Investments in the road sector have slowed down considerably in the past year not just because overall economic situation has deteriorated but also due to various hurdles to investors such as delayed land and environment clearances, stranded projects locking up funds and sticky issues of remunerative return to the investor. In Budget 2013, finance minister P Chidambaram has announced the setting up of a regulator for the sector and has set a target to award 3,000 km of highways in the first six months of next financial year as against just 1,000 km in the whole of the current fiscal. The minister also sought to bolster infrastructure financing through a slew of measures like credit enhancement facility, raising of the threshold for tax-free infrastructure bonds to R50,000 crore etc. The minister for road transport and highways, CP Joshi, tells Timsy Jaipuria about the ministry?s plans to achieve a record length of road construction this fiscal despite the odds. Excerpts:
There are apparently huge slippages in the award of new highway projects and the investor sentiments are downbeat. What are your plans to remedy the situation?
We will set higher targets for the next fiscal and will strive to achieve them. It may be noted that the economic slowdown has adversely affected road construction, as much it has other sectors. Yet we will achieve the highest-ever construction target this fiscal. My predecessor Kamal Nath had intended to achieve the road construction target of 20 km a day but that was not to be. One reason for the slippage was that there was a lack of investor interest. The worsening of the state of the economy has contributed to this and so have resultant financing problems. To overcome this, we have taken many steps like reviving the engineering, procurement and construction (EPC) model and will have awarded 4,000 km on this mode by the end of this year. We are now racing against time when it comes to awarding projects. The idea is not only to meet the target for next year but also to make up for this year?s shortfalls by the end of next fiscal.
So you are confident of meeting the 4,000 km awarding target for EPC contracts this fiscal?
Indeed. There could be an initial time-lag but you would see things improving once we are into the next fiscal. Since investments in the build-operate-transfer (BOT) mode have suffered a setback for a variety of reasons, we have shifted back our focus to EPC. While there had not been a single EPC project awarded in the sector between 2008-09 and 2011-12, we?re setting a seemingly optimistic target to award 4,000 km or nearly half of the highway projects to be awarded this fiscal through this conventional mode.
Highway projects of 3,055 km were awarded through the EPC mode in 2005-06 but it rapidly lost its sheen. The next year, only 345 km were awarded, slipping to 89 km in the following year. During these years, BOT projects have generally seen an increase, peaking at 6,491 km in 2011-12.
Last year (2011-12), the sector saw aggressive bidding and many of the concessionaires are about to achieve financial closure. The current economic scenario has created problems for them in tying up finances. Many developers are constrained, partly due to their exposure to other sectors like power. So, inevitably, there is a mismatch between the business cycles planned by the developers and the gestation period of the road sector, resulting in a situation where the developers were wanting to exit some of the projects they had taken up.
We had set the target to award 9,500 km of roads during the current financial year but, given this scenario, the target indeed looks high. One way to resolve the crisis, as I said earlier, is to focus on EPC projects. Despite our best efforts, it is not always possible to acquire land for road projects in time due to delays in obtaining forest and environment clearances. The Prime Minister?s Office (PMO) recently said that the ministry should try its best to award road projects as per the original targets for financial year 2012-13. We have been told to award 8,000 km of projects by March-end and we are making all efforts to do that.
What about the hurdles related to environment clearances?
There were issues and we are deliberating them, and some of them have been addressed at the highest level. The PMO itself is engaged in this. More procedural changes are awaited to streamline processes. For this, we are now getting everyone on board, including the Planning Commission, ministry of finance, environment ministry, etc. As soon as the talks get over, the processes will fall in place. As you know, it?s not just road projects but other infrastructure and industrial projects also who face environmental issues.
The ministry was proposing to ease the exit policy for developers. How will this be done?
There is already an exit policy in place. Under these norms, in place since November 2009, developers must hold at least 26% of equity up to two years after the date of start of commercial operations. Moreover, developers of BOT projects awarded before 2009 do not have the option to exit completely. To unlock the equity stuck in previous projects and allowing the companies with no interest in running the projects to make an exit soon after construction is what the NHAI chairman had proposed. The move is part of a series of measures being planned by the government to ease the funds crunch in the sector and revive investor interest. So, both NHAI and the ministry are of the view that equity can be released more liberally. The challenge is to get everyone on board. We cannot dissolve the PPP model completely, even as the current focus is on EPC. We are engaging all ministries concerned to devise pragmatic policies that would help revive investor interest.
Banks and financial institutions have raised concerns over the sector ?
Lenders are ready to lend more. Shortly, we will come out with solutions to pending issues of financing of road projects. Talks are already going on with the various departments of the finance ministry. I have personally spoken to the finance minister. The issues are getting addressed. The PMO is also in the loop.
The amendment to the NHAI Act is pending. How will an amendment help the sector?
Very shortly we will introduce the amendments. We need to understand that NHAI has multiple tasks including road construction, financial analysis, etc, and we require more experts. We have listed it (for this session of Parliament) and we are hopeful that the amendments would be approved by Parliament in the current session.