Road sector: lagging behind in the 5-year Plan, the new government has a lot of catching up to do: ICRA

The weak private sector participation in BOT (build-operate-transfer) road projects has resulted in subdued project awards for the second consecutive year during FY 14. In response, NHAI had to move towards awarding projects on an EPC (engineering, procurement, and construction) basis, thereby increasing the pace of projects awarded to some extent during the later part of FY 14.

The sector, which witnessed aggressive participation from private players till FY 12, has been facing difficulty in attracting private sector participants and achieving financial closure, implying reduced risk appetite of the developers and the banking sector.

The decline in projects awarded during FY 13 and FY 14 (aggregating to 2,223km) was steep when compared to FY 12 (6,419km). Similarly, execution was also hampered by bottlenecks related to land acquisition, clearances, and challenges related to project funding.

As a result, work on multiple projects awarded in last two - three years is yet to start. The government has taken several encouraging initiatives to revive this sector, including the proposal for setting up a regulator for roads, easing of exit norms, delinking forest clearance from environment clearance and rescheduling of premium.  While ICRA believes that these measures will resurrect the interest of the private sector, the improvement is likely to be gradual and would yield results only in the medium to long term.

While ICRA believes that these measures will resurrect the interest of private sector, the improvement is likely to be gradual and would yield results only in the medium to long term. In the immediate term, the funding and cash flow related problems are likely to persist unless the developers are able to raise funds through equity offerings or by selling stakes in some of their projects.

The 12th FYP  [5-year Plan] 2012-17 had more than doubled the investment target for the infrastructure sector including roads and bridges to Rs55,750 billion, of which, roads and bridges account for 16 per cent of total proposed investments in infrastructure at Rs9,200 billion. Of this, public sector contribution is estimated at Rs6,256 billion (68 per cent) and the remaining Rs2,944 billion (32 per cent) is expected through private sector participation. Of the total planned investments in road sector, investments towards National Highways account for 36 per cent The National Highway Development Program (NHDP), the flagship programme for development of National Highways, which was started in 1998 and was 35 per cent complete by the end of 11th FYP, has witnessed multiple revisions in its target completion date.

In the immediate term, the funding and cash flow related problems are likely to persist unless the developers are able to raise funds through equity offerings or by selling stakes in some of their projects.

According to Rohit Inamdar, senior vice president, ICRA, ''The 12th FYP has set the target for completion of NHDP by the end of the plan period in FY 17 translating into physical execution of 33,027km at the rate of 18.10km / day over 2012-17 period. The target is ambitious given that the actual execution rate for NHDP during 11th FYP stood at only 5.81 km / day. Further, during the first two years of 12th FYP, the execution rate has been at 6.30km / day – implying required execution rate of 25.9km / day over the next three years. Execution bottlenecks including delays in getting right of way and clearances as well as difficulty in arranging funding were the major reasons for the slow execution. As a result of these factors, work on 81 NH projects (many of these projects were awarded more than two - three years ago) covering ~9,442 km was yet to start as of May 31, 2014. With current slow pace of execution in the already awarded projects on one hand and low project award rate till 2013-14 on the other, the achievement of 12th FYP targets remains an uphill task.''

Two years into the 12th FYP, the private sector participation in NHDP projects has witnessed a significant slowdown as 13 out of 22 PPP projects could not find any takers in FY13 and about 21 of NHAI tenders failed to attract even a single bid in FY 14 and only two projects were awarded on BOT basis in FY14.

This is in sharp contrast to average of 10 bids per project witnessed earlier. Currently the mode of project award is determined based on the waterfall mechanism that explores BOT (toll) first followed by BOT (annuity) and then EPC routes depending on the traffic density along the project stretch.

This approach could further slow down awarding of projects. Additional budgetary support may be required to take up majority of the projects under EPC route till the revival of private sector participation. Out of the total private sector investments of nearly Rs3 trillion envisaged during 12th FYP, Rs1.67 trillion (57 per cent) is estimated for NHDP alone indicating the significant role that NHDP will continue to play in attracting private sector participation.

The remaining 43 per cent of private investments are for the state highways and non-NHDP national highways. Assuming developer's cost to be 25 per cent higher than the estimated cost on average, the total investments could be Rs3.68 trillion necessitating a bank credit of Rs2.58 trillion and equity commitment of Rs1.10 trillion over the 12th FYP, for a typical 70:30 D/E mix. The likely requirement assuming half of the target is achieved, could be almost Rs1.29 trillion of bank credit and Rs0.55 trillion of equity.

Inamdar added, ''In the medium term, PPP road projects are likely to remain dependent on debt from commercial banks in the absence of sizeable bond markets. The funding for road projects is likely to improve with the Budget proposal of easing banks' lending to infrastructure sector by allowing them to raise long-term funds with minimum regulatory pre-emption such as from CRR, SLR and priority sector lending (PSL). Further, proposal of formulation of Infrastructure Investment Trusts (InvITs), with tax related incentives, can act as important alternate avenue of long-term project finance and can support PPP in road sector. In addition, proposal to introduce flexible structuring of long term project loans known as 5/25 structure (tenor of 25 years with periodic refinancing once in five years) is likely to ease debt repayment burden on the projects.

"Overall, with both physical progress and investments lagging much behind the targets, the new government has a lot of catching up to do in the road sector. The budgetary support for the road sector in FY15 budget stood at Rs288 billion. If a similar support is provided in FY16 and FY17, about 4,500 km per year can be funded by government on EPC basis. Unless additional budgetary support is provided or alternately the private sector participation improves, the award target of 5,000km set for FY 15 would be difficult to achieve. If the private sector participation improves in rest of FY15, achieving award of 1,000km of length under PPP should not be very difficult. However, private sector participation may gather momentum from FY16/FY17 only, and awarding the remaining length under NHDP by the end of the 12th FYP will be challenging.''