The long road to prosperity
Early last month, the Union Minister of Road Transport & Highways Nitin Gadkari announced his intention to create a shelf of 500 ready-to-bid projects worth Rs 3 lakh crore to propel growth in the infrastructure sector. This is in addition to rolling out Rs 1.8 lakh crore worth of projects out of Rs 2.8 lakh crore stuck projects.
The news couldn’t have come at a better time for companies undertaking road contracts not to forget road construction equipment makers who have been feeling the strain of projects not taking off last three years.
Simultaneously, in order to ensure that the government is as good as its word, the Ministry, in order to fast-track projects, has created a separate section to prepare detailed project reports (DPR) to keep a vigil on the progress of all ongoing projects.
Indeed, the sector has been hit hard owing to faulty policies, which are likely being rectified now. Pouring oil over troubled waters, the Minister has not only promised a mechanism to solve all discrepancies but averred that a justified model concession agreement will be in place soon.
Gaurav Soni, general manager of Udaipur-based K K Gupta Constructions, says, “Over the last two years, the Centre terminated contracts for 36 highway projects . Later on, the delays in the projects due to lack of clearances and land acquisition escalated the costs, rendered them unviable for most companies. The highways ministry is also trying to estimate the escalation in the cost of these projects due to the delays.”
He added that about 189 highway projects involving investments of nearly Rs 1 lakh crore are stuck due to problems of land acquisition, delays in forest and environmental clearances, non-transfer of defence land and hurdles in rail over bridges. Officials of the ministries of highways and railways had met last month to resolve inter-ministerial issues which had delayed highway projects across the country.
Besides this, steps for building of long-durable concrete roads was also on while the government has already notified use of iron ore slags in road construction, which would be cost-effective. If one goes by what the industry has to say it appears that the Minister is confident of achieving 30km a day road building target and would contribute 2% to the GDP in coming years.
Again, last month, at an event, Gadkari had said that projects worth Rs 1.8 trillion have already kick-started after the BJP-led government took charge in May-end.
Are all the above mentioned statements for real? Considering the dismal state of roads and highways in the country, the promises by the new government seems like manna. Moreover, the action that has been taking place in this sector, it looks like most of these promises are likely to materialise.
Many more developments are also on the anvil. Among the lesser known ones are plans to construct 1,000km expressways under the National Highway Development Project (NHDP), including the Delhi-Jaipur expressway. The (proposed) expressways are at feasibility stage. In fact, different financing options are already being worked out for the Delhi-Jaipur expressway as it was found to be unviable on BOT (Build, Own, Operate) toll mode. The government has launched major initiatives to upgrade and strengthen 54,478km of national highways through various phases of the NHDP.
A well-developed infrastructure is a foundation for the growth in any country. The strategy now is to divide projects into smaller parcels wherever possible and speed up the execution. Several restructured projects are awaiting clearances from competent authorities such as the PPP appraisal committee for the award under the build-operate-transfer (BOT) mode on a toll basis.
As of now, NHAI has 20,000km balance road length which is yet to be awarded. Out of this 8,500km would be awarded in the current year, including NHAI’s 5,500km and the ministry’s 3,000km. Next year the remaining length of 12,000 kms would be awarded in 2015-16 out of which NHAI target is about 9,000km.
The highways ministry has showcased revival of 34 projects worth more than Rs 26,000 crore in its latest presentation on infrastructure targets to PM Narendra Modi with the projects spanning over 4,084km are being restructured or converted from public-private partnership to engineering, procurement and construction (EPC) mode to get them going.
A recent report brought out by rating agency Crisil says that the unprecedented pick-up in execution amid a proactive government and faster approvals by implementing agencies is visible among road projects as work on almost 75% of the ones awarded in 2013-14 has started. This is expected to improve the returns for the developers of BOT projects and companies engaged in EPC contracts. The average time overrun had increased from about 20 months in 2008-09 to about 50 months in 2013-14. Both BOT and EPC projects got stuck, with the average delay around 13 months for BOT projects and 45 months for EPC projects.
Satish Parakh, managing director at Ashoka Buildcon, says, “At a time when most state governments are cash-strapped to fund infrastructure projects, BOT in terms of construction management has offered some succour. Considering that developing countries like India require extensive infrastructure to meet population growth, budgetary constraints is what holds them back. In such cases, BOT is an option to finance the infrastructure project and boost the economical growth of the country without direct utilisation of government finances.
He adds, “BOT projects have the potential to serve the government and private sector with equal assuredness. If executed well, it can attract foreign investment into local projects and can be a lucrative opportunity to generate foreign exchange which in turn can aid economic growth.”
A BOT project can only be successful if there are heavy traffic flows on that stretch. “It’s for this reason that projects are identified in advance. We need to understand traffic flows over the next few years and much in advance. We need to look at origin and destination of traffic. For that reason, we also analyse various sectors on which traffic is dependent be it agriculture, industry driven, mining, etc. The future of those sectors will decide the future of toll collection for us,” says Parakh. Since bidding is done through an electronic process and the concessionaire is given a 35-day window period to bid, being forewarned helps.
He would also like the new government to market the BOT concept. “The government puts out advertisements for paying service tax and income tax. Why don’t they advertise for building infrastructure and paying toll tax? Why do people feel they are paying something more than due?” he asks.
In order to clear snarls and spur execution, the government has initiated many measures like fast-tracking environmental approval, delinking forest and environment clearances, increasing limits on sand mining and enabling online filing for clearances to build rail over-bridges and under-bridges.
Sridhar B, business head of SDLG in India, says, “The market has been terrible last two years besides a low morale. And I am not talking about the construction equipment industry only. The new government has often been travelling to countries and requesting them to invest. Gearing up with new products for upcoming projects is a big challenge for everyone. So while we will see growth, there are also likely to be some hiccups. We are geared up and have high capacity and can cater to the market demand.”
To revive stalled plans and help banks tide over mounting bad loans, the RBI eased norms for structuring of existing long-term project loans to infrastructure and core industries. The new guideline widens the scope of 5:25 scheme by including existing standard long-term project loans worth over Rs 500 crore to be flexibly structured and refinanced. The 5:25 scheme envisages banks to refinance or sell out their long-term project loans after every five years so that both the borrower and well as the lender doesn’t face much of an issue. For banks to avail such a facility, the loan tenor cannot be more than 25 years.
Soni says, “The government must understand that the concessionaire has invested crore of rupees on highways and if decisions are not taken on time and designs are not approved faster then the purpose of investing money is lost.”
Arie van Ettekoven, senior advisor, Top-Werk Group, says, “The last 4-5 years we have been here have been extremely hard and buying rarely materialised. We are missing the government tenders, but I am sure they will follow soon. We like the new government’s ideas about doing things and it is being appreciated by countries like Russia, China, Germany and France and we hope that through that it will develop into many more tenders at the government level.”
If the government swiftly implements the measures already announced, and continues with efforts to further streamline approvals, it is generally expected that average delays will come down to less than six months over a period of time. For developers, that will be a big advantage because project returns can improve by at least 200-300 basis points. Further, there will be a healthy improvement in the profitability of EPC companies as their working capital cycles will contract and overhead costs reduce.