Road sector back on growth path

After a sound beginning in the late 1990s, the road and highway sector has made rapid progress over the next decade. In fact, this sector emerged as the poster-child for successful public-private partnerships (PPPs) in infrastructure with hordes of private investors making a beeline for this sector.

The PPP model in this sector has provided a strong framework which, with passage of time and experience, has been fine-tuned to practicality. Many more adaptations and changes may be required in this journey, but improving constantly is a part of evolution. PPP being a learning-by-doing exercise for India, some errors in judgement were made when the tendering process for BOT-Toll projects witnessed some aggressive bids.

Leveraged project developers started facing the heat when the economy started showing symptoms of slowdown and the traffic growth did not pan out as projected. This was further aggravated by problems relating to land acquisition, delayed clearances and some gaps in Model Concession Agreements. As some developers struggled to service their loans, bank loans started becoming non-performing assets (NPAs) and this sector virtually came to a standstill for a few years.

However, to complement this government’s corrective actions since 2014, the pace of highway construction picked up to 22.6 km/day in 2016-17. Besides stepping up expenditure on road building through EPC, to revive private sector interest, an innovative Hybrid Annuity Model (HAM) was also introduced which mitigates the developer’s risk to a large extent.

PPP was not conceived to project BOT as a replacement for EPC or cash contracts. However, the government’s budgetary constraints coupled with the initial success of BOT (Toll/Annuity) during mid to late 2000s prompted the authorities to slow down awarding projects in cash contract. Order books for EPC players started drying up which gravitated them to join the PPP bandwagon as BOT players. But their forte being construction, this forced change in business model soon landed some in trouble. Severe competition led to a vicious cycle of aggressive bidding, delay in financial closure, and so on. This was further compounded by governmental delays in handing over land and providing approvals, tardy dispute redressal mechanism, delay in arbitral orders and red-tapism. All these factors led to time and cost overruns and default in interest repayment leading to project turning NPA.

It is worthwhile to note that stalled road projects may have suffered some time and cost overruns, but these projects can be resuscitated and these assets can generate long-term benefits. What is needed at this moment is some out-of-the-box thinking on how to revive such projects, if necessary, by providing a suitable exit route to the existing developers and removing any other hurdles.

Land acquisition still continues to be an area where practical resolution needs attention. Presently, a concessionaire needs a provisional certificate to start tolling. This certificate is issued only if at least 75% of the project construction is complete and that too on a continuous stretch. Since land acquisition is the responsibility of the project authority, a concessionaire should not be penalised if the minimum 75% work is completed on discontinuous stretches. It is obligatory for the project authority to ensure that the acquired land is contiguous. Since the user cannot be tolled on discontinuous stretches, the concessionaire should be adequately compensated by the authority.

Under the present setup, disputes are looked into by government, which ends up being a player and an umpire at the same time. To prevent this, setting up an independent dispute redressal mechanism is imperative to monitor, mediate and provide solutions to all such disputes. A Change of Scope (CoS) can create disputes between the project authority and the concessionaire. A delay in project completion or cost escalation or both resulting from such change in CoS puts the concessionaire at a disadvantage. A redressal mechanism can facilitate the concessionaire to get adequately compensated in such cases. Redressal mechanism can also intervene in disputes which result from differing interpretation of the same law by concessionaire and project authority.

Overall, there is a renewed bullishness in the road sector which is rightly so, because the government has definitely taken the right steps. If some pending hurdles are removed, this sector will once again be on the fast track. The bankers, investors, financial institutions and road concessionaires must get the message, bold and clear, that the government has the intent to sort out any issues quickly and fairly. It has to be truly a PPP, both in letter and spirit. The country will then see billions of dollars being invested in this sector again.

(The writer is Chairman and Managing Director of Srei Infrastructure Finance)