Road to reform

01 May 2012 CW Team

The ‘road’ to riches just got less rough, with the reduction of a few bumps as per notifications from the government. The Union Budget had already announced a relaxation in overseas borrowings norms (read External Commercial Borrowings or ECBs) for road projects: ECBs will also be allowed for capital expenditure on the maintenance and operation of toll systems in the roads and highways sector, provided these are a part of the original project. (ECBs have a minimum average maturity of three years. In 2011-12, Indian companies borrowed $35.9 billion through this route, up 45 per cent from the year before). Further, the finance minister has also reduced the rate of withholding tax on interest payments on ECBs to 5 per cent from 20 per cent.

Now the ride just got smoother for highway developers taking up projects under the public-private partnership route as they can now get loans for the entire contract period of 20-25 or even up to 30 years. So far, banks and financial institutions provided loans for up to 15 years. After that, they had to go for higher-cost loans as the debt had to be refinanced. So, developers borrowed at 12-13 per cent for the initial years and then ended up shelling out anywhere between 17.5 and 20.5 per cent on the refinanced part of the debt. Besides, there are only a handful of agencies such as IDFC and IIFCL that offer refinance.

The S&P downgrade in rating for India will increase the cost of overseas funds, but the above moves will surely ease the stress for debt-laden developers.

The Budget had also provided full exemption from duty on specified equipment imported for road construction by contractors of MORTH, NHAI and state governments that was further extended to contracts awarded by Metropolitan Development Authorities.

Although the outlook on India has been severely hit, mostly because it has shot itself in the foot, investors, fortunately, are far from discouraged. Given the abysmal growth prospects in other countries, with an ailing Europe and a still-struggling-to-recover US, India appears like an oasis despite its best efforts to push investors away. GAAR, retrospective income tax impact, the Vodafone tax dispute, the Supreme Court verdict on telecom license cancellation, the jeopardy in the Indo-Mauritius tax treaty…all have stumbled out of the Indian closet one after another, putting international investors on notice and making them rethink their India strategy. There used to be one component in the India strategy that the ‘big six’ consultants always advised; patience. Now, there is another one: more patience.

Three observations still plague the roads sector, offering in an otherwise smooth operating opportunity: 1) Road maintenance – Under BOT projects, this aspect is under control, but under EPC, fund planning and allocation are not adequately structured.
2) Road quality inspection – Every contractor’s payment cycle depends upon this approval, but not enough attention has been given to making this a transparent exercise. This needs better governance standards and high transparency. (Clearly, with
complaints of road quality on the rise, quality inspection of roads is under question. But, the process is very opaque. Currently, even international consultants are shying away from making any comments on their finding or involvement.) 3) High time lag – In 2011-12, the road equipment and materials industry is playing out the action bid out in 2009-10. If the time lag cycle can be shortened, better results can be obtained both for the economy and contractors.

Just like first computers, then telecom gave great visibility to the country in its reforms process, the roads sector is likely to continue the visibility of India’s reforms. Even though a weak government may not be able to resolve the great challenges that many infrastructure sectors face, it could focus on a few big ticket projects and make them the showcase for a global draw. A dozen projects like Delhi Metro, which even today attracts global interest, are needed to bring back investor interest; one shining star on the rise in this category is the Delhi-Mumbai Industrial Corridor. Time to step it up!