Road Sector Investments in India are Back in Vogue

by Sanjay Bansal

When Nitin Gadkari took the charge as the Minister for Road Transport, Highways and Shipping in 2014, he had a mammoth task of resurrecting India’s road infrastructure. He was presented with a bouquet of 384 projects worth Rs 3.80 trillion that were stalled due to stagnation in the economy, lack of investment, delays in approvals and red tape, among a few other reasons. Also, the fact that bad debts in the road infrastructure accounts for 50% of total Non Performing Asset (NPA), only made the matters worse.

Such a scenario is definitely not acceptable for a country whose road network of 4.87 million km is the second largest in the world; accounts for 85% and 60% of passenger and freight traffic respectively; contributes to 4.8% of GDP, and is expected to reach US$ 19.2 billion by 2017. For any country, especially ours with over a billion population, road connectivity plays a crucial role in the economic growth. It facilitates efficient movement of goods and manpower across locations, thereby enhancing productivity, expanding economies of scale and reducing logistics costs. India is riding high on ‘Make in India’ and ‘Skill India’ campaigns across urban and rural pockets; it’s a dire need of the hour that the road sector gets a much needed push.

The good news is that the road sector seems to be coming on track off late as depicted by the figures stated below:

• According to RBI’s monthly growth data, the credit growth in the road sector has witnessed a major boost in the period of last six months. Though it is a far cry from 21.5% in June 2013, it is definitely up from 3.4% in June 2015 to 7.9% in December 2015.

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• Projects worth 2599.58 km were awarded by National Highways Authority of India (NHAI) in FY15.

• As on November 2015, NHAI had awarded 873 km of projects worth Rs 11,900 crore on a Build, Operate & Transfer (BOT) model.

• As on November 2015, NHAI had awarded 1,776 km of projects worth Rs 27,234 crore under the Engineering, Procurement & Construction (EPC) model.

• As on March 2015, projects worth US$ 32.69 billion have been awarded through Public Private Partnership (PPP model), with as many as 165 PPP projects still under progress.

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(Source: http://www.livemint.com/Politics/J5MnWOwah7MYDyeJp54qJO/Roads-sector-prospects-brighten-with-new-project-awards-few.html)

• The construction of highways had reached an all-time high of 6,029 kms during FY 2015-16.

• Out of 384 projects stalled, only 7 projects remain to be cleared.

• The pace of execution has increased by 45%, from 3.41 km/day during April-November 2014 to 4.96 km/day during April-November 2015.

Government Initiatives as a Key Driver to Road Sector Growth

According to a report by ICRA, the policy measures announced by the government over the last 18 months were quite instrumental in reviving the road sector. Along with building 50,000 km road in the next six years, the government also aims to boost investment in the road structure and create 50 lakh jobs by 2020. Let’s take a look at some noteworthy policies:

• Establishment of National Investment & Infrastructure Fund (NIIF) with an initial authorized corpus of Rs200 billion to infuse funds in road infrastructure.

• NITI Aayog, the policy and planning think tank of the government has approved 20% of the total investment of $1 trillion envisaged during the 12th Five Year Plan (2012-17) to develop roads.

• 100% FDI approval under the automatic route, is paving way for international private players.

• Declaration of road sector as an industry – investors can now avail 100% tax exemptions in any consecutive 10 years out of 20 years, import certain identified equipment for constructing plants without paying any duty and avail concession periods of up to 30 years.

• A 10 year tax holiday for highway projects.

• Providing one time financial support for eligible stalled road projects, albeit only wherein at least 50% of the work has been completed as of November 2014.

• Projects to be awarded or allowed to bid only after 80% of Right of Way (RoW) is in order.

• Allowing developers to sell 100% stake in highway projects 2 years after completion.

• Delegation of powers to Regional Officers (ROs) for employing equipment and manpower to pull down structures that fall within the purview of a project, thereby making encumbrance-free land available for road construction.

• Establishing Land Acquisition (LA) cells throughout the country to resolve land acquisition disputes.

• A compensation policy for developers to compensate them for any delays caused due to clearance for road projects.

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Private Players to Play an Active Role

The presence of private players in any sector can bring long term benefits in terms of higher investment, better public services, efficient operations and innovation & technology. The road sector is no exception. In fact, around 90% of PPP projects in our country belong to the road sector. As of August 2015, there were 112 completed and 144 ongoing PPP road projects. The government plans to award 100 more highway projects under PPP.

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The recent approval of Hybrid Annuity Model (HAM) by the Cabinet Committee on Economic Affairs (CCEA) has also sparked the interest of private players. As per the hybrid model, the government and the private players will bear 40% and 60% of project cost respectively. The revenue collection responsibility will lie with NHAI and developers will receive annual instalments over a period of time. This model will also eliminate the ‘no traffic risk’ associated with BOT and EPC models, put lesser financial burden on private contractors and optimize their revenue generation capacity.

As per NHAI website, a total of 9 projects worth 8,333 crores have been already awarded this year to construct roads across Maharashtra, Uttar Pradesh, Uttarakhand and Delhi to companies such as MEP Infrastructure Developers Ltd and Sanjose India Infrastructure & Construction Pvt Ltd, Sadbhav Infrastructure Project Ltd, MBL Infrastructure Ltd, APCo Infratech Pvt Ltd and Welspun Enterprises Ltd.

There is also another model called TOT (Toll, Operate and Transfer) which has captured the attention of private players. Under this model, the Ministry of Road, Transport and Highways (MoRTH) has decided to bid out already constructed stretches of national highways by NHAI to the private players such as institutional investors, pension fund houses, private equity and infrastructure developers, for an upfront fee. Recently, CCEA has approved 75 such projects for potential monetisation under this model and it is expected to generate about Rs 1 trillion revenue.

The Budgetary Boost

The road developers had a huge reason to cheer when the Finance Minister Arun Jaitley allocated Rs 97,000 crore towards the road sector. This has set a momentum to undertake new projects and resume stalled projects at a faster rate.

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Increased Focus on Technology

In the road sector, technology can help in reducing construction cost, improving quality of construction material, manage traffic flow and monitor the highways. A report ‘SBI-Industry Wrap – Road Sector On a high-way’ released by the Economic Research Department of SBI emphasized on aligning the national standards pertaining to design, construction, maintenance and operation of roads, bridges and flyovers with the international standards to lower the cost of construction and at the same time, maintain superior standards of quality through adoption of innovative technologies and materials for construction of roads.

The ministry and developers are already encouraging use of technologies such as Zydex nanotechnology which can build moisture resistant and pothole free roads, and don’t require maintenance for 10-15 years; Geotextiles which is used as a separator between the subsoil and aggregate layer of roads to protect the aggregate layers from sinking in the subsoil; and Bitumen technology through which waster plastic can be used to construct environment-friendly roads.

Jamshedpur city has already set a fine example of how plastic can be used as raw material for building roads. The model is expected to be replicated in Uttarkhand, Himachal Pradesh, Jharkhand and Chattisgarh. Another example is that of Thondebavi located near Bangalore where Canadian pavement technologies have been put to use to construct roads which increase the durability of roads and reduce its greenhouse emissions.

The Union Minister Nitin Gadkari has also shown keenness to adopt U.S. technologies in road safety and highway maintenance. There have been also other positive developments on this front. The Indian Institute of Technology, Kharagpur (IIT-Kharagpur) and NHAI have signed a MoU for a research project to develop technology to construct maintenance free highways in India. NHAI has also tied up with the National Remote Sensing Centre (NRSC) under Indian Space Research Organisation (ISRO) and North East Centre for Technology Application and Research (NECTAR) to use spatial technology such as satellite data to monitor and manage national highways.

There is no doubt that India’s road sector will attract Investors which can bring technology expertise or provide funds to lead innovations.

Investors are Showing Interest

The value of roads and bridges infrastructure in India is projected to grow at a CAGR of 17.4% and expected to touch $19.2 billion by 2017. India needs $1 trillion to develop its entire infrastructure, including roads. These staggering figures, along with the positive steps taken by the ruling government, have caught the interest of investors as well as global pension funds, which were earlier hesitant to invest in this sector.

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In fact, global pension funds and sovereign wealth funds are expected to infuse up to $50 billion in India’s infrastructure sector over the next five years.

The Canadian Pension Fund has recently taken ownership of four toll roads totalling 710km as part of a global transaction with Grupo Isolux Corsan, a Spanish infrastructure company. Earlier, Canada Pension Plan Investment Board had announced an investment of Rs2,000 crore in L&T IDPL, a Larsen and Toubro Ltd subsidiary, which owns 17 road assets.

According to Equirus Capital data, out of the total infrastructure M&A deals that happened in 2015, the roads and renewable energy sectors drove half of the overall transactions.

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(Source: http://www.livemint.com/Politics/J5MnWOwah7MYDyeJp54qJO/Roads-sector-prospects-brighten-with-new-project-awards-few.html)

The GST Impact

The Goods and Services Tax (GST) bill passed earlier this year will give a tremendous boost to the road infrastructure of India. The uniform tax structure on the movement of goods will lead to efficient and organized transportation. The manufacturers, customers and manpower will demand for better road connectivity, resulting in higher demand for construction of roads.

The Indian road sector is standing at a critical turning point. The government has set the ball rolling in the right direction, we hope that it will soon yield expected results.

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