On slow track, UPA-II needs to get the show on road

In 2004, when the UPA-I took office, it had one great expectation to meet.

In 2004, when the UPA-I took office, it had one great expectation to meet. In the previous NDA regime, roads and highways development had picked pace and the UPA had to match that success if not do better. Alas, there was only a slowing down of the national highways development programme during the UPA-I, with delays in clearances and issues associated with the model concession agreement.

Revitalised, the UPA-II government, which came to power in 2009, fixed an ambitious target of achieving 20 km of road construction per day. Despite the best efforts of the ministry of road transport and the National Highways Authority of India (NHAI), the pace of road construction even today is just about 10 km a day. A concerned Prime Minister has now promised speedy clearances of projects, and has set up a monitoring mechanism for infrastructure projects, including roads. The PMO has also scaled up the target for awarding national highways projects from 8,800 km, announced in Budget 2012, to 9,500 km.

Fixing targets is one thing, but more important is creating a conducive environment for building roads and make the sector attractive to investors. While NHAI is awarding projects in bulk, implementation remains tardy as developers still have to run from pillar to post to acquire land and get various statutory clearances, including environment and forestry approvals,? said M Murali, director general of National Highways Builders Federation.

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Recently, the finance ministry told the ministry of road transport and highways that only those public private partnership (PPP) projects in the roads sector which have got all other requisite clearances need to be put up before the PPP appraisal committee (PPPAC), which oversees the financial aspects.

This reflects a self-realisation on the part of the government – Despite PPP-AC okaying road projects, a lot of them are unable to kick off owing to lack of other clearances or are stuck on issues of land acquisition.

In the first quarter of the current fiscal, several projects got deferred on account of environmental and law & order issues. Recently, private infrastructure firms, banks and lending institutions met the road transport and highways minister CP Joshi and urged him to find ways to remove these obstacles. The ministry had targeted to build 3,000 km of highways in the current fiscal.

According to HS Kohli, director at DS Constructions, which built the Delhi-Gurgaon Expressway, a key hurdle is the presence of multiple agencies at state and Central levels to take various strategic decisions and implementation, which creates a lot confusion. Further, he said that there were issues over the quality of the projects and the bidding criteria. Non-viable projects sometimes witness tough competition, leading to aggressive bidding and eventual abandonment of the projects midway. Kohli said the government should act more as a regulatory and monitoring authority, and the implementation part should be to left to agencies with complete authority. There should be a single window clearance for the projects, he said.

The rate of project completion in highways fell from 81% in 2004-05 to 56% in 2007-08 to below 50% now. This is despite the fact that award of projects has accelerated. The NHAI awarded 5,237 km between 2007-08 and 2009-10; 5,059 km in 2010-11 and 7, 960 km in 2011-12. However, completion rate still remains sluggish and building 20 km of roads per day remains a pipe dream. To create that scale, at least 20,000 km needs to get under construction at a given point in time.

However, there is a silver lining as well. An official of a private sector road developer told FE: ?The situation is not as bad as in late 2008 and 2009 when the global economic crisis reduced investor interest in road projects. If procedure for award of projects is made simple, clearances are taken before bidding and adequate financing is made available, road construction could pick up and reach the desired pace.? A spokesperson of GMR Infra said the mismatch of tenures of relatively short-term capital availability (typically 10-12 years) versus the life-time of the PPP model (typically 15-30 years) was a problem. This puts enormous strain to the businesses during the initial phase of development. According to GMR Infra, implementation of PPP projects has been hampered by various issues – poor regulatory framework to address settlement of claims to address deviations of terms of contract, poor capacity and speed of obtaining clearances, lack of independent technical capacity at government agencies to drive the plan and shortage of appropriate manpower/critical resources. The company believes that the relevant regulatory authorities should be party to the concession agreement where service levels from the government are incorporated too. The government can also help in facilitation between central and state agencies on large PPP projects.

That there is investor interest in highway projects is evident from last year’s bids as all projects got awarded and even commanded premiums. However, the situation has again become sluggish of late. In the first three months of 2012-13, NHAI has been able to award just 99 km against a target of 1,500 km. This is even as NHAI increased the number of projects to be awarded on engineering, procurement and construction (EPC) basis that protects developers’ returns and is less risky (for developers) as compared to BOT annuity and BOT projects. The model concession agreement for EPC projects is yet to be approved by the government.

Apart from procedural issues, high interest rates are proving to be a key obstacle as funding for such long-gestation projects is difficult to come by. In addition, raising fresh finances has become difficult too as most banks have already breached their exposure limit for the sector. The inability to tie up funds for projects is also forcing small and medium companies to explore options such as stake sales and partnerships with other firms.

?Banks and other lenders have become cautious, while lending to infrastructure sector, since construction companies have over-leveraged their balance sheets and have heavy debts,? Feedback Ventures’ chairman Vinayak Chatterjee said.

The government this year doubled kitty of tax-free bonds for the infrastructure sector to R60,000 crore for 2012-13, which includes R10,000 crore to be raised by NHAI for acquiring land and funding projects. While this could ease liquidity issues to an extent, private developers say bank financing would remain the mainstay for them.

Rising cost of construction is another issue. The cost of building highway stretches has gone up from R4-5 crore a km three years ago to over R10 crore now. This makes cost recovery more difficult despite the viability gap funding. ?Bidders who have been awarded high value stretches are busy arranging funds to complete the projects and are unlikely to show interest in any new project,? said Murali.

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First published on: 28-07-2012 at 01:41 IST