COVER STORY

ANALYSIS

Reinventing India's road infrastructure

Highway award and implementation has faced a major slowdown this fiscal, but most of the factors are the usual suspects. Then why is this year different? Rohit Chaturvedi and Tejaswi Subramanian explain the potential pitfalls and silver lining in the sluggishness.

of the 12th Five Year Plan, which entails an ambitious

After

business, the road sector has seen a marked a year of year in bidding slowdown this aggressivethe numberand allotments of flourishing made or expected to be made by the National Highways Authority of India (NHAI). Aggressive bidding, coupled with the tough economic, administrative and regulatory environment, has led to failure in the implementation of many of the awarded highway projects. The aggressive bidding has been caused, in a major way, from expectations of good returns (Figure 1). The current situation makes it rather tough to achieve the expected good returns owing to myriad problems. Given the problems, it seems difficult to meet the goal of constructing 36,500 km of road during the period

average of 20 km of roads being laid per day. In terms of investment, this translates to Rs 7 trillion, 38 per cent of which is expected to go into the state highways. Looking at the short-term horizon for the national highways, the current fiscal may see an aberration in the positive trends of award and implementation by NHAI. The recent trends show a steady increase in the overall length of the awarded projects over the years. In FY12, 6,390 km of the targeted 8,300 km was awarded, marking a year-on-year (YoY) increase of around 20 per cent. However, in the current year, only 560 km has been awarded in the first half. The rate of award is far below the rate required to reach the original award plan of

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9,500 km of national highways in FY13. It is understood that a maximum of 6,000 km of road works may be awarded during the rest of the fiscal year, aggregating to around 6,500 km of total award, which amounts to more than 30 per cent decline compared to the last fiscal.
FACTORS BEHIND SLOWDOWN

cted profitability. Such projects will need to be repackaged by the NHAI before inviting bids again. Nevertheless, the persisting moderation in bidding, as opposed to its aggressive nature in FY12, comes with the silver lining of the possibility of improved equity returns from new projects.
ACTIVITIES AT THE STATE LEVEL

Regulatory and administrative factors are chiefly responsible for delays in land acquisition and in obtaining environment clearances. Other such hindrances include difficulty in gaining railway approvals and pending approvals of changes in Detailed Project Reports (DPRs). These problems are aggravated by the prevailing difficult economic situation, with sources of financing drying up and lower expected traffic than anticipated. At a micro level, the situation has put several key private players under serious financial stress. Under-achievement of targets is majorly due to slow pace of progress in land acquisition; a YoY land acquisition summary reflects hardly any progress in this area, except in Maharashtra. The problem of underachievement is further compounded by lack of clarity in terms of framework for environmental clearances. The government has advised lending banks to the roads sector to prefer cases where there is 100 per cent Right of Way (RoW). This means NHAI needs to take urgent action in the process of land acquisition as well. Because of these roadblocks, bidding in FY13 has been sluggish. Out of the 15 projects that were announced, only six have been awarded. Of the remaining, only four projects had more than 10 participants, and five projects none. The tough macroeconomic situation has added to these woes as traffic growth rates have become increasingly uncertain. Several unattractive projects have been rejected by bidders due to poor expeFIGURE 1: EXPECTED PROFITABILITY FROM HIGHWAY PROJECTS

Concession Profitability (EIRR) *

>13% 14%-16% < 13%

The State Road Corporations have begun to show signs of increased activity. Several new tenders have been invited for state highways, bridges, flyovers and expressways. In Uttar Pradesh, the setting up of a State Highway Development Programme (SHDP) along the lines of National Highways Development Programme (NHDP) and the beginning of the implementation of four priority highways revitalised road development. The Asian Development Bank (ADB)-assisted projects are in full swing and have registered decent progress in Madhya Pradesh and Bihar, while other states like Jharkhand and Punjab also lead in state-initiated projects. However, along with such developments, a new concern has come to light-state and regional authorities rolling out parallel alternative routes to existing toll roads, and the effect it may have on toll road developers. Such instances have been observed alongside the strikeridden NH-47 at Paliyekkara, Kerala, and the Yamuna and Delhi-Gurgaon Expressways in Delhi. Competing routes to toll roads have also come up in Tamil Nadu and Uttar Pradesh. Such frictions are the result of the refusal by these states to sign the State Support Agreement (SSA) with the NHAI. The SSA is a commitment by the state authorities to not construct new, parallel roads to the existing NHAI projects. This commitment backs the prohibitive clause injected by NHAI in its concession agreements with companies involved in build, operate and transfer (BOT) road projects, which disallows state roads and guarantees competition-free operations for a definite period during which the developer earns returns on the investment through toll fees. While competition itself is a source of worry that impacts the feasibility of toll projects, the uncertain viability of the toll-based model is another issue that has plagued state highways. Alternative models like the mix of toll and annuity have been implemented on a trial basis on various routes, along with investigations into the possible ways of lowering the burden on frequent, local commuters. The evolving models may assist in fine-tuning the PPP structure in the changing context.
TECHNOLOGY USE IS SLUGGISH TOO

74%

_I
Source: CRISIL Research Study 0123 operational Toll BOT operational Since 2009. 34 Infrastructure Today December 2012

Various technological innovations have led to increased levels of mechanisation in the construction of roads. Although the new methods are capital-intensive, they ensure quality, are cost-effective, and bring efficie-

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ncies. This is especially important to developers involved in many projects simultaneously, as it is likely to free up their resources in shorter periods of time, thereby allowing them to bid for fresh projects, which could revitalise the bidding scenario in the country. Despite these advantages, new technology has not made much headway in the Indian road sector because of the low labour cost which encourages the use of labour-intensive methods, coupled with the high upfront costs of using technology as against the current model utilising variable cost structure by using labour-intensive methods. These factors pose a major roadblock to bringing these technologies to the field.
HOW TO ACCELERATE ACTIVITY

fast-track various approvals and land acquisition. A possible step may involve setting up of a dedicated cell, manned with qualified personnel, within the NHAI and state bodies. Lastly, it is advisable to make traffic trends and numbers available in the public domain, for ongoing and completed projects. The move is likely to aid decision-making by investors, especially, foreign investors, and help in encouraging investment in the sector.
LIKELY DEVELOPMENTS IN THE FUTURE

To rejuvenate the road development sector and put it back on track to meet the needs and demands of a commercially-connected India, it is imperative to focus on the following contributory factors: Regulatory clarity, especially in land acquisition and getting environmental clearances; Facilitation of new financing avenues with focus on long-term financing; Capacity augmentation, especially in the project management abilities at NHAI and State Road Development Corporations, and increased focus on critical issues; and Information sharing. The first point essentially focuses on issues related to land acquisition in the country. The situation is not helped by the fact that the Land Acquisition and Resettlement & Rehabilitation regulation has not received a green signal from the legislature, causing uncertainty and unwillingness by the sellers to sell their land. Moreover, it is understood from industry stakeholders that a major problem has emerged in the form of slow decision-making in getting the environmental clearances. The subsequent issue dwells on the fact that. funding in infrastructure, including the road sector, has dried up. The Indian banking sector's exposure to the infrastructure sector is stretched and hence, there is a paucity of financing. More avenues need to be opened to enable the fund flow through reforms and innovative structures such as attracting FDI and other types of foreign investments; relaxation of stipulation imposed on pension funds to invest in only high-rated papers; and greater use of innovative financing structures such as partial credit guarantee (PCG) schemes and gold bonds. With respect to the third factor, it is high time that NHAI and the state authorities augment their capacities and capabilities to enable effective project management instead of relying on the developers' team for issues related to clearances and other factors. Institutionalised efforts are called for in this direction, to coordinate and

In order to boost the pace of development of the road sector, the central authorities have started contemplating on the most effective ways of faster implementation of road projects. One such means to facilitate this has been to adopt the engineering, procurement and construction (EPC) mode of road bidding, which unlike the BOT model, does not require a state's nod. Moreover, the EPC business differs from BOT by way of significantly lower capital requirements from the developers, and lower traffic risk. According to the FY13 project plan, over 1,200 km are to be laid as a part of the EPC projects. However, given the favourability of the EPC projects, it is likely that this figure will reach as high as 4,000 km. Considering the slow-moving bidding progress, the awards are likely to fall short of the original target and the overall awards are expected to be less than those in the last fiscal. In addition to the problems in awarding the projects, the projects awarded last year are facing financial closure issues, which need to be addressed on a priority basis. The government's putative proposal to provide exit options to developers who took up projects before 2009 is an appropriate step. However, other avenues to help free up developers' equity and provide secondary investment opportunities must also be explored.
CONCLUSION

The problems in roads sector are aggravated by aggressive bidding in the recent past, which made many projects unviable due to high financial costs and lowerthan-anticipated levels of traffic. However, the need for development to sustain economic growth cannot be overemphasised due to huge pent-up demand for good road infrastructure. To enable the development of the sector, clarity in regulatory issues, and reforms to enable fund flows to the sector, are of paramount importance. In addition, NHAI and state bodies need to introspect and augment their capacity, both in terms of manpower and skills, for enhanced project management, which is the need of the hour. m
Rohit Chaturvedi is Head

(Transport), and Tejaswi Subramanian is Associate in Infra Advisory, at CRISIL Risk and Infrastructure Solutions.

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