'Set up a tribunal to enable re-negotiations in future'

'Set up a tribunal to enable re-negotiations in future'

'Set up a tribunal to enable re-negotiations in future'

Roads and Highways is one of the major sub-sectors within infrastructure, contributing to around 15-20 per cent of the investment in infrastructure. The road network in India carries about 60 per cent of all goods in the country, and about 85 per cent of the total passenger traffic. Development of the road network, thus, has a significant impact on economic growth.

Recognising this importance, the government had initiated the National Highway Development Project (NHDP) in 1997, with a target to develop over 48,000 km of road length. Several states also developed comprehensive programmes for the development of state highways. Madhya Pradesh, Karnataka, Gujarat, Maharashtra and Rajasthan are examples of states with highly evolved road development programmes.

By 2014, significant progress on National Highway development had been made. Out of the total identified road length, about 35 per cent was complete, 27 per cent was under implementation and 37 per cent was to be awarded. However, the sector was facing significant stress, and construction activity had come to a virtual standstill. Nearly 50 per cent of all private projects was under financial stress. Most of these were stuck in construction stage due to hindrances in land acquisition and clearances.

Several of those completed were not attracting enough traffic to service debt. Some developers were unable to bring in equity to complete their projects. This also meant that while projects awarded grew from 3,300 km in FY10 to 6,000 km in FY12, it trickled down to less than 500 km in FY14, with several bids attracting no bidders.

From annuity model to toll model
The National Highways PPP programme started with the annuity model, and as a supplement to the traditional item-rate contracts. From 60 per cent in FY06, the traditional contracting route became zero by FY09, forcing contractors to become PPP developers.

At the same time, the PPP model shifted from annuity to toll (along with a capital grant under the Viability Gap Funding scheme). By FY12, nearly 70 per cent of the toll project developers were offering a ‘premium’ to NHAI instead of asking for a grant.

It was becoming evident that winning a toll project depended entirely on the ability to take an aggressive view on future traffic (and being able to convince the lenders), and not on the ability to build the road in least time and cost, and to the prescribed quality.

The variation between financed project cost and authority estimate of project cost was visibly higher in toll projects than in annuity projects. Several steps have been taken in the last couple of years to address the challenges.

First, the government increased public spending on roads sector, with a 50 per cent increase in allocation. This was coupled with a project-by-project focus on addressing land acquisition and clearances for stalled projects. While projects under dispute continue on an arduous path, this combination did manage to get the construction cycle restarted. Several construction companies now have their order books filling up fast.

The return of private investment remains a more challenging proposition, though some progress is visible. The emphasis on clearances is helping some projects restart construction. Where this is not possible, part commissioning has been permitted.

Easier exit norms have helped viable projects churn their equity investments. However, schemes for last-mile financing from NHAI, and more liberal restructuring or refinancing by banks, has had limited impact so far.

Debt issue needs to be addressed
In 2014, bank debt to the National Highways sector was about Rs 1,30,000 crore. In April 2015, the transport sector accounted for 11.5 per cent of stressed assets, and 14 per cent of restructured stressed assets of the banking system. This remains an issue to be addressed before private investment can come back into the sector in a big way. The hybrid annuity model brings focus back on the developers’ ability to deliver prescribed quality in least cost and time, and is amenable to long-term financing.

Seven toll PPPs and two hybrid annuity PPPs have been awarded this year, and another twenty (more than half hybrid annuity) are under bidding. The competition is limited and the bids are not aggressive. While the public sector banks are still struggling with stressed assets, the private sector banks would probably find this a good time to re-engage with the sector.

While this is a positive story, it may be insufficient to get private sector investment in large enough volumes. Public spending will need to continue in parallel, at least in the short term.

Several recommendations of the Kelkar Committee need to be implemented for PPP’s to regain credibility, at National Highways as well as at the state level. More proactive approach to ‘actionable stress,’ as recommended, will require bold steps in taking a pragmatic view of the government actions (or inactions) leading to stress.

Hastening dispute resolution processes will require implementation of the proposed amendments to Prevention of Corruption Act and to Arbitration Act. The proposed National Facilitation Committee can better institutionalise the process of project preparation ahead of bidding. Removing the threat of CAG audit of project SPVs is important.

The most radical recommendation, of setting up a Tribunal by an Act of Parliament, to enable re-negotiations in future, will take some time to set up, but will go a long way in increasing investor comfort. Implementation of these could result in increased foreign developer interest, as well as flow of long-term pension and infrastructure funds into the sector.

That, in turn, could result in new benchmarks in construction cost, execution time and maintenance quality emerging in the road sector.

(The author is the Partner, Leader — Infrastructure at PwC India)