After a slew of reforms, the roads and highways sector is gradually stepping it up again.
Up until a year ago, progress in road construction had become exceedingly sluggish. Some developers were struggling to complete BOT projects. Finance was hard to come by, as were environmental and policy clearances. Private interest in new projects had sunk to an all-time low. To turn matters around, the government unveiled a slew of favourable policy measures.
Policy enhancements, speedy execution
A new hybrid annuity model (HAM) for the development of highways is financially easier on developers in comparison to BOT projects, and on the government in comparison to the EPC model. In this, the government and developer will share the project cost in the ratio of 40:60. Concessionaires will design, build, operate and maintain roads, and transfer projects at the end of 15 years. Concessionaires will receive financial support in the form of bi-annual payments. The National Highways Authority of India (NHAI) will collect toll and refund the amount in 20 equal instalments to the developer over a period of 10 years.
Other reforms include a new exit clause, a more pointed and resolute effort at acquiring land, increasing the threshold limit for appraising projects, instituting compensation to concessionaires for PPP project delays beyond their control, infusing equity in stalled projects, and extending the period of concession for some BOT (toll) projects.
¨Measures taken in FY15 to kick-start the implementation of road projects have especially been strong for EPC projects; now projects worth over Rs 50 crore will be implemented on the EPC model,¨ notes Arun Karambelkar, President and CEO, HCC E&C. He lists a few other initiatives: ¨Projects within 100 km of international borders have been exempted from environmental clearances; 80 per cent of required land will be acquired before the project is awarded; the National Highways & Infrastructure Development Corporation has been formed to fast-track road project execution in northeast states and in areas close to international borders; budgetary allocation to the road sector is up, as is the cess on petrol and diesel and borrowing by the NHAI to cover the capex on EPC road projects. Segregation of civil construction cost from total project cost is majorly helpful because spiralling land costs are increasing the total cost of many projects beyond Rs 1,000 crore, subjecting them to a longer approval process.¨
The prompt implementation of these initiatives is showing encouraging early returns. As examples, the 100 per cent exit clause approved for BOT projects has been applied in the Ulundurpet-Padalur project, and divestment of equity has been approved for several others.
Harmonious substitution has happened for stretches such as Solapur-Maharashtra/Karnataka border and Vijayawada-Gundogolanu to bring in developers in a better position to complete these projects. Weekly reviews for resolving issues impeding progress has helped stalled projects such as the Gurgaon-Jaipur, Panipat-Jalandhar and Delhi-Haridwar stretches take off.
¨At least about 35 projects had some significant problem or the other. We have been able to lend a helping hand so that about 20 of these projects have restarted,¨ says Raghav Chandra, Chairman, NHAI.
Private investment on an upswing
Private investment in highways is up this year. Spending by the NHAI is about 30 per cent more than last year.
¨We expect to have recruited about 400 new managers at various levels by the end of March 2016,¨ shares Chandra.¨We also plan to award about 6,000 km next year.¨
Equipment vendors are taking fresh orders
¨Demand has increased by 25 per cent with the award of over 5,000 km of EPC projects instead of the usual BOT projects. Now we´re waiting to see how tenders for the hybrid project model to be awarded between December 2015 and March 2016 will impact demand,¨ says Ramesh Palagiri, Managing Director & CEO, Wirtgen India Pvt Ltd. ¨Enquiries are coming in for equipment for both concrete and asphalt roads.¨ ¨Demand for road construction equipment has seen a surge in the past 12 months riding on renewed optimism and the pace of growth, with 8,000 km of highways having been awarded this year,¨ says Shalabh Chaturvedi, Head-Marketing, Case India.
Vibratory compactors and motor graders have especially shown growth, which has enabled Case India to consolidate its position in this segment.
At Case India, most enquiries so far have been for national highway and expressway projects.
¨We´ve seen a significant upturn in enquiries for road projects. We expect that to translate to increased sales of road equipment in 2016,¨ says Dimitrov Krishnan, Vice President and Head, Volvo CE, India.
Good tidings for 2016
Targeting the construction of 30 km of roads a day, to be achieved in two years, against the current 16 km has infused fresh optimism in the sector.
¨We are hopeful that public-private partnership projects worth Rs 50,000 crore to be awarded in 2016-17 will generate demand for road compaction equipment,¨ says Vipin Sondhi, Managing Director & CEO, JCB India Ltd.
¨We believe the growth story of the Indian infrastructure sector is intact. In the immediate future, 2,000 km of projects are on the anvil,¨ opines Chaturvedi. Another recent policy change that may boost developers´ interest in projects is the easing of foreign investment norms for the construction sector - it means companies can sell equity to investors at different phases of a project.
¨India is one of the most promising emerging economies in the current global scenario, so, easing foreign investment norms should go down well with investors to India´s advantage, given that the country needs a staggering Rs 31 lakh crore ($465 billion) for infrastructure development over the next five years; 70 per cent for power, roads and urban infrastructure,¨ observes Karambelkar. However, impediments in the domestic infrastructure industry that enhance the risk associated with greenfield construction projects could play spoilsport. Unless these are resolved, foreign funds will invest only in completed projects with a set IRR, he adds.
Easing investment norms is likely to see better outcomes after the government has taken up the issues of express mechanism to resolve disputes and termination payments, as that will remove major obstacle of investors´ sense of security about investments, according to Sanjay Londhe, Director, Ashoka Buildcon Ltd.
A few companies with heavy debts are already trying to avail of this facility to dilute or sell their stake in their BOT projects, according to Palagiri. ¨If they are successful, we may see some demand for equipment for stalled projects.¨
Positive impact of foreign funds
Why would overseas funds bode well for the road sector overall?
¨Funds from overseas investors would be cheaper than local funds,¨ says Londhe. ¨Also, overseas investors will bring a more disciplined work culture, heightened safety and environmental consciousness to the field.¨
¨Overseas funds may usher in productivity and efficiency in all levels of operations, and accordingly impact equipment selection,¨ says Krishnan. ¨Making it easier for investors to buy into Indian road projects should ensure that they have a higher chance of staying on schedule and becoming operational at the right time.¨ He believes beneficiaries of these new investment norms will most likely be ¨forward-thinking contractors who position themselves as industry leaders in this new era of increased development¨.
¨Contractors are likely to be more confident about participating in road sector projects,¨ reflects Sondhi. ¨Earlier, contractors facing financial difficulties had no choice but to leave projects.¨
Chaturvedi expects this opening up to bring liquidity into an otherwise cash-starved sector, based on the past few years as well as global management expertise. ¨Investing in the Indian infrastructure sector will make financial sense to a lot of foreign funds from low interest economies,¨ he says.
Improving service levels India is home to some of the most sophisticated equipment buyers in the world, according to Krishnan. ¨So as manufacturers,¨ he says, ¨we have to be sure we´re offering the best deals, otherwise customers will look elsewhere.¨
¨Let aside the purchase price and the service package, operational factors such as fuel efficiency, anticipated maintenance costs, productivity per kilometer, etc, have a strong bearing on contractors´ ability to maximise their profit and figure in our pre-purchase negotiations,¨ adds Krishnan. With action hotting up in the sector, vendors are ramping up their service levels.
Case India has recently launched the 1107DX soil compactor manufactured in India, and advanced motor graders from the CASE Construction manufacturing hub in Brazil. ¨We have expanded our service capability in the Indian market to include over 250 touch points across the country,¨ says Chaturvedi.
JCB offers after-sales support through 60 dealers and 600 outlets, with outlets positioned close to customers´ project sites to ensure that customers receive the best service at all times. Extended warranty on various major components such as the engine hydraulics, axle, etc, can be had at an extra nominal cost.
¨We offer our customers buyback schemes for old machines, both annual as well as full maintenance contracts, and strong application support,¨ says Palagiri.
Annual maintenance contracts include periodic servicing at the site of deployment with the customer footing the cost of spare parts needing replacement. Full maintenance contracts cover the cost of the service as well as spares. Customers have only to buy the machine; the company conducts regular inspections depending on its age.
Miles to go
Recent policy changes are a clear sign that NHAI or MoRTH is heading the right way. But some fine tuning remains, according to Londhe.
¨Land acquisition is still a hurdle, in the sense that the NHAI may consider certain land to have been acquired, and hence available, but things on the ground are otherwise,¨ he explains. ¨Land encroachers may exist or those who lost land may not be satisfied with the compensation received. Work cannot start until these issues or obstructions are addressed, simply because the previous occupants will not vacate the land. It would be useful for a special nodal officer to be entrusted with, and made accountable to sort out these issues.¨
Ashoka Buildcon has experienced land acquisition delays for its Delhi Eastern Peripheral Expressway project and others.
¨In future, we could also face delay in payments towards EPC projects, unless bureaucrats are made accountable for meeting project milestones and payment schedules,¨ adds Londhe.
Deadlines for all stakeholders would be good news indeed.