The Rs.7 lakh crore programme involving 83,000 km is a five-year mega opportunity for contractors and the support industry.
October 2017 witnessed the largest ever outlay of road construction in India: Bharatmala. The programme involves around 83,000 km - including the first phase of 24,800 km - of national highways development by FY2022. It aims to bridge the critical infrastructure gap through corridor-based development, add to the country's overall GDP by 3 per cent, and unleash massive employment opportunities.
Opportunities for the private sector
Bharatmala programme is a policymaker's dream.
'From the proposed Rs 7 lakh crore project, tremendous work can be done in Maharashtra itself,' observes CP Joshi, Secretary (Roads), PWD, Maharashtra. 'For the private sector, there is an opportunity for work of around Rs 50,000 crore in the state. This will boost the private sector.'
'The programme offers huge opportunities for both large and mid-sized road contractors,' says Shubham Jain, Vice President and Sector Head, Corporate Ratings, ICRA. 'With an estimated average spend of upwards of Rs 1 lakh crore per annum (excluding land cost), order book additions will remain healthy for the next four to five years.'
Jain adds that for the National Highway Development Programme (NHDP), the largest highways project ever undertaken in the country to date, private-sector participation stood at over 40 per cent. 'Against this, the proposed mix of private-sector participation is 20 per cent for Phase-I of Bharatmala; excluding land cost, this could be in the range of 25-30 per cent,' he says.
Higher private-sector participation could have reduced the financial burden on the government.
Some suggestions made by the Kelkar Committee could be implemented for strengthening the PPP framework, such as renegotiation of contracts and rejection of irrational bids, and the share of private-sector participation could be increased, especially given the favourable response to the newly introduced hybrid annuity model (HAM).
That said, Bharatmala is an opportunity for the big names in the construction sector to prove their worth, according to Rajat Gupta, Director, McKinsey & Company. 'After a dull period for four years till 2015, the industry can now revive.'
Significantly, the programme is not just about developing highways but economic corridors and expressways, establishing last-mile connectivity to ports, and developing coastal roads.
As Jagannarayan Padmanabhan, Director and Practice Leader-Transport and Logistics, CRISIL Infrastructure Advisory, points out, 'This throws up a plethora of opportunities for the private sector involved in construction, operations and maintenance; it will also enable technology transfer.'
For his part, Karunakaran Ramchand, Managing Director, IL&FS Transportation Networks, says, 'We consider this a step in the right direction when the sector is at an inflection point. The huge spending from the government should give a fillip to private-sector investments, revive capex cycles and boost economic growth.
We believe this programme is highly beneficial for an established road player like us.'
'With the initial stage of the project involving construction of about 30,000 km, it has given an opportunity to the private-sector to build an extensive network of roads across the country,' says Sudhir Hoshing, Joint Managing Director, IRB Infrastructure Developers. And, in the words of Vinayak K Deshpande, Managing Director, Tata Projects, 'Bharatmala will have a multiplier effect on reviving the economy.
We, in the private sector, are eagerly waiting for bids.'
Critical to the success of Bharatmala is land acquisition along with the grant of other requisite approvals.
In Padmanabhan's views, the three key challenges will be land acquisition, availability of funds, and research and capacity-building across all stakeholders.
'Fragmented land holdings, lack of clear land titles, dependence on local authorities, inadequate land acquisition plan at the time of preparing DPRs and lack of methodology for compensation are the major difficulties faced,' says Jain. 'In about 80 per cent of delayed road projects, the reason for delay is attributable to unavailability of right of way (RoW), which is the responsibility of the awarding authority.'
Another major challenge for Bharatmala (unlike NHDP) is compliance to the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR). This led to increase in compensation by four-times the market value in rural areas and twice the market value in urban areas, steeply increasing acquisition cost to upwards of Rs 2.50 crore per hectare (as against Rs 0.90 crore per hectare in FY2014). Jain adds that the total land requirement for Phase-I of Bharatmala is estimated to be about 70,000-75,000 hectare. Securing such huge parcels by complying with the RFCTLARR Act in its current form will not be easy.
From the contractor's perspective, while the cash conversion cycle for road contracts is relatively shorter compared to other infrastructure sectors, the non-fund based limit requirements are high. 'The total value of government-funded projects under the new programme is estimated to be around Rs 4.70 lakh crore (excluding land cost) over a four-year period, implying peak bank guarantee requirement of around Rs 35,000 crore (average execution period of two years),' says Jain. Therefore, providing necessary collateral security for securing additional non-fund based limits could be a challenge, especially for mid-sized contractors.
Gupta additionally points to tough terrain, anticipation of the weather, change in policies, sudden change in the health of the market and bans as possible hurdles.
'This programme will bring small and bigger market players together, and handling them in one way will be challenging for the government,' he says.
In Joshi's view, one challenge is that no single contractor can take up the complete project. In several cases, the government has curtailed the policy to make it contractor-friendly and bring in more participation from contractors.
Growth prospects for support industry
One thing is clear: Bharatmala will bring in a greater amount of technology. 'There will be a growing demand for construction equipment such as tippers and even tunnelling equipment in the northern states,' says Gupta. 'Also, to increase longevity of the road, cement will be used on a vast scale.'
Undoubtedly, the programme is set to spur growth for the support industry. 'It is expected to push cement demand in the medium term,' avers Jain. 'The total cement requirement for 83,000 km is estimated to be in the range of 100-120 million tonne. And, the value of construction equipment required to support the execution is estimated to be in the range of Rs 35,000 crore to Rs 40,000 crore.'
For his part, Ramchand adds, 'The government is set to spend around Rs 6.92 trillion on roads over the next five years. Naturally, this will boost equipment demand and grow the market size in double digit in these years.' The additional construction of industrial corridors and urban centres will also boost demand for cement and equipment.
In fact, Bharatmala is an excellent opportunity for global majors to enter India as the scale of operations would justify it.
'We could also see domestic engineering companies entering into partnerships and furthering the Make in India initiative,' says Padmanabhan, adding that an ideal platform is being created for technology transfer and significant upskilling of the existing workforce of contractors.
An overall fillip!
The project-based approach adopted in the past (different stretches in different geographies), led to an inconsistent infrastructure development across corridors. However, Bharatmala has adopted corridor-based development, which is more scientific and desirable in the long term as it takes a holistic view of the overall network. The main objective, of course, is to improve connectivity particularly on economic corridors, border areas and far-flung areas to enable quicker movement of cargo and boost exports.
'There is a systematic change in approach with better transparency and tighter pre-bidding due diligence,' says Jain. As per the plan, the awarding authority is required to disclose the status of land acquisition, rehabilitation and resettlement (R&R), shifting of utilities and obtaining environmental clearances, etc, together with likely date of completion of these activities. 'Unlike in the past, wherein projects were awarded without acquiring requisite land, the Bharatmala awarding process is expected to be more transparent with tighter prerequisites; 80 per cent of RoW for BOT projects and 90 per cent for EPC projects will be made available before awarding,' says Jain. All investment proposals are expected to be based on DPRs and cost estimates are based on the price level not earlier than six months from the date of consideration of the proposal by the authority. Proposals should give separate details of costs of four or six-laning, ROBs and major bridges along with comparative costs of the latest approved or awarded projects on a like-to-like basis.
This is an excellent opportunity for good regional players to assume centre stage and augment supply. As Padmanabhan puts it, 'The role of the private sector would have to change from contractor to that of a partner and be actively involved with NHAI for the development of this sector. Technology adoption, process re-engineering and adopting innovative financing mechanisms will be the cornerstone of success of the programme.'
In terms of employment, Ramchand shares, 'The project is anticipated to create nearly 100 million man days of jobs during road construction; in terms of increased economic activity across the country, analysts predicts close to 22 million jobs.' With regard to financing, he adds, 'It is likely to be funded through a mix of gross budgetary support or proceeds from the Central Road Fund (CRF) of Rs 3 trillion, Rs 800 billion funds from expected monetisation through the toll-auction-transfer (ToT) route/toll collections done by NHAI, Rs 2.1 trillion market borrowings and Rs 1.06 trillion private investment. As per current budgetary allocations, we believe these funding goals are achievable.'
Tata Projects is building the Dedicated Freight Corridor - part of this should be operational in 2018/19 - which will eventually be linked with Bharatmala.
'The programme is set to give a boost to 'manufacturing' as well,' observes Deshpande. 'It will reduce transport time, further saving on working capital.'
'This programme will connect the whole of India together,' predicts Indrajit Banerjee, Joint General Manager (Co-ordination), Afcons. 'People who are not connected will get connected, and the development of roads will bring in a lot of employment and development in surrounding areas.'
'The private sector will carry out most of the construction activity and contractors are eagerly waiting for the projects to start,' says Hoshing. 'The lull is finally coming to an end, and this is the right time for these projects to be auctioned.'
Indeed, Bharatmala is not just about connecting roads, but connecting the entire country.
A true transformation and we are off to a great start!
Feasible funding plan
Funding for Phase-I of Bharatmala at Rs 5.35 lakh crore has been planned through the Central Road Fund, market borrowing, monetisation of highway projects, budgetary allocation, etc.
'As of now, the projects are feasible,' says Indranil Pan, Chief Economist, IDFC Bank. 'However, the one thing we all are missing out on is the fiscal deficit. Building a nation requires a tremendous amount of capital and you cannot just shy away from the large sum involved. Currently, I see that a large number of projects are being undertaken by the government. These cannot and will not have a single private partner. Government involvement is necessary for projects of this magnitude.' He goes on to add that the biggest challenge for the project is the critical aspect of execution. 'The first rupee has to come from the government. Once this is the case, we as lenders are there to back the government's ambition.'
Anil Taneja, CEO, IIFCL Asset Management Company, sees a lot of investments coming up along the Bharatmala programme. 'With enough budgetary support coming from the government, bringing money into such projects is not difficult. Among the current government initiatives, the Pradhan Mantri Gram Sadak Yojana was initiated to have good roads in rural areas. We now have HAM projects, for which around 40 per cent of funding comes from the Centre. Such aids boost the infrastructure sector.'
Development of Multimodal Logistics Parks
Twenty-four logistics parks identified on national corridors will cater to key production and consumption centers accounting for 45 per cent of India's road freight.
Projects awarded and execution
Under Bharatmala, the ministry plans to complete 83,000 km within five years.
'This includes 25,000 km of regional work, 10,000 km of the National Highway Development Programme, and 48,000 km of other work,' shares Nagendra Nath Sinha, Managing Director, National Highways and Infrastructure Development Corporation (NHIDCL). 'To complete the programme within five years, we need to achieve about 17,000 km per year, which is about 50 km per day. This is substantial compared to what the nation has been giving to date. That said, the use of technology will be grand in this programme.' He adds that the target for NHIDCL this year is 1,300 km. 'For NHIDCL, considering the terrain we work in, EPC is the most preferred mode of implementation.'
RK Pandey, Member-Projects, National Highways Authority of India (NHAI), says, 'NHAI has awarded 1,503 km this year, of which about 1,400 km has been constructed.' He further adds that of the total awarded projects, about 1,300 km falls under the Bharatmala plan. 'Most projects will be implemented under HAM. As per the NHAI financial plan, not more than 30 per cent of projects should be awarded under the EPC mode; the remaining 70 per cent should be awarded under HAM or BOT.' And, according to Karunakaran Ramchand, Managing Director, IL&FS Transportation Networks, 'The initial projects are more likely to be inclined towards EPC, where 100 per cent funding will be provided by the Indian government. Gradually, projects are likely to be awarded in the HAM and BOT modes.'