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Weak private sector participation; Road targets lag behind i

The weak private sector participation has brought awarding of BOT road projects to nearly standstill during FY14. As a result, NHAI moved towards awarding of projects on EPC mode thereby giving some boost to awarding on road projects in second half of FY14.

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Weak private sector participation; Road targets lag behind i

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  1. Weak Private Sector Participation; Road Targets lag behind in FYP ROAD CONSTRUCTION AND DEVELOPMENT IN INDIA

  2. The weak private sector participation has brought awarding of BOT road projects to nearly standstill during FY14. As a result, NHAI moved towards awarding of projects on EPC mode thereby giving some boost to awarding on road projects in second half of FY14. The sector which once witnessed aggressive participation from the private players till FY12, faced difficulty in attracting private sector participants and achieving financial closure implying reduced risk appetite of the developers and the banking sector. The ICRA report on the Indian road sectors reports that there was a steep decline in projects awarded during FY13 & FY14 aggregating to 2,223 km compared to 6,419 km in FY12.

  3. Adding to the misery of the road sector was execution delay on back of land acquisition, clearances, and challenges related to project funding. As a result, work on multiple projects awarded in last 2-3 years is yet to start. “Execution bottlenecks including delays in getting right of way and clearances as well as difficulty in arranging funding were the major reasons for the slow execution. As a result of these factors, work on 81 NH projects (many of these projects were awarded more than 2-3 years ago) covering 9,442 km was yet to start as of May 31, 2014,” states ICRA report.

  4. The 12th FYP had set the target for completion of NHDP by the end of the plan period in FY17 translating into physical execution of 33,027 km at the rate of 18.10 km/day over 2012-17 period. “The target is ambitious given that the actual execution rate for NHDP during 11th FYP stood at only 5.81 km/day. Further, during the first two years of 12th FYP, the execution rate has been at 6.30 km/day –implying required execution rate of 25.9 km/day over the next three years,” opines RohitInamdar, Senior Vice-President, ICRA.

  5. Two years into the 12th FYP, the private sector participation in NHDP projects has witnessed a significant slowdown as 13 out of 22 PPP projects could not find any takers in FY13 and about 21 of NHAI tenders failed to attract even a single bid in FY 14 and only 2 projects were awarded on BOT basis in FY14. This is in sharp contrast to average of 10 bids per project witnessed earlier. Government has taken several encouraging initiatives to revive this sector, including proposal for setting up regulator for roads, easing of exit norms, delinking forest clearance from environment clearance and rescheduling of premium. While ICRA believes that these measures will resurrect the interest of private sector, the improvement is likely to be gradual and would yield results only in the medium to long term. “In the immediate term, the funding and cash flow related problems are likely to persist unless the developers are able to raise funds through equity offerings or by selling stakes in some of their projects,” views Inamdar.

  6. Further, funding for road projects is likely to improve with the Budget proposal of easing banks’ lending to infrastructure sector by allowing them to raise long-term funds with minimum regulatory pre-emption such as from CRR, SLR and priority sector lending (PSL). Further, proposal of formulation of Infrastructure Investment Trusts (InvITs), with tax related incentives, can act as important alternate avenue of long-term project finance and can support PPP in road sector. In addition, proposal to introduce flexible structuring of long term project loans known as 5/25 structure (tenor of 25 years with periodic refinancing once in five years) is likely to ease debt repayment burden on the projects.

  7. However, ICRA analyst feels that with both physical progress and investments lagging much behind the targets, the new government has a lot of catching up to do in the road sector. “The budgetary support for the road sector in FY15 budget stood at Rs288 billion. If a similar support is provided in FY16 and FY17, about 4,500 km per year can be funded by Government on EPC basis. Unless additional budgetary support is provided or alternately the private sector participation improves, the award target of 5,000 km set for FY 15 would be difficult to achieve. If the private sector participation improves in rest of FY15, achieving award of 1,000 Km of length under PPP should not be very difficult. However, private sector participation may gather momentum from FY16/FY17 only, and awarding the remaining length under NHDP by the end of the 12th FYP will be challenging,” opines Inamdar.

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