As power and rail ambitions tarry, roads could lead the way
Infrastructure is a fairly broad term in India. However, during 2007-2015, infrastructure creation was mainly focused on the power sector, followed by iron & steel. Capacity addition in the power sector is unlikely to revive in a hurry given pending distribution reforms, fuel constraints, stressed private sector balance sheets and low PLFs for existing plants.
A late July report of Religare Institutional Research says despite the government’s strong intent to revive the railways sector, capacity expansion plans have been lagging due to poor internal financials of the Railways, which leave limited scope for capacity addition. While a scale-up in the railways is a possibility post-2017, any development over the next two years is unlikely.
In contrast, the roads sector has suffered from relatively limited constraints, even as it was hit in FY13 & 14 by (i) under-prepared projects given up for bidding, and (2) aggressive bidding by overenthusiastic private sector players.
While some of these issues have been addressed, land acquisition could be a potential stumbling block; though land acquisition for projects to be awarded in FY16 is about 90% complete, those beyond FY16 are yet to be ascertained.
Still, the roads sector has become a potent means to revive the investment cycle in the economy for two key reasons. (i) Budgetary allocation to the ministry of road transport and highways has been meaningfully raised to R400 billion, up 59% year-on-year. (ii) The allocation of funds to the National Highways Authority of India is likely to aid road sector capacity addition. NHAI funding is set to almost double from FY15 levels to R450 bn in FY16.
The report says significant growth is possible in the addressable roads sector market over FY16-FY18, led by increased government infrastructure spending, easing regulatory hurdles, and the introduction of innovative financing models to spur private sector investment. The addressable market could increase from 3,068 km in FY15 to 5,400 km in FY16 (NHAI expected awards).
Unlike for projects awarded in FY11 & 12 which faced several regulatory hurdles, norms have now been eased and land acquisition. Moreover, to address private sector funding constraints, the government has come up with innovative financing models that minimise developer
risk and make debt servicing more manageable. Thus, minor as well structural changes in regulations should incentivise investments in the roads sector.
The cost of capital is expected to trend lower over the next 12-18 months and traffic growth should pick up from a possible industrial recovery, making the build, operate, transfer (BOT) business models attractive for long-term investors in the roads sector.
NHAI’s road awards target for this fiscal year is 5,400km, while the total target for the ministry of roads and surface transport is 9,000 km. So, about 4,600 km would be implemented through the state public works departments (PWDs) and the ministry itself. NHAI plans to award 2,100 km of BOT, 2,500 km for engineering, procurement and construction (EPC) and the remaining 800 km in the hybrid annuity model (HAM). So far, NHAI has awarded three BOT projects and six EPC projects so far this fiscal.
NHAI targets to award 20,000 km of projects within the next two years. While BOT is the preferred route, the government may still award these projects on an EPC basis, if the appetite for BOT is low. NHAI’s capital requirement for 20,000km of road projects is about R1.8 trillion for the the next three-four years. Its investment spends were R210 bn in FY15 and are estimated at R450 bn for FY16. Such scale-up points to road anchoring India’s growth drive in the next few years.