Trends and Outlook

The past year has been a significant one for the road sector. The gradual shift from focusing only on project award to initiating measures for faster project turnaround was quite noticeable. The Ministry of Road Transport and Highways (MoRTH) has left hardly any stone unturned to facilitate active stakeholder participation. Project-related activity has been on the rise following the government’s push for innovative implementation models. Earlier reservations about the viability of the hybrid annuity model (HAM) have started to reduce. While the construction rate is not in line with the MoRTH’s target, the pace has certainly improved. In the future, the sector will continue to offer new and innovative opportunities under the National Highways Development Programme (NHDP), big-ticket programmes like the Bharatmala and the toll-operate-transfer (TOT) model to stakeholders across the board.

Key trends

• Fund flow to the road sector has risen continuously over the past few years. The central government allocated funds amounting to Rs 649 billion to the MoRTH for the road sector under Union Budget 2017-18. The allocation has gone up from the revised estimate of Rs 524.47 billion during 2016-17.
• The pace of award of national highway projects has picked up. Overall, the MoRTH awarded a record length of about 16,271 km during 2016-17 in contrast to a length of 10,000 km awarded in 2015-16.
• During 2015-16, the National Highways Authority of India (NHAI) achieved about 85 per cent of its project award target, as against realisation of 50 per cent of the target in 2014-15. Meanwhile, the year 2016-17 witnessed the award of 77 projects spanning about 4,300 km that were valued at over Rs 600 billion. However, with this, NHAI achieved a mere 29 per cent of the targeted project award of 15,000 km for the year, reflective of a huge lag.
• With respect to the mode of implementation, the engineering, procurement and construction (EPC) model was the dominant mode in 2015-16 with 80 per cent of the projects being awarded by NHAI under this mode. HAM was next, with the award of nine projects, accounting for 12 per cent of the total project award and, finally, six projects (8 per cent of the total) were awarded on a build-operate-transfer (BOT) basis. Notably, in 2016-17, the HAM mode of project implementation saw a jump, scooping up 44 per cent of the total projects awarded (34 projects), while the EPC and BOT modes saw a decline at 51 per cent and 5 per cent respectively.
• Construction has picked up pace as well, with the MoRTH recording an average construction rate of about 22 km per day in 2016-17 up from 18 km per day during 2015-16. About 8,200 km of road length was completed during 2016-17 as against 6,000 km during 2015-16. NHAI met about 30 per cent of its construction target of 8,000 km.
• There is an increasing focus on road construction in the north-eastern region. National Highways and Infrastructure Development Corporation Limited is currently involved in the implementation of 220 projects covering about 9,000 km of road length.
• Road development at the state level gained momentum with the commissioning of major projects such as the Agra-Lucknow expressway in Uttar Pradesh, the Chenani-Nashri tunnel in Jammu & Kashmir, and the Dhola-Sadiya bridge in Assam.
• Project financing in the state road segment continues to depend on budgetary resources and multilateral funding. In the past 12-15 months, the World Bank approved the Tamil Nadu Road Sector Project II and the Asian Development Bank approved the Kachi Dargah-Bidupur bridge project in Bihar, a multi-tranche financing facility for Tranches I and II under the Rajasthan State Highway Investment Programme and the Madhya Pradesh District Roads II Sector Project (MPDRIISP). The New Development Bank also granted a loan of Rs 23.95 billion for the MPDRIISP. The Japan International Cooperation Agency sanctioned a loan worth JPY 144.79 billion for the Mumbai Trans Harbour Link (MTHL) project and Rs 40 billion for Phase I of the North-East Road Network Connectivity Improvement Project. In a notable development, the Asian Infrastructure Investment Bank approved its first equity investment of $150 million to the India Infrastructure Fund to support infrastructure projects in India, including roads.
• Financial closures, especially for HAM-based projects, have picked up. As per India Infrastructure Research, of the 16 road projects that achieved financial closure between May 2014 and July 2017, about 60 per cent are being implemented under HAM.
• The mergers and acquisitions market has seen heightened activity by both domestic and foreign investors. This has provided the much-needed push to ailing developers and facilitated the deleveraging of stressed balance sheets. Since 2016, about 15 such deals have been inked by players such as GMR Infrastructure Limited, HCC Limited, Sadbhav Infrastructure Project Limited, and PNC Infratech Limited.
• The number of corporate debt restructuring cases is also on the rise. During the past year, IL&FS Transportation Networks Limited’s (ITNL) subsidiary, Jharkhand Road Projects Implementation Company Limited, refinanced its debt of Rs 17.3 billion that was availed of for the implementation of five road projects in Jharkhand. Hazaribagh Ranchi Expressway Limited, a special purpose vehicle incorporated by ITNL and Punj Lloyd Limited, has refinanced its debt raised for the implementation of the Hazaribagh-Ranchi four-laning highway project (National Highway-33). Moradabad Bareilly Expressway Limited, another ITNL subsidiary, has refinanced its debt raised for the implementation of the Moradabad-Bareilly four-laning highway project. Meanwhile, companies such as Sadbhav Infrastructure and ITNL are looking to refinance their road projects. Recently, Supreme Infrastructure received the nod to restructure its Rs 24.1 billion debt raised from a State Bank of India-led consortium under the Scheme for Sustainable Structuring of Stressed Assets.
• While a number of road sector players unveiled plans to hit the equity route to raise funds, on the ground initial public offerings (IPOs) were reported only by a few. Since 2015, five key IPOs have been launched. The most recent ones include those by Dilip Buildcon and the IRB InvIT Fund, while PNC Infratech, MEP Infrastructure and Sadbhav Infrastructure had successfully launched their IPOs earlier. While IPO activity has been subdued in terms of numbers, these IPOs have generated significant investor interest as most of them were oversubscribed indicating an improved investor sentiment.
• The bond market witnessed the launch of the ministry’s first-ever masala bond issuance. The Rs 30 billion issue which was listed on the London Stock Exchange attracted an overwhelming response from investors from across the globe with Asia contributing 60 per cent of the subscription and the balance 40 per cent coming from Europe. Besides, NHAI garnered a sum of Rs 5.02 billion through the issuance of debt securities on the electronic book mechanism platform of the Bombay Stock Exchange. The issue was oversubscribed by over 10 times.

Outlook

• The sector is on a gradual path towards revival. Long-term and innovative funding avenues are emerging in the market. IRB Infastructure Developers and MEP Infrastructure Developers have launched infrastructure investment trusts. ITNL and Reliance Infrastructure also plan to list their assets under the instrument.
• In line with its plan to tap long-term funds from the Life Insurance Corporation of India, NHAI raised Rs 85 billion for 30 years at an interest rate of 7.22 per cent per annum.
• The first round of bidding for toll-operate-transfer projects is to be held shortly. Initially, 75 publicly funded national highway projects with an aggregate length of 4,500 km and an annual toll revenue collection of around Rs 27 billion have been identified under the model. Preparatory activities including the finalisation of the model concession agreement and tender documents have been completed.
• Technology continues to be a key focus area of the MoRTH and NHAI. FASTag is now active at more than 360 toll plazas across the country. The Indian Bridge Management System has been launched to ensure efficient upkeep of the country’s bridge infrastructure.
• Online platforms like e-Pace and INFRACON, and the recently launched INAM Pro+ have eased operations. 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. In this regard, in March 2017, the cabinet approved changes to the Motor Vehicles (Amendment) Bill, 2016.
• The ministry has set a completion target of 15,000 km during 2017-18. During April-June 2017, the construction of about 2,300 km of national highways was completed, increasing the rate of construction to about 25 km per day. The MoRTH plans to further scale this up to 40 km per day.
• Significant opportunities will be offered to contractors, and equipment and material providers through programmes like Bharatmala and Setu Bharatam. Providing a major fillip to its expressway development agenda, the NHAI has floated tenders for the appointment of contractors for the Mumbai-Vadodara expressway and consultancy bids for the Delhi-Amritsar-Katra (for the feasibility study) and the Delhi-Yamunanagar expressways (detailed project report preparation). Meanwhile, the central government is also laying emphasis on multimodal transport and is in the process of launching the Multi-Modal Logistics and Transport Policy.

The overall outlook for the sector is optimistic. As per the MoRTH, what remains to be dealt with is the bureaucratic logjam. While the issues have largely been dealt with, private players need to now make the most of the opportunity put forth by the government. The public-private partnership model is here to stay; however, its uptake will be at a pace much slower than seen in the mid-2000s. 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 a more balanced risk allocation.