Road sector: Challenges and initiatives for the govt

The National Highways Authority of India (NHAI) awarded about 3,000km of projects in fiscal year 2010 (FY10), over 4,000km in FY11 and 6,000km in FY12. This trickled down to barely 1,000km in FY13 and 500km in FY14. The government would need to move on three tracks to (1) restart construction, (2) attract investments, and (3) sufficiently leverage these to improve logistics in the country.

On track 1, award of construction contracts can start sooner than bringing public-private partnership (PPP) investments back. NHAI gets cess revenues of about ₹ 6,000 crore a year. While some of this may be committed (e.g. towards servicing of borrowings), it could fund 2,000-3,000km of projects on its own. Indeed, NHAI has been attempting engineering, procuring and construction (EPC) contracts, but contractors’ response has been limited. To address this, the large amount of contractors’ capital stuck in incomplete projects and disputes will need to be released. Projects with a two-year construction schedule are taking close to six years on EPC mode and over three years in PPP mode. Addressing the hurdles of land acquisition and clearances will require coordinating across not only at the Union government-level environment and railways ministries), but also at state and local government levels (utility shifting, stone quarrying permission).

The second track would be to address PPP investments, close to 50% being under stress. These include completed projects not generating enough revenue to service debt (about 25% of stressed projects), projects awaiting land and clearances and escalation in project costs in the meanwhile (approximately 50% of stressed projects, and many of these could struggle to service debt once they are completed), and projects unable to commence construction for several reasons including the developers’ inability to fund equity (approximately 15%).

Commercial banks’ exposure to the sector, growing at 30% per year, has reached about ₹ 130,000 crore. Considering most of this is from public sector banks, it seems inevitable that the Union government will need to play a key role in relieving the financial stress in the sector. Premium restructuring is only a part of the solution, where NHAI is willing to postpone receipts from the projects. A much larger set of projects will require infusion of funds into the sector. Sources of long-term capital will need to be tapped to better align the debt servicing needs with realistic project revenues. India Infrastructure Finance Co. Ltd and infrastructure debt funds could play a role towards enabling this.

The second part of track two, after addressing the current financial stress, will be to attract investors to new PPP projects. This will require a serious rethinking of the PPP structure and the risk-sharing philosophy. It has become increasingly clear that toll road projects encourage competition on the ability to predict traffic rather than on ability to build good quality roads, faster and cheaper. The uncertainty in timeframes for clearances and permits only aggravates the risks that the private sector needs to take, making the sector less attractive to reputed developers, both domestic and foreign. The expectation of large inflows from foreign pension and insurance funds into the sector will not be realistic until more annuity/availability payment-type structures are adopted, which fit better with the risk appetite of such investors.

Third, the development of state highways (SHs) is critical to providing a consistent ride quality from factory to port/destination and reducing logistics costs. The state roads working committee of 12th Five-Year Plan highlighted: “Broad assessment shows that over 50% of SHs and major district roads have poor riding quality. Losses due to the poor condition of these roads would be around ₹ 6,000 crore per annum besides their premature failure resulting in huge rehabilitation and reconstruction costs implying infusion of avoidable plan funds at accelerated intervals.”

The Union government, through Plan expenditure, non-Plan expenditure and viability gap funding for PPPs, provides funding to state projects, but their structure can lead to suboptimal choices. The Centre can play a key role by linking its funding to outcomes, such as road quality. Necessary adjuncts to this would include electronic tolling and improvement in highway management and discipline for seamless, safe travel at much higher speeds, and lower logistics costs.

Manish Agarwal is leader, capital projects and infrastructure, PwC India.