Last-ditch efforts

The government has set ambitious targets for the roads and highways sector, though the investor sentiment has hit the nadir and many projects are stuck on the way for want of clearances and funds.

Having lost the first half, the government mulls various measures to put development back on the road

The government has set ambitious targets for the roads and highways sector, though the investor sentiment has hit the nadir and many projects are stuck on the way for want of clearances and funds.

According to the ministry of roads, highways and transport, 9500 km of roads have to be awarded for development this year, but only 600-km road projects have been given out until now. The target is tough to meet as only six months are left to award the remaining 8,900 km.

Senior National Highways Authority of India (NHAI) officials feel the target is too ambitious and cannot be met given the poor investor appetite. A concerned government is weighing various options to achieve its near-impossible target. Awarding projects on the EPC (engineering, procurement and construction) mode is one such option. The ministry has targetted development of 4,000 km under the EPC mode for this financial year.

The EPC mode in road building ?will minimise, if not eliminate, the time and cost over-runs… enable a faster roll-out of projects with least costs and greater efficiency,” minister for road, transport and highways CP Joshi explained to a Parliamentary panel recently.

The EPC mode, Joshi said, would also ensure implementation of the road project to specified standards with a fair degree of certainty relating to costs and time, while transferring the construction risks to the contractor. The ministry plans to give out 20,000 km of highways by 2017 under this mode, which minimises the risk to developers. In EPC projects, the government pays the developer for constructing the highway while the toll revenues accrue to the government.

The other two modes through which the highways projects are bid are build-operate-transfer (BOT-toll) and BOT-annuity. In the BOT mode, the developer has to operate the highway for several years. The model draft for EPC finalised by the government says annuity-based projects are comparatively expensive, while conventional contracts (BOT) are prone to time and cost overruns.

The government’s choice of the EPC mode comes in the backdrop of the severe financial constraints faced by road developers. Starved of funds, many highway developers are looking at selling their stakes in various central road projects to raise funds, as banks are denying them loans citing the high risks the BOT projects carry. ?Equity dilution helps companies place bids for multi-million-dollar projects,? says Hemant Kanoria, chairman & managing director, Srei Infrastructure Finance, which has supported several road developers to qualify for large projects.

The inability to tie up funds for projects is forcing unlisted small and medium companies to explore partnership with other firms. This, according to Vinayak Chatterjee, chairman of Feedback Ventures, ?helps builders to reassure their guarantees with the lenders?, and is a healthy trend.

On its part, the NHAI has urged the finance ministry for creating a robust secondary market to revive investor interest in highway projects and free equity locked up in completed projects. It has said private equity (PE) players and financial firms should be allowed to pick up stakes in existing projects.

In a note to the finance ministry, the authority has proposed allowing ownership change in BOT highway projects soon after they begin commercial operations. Currently, for projects floated after November 2009, equity stake transfer of up to 100% is allowed two years after project completion. For projects prior to this, it is mandatory for a developer to hold a 51% stake in the concessionaire company until two years after project completion. Under the new proposal, not only the post-November 2009 projects, even earlier projects will be allowed stake transfer when the projects are commercialised.

The government?s aim was to construct 20 km of roads per day. But so far it has reached just half of that target, at close to 10 km per day. A key reason for such slow pick-up is clearances from various ministries. For example, in a recent note to the finance ministry, the NHAI has proposed that the government rescind a February-2000 mines ministry notification that has brought the ?ordinary earth??used for filling or levelling or building roads, embankments, railways and buildings?under the definition of minor minerals. This has made environment clearance mandatory for taking earth/soil even from borrow pits.

To veer round the problem of projects getting stranded for clearances, the public-private partnership appraisal committee (PPP-AC) is now insisting that only road projects that have got all other clearances need to be put up before it. The PPP-AC, chaired by secretary-economic affairs, vets concession agreements from the financial angle and decides on guarantees to be extended. It generally assesses risk allocation from the investment and banking perspectives, before giving its nod for an infrastructure project in the PPP mode.

Evidently, there is much eagerness and some action on the ground to speed up road development. But considering that the first half of the financial year is practically lost, the second half may just not be enough to do all the catching up, however hard the government pedals.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

First published on: 17-10-2012 at 01:23 IST