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The Promising Pathways

The Promising Pathways

With India trailing on the infra-focused growth agenda, the roads and highways sector shows favourable investment opportunities for the stakeholders of infra-construction industries. 


Infrastructure is the backbone of any nation’s development. We have gone beyond the incremental growth to attain transformative achievements,” stated Piyush Goyal, Union Finance Minister, while presenting the Interim Budget for 2019-2020. With the world’s second largest road networks, India has paced leaps and bounds in regards to the development of road infrastructure. So much that, the year 2018 saw India emerging as one of the fastest highway developer with 27 km of highways built each day.

Confirming the progress achieved, Nitin Gadkari, the Union Minister for Road Transport and Highways said during a recent media meet, “Today, India is the fastest highway developer in the world with 27 km of highways built each day. Projects stuck for decades like the Eastern Peripheral Highway around Delhi or the Bogibeel rail-cum-road bridges in Assam and Arunachal Pradesh have been completed.”

Upholding infrastructure development as the core agenda of the nation’s development the roads and highways sector has gained a spotlight even the budget allotment by the Government. The allocation for highways sector shot up to about Rs. 83,000 crore and going ahead the Shri Narendra Modi led Government aspires the country to touch an economy of USD 10 trillion in the next eight years with increased focus on developing the next-gen infrastructure largely focusing on the roads and highways sector.

Impressive Investments

The road infrastructure has been a key priority despite the changing political governing dynamics. The sector has received a strong budgetary support over the years. As per the Union Budget of 2019-20 the Modi led Government provided an outlay of Rs. 1.12 trillion under the Ministry of Road Transport and Highways. In FY18, the construction of national highways hit a record high of 26.93 km (about 27km) per day, wherein the length of national highways being constructed alone reached to 6,715 km at a pace of 24.42 km per day between April-December in FY18.

Adding to this was the allocation of a 100 per cent FDI under the automatic route for roads and highway projects. Owing to which a prospective flow was seen in regards to the overseas investment for infrastructure development. As per the data from the Ministry of Road Transport and Highways, the Canada Pension Plan Investment Board (CPPIB) plans to chip an investment amounting to US$322 million for infrastructural development in India. A recent report from IBEF also indicates that the Government has received support from public sector undertakings from Malaysia and Japan for funding the upcoming highway projects in India – wherein an annuity model is being followed, i.e. 60 per cent of the investment is borne by the private investors and 40 per cent by NHAI in five equal instalments. Also, the Union Government has inked a loan agreement worth US$ 500 million with the Asian Development Bank to build the longest bridge across the River Ganga in Bihar – the project is expected to be fully complete by 2020.

However, despite the benefiting scenario analysts see a considerable fall in the order inflows within the sector as against the corresponding period last fiscal. Confirming this is the recent findings from JM Financial Services Ltd. As per the findings the target of total orders awarded saw a drop owing to the delays in land acquisitions and clearances on projects, especially awarded on a hybrid annuity model (HAM). While in few projects the delays has been due to the glitches in financial closures. Also, a considerable cold scenario was seen in the order book status of new projects being acquired among the construction firms in the fiscal as against the previous period. Analysts from JM Financial Services hence indicate through their findings that the scenario will ‘see positive change post-elections, by bringing in the required trigger for investors.  “With a healthy debt-equity of 0.8x (as of Sept’18), NHAI has ample cushion for 2-3 years of EPC/HAM ordering by leveraging its balance sheet, even if budgetary allocation to NHAI remains stagnant,” stated the JM Financial report.

Expert Views

Though a slow pace was seen in the overall projects being awarded, the implementation and planning of mega face-lifting projects like Bharatmala have brought in a cheer among the stakeholders of the infrastructure sector.

“India has the one of the largest road networks with over 5.5 million km of roads catering to 90 per cent of passenger traffic and 64.5 per cent goods traffic. National highways account for 2 per cent of the total road network and carry over 40 per cent of total traffic. A slew of recent policy initiatives such as the Bharatmala programme, is expected to be a game changer for the sector. Under the Bharatmala Pariyojana about 35,000 km of roads are envisaged to be developed in Phase 1 alone.  The market for roads and highways is projected to grow at a CAGR of 36.16 per cent during 2016-2025 on the back of government initiatives to improve transportation infrastructure in the country. This is indicated by the fact that almost half (742) of the 1,531 PPP (public-private partnership) projects awarded in India until March 2018 were related to roads,” points out Harish Nair, Executive Director and Head, Consulting, CBRE Asia Pacific.

Opining on similar lines Bajrang Kumar Choudhary, MD, Bharat Road Network Ltd says, “Even though the total project award in FY19 has been tepid lower than the previous financial year, the opportunities in the sector remain robust due to Bharatmala. When you are looking at estimated capital investment of almost Rs. 7 tn by 2022 across the sector, the sporadic sluggishness should not be a trigger for concern but it may still be prudent to reassess our preparedness for meeting the enormous target we have set for the infra creation. While the liquidity issues arising out of lenders lack of the financial closure. Enthusiasm in increasing their infrastructure exposure have been pinching the sector for a while now, the aggressiveness in bidding has also hurt many developers badly as they face challenge in achieving the projects.”

He further adds, “Besides the opportunities for bidding in the primary market, we do see a lot of scope in the secondary market for portfolio churning and consolidation. As a lot of global Private Equity players are vying for their share of the pie in infrastructure sector, we could see a lot of activities in the secondary market. The active interest of PE players coupled with the intent of developers looking out creates value out of the BOT assets in their portfolio, the market is expected to witness a lot of asset sale and acquisition happening in near future.”

Commenting on the prevalent opportunities, Garapati Radhakrishna, CMD of RKEC Projects Ltd highlights, “The Government of India has increased its expenditure in Roads and Highways from Rs. 32,438 crores (3620 km) in the year 2013-14 to Rs. 1,16,324 crores (17055 km) in the year 2017-18 which shows the government of India is keen on developing infrastructure on roads. At present India has not completed even 50 per cent of roads and highways. Hence, we find a tremendous opportunity in construction of both roads and highways. Though we are into major infrastructure development projects, we have also done some noteworthy projects in roads infrastructure like construction of road over bridge AT LC- 43A at Km 38/175 of NH45A in Puducherry allotted by PWD. The contract was valued at Rs. 3,496 lakh.”

Pointing out the noteworthy projects being completed in the sector, he further brings out, “Recently we have completed the prestigious project- Farakka Barrage, Rail cum Road Bridge in WB under the National Highway Authority of India, which chose RKEC in JV (joint venture) with CQCE for construction of 5.468 km long bridge cum approach roads along with NH34 on EPC mode. This was one out of 12 such bridges planned to be constructed across Ganges, under the supervision of honourable PM. The project was awarded to the company in August 2018 and was handed over much in advance (90 days prior) in December 2018.”

Trending Practices

The Government of India has set a target for construction of 10,000 km national highway in FY19. And the revenue in highway construction alone is forecasted to grow at a CAGR (Compound Annual Growth Rate) of 20 per cent by 2020. The mounting opportunities demands for new-age practices and technologies that can result in timely and cost effective execution of projects.

“While, plastic roads first started being used in India back in 2002, it has become a thrust area in development of roads today. Additionally, newly developing technologies such as ‘self-healing’ materials, Intelligent Road Networks, etc. are expected to be part of the ever evolving road sector in the near future,” echoes Nair. CBRE’s Project Management vertical has been delivering cost- efficient and effective project solutions from ‘Concept To Completion’ with project management provided for over 600 million sq. ft. including commercial buildings, corporate greenfield campuses, built-to-suit facilities, residential developments, retail developments, research and development facilities, data centers, critical facilities, hospitals, integrated townships, educational and institutional facilities. Additionally, CBRE’s Consulting Team has been at the forefront of providing advisory for projects such as Industrial Corridors, Expressways and Multi-modal logistics hubs, which in turn have helped developed an understanding of the technologies used in the road sector.

Radhakrishna draws out a shift in the execution practices. He says, “The trending practices in the sector are switching over from traditional construction methodology to pre-cast structures by leveraging on designs and mass productions, the industry is performing on par with 24x7 manufacturing units. Our company’s core competence is in marine structures and bridges which is a much more sophisticated version of bridges and elevated corridors. Our USPs do include excellent design capability, project management capability, cost effectiveness and timely delivery. As such we find ourselves positioned comfortably in all areas of execution.”

On the other hand, Choudhary indicates that India still needs to pick up on the technology front, and the situation though is progressing is still at a nascent stage considering the global developments. He views, “Use of technology is an area where India probably needs to get its act together and facilitate the adoption of latest available technology for road construction, operation and maintenance. Though we have so far seen remarkable progress in Electronic Toll Collection system and exponential growth in number of Fastags sold and user fees collected electronically, there are still many more areas where the use of technology can really enhance effectiveness and efficiency of highway operation and maintenance. Intelligent network highway is one such area which may really enhance user experience as well as increase the highway asset life cycle. The use of technology, data based predictive analytics for infrastructure creation, operation and maintenance can possibly be the biggest differentiating factor for infrastructure asset management in the near future. Though globally there are already a significant number of players that are able to predict maintenance and operational issues before they become bigger problems, the penetration of technology and data analytics are still at nascent stage in Indian infrastructure market.”

Pointing out another evolving trend, he further adds, “There is also an emerging trend of solar highway which enables using the existing highway network for generating solar power thereby creating incremental value from the existing network. At BRNL, we are actively exploring all these innovative solutions for asset creation and asset management in line with dynamic technology landscape. BRNL is also focused towards driving efficiency through technology innovation across multiple segments of asset development, toll operation and management and route operation and maintenance. By developing an integrated technology platform for road asset management, we aim to maximize automation of system, processes and services and adopt a hands-off approach towards asset management.”

Maturing Models

The growing opportunities while has drawn in the attention of private investors into the roads and highways sector, the flow of investments has today broadened the models of project execution. From public private partnerships (PPP) to build operate transfer (BOT) and build own operate transfer (BOOT), today projects are being executed in a different array of models as per the cost convenience, effectiveness and time involved in construction.

Talking about the effectiveness of each model, Choudhary says, “The key differentiating factor among all the operating models is allocation of risk and resources. As long as budgetary allocation for infrastructure creation remains robust, EPC model would invariably suit the industry due to low risk on private players. However, considering the current scenario of fiscal constraint for the Government in increasing budgetary allocation and simultaneous liquidity crunch in the market due to lenders reluctance to increase their infrastructure exposure, we believe that an ideal operating model for infra creation should be judicious mix of PPP and EPC projects based on the individual merits of the projects. While public funding for EPC projects would keep the contractors engaged with a robust order book, private capital in PPP under BOT (Toll/ HAM) would give major fillip to infra creation at the required scale and size. Since the infrastructure need of our country is humongous, the focus of policymakers should be aligned more towards rejuvenating PPP model under BOT (Toll) to enhance private capital infusion and optimize yield for the infra investors. Although it is equally important that Government takes adequate measure to allay the past fears over the land acquisition and delay in dispute resolution. This would help in reinstating the trust of lenders and investors alike for increasing their allocation for PPP projects in Roads under BOT (toll) model.”

Highlighting upon the glitches involved in certain models of execution, Radhakrishna indicates, “While BOT and the BOOT can be the choice of the government, the same is suffering from stringent norms of banks for lending and high pre-qualification criteria by restricting entry of SME’s who are cost-effective and efficient with respect to quality and timely delivery. Further, resorting to Joint Venture (JV) etc. is time consuming. Striking a balance on various parameters, we prefer EPC as the best model for faster implementation of projects by ensuring quality work at lower cost. The EPC mode also helps in bidders proposing cost effective solution and thereby government will be encouraging in house technology upgradations.”

Emphasizing on the financial hiccups faced during the execution of PPP projects, which led to project delays and failures in on-time completion, Nair points out, “It has been noted that the road sector has been sluggish in getting private sector financing as evidenced by the fact that in the past, several road based PPP projects were not able to get the requisite bids from the private sector. Key reasons for this are the financial capacity constraints and lack of debt financing products aligned with the revenue projections of highway projects.”

For addressing such concerns, the Government had formed a committee in November 2015 that focused towards resolving the inefficiencies and inequitable allocation of risk on the private sector as a major factor leading to failure of PPP projects. Following this, the Cabinet Committee of Economic Affairs was established in 2016, which in turn observed that long term loan disbursement in BOT or BOOT models are turning into Non-performing assets and banks have become reluctant to finance the highway sector.

Later, in 2016 the Cabinet Committee of Economic Affairs approved a Hybrid Annuity Model for implementing highway projects in India. HAM is hybrid between EPC and BOT. Under this model, the government and private entity shares the project cost in the ratio 60:40, the model has since then, lowered initial capital outflow for the government, as bulk of the payment is done through annuity payments while the private entity is insulated from traffic and inflation risks. As per the analysts this model is fast emerging as one of the most favoured models for road project implementation.

According to the findings in IBEF report, as of February 2019, there were 1,733 PPP projects in India, of which 763 are related to roads and highways. Projects awarded under the BOT model is 37.48 per cent of the total awarded projects as of February 2019. In FY18, about 209 km of projects were awarded to BOT players by NHAI.

The Road Ahead

Like any economic activity, the roads and highways sector though has to face its fair share of challenges and hiccups, the market analysts and stakeholders uniformly draw an optimistic outlook for the sector. One among the vital influencing factors demanding a thrust are the growing domestic trade flows and resultant rise in the commercial vehicles and freight movement. As per the industry reports, the rise in production of commercial vehicles reached to 894,551 in 2017-18 from 567,000 in 2009-10, recording a CAGR of 5.87 per cent.

The IBEF findings suggest that the road’s traffic share of the total traffic in India grew from 13.8 per cent to 65 per cent in freight traffic and from 32 per cent to 90 per cent in passenger traffic over 1951-2017. Adding to this was the increased individual spending on cars, motorbikes and scooters.  While the domestic sales of passenger vehicles rose at a CAGR of 4.26 per cent during FY12-18, scaling up to 3.29 million in FY18 from 26,65,015 in FY13; the domestic sales of commercial vehicles in the country shot up at a CAGR of 1.56 per cent in FY12-18 with the number standing at 856,453 during FY18 from 7,93,211 in FY13.

“It is not only the optimism in primary market but also the magnitude of secondary market contributing towards the excitement in the market. With such a huge opportunity on the anvil across multiple segments, the EPC contractors who were earlier to some extent compelled to enter PPP space for BOT projects, are now eager to deleverage their balance sheet and free up their capital commitments. Additionally, amid the mounting NPAs, the lenders are also looking sponsor substitution to minimize their exposure to stressed asset portfolio by offering them to developers with strong financials and asset management skillset. With active interest from overseas private investors towards the Roads sector, we do expect a lot of consolidation happening in the market. An active primary market with a major uptick in project awarding and an equally stimulating secondary market for project acquisition and sale are tell-tale signs for exciting times ahead for the sector,” opines Choudhary.

Nair says, “The road ahead seems positive at the back of spate of government reforms, the adoption of technology, and embracing new models.  This is witnessed by the highest pace of new road development ever witnessed in the country. In addition, utilization of the Hybrid Annuity Model to award road projects will further encourage private sector investment and momentum is observed in Highway PPP projects. However, Indian infrastructure especially in terms of road and highways faces certain challenges such as land acquisition and lack of skilled manpower have implications on the sector.”

With numerous face-lifting projects and policy frameworks being pipelined the industry despite few hiccups projects an optimistic outlook for the sector, especially post-elections.


@EPC World Media


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