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Road to success

 Dominick Rodrigues |  2015-09-13 19:50:49.0  |  New Delhi

Road to success

The Indian economy is the 4th largest economy by purchasing power parity. India’s gross domestic product (GDP) per capita on a purchasing power parity basis was estimated by the International Monetary Fund to be <g data-gr-id="216">approximately</g> $5,855.31 million and expected to increase to $6,265.64 million in 2015. In the first quarter of 2015, India’s GDP grew by 5.7 <g data-gr-id="159">per cent</g> – the highest growth rate in 10 quarters. Industrial GDP increased by 4.2 <g data-gr-id="160">per cent</g>, showing sign of revival following approximately 0.4 <g data-gr-id="161">per cent</g> growth in the financial year 2014. An increase in investment demand and exports is also apparent. Steps announced by the government, such as higher sectoral limits for foreign direct investment (defence, railways and insurance), the launch of an online portal for environmental and forest clearance to increase transparency, budgetary support towards encouraging labour-intensive sector growth, push towards easing labour laws and budgetary allocation to infrastructure in addition to facilitating infrastructure financing, which aim to improve business processes, are lifting investor sentiment. In addition, the government’s aim to increase fiscal discipline is expected to positively change the attitude of investors. The quicker implementation of stalled projects will also encourage investment.

As the growth of the economy in general – and the manufacturing sector in particular – is largely dependent on <g data-gr-id="235">creation</g> of suitable infrastructure, the policy focus in India has been on infrastructure investment. Such investment has increased manifold over time with increased private-sector participation in the country. The 12th Five Year Plan has also laid special emphasis on infrastructure development as quality infrastructure is important not only for sustaining high <g data-gr-id="234">growth,</g> but also ensuring that the growth is inclusive. Large infrastructure investment during the last decade or so has helped India emerge as one of the fastest-growing economies in the world.

The total investment in infrastructure for the 12th plan is expected to be Rs 55.7 lakh crore. The share of private investment in the total investment in infrastructure increased from 22 per cent in the 10th plan to 36.61 per cent in the 11th plan. If the infrastructure target is to be met, the share of private investment in the infrastructure sectors will have to increase to approximately 48.14 per cent. The Union Budget for 2015-2016 highlighted initiatives for infrastructure development including: investment in infrastructure to increase by Rs 700 billion in the financial year 2016, over 2015; proposal to establish a National Investment and Infrastructure fund which will be funded with Rs 200 
billion annually, and will invest in equity in infrastructure finance companies;  proposal to permit tax-free infrastructure bonds for the projects in the rail, road and irrigation sectors; proposal to revisit and revitalise the PPP mode of infrastructure development, with the sovereign bearing a major part of project risk; CAPEX of the public sector units to be Rs 3,178.89 billion, an increase of approximately Rs 808.44 billion over 2014-2015; government to consider plug-and-play projects in infrastructure projects such as roads, ports, rail lines, airports; Roads: increased outlay of Rs 140.31 billion on road infrastructure; Urban Infrastructure and Irrigation: Rs 53 billion to support micro-irrigation, watershed development and the Pradhan Mantri Krishi Sinchai Yojana. To the extent possible during the year as a result of tax buoyancy, proposal to allocate an additional Rs 30 billion to this Yojana; Railways: increased gross budgetary support of Rs 100.50 billion to the Indian railways; Ports in the public sector will be encouraged to corporatise and become companies under the Companies Act to attract investment and leverage land resources.

India has the second largest road network in the world with approximately 4.8 million kms of roads, which are the most common mode of transportation and account for 85 per cent of passenger 
traffic, besides approximately 60 per cent of freight traffic. National highways in India constitute two per cent of the road <g data-gr-id="125">network,</g> but carry approximately 40 per cent of the total road traffic. State roads and major district roads are the secondary <g data-gr-id="122">system</g> of roads and they carry another 60 per cent of traffic and account for 98 per cent of road length.

National highways – which constitute approximately two per cent of the total road network but carry approximately 40 per cent of total road traffic – facilitate trade and allow convenient movement of traffic across states. The national Highways Authority of India (NHAI) is the nodal agency under the Ministry of Road Transport and Highways that is responsible for the building, maintenance and upgrading of national highways. In December 2000, NHDP was launched by the NHAI to develop the national highway network in India. The number of lanes on national highways has also increased from single or double lane to four <g data-gr-id="184"><g data-gr-id="183">lane</g>,</g> while single lane roads decreased from 30 per cent in 2008-2009 to 24 per cent in 2012-2013. Double lane roads decreased from 53 per cent in 2008-2009 to 51 per cent in 2012-2013. For the same periods, four or more lane roads have increased from 17 per cent to 24 per cent.

The NHDP involves the building, upgrading, rehabilitation and widening of existing national highways. The programmed is executed by the NHAI, in coordination with the Public Works Department of the various states. The NHAI also collaborates with the Border Roads Organisation for the development of certain stretches of road.

The NHDP is being implemented in seven phases: Phase I is almost complete and approximately six per cent of Phase II is left to be awarded. Phase III involves converting two-lane roads into four-lane roads. The criteria for identification of stretches under this phase include high-density traffic corridors not included in Phases I and II, providing connectivity of state capitals with the NHDP (Phases I and II) and connecting centres of tourism and places of economic importance. In 2011-2012, projects with a total length of 1,871 km were awarded. However, project awarding decreased to 153 km in 2012-2013. In 2014-2015, nine projects with a total length of 680 km <g data-gr-id="193">was</g> awarded. Out of the total length of 12,109 km under this Phase, approximately 54 per cent was complete as of May 31, 2015, and approximately 25 per cent was under implementation. Further, approximately 21 per cent of the total length under this Phase is yet to be awarded. The total cost incurred under this Phase upto October 31, <g data-gr-id="192">2014</g> was Rs 850 billion.

Under Phase IV, approximately 20,000 km of national highways are planned to be improved to two-lane standards with paved shoulders. The NHAI has identified a total of 14,799 km of road under this phase. As of May 31, 2015, approximately 10 per cent of the total length was executed, approximately 27 per cent of the total length was under implementation and approximately 63 per cent was left to be awarded. As of October 31, 2014, a sum of Rs 96 billion has been incurred on this phase.

In 2013-2014, around 928 km of projects were awarded under this phase compared to only about 644 km being awarded during 2012-2013. In 2014-2015, projects with a total length of around 2,397 km were awarded. Of these, four projects with an aggregate length of 612 km were awarded on a build-operate-transfer (“BOT”) basis.

Phase V involves six-<g data-gr-id="118">laning</g> of 6,500 <g data-gr-id="119">kms</g> of selected stretches of existing four-lane national highway on a design-build-finance-operate (“DBFO”) basis. This includes approximately 5,700 <g data-gr-id="120">kms</g> of the GQ and other selected stretches at a total cost of Rs 412 billion (2006 prices). As of August 31, 2014, approximately 29 per cent of Phase V was completed. As of May 31, 2015, approximately 33 per cent of the total length under this phase was completed, approximately 22 per cent was under implementation and approximately 45 per cent was left to be awarded.  As of October 31, 2014, a sum of Rs 307 billion has been incurred on this phase. In 2013-2014, two projects with a total length of 130 km were awarded under this phase and projects with a total length of 265 km were awarded in 2012-2013. This was much lower than the 1,689 km length of project awarding in 2011-2012. Also, both these projects were re-awards of projects awarded in the previous two years. Phase VI includes the development of approximately 1,000 km of access-controlled four or six-lane divided carriageway expressways. Although this phase has been approved by the government, it is yet to see any awarding.

Phase VII proposes the construction of ring roads, flyovers and by-passes on selected stretches of national highways at an estimated cost of Rs 167 billion. The government approved this phase in December 2007. While 700 km of stretches have been identified, as on May 31, 2015, approximately three per cent of the project length was completed, approximately three per cent of the project  was under implementation and approximately 94 per cent was yet to be awarded. As of October 31, 2014, a sum of Rs 17 billion had been spent on this phase.

NHDP projects are awarded to private companies either in a cash contract or on a BOT basis. NHDP cash contracts are mainly financed through budget allocations from the Central Road fund, negative grants or premium received and toll revenues. These projects may also be funded by loans and grants received from the World Bank and the Asian Development Bank. Over the last few years, National Highway projects have been awarded at an extremely slow pace due to issues related to delays in land acquisition and environmental clearances, the offer of more stretches of road with lower traffic densities and weak financials of players in the sector. Although the number of projects has almost doubled from 1,522 km of projects in 2013-2014 to 3,091 km of projects in 2014-2015, this number is significantly lower compared to historical levels of 5,000 km and falls short of the government’s execution target of 30 km per day. Over the next five years, over 24,585 km of national highway projects are expected to be awarded. With developers losing interest in BOT projects, NHAI is looking to award more projects through the engineering, procurement and construction (“EPC”) route.  

In this regard, Sadbhav Infrastructure Project limited – a leading Indian road BOT company specialising in development, operation and maintenance of highways, roads and related projects – recently made a public issue of shares priced at Rs 100 to Rs 103 per share for an amount aggregating up to Rs 4,250 million, as part of its initiative to spread further into the country. The issue opened on August 31, 2015 and closed on September 2, 2015.

Nitin Patel, Director, SIPL, this amount is being raised for growth capital as part of its key investment rationale <g data-gr-id="176">including:</g> a focused strategy on roads and highways as a BOT operator; high growth in industry to drive investments. “Our business is linked to the GDP of high growth states and FY18 will <g data-gr-id="174">see of</g> all our projects becoming operational. We are involved in development, operation and maintenance of national and state highways and roads in several states including Maharashtra, Gujarat, Rajasthan, Karnataka, Haryana, Madhya Pradesh and Telangana, and border <g data-gr-id="196">checkposts</g> in Maharashtra. We have a project portfolio of 10 BOT projects of which six are fully operational, one partly operational and three in various stages of development. Our operational projects cover 1,531.16 lane <g data-gr-id="197">kms</g> and <g data-gr-id="198">proj3ects</g> under development cover 1,061.48 lane <g data-gr-id="199">kms</g>.

“Before bidding for any project, we study the location, traffic mix, and also hire consultants to assess the traffic mix including past history of that corridor traffic movement, geographical condition (whether monsoons delay construction and increase costs). Traffic mix is most important (due to ban on mining etc) and the corridor should have long distance traffic – like Ahmedabad and other cities which depend on traffic movement as commercial traffic is high and brings in revenue. We are presently bidding for eight to nine upcoming projects. The government has started giving bids aggressively for developing its infrastructure as speedily as possible and there were about Rs 30,000 crores of bids in the past five to six months. Around 22 checkposts are coming up on the Maharashtra border, besides the Ahmedabad Ring Road having 22 projects and all this benefits us.”

To a question about the Maharashtra Government promising to become a Toll-Free State, Patel said this is the state government’s decision. “We do not collect revenue from cars, only 100 per cent collection come from commercial vehicles. The Maharashtra government wants toll-free access for cars and government buses and that developer will be compensated by the government through repayment of this facility. The border checkposts are a different type of a model.”

Dominick Rodrigues

Dominick Rodrigues

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