure projects. He says, “Positive government intervention, supported by a strong follow-through action on the ground could revive investors’ sentiments.
Steps could include ensuring a lasting solution to the fuel supply issue at the systemic level; relief from onerous revenue share requirements for toll road projects; facilitating transfer of ownership from weak sponsors; and constituting independent regulators expeditiously (e.g. roads sector).”
A solution to such problems is to ease the cash flow by elongating the debt or equating the debt tenor with the economic life of the road. Some policy decision will also be required. “A decision could be taken to defer the premium payments allowing the road to be tolled during construction thus offering some relief,” says Rajaraman.
Humbad says, “As a consultant, we have long experience of PPP in constructing highways. In one project, the detailed project report (DPR) was prepared with a river bridge as submersible bridge. We pointed this design limitation and explained to the owner that people would be paying toll to use this road infrastructure, and it would be unfair to construct a submersible bridge. The owner agreed but had financial constraints.
We redesigned the bridge using certain value engineering practices but catering to high flood level and with cost lower than DPR cost.”
Most of the time, the developers are the EPC contractors. To some extent, equity invested in the road projects is taken back from EPC margins. “Lenders will have to be more cautious. They must appraise the projects by performing different stress scenarios – varying from light to harsh intensities. Management cases and projections must be moderated by the banks.
In our portfolio traffic underperformance has ranged from 8% to as high as even 42%,” says Nandkumar.

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