BUMPY RIDE OFF, SMOOTH ROADS AHEAD….
Riding on an increased spend, the roads & highways sector is looking for a rejuvenating spell of growth in the times to come. The industry players are set with a new set of goals and are looking for a major revival with able government support, explores Garima Pant
The recent inauguration of the 10.89 km long Chenani-Nashri all-weather road tunnel on the Jammu-Srinagar National Highway ushered in a new dawn for the roads & highways segment in the country. Asia’s longest bi-directional highway tunnel, which will cut the distance between Jammu and Srinagar to around 250 km, is one of the few initiatives to laud in the segment that is receiving much-needed impetus by the government.
Armored with an outlay of Rs. 3,96,135 crore set aside for the infrastructure sector to spur economic activity and Rs. 67,000 crore for the national highways in 2017-18, the ball has been set rolling. And with Rs. 97,000 crore being allocated for development of road & highways, players in the sector are looking for increased and fruitful participation through tenders and fresh projects.
The industry is relieved and looking forward to a prosperous growth in the sector to continue with the rejuvenation infrastructure sector is looking at. “The increased allocation means a major revival of the space and the end to a lot of the legacy issues faced by some of the top players. This will have a trickle down effect and we are already seeing mid tier contractors winning major projects and elevating themselves to new levels. It also means the stress on some of the banks is being alleviated and one would hope they will view the sector with more positive discretion,” says Ben James, CEO & Founder, Global Road Technology.
Company’s like JCB are realigning their product portfolio to make the most of the changing face and fortunes of the roads & highways sector. “The earth moving and construction equipment industry had peaked in the year 2011, post which there was a downturn that lasted about four years. Roads & Highways sector has been one of the shining stars that led to the revival of the Earthmoving and Construction industry in 2016. The Earthmoving and Construction Equipment (ECE) Industry grew by 43 per cent in 2016 as compared to 2015 with Government allocating substantive funds and streamlining the roads and highways sector,” says Jasmeet Singh, Head - Corporate Communications and External Relations, JCB India Ltd.
2016 saw JCB launch 10 new products, which included three revolutionary products in the Material Handling segment - the first being the Telehandlers known as JCB Loadall, followed by the Skid Steers known as JCB Robot, and finally the recently launched Super Loaders and five class leading products in the Premier Line segment – the JCB 220LC Xtra (22T Excavator), the JCB305LC (30T Excavator), the JCB 370LC (37T Excavator), a 5.5T Wheeled Loader, the 455ZX and a 10.5T Road Compaction machine, the JCB116.
“With this new range, JCB has re-aligned and transformed into a full range infrastructure equipment partner. All these revolutionary products are aimed at maximising productivity and profitability for our customers. These machines will be used in several sectors like Roads and Highways, Mining, Ports, Irrigation projects etc. and will contribute towards building of India’s infrastructure,” adds Singh.
With the government’s renewed ‘intent’ and focus to bring back the lost glory of one of the most integral infrastructure connects has brought about a change in approach and announcement of key measures. If given the right attention, Roads and Highways could prove to be the growth game changer with far reaching consequences of development. “With increased budgetary support, highway development will gain momentum and speed of highway construction will increase to meet the development target of 40km of roads per day in the medium term,” says Jagannarayan Padmanabhan, Director – Transport and Logistics - CRISIL Infrastructure Advisory.
According to BMI Research, a Fitch Group company, roads and highways have been well established as the prime sector component in India’s growth story. And statistics support the view. India’s transport infrastructure sector is looking at an escalated growth over the next five years owing to the increased government investment, particularly in roads and railways, and a slow and steady improving environment for private investors and public-private partnerships (PPPs).
“The latest FY2017/18 Union Budget increased allocations for National Highways Authority’s (NHA) by 24% and Indian Railways by 8.2 per cent - to support significant expansion plans. In addition to that, a new Metro Rail Policy proposed by the government, aimed at easing and encouraging the use of PPPs for urban transit projects, further expands the quantity of opportunities for private parties to invest in infrastructure. Our latest forecast is for India’s transport infrastructure sector to grow by 6.1 per cent in real terms in 2017 and average 5.9 per cent annually through 2021 - the fastest-expanding component of the country’s infrastructure sector,” says the research.
Ashish Tandon, MD, Egis in India believes that with the increased allocation, government has displayed its commitment and directional continuity focusing on infrastructure development for economic growth. “The length of National Highways is expected to grow from 92,850 kms in 2013-14 to 100,000 kms by end of 2017. NHAI plans to build 25,000 kms of highway by 2021.There is also a sustained focus on development of rural connectivity with earmarking of Rs. 27,000 crore for rural roads in the Financial Year 2018 budget. Thus, increased budgetary allocation will pave way for more of these projects being taken up for implementation,” says Tandon.
The market for roads and highways in the country is expected to exhibit a CAGR of 36 per cent during 2016-2025. With such a bevy of projects, investments will be the bigger issue surrounding the pace of the sector. The strong pipeline of ~ 55,000 km of highway development will require huge investments (to the tune of $100 billion in next 5 years). Considering the enormous scale of investment, almost 30 per cent is expected to come from private sector, to facilitate and encourage private investment, government will have to continue the reform process with timely and innovative interventions. “Execution of project is also likely to pick up pace in this fiscal year under the New Land Acquisition Act,” says Mukund Sapre, Executive Director, IL&FS Transportation Networks Limited. (Read Interview)
The Private Equity market, albeit, has been slow to react, even with strong fundamentals presenting across the board. “This is due to their own legacy issues from other sectors on the downturn,” adds James. However the sector is seeing positive signs and this will only continue to improve with the mass inflow of public money – which in-turn will attract the key players back and entice them to invest and scale up infrastructure projects pan India.
Challenges a plenty
With National Highway Authority of India (NHAI) getting the baton to raise Rs. 15,000 crore through bond issues, had also given itself a stiff target of awarding 15,000 kilometers of new road projects by March 2017. However, only 6,604 kilometers of highways could be built till end of February. Pending environment, forest and wildlife clearances and issues with the Indian Railways for over-bridges and under-bridges as some of the factors, which slowed down the pace of construction stated a written statement by Minister of State for Road Transport and Highways Pon Radhakrishnan in Lok Sabha. The Ministry of Road Transport & Highways has fixed a target of building 41 km of roads a day. Around 22 km a day was achieved as on February 28 as against 16 km a day in 2015-16.
Looking to add to its revenue stream, NHAI is relying on earning likely handsome proceeds from leasing out of existing projects under the proposed toll-operate-transfer (TOT) scheme, the National Highways Authority of India (NHAI) has lined up a massive R5.35-lakh-crore expenditure plan for the next three years (FY18-FY20). According to the plan, the authority that implements/ oversees roughly 55% of the highway projects in the country in terms of value doesn’t expect a big turnaround in the sluggish public-private partnership (PPP) segment, with private funds expected to be just 11% of the overall resources available in the next three years.
The Cabinet Committee on Economic Affairs (CCEA) had authorised the National Highways Authority of India (NHAI) to monetise public funded National Highway projects, which are operational and generating toll revenues for at least two years after the Commercial Operations Date through the Toll-Operate-Transfer (TOT) model in August 2016.
A recent Crisil Research cites that the much-anticipated TOT model could get the government about ` 40,000 crore. The model is likely to be implemented by May this year allowing domestic roads organisations and international funds to participate in a bidding process for obtaining the operational assets.
“These National Highway projects will be leased out to entities, which will collect toll and operate the project for a specified duration, in a return for a fee. The money procured though this exercise will be used to invest in developing more highways. Under this model, 75 highway projects that are operational and which have been completed under public funding have been zeroed upon for potential monetization,” says Padmanabhan.
The research also estimates that between fiscals 2018 and 2020 construction of highways would require investments of ` 2.2 lakh crore with higher execution of publicly funded projects.
Such a huge leap in funding requirement would demand tapping new avenues of funding. The TOT model is one such, where the authority transfers ownership – and the right to collect toll -- of operational highways to private entities for as long as 30 years in return for a one-time upfront payment, indicates the research.
The best model
To garner pace, private participation has to be roped in. Along with EPC, BOT models, Hybrid Annuity Model (HAM) were introduced in 2016 by the government to revive PPP (Public Private Partnership) in highway construction. Each of the three models finds its position as per the nature of the road and traffic volumes. A combination of EPC and build-operate-transfer (BOT) models, HAM model has the government paying 40 per cent of the project cost during initial five years through annual payments. The remaining 60 per cent will be invested by the private player thus reducing risks and funding requirements.
“While EPC would be the most preferred model, as the government takes up a majority of the financial risks, this would need huge capital investments. Therein the role of public private participation comes, which is answered by BOT projects. However the traffic volumes may not render the projects viable for BOT in multiple cases. HAM is an improved model and a good step by government, whereby revenue risk and those of financing are taken up by them,” says Tandon.
HAM is an improved model for public private participation where a significant chunk of risks (revenue and financing) are owned by NHAI. Government pumps in a maximum of 40 per cent of the project cost. “Many of the concerns of the banks have also been addressed. This is yet to become popular with the lending agencies. However the recent trends have been promising and many HAM projects have achieved financial closure in the current financial year. About 35-40 per cent of projects on National Highways are likely to be in this model and is set to continue and garner favor,” he further adds.
However, HAM hasn’t been able to make a lasting impression in the industry owing to certain key clauses and features. Also, the ongoing financial crunches have made bigger players vary of choosing HAM and are opting for EPC.
“There is not one model (EPC, BOT or HAM) which can be the right choice for a project. Current macro and micro economic conditions, general economic outlook for next 2-2.5 years, availability of funds with Banks, Financial Institutions and developer are the few factors which will drive the choice of the model,” says Padmanabhan
He also reiterates that many HAM developers are also BOT developers. Because of adopting HAM, financial health of these developers might improve in future. This will help revive entire highway sector including BOT in long run.
While investments to develop and expand the network gather pace, another pertinent facet of this segment is the issue of road safety that needs renewed interest and attention. A global leader in road fatalities, right after China, the recent Supreme Court order for banning sale of alcohol along the national highways in the country aims to tackle drunk driving menace and improve road safety conditions in the country. While debates rage over the move, a pertinent question that rises is that is it enough? And is alcohol the only cause for the rising number of road accidents in the country? Industry experts believe its not just liquor vends but bad planning and execution of road projects and absence of safety measures are also prominent causes for the rising fatalities.
Statistics estimate that Indian roads account for about 11 per cent of total road accident deaths. In 2014, government number of recorded deaths caused by potholes, speed breakers and humps on roads were 11,400. “While the government and the implementing agencies can address this through education, identification of black spots, mitigation measures to improve the rideability on these spots, ensuring care during design to render safe roads, reducing and eliminating conflict points, providing for safe mobility of all road users, enhanced safety measures for pedestrians and slow moving vehicles can also help the cause,” shares Tandon.
National Highways account for almost one third of road accident fatalities and hence ensuring care for road safety during design, sensitization of heavy vehicle drivers, adopting measures of segregation of slow moving traffic, providing arrangements for timely road side assistance and ambulatory facilities etc could be helpful. More than improving the infrastructure, sensitization and educating the people to change their behavior and mindset towards road safety would yield better results.
“It’s up to both government and private sector to address safety issues. There is certainly room for improvement with regards to Health & Safety in India,” says James. With an Australian parent concern, James feels that a lot of learning can be taken from the roads down under. “This can include areas for improvement such as; intelligent safety systems such as GPS, wireless communications and video detection systems, Smart signs, Smart camera crash prevention, Roadside collision avoidance, Driver fatigue detection and warning, Collision avoidance technology systems,” he adds.
A collective and collaborative effort and approach will transform the roads & highways sector in the country and make it the spearhead of change for the country’s infrastructure journey.