READY TO ROLL
The Indian road building market is worth Rs800-Rs1,000 crore per annum and is likely to grow at the rate of 10-15% per year. The National Highways Authority of India initially (in 2009) under the National Highways Development Project (NHDP) had set a target to construct about 35,000 km of roads within five years which translates to about 20 km per day but this target was later brought down to about 10 km of national highways per day.
In fact many projects across India have hit potholes over the process of awarding projects, land acquisition and funding issues. The roads ministry reportedly failed to award the Eastern Peripheral Expressway by the end of December 2013. Apparently, two other road projects listed by the panel – the Delhi-Meerut Expressway and the Mumbai-Vadodara Expressway will also fail to meet their respective deadlines of March 1 and 15. These three projects are estimated to have a total project cost of Rs25,000 crore. Also due to delays in land acquisition about 16 major projects across four states and worth Rs15,000 crore have been stalled.
Queried about the growth of the Indian road building equipment market and how the company intends to leverage it, AM Muralidharan, president, Volvo Construction Equipment, said, “The demand for road building equipment looks promising.
As of last year, the road construction equipment market stood at an industry volume of 2,500 machines and it is expected to grow at the rate of 5-10% in coming years. So we are hopeful and confident that these projects will come up in the later part of 2014 and early 2015 for execution.
We have a complete range of products for road equipment which is not just compaction and paving — we also have excavators, wheel-loaders, crushers, etc. While we await more investments to happen in national highways there are a lot of state highway projects that are picking up in Uttar Pradesh, Rajasthan, Bihar, Karnataka, Tamil Nadu, etc. Many state highways are being re-laid or upgraded so there is a huge market in state highways also. So while we await national highway projects to pick up we are able to get good business out of state highway projects. If you compare the market now, it is 70% in state highways and 30% in national highways.”
Since nearly 80% of construction equipment is bought through borrowings to enabling financial assistance for equipment, about internal financing options benefiting customers especially in terms of high interest rates, he said, “In financing there are many retail financing options for customers. There are many NBFCs and nationalised banks supporting infrastructure. They are willing to support any equipment required for infrastructure as equipment or as a whole infrastructure project. The interest burden is slowing down infrastructure projects and it adds on to the contracted cost which is not getting compensated in the bids or in the tenders when they submit it. This is definitely affecting the profitability of contractors which is why the market for construction equipment was lower last year as compared to the earlier year.”
About how many machines the company produces per year and what measures the company is taking to meet market demand, he said, “We had invested Rs100 crore in our Bangalore facility in 2011 and we have capacity to cater to market demand till 2016.” Of issues facing the segment he said, “The problems are on the policy side whereas some steps have been taken in land acquisition. In terms of top three issues in road construction a major one is land availability for the contractor. Second is repatriation of people who live in those areas and giving them compensation and moving them to a new area. Third is service availability in terms of power and aggregates availability near projects. These are the three areas where we face issues in execution.
To summarise, we are confident that there is a lot of work to be done. We are at the lowermost part of the curve and in 2015-2016 the segment could peak.”
About the Indian road building market growth rate of 10-15% per year and the National Highways Authority of India (NHAI) ambitious plan to construct nearly 10 km of national highways per day, Hrishikesh Kulkarni, Director Marketing, XCMG India, said, “NHAI and National Highways Development Project (NHDP) have ambitious plans. In the past too they had such plans and executed some big projects like the Golden Quadrilateral project, etc. However, for the last few years execution has slowed down. The main reason is the economic slowdown which is not generating enough funds for EPC cost-based projects and lack of maturity in the system for PPP framework of doing business. There are increased risks which is putting pressure on positive cash-flow for private partners.
Because of this many private investors are not looking at infrastructure including road projects. A common factor in these two types of projects is the need of ground level reforms which need to be expedited to remove bottlenecks such as land acquisition, environment clearances, labour reforms, etc. However, going by recent announcements made by the government, there is a ray of hope for improvements in these areas in the near future.”
Asked about pros and cons of the National Informatics Centre (NIC) being tasked with the responsibility of developing a programme for GIS and web-based monitoring of road projects, he said, “It will be a Herculean task for NIC. This challenge needs to be passed through a short time as this is the need of the hour. If NIC takes a long time to develop the programme, it may not be fruitful in that case. Such a monitoring programme will be a great help to the monitoring agency. However, this should be basically used to identify bottlenecks in projects and removing them at the earliest. Along with this monitoring there is a need for a single window to remove bottlenecks. The monitoring agency needs to ensure that the programme is used in a positive manner and not for policing purposes. Since the programme is webbased, great importance needs to be given for data security and confidentiality while developing such a programme.”
Since over 60% investment is expected from private firms, he said, “All will depend on success of the PPP model. If bottlenecks are removed, more and more investors will get attracted to such road projects. If this happens, definitely these projects will move faster. It is not only building roads, overall facilities alongside also need to be developed. The earlier these roads are made available the quicker will be the GDP growth which will lead to overall development and economic growth of the country.” About 16 major projects across four states and worth Rs15,000 crore are stalled due to delays in land acquisition.
NHAI in the first half of 2013-2014 acquired almost 5,000 hectares at a cost of Rs3,000 crore — 51% more than last year. When asked to what extent this will ease the situation, he said, “This will ease the situation to some extent only for next year. But land acquisition is one of the hurdles. Along with this NHAI needs to work on other bottlenecks and land should be made available to the PPP partner or EPC contractor free of any bottlenecks. No private player wants to get stuck after investing his money.”
On the need to rationalise bidding prices which are well below the viability of projects, he said, “Our bidding system needs not only rationalisation but also reforms. These reforms should come from out-of-the-box thinking.” About government initiatives required to make the roads sector an attractive proposition for developers and financiers, he said, “The road sector needs a lot of reforms. It needs the national will to bring these reforms to this sector for faster implementation. The reforms should lead to a win-win situation for all the stake holders that is public and private partners and financers. Only then will developers and financers get attracted towards this infrastructure sector.”
On the National Highways Authority of India (NHAI) plan, Ramesh Palagiri, MD and CEO, Wirtgen India Pvt Ltd said, “Although there were more than 11,000 km of BOT projects awarded between 2010-2012, only an approximate 10% of these projects have started and the current backlog is over. These BOT projects have not made progress due to issues like land clearances, long-term funding, forest clearances and also depreciation of the Indian rupee. On account of these key factors a number of BOT road projects were stalled or are going slow. However, there has been progress under the EPC mode in state highways and rural road projects.”
About leveraging this target to their benefit, he said, “Our recent focus is to increase and strengthen our sales and service network and also offer newer products to the market. We have also taken measures to introduce innovative technologies to the Indian market like cold milling and recycling and we are already seeing the results of these coming. Products to suit the demand of the Indian market are locally manufactured to ensure a cost-effective and competitive product.”
About government initiatives to make the sector an attractive proposition for developers and financiers, he said, “The government has to address issues like long-term funding for road projects, faster land clearances and also introducing more stringent prequalification criteria for contractors who are bidding for road projects.
The blocks have to be cleared to expedite a healthy growth in this sector. Growth acceleration can also be seen if the government ensures a good mix of both BOT and EPC projects.”
On NHAI acquiring almost 5,000 hectares to ease the situation, he said, “Acquisition of additional land together with enforcement of the new Land acquisition bill will contribute to ease the existing situation and pave the way for faster implementation of projects.
This will definitely ease the situation but unless long-term funding is addressed progress will continue to be slow.” About NIC developing a monitoring programme he said, “This is a good step for better monitoring of road progress and would help highlight problem areas in advance.”
On the role of private developers in road building, he opined, “As soon as issues like long-term funding of road projects and introducing stringent qualification norms for bidding are addressed, the government would be able to again attract the private sector for BOT projects and this is the only way NHDP can make fast progress.”
About the need for companies to upgrade project management expertise in order to undertake and execute projects on time, he agreed and added, “But it is more important to upgrade their risk management expertise which would make their bids more realistic.”
On the need to rationalise bidding prices which are well below the viability of projects, he said, “Introducing stringent prequalification norms for BOT projects would be a realistic solution.”
Since nearly 80% of construction equipment is bought through borrowings, in terms of enabling financial assistance for the same especially in terms of high interest rates he suggested, “A healthy growth of the rental market could help contractors and equipment manufacturers.”
About the number of machines churned out by the firm’s Bhandgaon facility (as per its initial target of 200 machines), he said, “Further to our first Indian product — Hamm 311 vibratory soil compactor, we have also recently launched tandem rollers HD 99 and HD 109 and Vogele pavers would follow shortly. We are also expanding with a new facility and would start producing Kleemann range of crushing and screening plants in India by January 2015. In 2013 we delivered 250 compactors and our target for 2014 is 400.”
About the NIC programme for webbased monitoring of projects, P Ravishankar, CEO, Ashok Leyland John Deere Construction Equipment Company, said, “This programme is a move in the right direction for road projects. GIS and webbased monitoring would increase the government’s focus on reducing delays in the sector. Such a move will also benefit private investors by increasing the accuracy in estimation of the required clearances for each project much ahead of time and this in turn will aid in analysing the viability of projects before bidding.”
On 60% of the cost for paving 55,000 km of highways coming from private developers he said, “The PPP model is definitely the way forward as it will accelerate the pace of investments in the road sector. However, the model has not yet produced the desired results as road project investments have currently become unattractive due to the continued delay in land acquisition and environmental clearances in projects that have already been awarded. The government needs to set out very clear policies on a regulating body, scheduling of premium payments and an exit policy for investors in order to make this model much more attractive. While the viability of the model is not in question, the policy framework and overall environment need to improve drastically to fully benefit from this model of infrastructure development.”
About the policy that NHAI is not supposed to carry out maintenance work on stretches awarded on BOT basis, he said, “The government needs to take a relook at this policy considering the long delays in BOT projects. The condition of roads in awarded projects where construction activity has not yet begun due to various delays is causing high discomfort to commuters. The policy must be modified to improve the overall standard of maintenance of roads under BOT projects.”
In view of land acquisition issues, NHAI acquired almost 5,000 hectares. When asked to what extent this will ease the situation P Ravishankar,said, “This is a positive step to accelerate road projects as land acquisition constitutes a big portion of the total reasons for delays in these projects. Also, the recent decision by the government to award projects only after acquiring a minimum of 90% of the land into their possession will instill confidence in contractors to bid for future projects. However, even though the amount of land acquisition appears to be much better than last year, this rate needs to be sustained in order to achieve the required target in road development.”
About companies upgrading project management expertise to execute projects on time, he said, “Current delays in road and other infrastructure projects are predominantly due to delays in government policies and decisions and therefore it will be difficult to assess companies’ project management abilities today.”
On the need to rationalise bidding prices, he added, “In road projects a delay of a year or more which is normal today, considerably reduces the viability of the project. As such delays prolong, the bidding prices become more and more irrelevant. The bidding prices must definitely be rationalised to ensure that private investors are not left hanging after being awarded projects.”
About government initiatives to make the roads sector an attractive proposition he suggested, “There is a massive deficit of infrastructure, especially roads, in India today and this deficit will continue to grow as the economy expands unless there is a clear focus from the government to accelerate growth in this sector. There needs to be a transparent policy framework that will eliminate delays in land acquisition, environmental clearances and state or local body approvals. The industry players and investors need this stability to plan their strategies and without this it will be difficult to achieve targets that the government has set for themselves.”
About enabling financial assistance for purchase of construction equipment, P Ravishankar said, “We have tied-up with all the leading financiers on a pan-India basis. Within our group, we also have two financing entities namely Hinduja Leyland Finance and IndusInd Bank. So there is a wide range of financing options available to our customers. Moreover, we are also planning to work with public sector banks which have a strong reach in the deep rural hinterland.”
For a long time now our roads and highways segment has been in a bad state.
While the drive towards sufficient infrastructure to match strides with burgeoning growth may be a long way off, speedy efforts in this direction though are the need of the hour.
Critical projects must be identified.
Abhijit Gupta, MD, Case Construction Equipment India, on accelerating the pace of road projects.
Do you think there is a need to have a re-look at the current PPP model for road projects?
PPP models have been reasonably successful in the past few years. There are a few roadblocks with regards to concession agreements and revenue-sharing models due to cost-escalation in long term. For this model to be successful, the government has to be more forthcoming in terms of setting the right guidelines and making sure that they are implemented. With proper guidelines set by the authorities, I am sure PPPs with increasing participation from private players will be the trend of the future.
Do you think the government should offer incentives to attract investors for projects?
There has always been incentivisation. There is no issue with regard to the government’s intention to incentivise.
There are issues pertaining to implementation and execution — how to implement a PPP project, how to complete it on time, how to get those incentives, etc. Somewhere we are stuck and that makes us feel that the entire process is not holistic. Project implementation and execution procedures need to be least complicated in order to enable investors to fully benefit from the government’s incentive policy.
It is said that NHAI projects have been slower as compared to various state projects. What could be the reason for this?
Land disputes across states have become a big issue in terms of resolution. It is much easier to resolve land disputes at the state level since there are people who are directly affected and included. Since there is a local interest, things are dealt with in a better way at the local rather than national level.
Do you have any suggestions to accelerate the pace of road projects?
Out of the several projects that are on the government’s plate, critical ones must be identified categorically and the involved parties must come forward and proclaim that they are ready to bear the risk of cost escalation so that the government is assured of no budget overruns. This will surely be at the cost of financial burden on the interested parties, but on the other hand this will put an end to the uncertainty factor and provide a boost to the sector.