Private investments in national highway projects will be lower as compared to the past five years, as most developers struggle with weak financials and are therefore unable to
bid for Build-Operate-Transfer (BOT) projects.
Roads form the most common mode of transportation and are the main arteries for travelling across India, carrying an estimated 60 per cent of total freight and 85 per cent of total passenger traffic. The Indian road network, at approximately 4.7 kms in length, is second largest road network in the world.
Indian road are divided into two categories: National Highways: Intended to facilitate medium and long-distance intercity/state passenger and freight traffic across the country; and State Roads: Comprising state highways and major district roads providing connectivity to state capitals, district centres, important towns, national highways and other states and rural roads providing villages accessibility to meet the social needs of such villages and also the means to transport agriculture produce from villages to nearby markets.
National highways, which account for about two per cent of the total road network length in India, carry nearly 40 per cent of total road traffic volume. On the other hand, state roads and major district roads – the secondary system of roads – carry another 40 per cent of traffic volume and account for over 20 per cent of road length.
Due to Government efforts, national highways network in India has been expanding considerably. In 2000, the Central Government initiated the National Highway Development Project (NHDP) in an effort to improve highway infrastructure in the country. The project includes seven phases and is being implemented in all phases except for Phase VI.
The ongoing construction of new national highways and upgradation of existing ones has led to an increase in terms of lanes in national highways in the last five years, which has gone from being single lane and double lane to four-lane.
Single lane roads decreased from 30 per cent in Fiscal Year 2009 to 24 per cent in 2013. Double lane roads reduced from 53 per cent in 2009 to 51 per cent in 2013, while four-lane roads have increased from 17 per cent to 24 per cent in the same period.
Investments in road projects are expected to grow by two times to Rs 8.6 trillion over the next five years, according to CRISIL Research: Roads and Highways Annual Review October 2015. Investments in state roads are expected to grow steadily, while those in rural roads will rise at a slower pace, impacted by a drop in budgetary allocations and funding constraints.
For national highways, execution is expected to pick up in fiscal year 2016, aided by policy reforms, after having slowed down in the previous two fiscals. Higher budgetary support to fund engineering, processing and construction (EPC) projects, will also drive investments in the national highways, which has recently seen a significant drop in private interest.
Private investments in national highway projects will be lower as compared to the past five years, as most developers struggle with weak financials and are therefore unable to bid for build-operate-transfer (BOT) projects. Hence, the government awarded more EPC projects over the past five years. Almost 70 per cent of the projects awarded in the last two fiscals were in EPC mode.
However, till July 2015, a good pickup in BOT awarding is evident with 60 per cent of the projects being awarded on a BOT basis. However, on an aggregated five-year basis, the proportion of private participation will show a marginal dip.
CRISIL Research estimates that Rs 8.6 trillion will be invested in roads projects between Fiscal year 2016 and 2020, and a majority of this would be funded by the Government (both Centre and respective State Governments). While the share of private investments in state roads will remain steady in the next five years, their participation in national highway projects, which has slowed down in the past five years, will start improving from this fiscal year, but will stay lower than the levels of private participation previously witnessed.
Overall, this would slightly bring down the share of private players in funding road projects.
The Indian economy is based on planning through successive Five-Year-Plans (FYP). The 12th FYP has laid special emphasis on infrastructure development.
The road and bridges segment at 18.8 per cent of the total 12th plan projected investments, is an important segment of the Indian infrastructure sector.
Over the next five years, CRISIL Research expects the National Highways Authority of India (NHAI) to award more than 22,500 kms of projects. With BOT projects losing flavor among developers in the last two years, NHAI has been awarding more projects through the EPC route, which is believed to attract higher player interest as they require limited upfront capital and involve lesser risk, as compared to BOT projects.
Moreover, the regular milestone payments from the NHAI would provide developers with some cash flows. EPC would continue to dominate NHAI awarding this year, while private participation continues to pick up from this year.
During 2014-2015, NHAI awarded a total road length of 3,091 kms with about 75 per cent of this on EPC mode. An increase in private participation, aided by the Hybrid-Annuity model and entry of new players helped push up NHAI awarding to 4,400 kms in 2015-2016. While 859 kms were awarded by NHAI in first quarter of current fiscal, another 700 kms were awarded in July alone, thereby giving confidence in the annual awarding numbers for this year.
Alongside the NHAI, the Ministry of Road Transport and Highways (MoRTH) has slowly started awarding projects under the NHDP in phase IV and non-NHDP projects through the state public works developments (PWDs). To accelerate road development in the North-East and international borders, a new company called NHIDCL was floated in July 2014 and about 600 kms of projects were awarded by this company in 2015.
Further, in the light of fewer projects awarded by NHAI, the ministry awarded another 3,670 kms during the year to meet its awarding targets, taking the tally to 4,270 kms in fiscal year 2015.
Execution of NHAI projects declined for the second consecutive year in 2015 too, by 11 per cent to 1,691 kms, because the project pipeline fell to a five-year-low of about 10,181 kms as the NHAI terminated atleast 32 projects of 4,190 kms. In the case of BOT projects, construction begins usually after eight to 12 months post awarding, with the time lag even higher in the current scenario as players take more time for financial closure.
On the other hand, implementation for an EPC project typically can start within two to four months. With EPC projects dominating awarding in the last two years, road project execution is expected to get a boost in the coming years.
The pace of awarding through MoRTH increased significantly in the last one year. However, given the poor track record of state PWDs, execution is expected to be stagnant at an average of 1800 to 1900 kms in the next five years. A 20 per cent cut in budgetary allocations to state PWDs to Rs 42 billion in 2016 is also expected to hinder execution. Projects awarded by the NHIDCL are also likely to progress slowly owing to shorter
working season amid rains, unavailability of raw materials, issues over land acquisitions and lack of experience of local contractors. Between 2016 and 2020, CRISIL Research expects an average of 16.6 kms roads to be constructed or upgraded per day at a total estimated cost of Rs 2.8 trillion. Investments are expected to grow 2.8 times over the next five years, as compared to past five years. Notably, more than half of the investments would be government-funded, compared to just about a third in the previous five years.
The share of public funding in national highways is set to increase to 56 per cent between 2016 and 2020 from 35 per cent over the last five years. The increase would be driven by a rise in the share of EPC contracts and higher number of projects on grant.
Dilip Buildcon limited, a private road-focused EPC contractor, recently launched an IPO for equity shares – at Rs 214 to Rs 219 each, aggregating upto Rs 4,300 million – from August 1-3, 2016. “Roads are the lifeline of our country and India has challenging projects which we undertake.
Today our order book is about Rs 11,000 crores from 12 states in India because of project completion before time (for which we got Rs 220 crores bonuses) due to 100 per cent knowledge of trade and largest equipment bank ensuring our success,” Dilip Suryavanshi, CMD, said, adding “We completed the Asian development Bank (ADB) project in less than six months, besides Indian Oil, BPCL and HPCL being biggest clients among others for roads, irrigation projects. We have about 95 per cent of our business from Government contracts and will be focusing on our IT systems.”
The Epc model gained traction, as more projects under the NHDP Phase IV had been taken up for awarding through this mode over the last two years as many players amid stretched financials did not have the muscle to bid for build-operate-transfer (BOT) projects.
The rise in share of EPC projects is also attributable to the fact that funding for BOT projects presents a cause for concern in the current scenario (stretched financial position of developers) and could persist over the next two years. Banks are also exercising greater caution while lending to the sector, as some projects that the6y have lent to in the past have performed poorly.
Also, many banks are approaching their sectoral exposure limit for roads. About 80 per cent of road projects have been awarded on the EPC mode in the past two years and executing these would need incremental investment of Rs 235 billion by the Government over the next two years. However, this can be met through Rs 4 increase in road cess on diesel and petrol and increased market borrowings through capital gain and tax-free bonds.
CRISIL Research estimates that the national Highways Authority of India’s cash inflows from cess allocations are expected to rise by Rs 81 billion to Rs 229 billion in fiscal year 2016 and further to Rs 245 billion in 2017. This amount along with the permission to raise Rs 280 billion through a mix of tax-free and capital gains bonds places the agency in a comfortable position to meet its funding requirements.
The bond route will also prove helpful, as over the next five years, the NHAI would need to invest close to Rs 3,000 billion for construction cost of EPC projects, land acquisition – especially given the increase in land acquisition costs (as national highways are now under the purview of the new Land Acquisition Bill) and lower premium receipts as a large proportion of projects awarded on a premium in 2011-2012 have been terminated. However, NHAI can meet this gap by increasing its borrowings and with an increase in budgetary support.