Trends and Outlook - Indian Infrastructure

The road sector has undoubtedly started showing signs of recovery after a slowdown lasting almost three years. Initiatives taken by the central government have begun to reap results. During 2015-16, project award activity picked up and construction too followed suit. The newly launched hybrid annuity model (HAM) saw some takers. However, the projects awarded under this mode are yet to make significant headway and the industry will have to wait for at least the next one or two years to assess its performance. On the policy front, ap-proval to a one-time fund infusion by the National Highways Authority of India (NHAI) is expected to offer respite to languishing projects. Meanwhile, the government is at an advanced stage of launching the toll-operate-transfer (TOT) model to monetise the public-funded toll plazas. The bold award and completion targets set by the Ministry of Road Transport and Highways (MoRTH) are likely to create substantial opportunities for stakeholders.

Network size and growth

As of May 2016, India’s total road network had increased to 5.23 million km from about 2 million km in the 1990s. Of this, national highways account for 2 per cent of the network, state highways for about 3 per cent and major district roads (MDRs) and other roads account for about 95 per cent. National highway length has increased to over 100,000 km from 33,690 km in the last two decades.

Key trends

The policy measures taken by the government have led to a modest pick-up in project award. Overall, the MoRTH awarded a record length of about 10,000 km in 2015-16. The sector also received a 25 per cent higher allocation (central plan outlay) in the 2016-17 budget.
During 2015-16, NHAI achieved about 85 per cent of its project award target as against the 50 per cent realisation of the award target in 2014-15. While engineering, procurement and construction (EPC) projects dominated the modal mix, the public-private partnership (PPP) model marked a gradual comeback with the award of 16 projects worth over Rs 202 billion. Of these, nine projects worth Rs 83 billion were awarded under HAM. The year witnessed the award of several big-ticket projects such as the Eastern Peripheral Expressway and two packages of the Delhi-Meerut Expressway.
Construction has picked up pace as well, with the MoRTH recording an average construction rate of about 16 km per day in 2015-16. About 6,000 km of road stretches were completed during the year and NHAI met about 90 per cent of its construction target (2,000 km).
There is an increasing focus on road construction in the Northeast. National Highways Infrastructure Development Corporation Limited (NHIDCL) completed two years of operations in July 2016 during which it awarded 29 projects spanning a length of about 850 km worth Rs 150 billion.
At the state level, project award and completion continued at a subdued pace. The award of the Zuari Bridge project in Goa, the Karal Phata Bridge connecting the Jawaharlal Nehru Port Trust (JNPT) and Uran taluka in Maharashtra, the New Ganga Bridge near Kachhi Dargah in Bihar and Phase III of the Barapullah elevated road project in Delhi were the only major developments at the state level. The key projects completed include a section of the Vikaspuri-Mukarba Chowk signal-free elevated corridor in Delhi, the Andheri-Ghatkopar Link road in Maharashtra and the Thiruvananthapuram City Roads Improvement Project in Kerala.
Financial closures continue to be slow paced. As per India Infrastructure Research, between May 2014 and July 2016, only eight road projects achieved financial closure. The majority of these were national highway projects.
Operational asset sales have begun to take place in the sector, especially after the policy change that allowed companies to fully exit their projects two years after construction. This is helping road developers deleverage their balance sheets to infuse fresh liquidity into the sector. Some of the companies that divested their assets are Hindustan Construction, Nagarjuna Construction, Sadbhav Infrastructure Projects, GMR, Madhucon, Gammon and PNC Infratech.
During the past year, the sector also reported a surge in corporate debt restructuring (CDR) of projects. In August 2015, Shapoorji Pallonji Jammu Udhampur Highway Limited raised funds through bonds to refinance project debt. In December 2015, Ashoka Buildcon Limited’s associate Jaora-Nayagaon Toll Road Company Private Limited completed the refinancing of its Rs 5.52 billion debt with the State Bank of India. Meanwhile, on December 1, 2015, IVRCL Limited’s CDR lenders undertook strategic debt restructuring (SDR) in the company following the completion of the CDR process.
Road sector players have also started raising funds through the capital market to meet their expenditure plans. In 2015, PNC Infratech Limited, MEP Infrastructure Developers Limited and Sadbhav Infrastructure Project Limited successfully launched initial public offerings (IPOs). While IPO activity has been subdued in terms of numbers, these IPOs have generated interest from investors as most of the IPOs were oversubscribed, which in turn indicates improved investor sentiment. In August 2016, Dilip Buildcon Limited launched its IPO. As per reports released in September 2015, GVR Infraprojects had reportedly filed draft papers with the Securities and Exchange Board of India for its upcoming IPO. The company plans to raise at least Rs 4 billion through an initial share sale programme. GR Infraprojects Limited is also planning to launch an IPO worth Rs 4 billion.
Bond issuances also saw an increase in the past 12 months. In August 2015, the Shapoorji Pallonji Group launched a Rs 26.1 billion offering for its Jammu-Udhampur road project. The funds will be utilised to refinance debt taken for the implementation of the national highway widening project. In December 2015, Essel Infraprojects Limited raised Rs 6 billion worth of non-convertible debentures for the Lucknow-Rae Bareli road widening project.
Multilateral funding continued to flow into the sector, though at a slower pace. In the past 12-15 months, the World Bank ap-
proved the Tamil Nadu Road Sector Project II and the Asian Development Bank approved the Jharkhand State Road II Project, a project entailing improvement of MDRs in Uttar Pradesh and allocated funds for the development of the New Ganga Bridge in Bihar.

Outlook

The government has certainly raised stakeholder hopes. Initiatives such as the approval of an exit policy for developers, a one-time fund infusion option by NHAI to enable the completion of build-own-operate projects delayed due to funding constraints and authorisation to the MoRTH to appraise projects worth up to Rs 10 billion (as against the earlier limit of Rs 5 billion) have paved the way for sound project implementation. In addition, enhanced inter-ministerial coordination has fast-tracked clearances pertaining to the railways, the Ministry of Environment, Forest and Climate Change and the Ministry of Defence. On the funding front, new sources are being explored. The government’s decision to remove the dividend distribution tax on infrastructure investment trusts (InvITs) has encouraged companies like IRB Infrastructure, IL&FS Transportation Networks Limited, Larsen & Toubro and MEP Infrastructure to list their assets under InvITs.
The ministry is also planning to tap Rs 500 billion from the Life Insurance Corporation of India to finance its expressway development programme. Meanwhile, NHAI has been allowed to raise Rs 500 billion-Rs 550 billion through market borrowings. Notably, the authority is in the process of floating green masala bonds in the market. Plans are also afoot to list these bonds on the Singapore or London Stock Exchange.
In August 2016, the Cabinet Committee on Economic Affairs authorised NHAI to monetise public-funded toll plazas. Around 75 operational projects have been initially identified for potential monetisation using the TOT model.
Technology continues to be a key focus area of the ministry and NHAI. FASTag is now active at more than 325 toll plazas across the country. NHAI is in the process of introducing advanced highway management systems on national highways. This will help improve vehicular flow as well as transfer real-time traffic data to the operator. The MoRTH will launch the Indian Bridge Management System soon to ensure efficient upkeep of the country’s bridge infrastructure.
Online platforms like e-Pace, INFRACON and an updated version of INAM-PRO have also been launched by the ministry. Through these initiatives, the government aims to make road building procedures faster, and more transparent and efficient. Road safety is another focus area of the government. It has set a target to reduce the number of fatalities due to road accidents by 50 per cent by 2020. It has also constituted a group of ministers to recommend safety-related measures.
Going forward, the targets for 2016-17 are ambitious. The government aims to award 25,000 km and construct 15,000 km of roads during the year. Of the total length of national highways targeted for award, 15,000 km will fall under the target of NHAI and 10,000 km will come under the target of the MoRTH and NHIDCL. The construction target for NHAI has been fixed at 8,000 km while the target for the ministry and NHIDCL is 7,000 km.
Estimates indicate that projects spanning 50,000 km and entailing investments of about $250 billion will be developed over the next five-six years. Significant opportunities will be offered to contractors as well as equipment and material providers through programmes like Bharat Mala, Char Dham, District Connectivity and Setu Bharatam.
The overall outlook for the sector is fairly optimistic. PPP projects are expected to make a gradual comeback. However, the road sector continues to face some key issues. Land acquisition is still an area of concern for many projects. There is a need for a more effective dispute resolution mechanism, proper project development and preparation and more balanced risk allocation. The absence of long-term financing instruments and a mismatch in traffic estimates are other major challenges.