Bumpy Road to Recovery
ROADS & HIGHWAYS

Bumpy Road to Recovery

While the roads sector waits for the impact of new government initiatives to kick in, it continues to be plagued by unreasonable targets, delays in project execution, cost overruns and lack of funding. What will it take to get the sector back on track?

With the change of power at the Centre, the roads sector was expected to get back on the move with fast-track approvals, delink of forest and environment clearances, increased limits on sand mining, positive movement on land acquisition, online filing for clearances to construct rail over-bridges (ROB) and under-bridges (RUB), and change in bidding from BOT to EPC. However, while we wait for the impact of these changes to become evident, the sector continues to battle its demons.

Tall targets
For starters, the targets set for tenders to be awarded and project construction often seem a tad ambitious. Vijay Chhibber, Secretary, Ministry of Road Transport & Highways, shares an update: ´The target to award projects for 2014-15 was 8,500 km of which 5,385 km has been achieved as of January 2015. Further, the target for construction of projects for 2014-15 has been 6,300 km, of which 3,038 km has been achieved as of January 2015.´ While expressing his confidence at the Ministry´s ability to achieve the award targets, he concedes, ´There may be a marginal shortfall in the target for construction, which we hope to make good in the next financial year.´

For its part, the National Highways Authority of India (NHAI) is confident of meeting its target of 5,500 km this fiscal. As a senior official from NHAI informs CW, 18 projects totalling 1,813 km have been awarded (see list of ´Projects awarded from April 2014 to January 2015´ on page 50.), awards for another five projects of 539 km will be made shortly (bids have been received), and bids for another 37 projects for a total 2,607 km have been invited (expected to come within a month or two). What´s more, the government has set a daily road construction target of 25 km a day - around 7,000-7,500 km a year - until 2016, and 30 km a day thereafter.

The industry´s reaction is telling. ´There is no clear inkling of how the calculation is done,´ says Paresh Mehta, CFO, Ashoka Buildcon. ´As of now, it is not happening because I do not see projects in such large numbers bid out.´ Similarly, Sudhir Hoshing, CEO-Roads, Reliance Infrastructure Ltd, believes this target is a stretch. Also, the NHAI source confirms that NHAI targets are different as these are fixed in consultation with the Ministry and Central Government planning commission. The only thing, then, that is clear is the backlog of pending projects (see list of ´Delayed projects - Rs 1,000 crore and above´ on page 45.) The scenario requires a closer look.

From BOT to EPC
It is evident that interest in BOT (Build-Operate-Transfer) projects has been poor. Eight of the 12 projects put out for bids during the April-September 2014 period reportedly did not receive any.

On the contrary, about 60 per cent of the project tenders in this fiscal have been through the EPC mode. (see ´pie chart´ and ´list of EPC Bids-2015´ on page 48). Interestingly, in less than 20 years, India became the single largest PPP market in the world - private participation in PPP has increased from 20 per cent in the Tenth Five-Year Plan to 37 per cent in the Eleventh Plan. However, in recent times, the shift to EPC has been apparent.

Consider this. Of NHAI´s set target for 2014-15, it aimed to award 2,000 km through the BOT mode and 3,500 km through the EPC mode. However, Rahul Prithiani, Director, CRISIL Research, CRISIL Ltd, reveals, ´Between April and December 2014, about 1,815 km has been awarded, of which 14 projects with an aggregate length of 1,300 km were awarded on EPC basis (with an average of about five bidders) and three projects with an aggregate length of 515 km were awarded on BOT basis (all on grant).´ According to the recent financing plan for NHAI, Chhibber adds, ´Around 13,500 km of EPC projects shall be taken up over 2014-15 and 2015-16.´

´EPC projects would attract higher player interest, as they require limited upfront capital compared to BOT projects.´ believes Prithiani. And Manish Aggarwal, Partner-Corporate Finance, Infrastructure & Government Services and Head Energy Natural Resources, KPMG in India, adds, ´Faster execution, low investment requirements and quicker turnaround time for EPC projects have been the key drivers behind this. On the flip side, this is leading to increasing competition as well.´ Although the focus is on EPC, Aggarwal is positive that in the long term, PPP projects would need to make a comeback for the development of the sector on a sustainable basis.

What went wrong with BOT?
That said, for two consecutive years, weak private-sector participation in BOT road projects has resulted in subdued project award activity. The decline in projects awarded during FY13 and FY14 (aggregating to 2,223 km) was steep compared to FY12 (6,419 km). What went wrong with a sector that witnessed aggressive participation from private players till FY12? M Murali, Director-General, National Highways Builders Federation (NHBF), answers, ´The sector has been facing difficulty in attracting private-sector participants and achieving financial closure, reflecting the reduced risk appetite of developers and the banking sector.´ This is the sector that became unduly exuberant between 2005 and 2010 owing to high economic growth.

The consequence of this euphoria was aggressive pitching by players with highly unworkable bids. This led to delays in implementation and consequent time and cost overruns, steep increase in input costs and decline in traffic revenues owing to the economic slowdown - all this snowballed into a crisis and the failure of several BOT projects in the recent past. BOT contractor Yogesh Kumar Jain, Managing Director, PNC Infratech Ltd, lists the challenges faced today:´Ambitious timelines by project sponsors for implementation overlooking ground realities, prolonged delay in land acquisition, environment and forest clearances, approvals for RoBs and RUBs, and shifting of utilities, apart from lack of preparedness and adequate planning before award and execution.´

Many regional players have expertise in EPC but shy away from BOT projects as they are not in a position to block their investment for 20-30 years and face traffic risk, believes Hoshing. ´These regional players benefit from EPC projects under Rs 500 crore where they can earn good returns owing to regional presence,´ he observes. A considerable benefit an EPC project offers over a BOT project is that it solves the issue of financial stress to the developer. ´However,´ Hoshing adds, ´the issue of land acquisition and availability of regulatory approvals still remains and has a substantial bearing on the construction cost of the project.´

An additional challenge is the government´s ability to bring projects on board for bidding, which is happening at a slow pace at present.

Amid this, whether DBFOT or EPC, challenges remain the same.

Anil Kumar Singh, Managing Director, APCO Infratech Pvt Ltd, lists these: ´Availability of ROW, support of local government or administration authorities, availability of basic raw materials (earth and stone) and availability of long term financing at reasonable cost are still not addressed in a comprehensive manner or under single window.´ Land acquisition is also crucial for both EPC and BOT projects. B Seenaiah, Managing Director, BSCPL Infrastructure Ltd, emphasises on the need for at least 80 per cent of the land to be in place while a project is awarded. ´Shifting of utilities, tree fittings and land acquisition have to be completed before the project is handed over, which is not the case,´ he rues. In fact, CW has learnt from sources that, in several instances, not even 20 per cent of the land is in place when the project is awarded.

While Ashoka Buildcon has bagged a few state projects, EPC contracts worth about Rs 300 crore, and BOT contracts from the Karnataka Government, it has not bagged any NHAI contracts in FY13-14 and FY14-15. ´We bid for a couple of them but did not find them financially viable,´ says Mehta. Reliance Infrastructure has also not bagged any NHAI projects this year. While Hoshing expects some bidding to happen towards the end of this fiscal, he says, ´As a BOT developer, FY13-14 witnessed hardly any good projects for bid by NHAI. In fact several projects saw no bidders. We are now poised to win new projects but only at the right price.´ On the flip side, Devendra Jain, Director, Dilip Buildcon, says, ´We have bagged projects worth Rs 6,000 this year from NHAI and MoRTH. But despite receiving clearances, we started late.´ He owes this to what he describes as the biggest challenge - the ban imposed by Supreme Court on mining.

Funding issues
Cost overruns owing to delays, aggressive bidding, leveraged balance sheets and slowdown in traffic growth has had a severe impact on the execution of BOT projects. ´The funding challenges of NHAI are unlikely to be significant owing to increased revenue share from BOT projects awarded in the past and continued support from the government in the form of cess on fuel,´ says Prithiani.

However, past experience suggests that the moment a project gets delayed, all the cash flow gets disturbed and lenders face the risk of non-servicing of interest, non-payment of principal, and an asset turning into a non-performing asset. In such a scenario, banks had become overly cautious. Mukund Sapre, CEO, IL&FS and Executive Director, IL&FS Transportation Networks Ltd, explains: ´Termination of projects had become a reality and banks were not getting fully covered for the amount that they had lent to the concessionaire owing to a disconnect in the NHAI's definition of project cost (which is the basis of termination payments) and the concessionaire's project cost on which financial closure is achieved.´

Nevertheless, Sapre believes banks and financial institutions will be more comfortable lending to infrastructure projects compared to a year ago, given recent proposals by the government to address their concerns on the infrastructure sector. To this, Hoshing adds, ´The government is working on measures like the new model concession agreement to address the needs of the sector and ease of financing. Success of new bids will depend on availability of funds and effectiveness of new policy measures.´ Moreover, as majority of the projects targeted to be awarded are on the EPC mode, there is a budget constraint to fund them; thus, the government plans to securitise some of its toll projects under OMT mode to fund EPC projects.

There may also be higher budgetary allocation for these projects. Highlighting a big opportunity for lenders, Chhibber says, ´According to the recent financing plan for NHAI, to implement the balance 20,000 km of the NHDP project (comprising around 13,500 km of EPC projects and 6,500 km of PPP projects) both PPP and public-funded EPC projects, an estimated Rs 180,000 crore of market borrowings would be required from 2014-15 to 2018-19 in addition to existing sources like budgetary allocations, cess and toll collections.´

Exit guidelines for developers

All considered, the roads sector has been among the few to have tackled the issues that have come its way. Given there is paucity of capital in the market, if concessionaires are permitted to exit projects and sell out 100 per cent, there would be many potential buyers. The present exit policy for the road sector is as below:

  • Projects awarded pre-2009: Maximum allowable exit 74 per cent of total equity held by concessionaire.
  • Projects awarded after 2009: 100 per cent equity sale allowed two years after completion of commercial operation.

As Mehta avers, ´At present, there are no significant new guidelines, except in the case of stressed projects, where concessionaires can be replaced provided the lenders come into the picture.´

The silver lining
There is some good news to report. Of the 16 projects awarded in 2013-14, work had already begun on 12 - or 75 per cent - of them by November 2014 (see status on the 16 projects on page 46).
´That is a big difference considering that for projects awarded in 2011-12 and 2012-13, work had begun only on 10 per cent and 18 per cent of them, respectively, at a similar juncture in previous years,´ says Prithiani. Hence, despite all the challenges, execution is clearly expected to pick up from FY16.

Another cause for cheer is the 10,000 km of highway projects - to be awarded in the next three years - that the government has identified for development by the National Highways and Infrastructure Development Corporation Ltd (NHIDCL) with special focus on the North and East. Of this, 3,586 km projects are to be constructed in the first tranche. Vijay Chhibber, also Chairman, NHIDCL, states, ´Out of the 3,586 km, around 1,000 km is expected to be awarded by March 2015 and the balance 2,500 km during 2015-16.´ These projects would mostly be implemented through the EPC mode. While Chhibber specifies that additional costs may be involved on project-specific basis, he list the many challenges: ´Land acquisition; lack of institutional capacity in local governments; rough terrain; difficulty in procurement of construction material; less effective construction time owing to prevailing weather conditions.´ As for the development cost, BB Lal, Additional Director-General, Border Roads Organisation, reveals, ´While we spend around Rs 3 crore to Rs 5 crore per km, excluding the bridge, NHIDCL has projected a cost of Rs 7 crore to Rs 8 crore per km.´ (Read full interview on page 51) And Aggarwal informs us, ´NHIDCL has also received encouragement through funding from ADB, World Bank and JICA.´

Apart from this, the Government has also initiated the National Highways Inter-Connectivity Improvement Project, which is expected to take up the double-laning of single-lane highways in eight states - Bihar, Himachal Pradesh, Odisha, Uttarakhand, Karnataka, Rajasthan, West Bengal and Andaman & Nicobar Islands - in the next three years. For this project too, World Bank has approved a contribution towards 80 per cent of the required funding, with the government putting in the rest. Such projects will go a long way to boost overall activity and interest in the sector as a whole.

Workable solutions
Indeed, all eyes are on the sector to stage a recovery. While, realistically, issues like land acquisition, clearances and the financial situation of private developers will take time to resolve, in the interim, basic corrective measures must be adopted by decision makers. The government has targeted several of the key issues through its proposal to set up a roads regulator, delinking forest and environmental clearance, and new RBI norms for financing of infrastructure projects. Further, CW proposes that an initiative to monitor awarded projects could be beneficial in job completion as well as understanding and addressing problems faced during execution well in time. In addition, here are some industry recommendations for challenges facing the sector:

  • Projects are allocated on the basis of the ´lowest´ price bid irrespective of complex technicalities. Project allocation is just an initiative or initial step; as the major stakeholder, the government needs to provide holistic support to the industry for sustainable or consistent growth.
  • A comprehensive situation or risk analysis needs to be done at ground level. One requires an extremely focused and practical approach towards the sector.
  • While allocating a project either on EPC or BOT basis, the government should address basic issues like availability of raw material. This will help ensure availability of the material at optimum price and reduce problems like illegal mining along with related law-and-order concerns.
  • Given land acquisition issues and delays owing to required approvals, there needs to be an alignment of interest between NHAI and other government entities like the Railways, state PWD, local bodies, MoEF, etc, for faster approvals and execution of works. The establishment of a joint committee with representatives from all these concerned ministries would be a fruitful step in this regard.
  • The government needs to critically examine and conduct rigorous due diligence before bidding out any project to ensure it makes good investment sense.
  • The government needs to procure land and all statutory clearances right at the outset or at least before the appointed date to avoid undue delays and cost escalation.
  • Financial closure for any project must be the joint responsibility of the private investor and the government.
  • The government should provide comfort to lenders.
  • It is difficult for infrastructure players to keep expanding their portfolio. Once existing projects are operational and stabilised, they need to be bought out by O&M specialized agencies backed by financial investors. Release of equity is important for infra balance sheets, which are stretched today. This will make room for players to focus on new projects.
  • Arbitration is still ongoing for many completed projects for disputes during the construction period. In fact in some EPC cases, money has not yet been disbursed even after awards. The release of these funds will help build confidence among players and ease liquidity pressure.

Such measures could go a long way in setting things back on track. As Aggarwal says, ´The roads sector presents a sizeable opportunity over the next four to five years, with over 30,000 km of roads to be constructed and over 25,000 km of NHDP road projects to be awarded.

This translates to new projects worth over $45 billion from NHDP alone.´ Add to this the government´s initiatives, state highway developments and new highway improvement projects and the sector´s growth story could well be on its next chapter - a smooth, speedy route to a happy ending.

IS 30 KM PER DAY ACHIEVABLE?
- Nitin Gadkari, Minister, Ministry of Road Transport & Highways (MoRTH)?, GoI, shares the targets set for the road sector exclusively with CW. ´Before I took charge as Minister for MoRTH in May 2014, the earlier government achieved only 2 km per day. From then till date, there has been progress and we have been able to achieve 15 km per day. That said, in the next two years, I am confident that we will reach our target of 30 km per day. This is in background of the fact that we have set a target of releasing projects worth Rs 5 lakh crore in the next five years. In that direction, in the last nine months, the ministry has already sanctioned road projects worth Rs 1 lakh crore.

Also, in terms of acquiring land, the Land Acquisition Bill is with the Lok Sabha. If the Bill is passed by both houses - including Rajya Sabha - in its current form, the project cost is likely to increase and this increase in cost will have to be considered by the government as well in future bidding.´

´At present, we have 18 ongoing projects in the East and West.´
- BB Lal, Additional Director-General, BRO
The Border Roads Organisation (BRO) serves the border areas of India by maintaining its roads. It develops and maintains operational road infrastructure and contributes to the socioeconomic development of the border states. BB Lal, Additional Director-General, BRO, shares more on projects and challenges in conversation with Shriyal Sethumadhavan.

Please introduce us to your upcoming projects.
Since 1960, BRO has developed about 50,000 km of roads in the border area. In India, at present, we have 18 projects in the East and West. Projects in the East include Pushpak in Mizoram; Sewak in Nagaland; Setuk in Tripura and Manipur; Vartak, Udayak, Arunak and Brahmank in Arunachal Pradesh; Swastik in Sikkim; and Dantak in Bhutan. Projects in the West include Shivalik and Hirak in Uttaranchal; Deepak and Rohtang Tunnel in Himachal Pradesh; Sampark, Beacon, Himank and Hirak in Jammu & Kashmir; and Chetak in Rajasthan. In some areas of strategic importance, we are also developing MoRTH roads.

What is your equipment requirement?
We have an equipment plant worth Rs 1,800 crore in our inventory. We commonly require dozers, excavators, motor graders and road rollers along with paver finishers, hot-mix plants, etc.

The National Highways and Infrastructure Development Corporation Ltd (NHIDCL) has been established to construct highways in the Northeast´
NHIDCL is working on a contract mode, where the contractor is paid as per the predetermined rate. However, in the departmental mode that BRO follows, the Government is committed to give the final amount invested in the project.

What are the challenges you face in the Northeast?
The working season is less owing to the rains. Further, the repair cover for equipment is not available beyond Guwahati. Also, the location is remote, and despite giving 12.5 per cent allowance, there is shortage of manpower. Moreover, local contractors do not have the resources to complete the work and, at the same time, they are against outside contractors taking up jobs. The only solution, then, is to pump more resources and money through departmental construction means.

How do you plan targets each year?
We make a five-year plan and work towards it annually. At present, we have an order of over 30,000 km pending and are working towards it. While we operate 0 km to 100 km from the international border, NHIDCL is targeting only the softer area, which is 150 km deep inside the international border.

While the roads sector waits for the impact of new government initiatives to kick in, it continues to be plagued by unreasonable targets, delays in project execution, cost overruns and lack of funding. What will it take to get the sector back on track? With the change of power at the Centre, the roads sector was expected to get back on the move with fast-track approvals, delink of forest and environment clearances, increased limits on sand mining, positive movement on land acquisition, online filing for clearances to construct rail over-bridges (ROB) and under-bridges (RUB), and change in bidding from BOT to EPC. However, while we wait for the impact of these changes to become evident, the sector continues to battle its demons. Tall targets For starters, the targets set for tenders to be awarded and project construction often seem a tad ambitious. Vijay Chhibber, Secretary, Ministry of Road Transport & Highways, shares an update: ´The target to award projects for 2014-15 was 8,500 km of which 5,385 km has been achieved as of January 2015. Further, the target for construction of projects for 2014-15 has been 6,300 km, of which 3,038 km has been achieved as of January 2015.´ While expressing his confidence at the Ministry´s ability to achieve the award targets, he concedes, ´There may be a marginal shortfall in the target for construction, which we hope to make good in the next financial year.´ For its part, the National Highways Authority of India (NHAI) is confident of meeting its target of 5,500 km this fiscal. As a senior official from NHAI informs CW, 18 projects totalling 1,813 km have been awarded (see list of ´Projects awarded from April 2014 to January 2015´ on page 50.), awards for another five projects of 539 km will be made shortly (bids have been received), and bids for another 37 projects for a total 2,607 km have been invited (expected to come within a month or two). What´s more, the government has set a daily road construction target of 25 km a day - around 7,000-7,500 km a year - until 2016, and 30 km a day thereafter. The industry´s reaction is telling. ´There is no clear inkling of how the calculation is done,´ says Paresh Mehta, CFO, Ashoka Buildcon. ´As of now, it is not happening because I do not see projects in such large numbers bid out.´ Similarly, Sudhir Hoshing, CEO-Roads, Reliance Infrastructure Ltd, believes this target is a stretch. Also, the NHAI source confirms that NHAI targets are different as these are fixed in consultation with the Ministry and Central Government planning commission. The only thing, then, that is clear is the backlog of pending projects (see list of ´Delayed projects - Rs 1,000 crore and above´ on page 45.) The scenario requires a closer look. From BOT to EPC It is evident that interest in BOT (Build-Operate-Transfer) projects has been poor. Eight of the 12 projects put out for bids during the April-September 2014 period reportedly did not receive any. On the contrary, about 60 per cent of the project tenders in this fiscal have been through the EPC mode. (see ´pie chart´ and ´list of EPC Bids-2015´ on page 48). Interestingly, in less than 20 years, India became the single largest PPP market in the world - private participation in PPP has increased from 20 per cent in the Tenth Five-Year Plan to 37 per cent in the Eleventh Plan. However, in recent times, the shift to EPC has been apparent. Consider this. Of NHAI´s set target for 2014-15, it aimed to award 2,000 km through the BOT mode and 3,500 km through the EPC mode. However, Rahul Prithiani, Director, CRISIL Research, CRISIL Ltd, reveals, ´Between April and December 2014, about 1,815 km has been awarded, of which 14 projects with an aggregate length of 1,300 km were awarded on EPC basis (with an average of about five bidders) and three projects with an aggregate length of 515 km were awarded on BOT basis (all on grant).´ According to the recent financing plan for NHAI, Chhibber adds, ´Around 13,500 km of EPC projects shall be taken up over 2014-15 and 2015-16.´ ´EPC projects would attract higher player interest, as they require limited upfront capital compared to BOT projects.´ believes Prithiani. And Manish Aggarwal, Partner-Corporate Finance, Infrastructure & Government Services and Head Energy Natural Resources, KPMG in India, adds, ´Faster execution, low investment requirements and quicker turnaround time for EPC projects have been the key drivers behind this. On the flip side, this is leading to increasing competition as well.´ Although the focus is on EPC, Aggarwal is positive that in the long term, PPP projects would need to make a comeback for the development of the sector on a sustainable basis. What went wrong with BOT? That said, for two consecutive years, weak private-sector participation in BOT road projects has resulted in subdued project award activity. The decline in projects awarded during FY13 and FY14 (aggregating to 2,223 km) was steep compared to FY12 (6,419 km). What went wrong with a sector that witnessed aggressive participation from private players till FY12? M Murali, Director-General, National Highways Builders Federation (NHBF), answers, ´The sector has been facing difficulty in attracting private-sector participants and achieving financial closure, reflecting the reduced risk appetite of developers and the banking sector.´ This is the sector that became unduly exuberant between 2005 and 2010 owing to high economic growth. The consequence of this euphoria was aggressive pitching by players with highly unworkable bids. This led to delays in implementation and consequent time and cost overruns, steep increase in input costs and decline in traffic revenues owing to the economic slowdown - all this snowballed into a crisis and the failure of several BOT projects in the recent past. BOT contractor Yogesh Kumar Jain, Managing Director, PNC Infratech Ltd, lists the challenges faced today:´Ambitious timelines by project sponsors for implementation overlooking ground realities, prolonged delay in land acquisition, environment and forest clearances, approvals for RoBs and RUBs, and shifting of utilities, apart from lack of preparedness and adequate planning before award and execution.´ Many regional players have expertise in EPC but shy away from BOT projects as they are not in a position to block their investment for 20-30 years and face traffic risk, believes Hoshing. ´These regional players benefit from EPC projects under Rs 500 crore where they can earn good returns owing to regional presence,´ he observes. A considerable benefit an EPC project offers over a BOT project is that it solves the issue of financial stress to the developer. ´However,´ Hoshing adds, ´the issue of land acquisition and availability of regulatory approvals still remains and has a substantial bearing on the construction cost of the project.´ An additional challenge is the government´s ability to bring projects on board for bidding, which is happening at a slow pace at present. Amid this, whether DBFOT or EPC, challenges remain the same. Anil Kumar Singh, Managing Director, APCO Infratech Pvt Ltd, lists these: ´Availability of ROW, support of local government or administration authorities, availability of basic raw materials (earth and stone) and availability of long term financing at reasonable cost are still not addressed in a comprehensive manner or under single window.´ Land acquisition is also crucial for both EPC and BOT projects. B Seenaiah, Managing Director, BSCPL Infrastructure Ltd, emphasises on the need for at least 80 per cent of the land to be in place while a project is awarded. ´Shifting of utilities, tree fittings and land acquisition have to be completed before the project is handed over, which is not the case,´ he rues. In fact, CW has learnt from sources that, in several instances, not even 20 per cent of the land is in place when the project is awarded. While Ashoka Buildcon has bagged a few state projects, EPC contracts worth about Rs 300 crore, and BOT contracts from the Karnataka Government, it has not bagged any NHAI contracts in FY13-14 and FY14-15. ´We bid for a couple of them but did not find them financially viable,´ says Mehta. Reliance Infrastructure has also not bagged any NHAI projects this year. While Hoshing expects some bidding to happen towards the end of this fiscal, he says, ´As a BOT developer, FY13-14 witnessed hardly any good projects for bid by NHAI. In fact several projects saw no bidders. We are now poised to win new projects but only at the right price.´ On the flip side, Devendra Jain, Director, Dilip Buildcon, says, ´We have bagged projects worth Rs 6,000 this year from NHAI and MoRTH. But despite receiving clearances, we started late.´ He owes this to what he describes as the biggest challenge - the ban imposed by Supreme Court on mining. Funding issues Cost overruns owing to delays, aggressive bidding, leveraged balance sheets and slowdown in traffic growth has had a severe impact on the execution of BOT projects. ´The funding challenges of NHAI are unlikely to be significant owing to increased revenue share from BOT projects awarded in the past and continued support from the government in the form of cess on fuel,´ says Prithiani. However, past experience suggests that the moment a project gets delayed, all the cash flow gets disturbed and lenders face the risk of non-servicing of interest, non-payment of principal, and an asset turning into a non-performing asset. In such a scenario, banks had become overly cautious. Mukund Sapre, CEO, IL&FS and Executive Director, IL&FS Transportation Networks Ltd, explains: ´Termination of projects had become a reality and banks were not getting fully covered for the amount that they had lent to the concessionaire owing to a disconnect in the NHAI's definition of project cost (which is the basis of termination payments) and the concessionaire's project cost on which financial closure is achieved.´ Nevertheless, Sapre believes banks and financial institutions will be more comfortable lending to infrastructure projects compared to a year ago, given recent proposals by the government to address their concerns on the infrastructure sector. To this, Hoshing adds, ´The government is working on measures like the new model concession agreement to address the needs of the sector and ease of financing. Success of new bids will depend on availability of funds and effectiveness of new policy measures.´ Moreover, as majority of the projects targeted to be awarded are on the EPC mode, there is a budget constraint to fund them; thus, the government plans to securitise some of its toll projects under OMT mode to fund EPC projects. There may also be higher budgetary allocation for these projects. Highlighting a big opportunity for lenders, Chhibber says, ´According to the recent financing plan for NHAI, to implement the balance 20,000 km of the NHDP project (comprising around 13,500 km of EPC projects and 6,500 km of PPP projects) both PPP and public-funded EPC projects, an estimated Rs 180,000 crore of market borrowings would be required from 2014-15 to 2018-19 in addition to existing sources like budgetary allocations, cess and toll collections.´ Exit guidelines for developers All considered, the roads sector has been among the few to have tackled the issues that have come its way. Given there is paucity of capital in the market, if concessionaires are permitted to exit projects and sell out 100 per cent, there would be many potential buyers. The present exit policy for the road sector is as below: Projects awarded pre-2009: Maximum allowable exit 74 per cent of total equity held by concessionaire. Projects awarded after 2009: 100 per cent equity sale allowed two years after completion of commercial operation. As Mehta avers, ´At present, there are no significant new guidelines, except in the case of stressed projects, where concessionaires can be replaced provided the lenders come into the picture.´

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