The Cabinet Committee on Infrastructure cleared widening of Kiratpur-Ner Chowk section in Himachal Pradesh at a cost of Rs 2,356.20 crore, six-laning of Vijaywada -Gundugolanu section in Andhra Pradesh worth Rs 2,011 crore and Rs 1,021.16 crore scheme for four-laning of Uttar Pradesh/Haryana border- Panchkula section in Haryana.

“The main objective of the project is to expedite the improvement of infrastructure in Himachal Pradesh and also in reducing the time and cost of travel for traffic, particularly heavy traffic, plying between Kiratpur and Ner Chowk,” an official statment said about the Himanchal Pradesh project.

The widening of 84.38 km stretch on National Highway (NH) 21 in state will be implemented under NHDP phase III on design, build, finance, operate and transfer (DBFOT) basis in BOT toll mode of delivery, it said adding of the entire cost, Rs 537.37 crore will be spent on land acquisition, rehabilitation, etc.

The project, on completion, will reduce the time and cost of travel for traffic, particularly heavy traffic, plying between Kiratpur and Ner Chowk. It will also increase the employment potential for the local labourers for the project.

NH 21 is not only an important link connecting national capital and tourist destination of Manali in Himachal Pradesh but is a major link to Leh in Ladakh.

About Andhra Pradesh project comprising 103.59 km, the statement said it will be implemented under NHDP Phase V on DBFOT basis in BOT (Toll) mode of delivery.

“The total project cost estimated will be Rs 2,011 crore out of which Rs 327 crore will be for the land acquisition, rehabilitation, resettlement and pre-construction,” it said.

It added, “The main objective of the project is to … increase the capacity of Golden Quadrilateral (GQ) corridor and also to reduce the time and cost of travel for traffic, particularly heavy traffic between Vijayawada- Gundugalanu.”

NH 5 is an important link connecting Kolkata to Chennai, which is part of the GQ Corridor. This will facilitate road users, particularly traffic on Chennai-Kolkata section of GQ passing through Guntur, Krishna and West Godavari districts and Chennai- Hyderabad and Kolkata – Hyderabad sections.

Out of the total cost of the 104.7-km Haryana project on NH 73 under NHDP Phase-III on DBFOT basis in BOT (Toll) mode, Rs 86.23 crore will be for land acquisition, rehabilitation, resettlement and pre-construction.

The project, on completion, will reduce the time and cost of travel for traffic, particularly heavy traffic, plying between UP/Haryana border – Yamunanagar – Saha – Bawala – Panchkula. It will also increase the employment potential for the local labourers for the project activities.

Source: articles.economictimes.indiatimes.com

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Dear Reader

Indian tollways team is glad to share the moments of  conference which was successfully conducted by Annual National Conference on Road Infrastructure in India 2011 on 6th Dec 2011 at Mumbai. 14 speakers and about 100 delegates were presented in the conference.

Theme of the conference was Planning, Designing, Modernization & Investment for Indian Roads to match International standards.

Confirm speakers for the conference were:

• Shri Nitin R.Gokarn, Joint Secretary, Ministry of Road Transport & Highways
• Mr. Sudhir Hosingh, CEO-Roads, Reliance Infrastructure Limited
• Prof M.N.Sree Hari, Advisor to Gov. Karnataka T.T & Infrastructure
• Mr. Satish Pendse, President – Highbar Technologies Limited -Hindustan Construction Company
• Mr. Alon Globus, Director, i-Tec-India
• Mr. N.K.Sinha, Chairman International Road federation Indian Chapter
• Shri Sudhir Thakre, Secretary, PMGSY
• Shri Ajay Saxsena, PPP Expert, Asian Development Bank (ADB)
• Mr. N.N.Kumar, Dy. Chairman, JNPT
• Mr. Rajesh Rohatgi, Sr. Transport Specialist, World Bank
• Mr. Brijesh Koshal, MD, Daiwa Capital Market
• Mr. Kamal Bali, President & CEO, LeeBoy India Construction Equipment (P) Ltd
• Mr. Sachin Bhatia, CEO, Metro Infrasys p Ltd.
• Ms. Archana, Prof. RV College of Engineering
• Dr.  S. L Dhingra, Chair Professor, IIT Mumbai etc.

The National Highway Authority Of India (NHAI) will undertake 10 projects whereas implementation of the rest of the projects would be with the Rajasthan and Madhya Pradesh state agencies.

Source: articles.economictimes.indiatimes.com

Updated program and more details or logon to http://ibkmedia.com/events/index.php?event_id=3

The Road Infrastructure In India 2011 conference provides an excellent platform for decision makers from the government and service/technology providers to come and interact. The conference through its technical sessions will discuss and deliberate the key issues in the Indian Road sector:

Topics

• Challenges in land acquisition for road construction in India
• Challenges in Public Private Participation (PPP) – Build Operate and Transfer (BOT) toll mode or BOT (Annuity) mode
• Current Scenario on Roads in Karnataka State (State Initiatives in PPP)
• Output and Performance Based Road Contracts – An alternate PPP Contracting Model
• Challenges to build 20 km of road per day under the five year plan (2017-22)
• Advance Technology Electronic Toll Collection (ETC)
• Role of IT in Road Construction
• Traffic Management by Designing of roads, Flyovers
• Updates on NHDP-iv, or NHAI
• Opportunities & Challenge PMGSY in Next 3-4 year’s
• PPP of Special Purpose Vehicle (SPV) Projects for Port & rail Connectivity
• Challenges in Achieving high Return on Investment (ROI) through PPP
• New technology & Equipments for road Construction
• Ecological Road construction
• Challenges in construction and maintenance of roads in India
• Challenges for Sustainable Rural Road Development

Confirm speakers for the conference

• Shri Nitin R.Gokarn, Joint Secretary, Ministry of Road Transport & Highways
• Mr. Sudhir Hosingh, CEO-Roads, Reliance Infrastructure Limited
• Prof M.N.Sree Hari, Advisor to Gov. Karnataka T.T & Infrastructure
• Mr. Satish Pendse, President – Highbar Technologies Limited -Hindustan Construction Company
• Mr. Alon Globus, Director, i-Tec-India
• Mr. N.K.Sinha, Chairman International Road federation Indian Chapter
• Shri Sudhir Thakre, Secretary, PMGSY
• Shri Ajay Saxsena, PPP Expert, Asian Development Bank (ADB)
• Mr. N.N.Kumar, Dy. Chairman, JNPT
• Mr. Rajesh Rohatgi, Sr. Transport Specialist, World Bank
• Mr. Brijesh Koshal, MD, Daiwa Capital Market
• Mr. Kamal Bali, President & CEO, LeeBoy India Construction Equipment (P) Ltd
• Mr. Sachin Bhatia, CEO, Metro Infrasys p Ltd.
• Ms. Archana, Prof. RV College of Engineering
• Dr.  S. L Dhingra, Chair Professor, IIT Mumbai etc.

In addition to the above around 150 high profile delegates comprising decision makers from central, state governments and Private professionals, consultants, Road Developers, national & international funding organizations, Technology & Equipment suppliers, Contractors, service providers, research & academic institutes will discuss, deliberate and share their knowledge and experiences.

For more Information, You can email to anita.verma@ibkmedia.com

We are sure that the participation of delegates from your organization will not only update them on the current issues, emerging business opportunities in Road Sector in India but also provide them the ample opportunities to meet with the national and international experts to discuss, share and learn from their the experiences.

Looking forward to receive you at the Road Infrastructure In India 2011 conference.

Source: http://ibkmedia.com

The construction sector has been in the news of late. Firstly, increasing interest rates has ensured that it is a topic of discussion among the general public and secondly, delays in rolling I out of projects by the government has been a cause of concern for construction companies in the last few months. These have resulted in the downgrading of a number companies in the sector.

So what exactly are the problems that are posing hurdles for the sector’s growth? At a time when interest rates  are rising and companies are in the cost-cutting phase, would  construction companies be able to find a firm footing in the coming quarters? We give you a lowdown on the opportunities in the construction sector and the problems that are making it difficult for construction companies to turn these opportunities into visible earnings.

THE INDUSTRY

The construction industry is directly related to the infrastructure of the government and corporations in different sectors. It is estimated that under the 11th Five-Year Plan (FY08-12) around Rs.11 trillion has been spent on infrastructure.

Of the total estimated amount of Rs.20 trillion, Rs.9 trillion is to be spent in FY12. Apart from this, the 12th Five-Year Plan is expected to entail an investment of Rs.41 trillion in infrastructure projects, which means the investment allocated to this sector is over 200% in comparison with the previous Five-Year Plan.

In addition to this, other sectors such as power, road, irrigation, port, airports and water infrastructure depend heavily on construction companies as enablers of growth. In the coming two fiscal years, these sectors are likely to present enough order book and earnings visibility for the construction companies.

a) Power Sector

Experts believe that if the government follows the investment pattern of the Eleventh Plan, a substantial amount of investment would be channelized into power generation, transmission and distribution segments of the power sector in the Twelfth Plan. After providing for investment in these sectors, the remaining investment would find its way into roads, irrigation as well as water supply and sanitation.

In addition to this, India’s power capacity is expected to treble in the Eleventh Five-Year Plan. In comparison to the Tenth Five-Year Plan of adding capacity of 12 GW of thermal power, it is expected that the Eleventh Five-Year Plan would add a capacity of 50 GW.

Additionally, private players in the sector too would play a crucial role in it and is estimated to account for 56%  of 27 GW supposed to be added in FY12. Hence, there is enough opportunity for construction companies that would be building power plants to meet the power demand in the country. The estimated opportunity for the construction companies would be worth $56 billion or Rs.254 crore, approximately. The Power Grid Corporation of India, which is the central nodal agency for maintaining national and regional transmission grids, has a capital expenditure of Rs.550 billion, which it would spend in the span of four years ending 2012.

b) Roads

Roads form an integral part of the order book of construction companies. Being a developing country, infrastructurally speaking, roads in the country are in a bad state and suffer from under capacity.

The government has come up with programmes such as the National Highway Development Project (NHDP) and the Pradhan Mantri Gram Sadak Yojna (PMGSY) to upgrade the national highway network and the rural road infrastructure, respectively. Projects have also been undertaken at the state level to upgrade state highways. Multi-lateral agencies like the  World Bank and the Asian Development Bank have been involved in funding a number of projects at every level.

Under NHDP, the government has planned to develop 49,987 km of national highways. Projects like the Golden Quadrilateral and the North-South/East-West corridors are almost complete. However, projects whose cumulative length adds up to more than half of the total length to be developed under the NHDP, are yet to be awarded. Estimated projects worth $55 billion are yet to be awarded and may be issued in FY11-14 if NHDP is to be completed by its deadline.

c) Water Infrastructure

Water infrastructure is in dire need of investments. There is a scarcity of fresh water in India. Nearly 85% of water in the country is used for irrigation. Every year some regions of the country face drought, while others face floods. Scanty rainfall received last year and the spate of farmer suicides in recent years have brought the government’s attention to the development of water resources and channelize the supply to every corner of the country.

The government has set aside nearly Rs.415 billion for water projects. This forms about 71% of the total allocation under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). The projects under JNNURM are meant to establish and upgrade infrastructure in cities with water supply, sewerage and drainage being the top priority. Providing clean drinking water and treating and disposing sewage are the main objectives of the programme. Hence, these projects provide enough opportunities for the construction companies to cash on.

ISSUES

However, there are several roadblocks obstructing the growth of construction companies. The construction companies are finding it difficult to secure consistent orders. There have been delays due to lack of clarity on land acquisition, fuel linkages, and financing. Also, projects are getting unviable due to outdated costs and insufficient manpower. Another important reason for delays is regulatory norms on the part of the government, which is probing a host of scams. These obstacles have stalled swift issuance of projects and, hence, increased interest cost of companies.

Construction companies are also facing a problem of increase in working capital cycle. A working capital cycle is defined as the number of days taken by a company to procure revenues for its projects. The working capital cycle of construction companies has widened in the past few years due to issues such as credit crunch in FY09, delay in payments, slippages in execution of projects and change in mix of projects.

The working capital cycle for companies has increased from 85 days to 145 days. This deterioration in the last two quarters is mainly due to delays in payments and increasing loans and advances.

This has resulted in higher borrowing, thus impacting profitability. Most companies’ loans and advances shot up because of increasing loans to their subsidiaries for investments in BOT projects, which will be returned once the projects become operational.

As a result of increasing working capital cycle of construction companies, the debts on their books have been rising. Most construction companies still maintain a debt to equity ratio of less than 1. However, with high working capital these companies have to stretch their balance sheet to fund future growth. More so with rising interest rates, the resultant increase in cost of funds would hurt profitability of companies. Also, execution of projects in the last two quarters has slowed down. Much of the negative impact of these factors can be seen in the lackluster performance of most construction companies in the sector in the June ’11 quarter.

Going forward, it is important that the government clears projects promptly and urgently. Traditionally, the third and fourth quarters of a fiscal are considered to be better than the first and the second quarter.

Experts believe that it would take few more quarters for the sector to enjoy the desired momentum in project  execution considering inflationary and interest rate concerns. However, most big-sized companies are likely to see revenues coming in the next three to four years.

Source: stockmarketsreview.com

SIIL’s construction business has an integrated business model with in-house asphalt, ready-mix concrete, crusher and wet-mix plants, ensuring timely supply of construction material and saving of tariffs & taxes due to captive material transfers. This also ensures lower costs.

For the financial year ended 31 March 2011, SIIL’s total income jumped 72% to Rs918.70 crore from Rs534.10 crore, while net profit surged by 91% to Rs74.80 crore from Rs39.20 crore in FY09-10. Its net profit for the March 2011 quarter zoomed 148% to Rs27.40 crore from Rs11 crore in the corresponding period last year on an 88% rise in total income to Rs328 crore from Rs174.30 crore.

At present, SIIL has five BOT (build, operate, transfer) projects in Maharashtra. These include Kasheli Bridge which is expected to be complete by Q2FY11-12, while the Panvel-Indapur and Manor-Wada-Bhiwandi projects are expected to be completed by July 2013 and the Ahmednagar-Karnala-Tembhurni project is expected to finish by March 2014. The Haji Malang project is a ropeway project having a construction period of two years. The Manor-Wada-Bhiwandi project—an industrial belt connecting Gujarat and Maharashtra—is the company’s first BOT road project.

The company has also won contracts in the irrigation, railways, building and power sectors. Its Osmanabad (Andhra Pradesh) irrigation project is scheduled to be completed by June 2012. SIIL, in a joint venture with Patwari Electricals, is executing turnkey power projects for Maharashtra State Electricity Distribution Co Ltd. In the railways segment, SIIL has won many orders from Mumbai Railway Vikas Corporation. Also, in the building segment, the company has won several orders from government agencies as well as private companies. Some of the major projects include construction of Edge Towers worth Rs255 crore at Ramprastha City, Gurgaon, construction of Hexcity worth Rs138 crore for Armstrong group at Navi Mumbai.

The company is looking to expand its capabilities in the marine projects segment and deepening vertical strength in each state. In Kolkata, it has joined hands with Bengal Tools to undertake orders in the industrial infrastructure space.

However, currently, most of the company’s orders are from Maharashtra (around 76%). Any slowdown in the order book from this state may affect the cash flows of the company. SIIL has a track record of timely completion of projects. But, being a new player in the BOT segment, there could be a potential execution risk. Land acquisition is also another problem—any delay in project execution would affect the revenues of the company, going forward.

Over the past five quarters, SIIL has reported an average growth in revenues and operating profit of 59% and 56%, respectively. Its average operating margin is 17% and return on net worth is 29%. Its market-cap to revenues is 0.33, while its market-cap to operating profit is 2.16 times. The stock is an attractive buy at the current market price.

Source: moneylife.in

GROWTH DRIVERS

The company currently has orders worth Rs 3,117 crore which is 3.4 times its sales for FY11. Nearly 85% of these unexecuted orders are for buildings and roads, while the rest consist of bridges, irrigation and power etc.

In the roads segment, Supreme Infra is a fully backward integrated company. It produces all the key raw materials such as asphalt and RMC, and has in-house stone quarrying and crushing capacities. This enables it to earn one of the best margins in the industry.

Source: economictimes.indiatimes.com

The unusually high number of investors, who have registered to become the investors of the Ninh Binh-Thanh Hoa road, and Nghi Son-Bai Vot road, the parts of the North-South Expressway, has made the expressway project become the “hottest project” nowadays.

With the total investment capital of 59 trillion dong, the Ninh Binh-Thanh Hoa will have the length of 126.7 kilometers and six lanes, while Nghi Son-Bai Vot stretch of roads, will have the length of 92.7 kilometers and 4-6 lanes

In the period from March 2011 to June 2011 alone, the Ministry of Transport received the registrations from five investors and joint venture investors, including the foreign well known corporations in infrastructure like South Korean Keangnam Vina and Posco, Chinese Asian Investment Fund, and the Thai Bangkok Transport Public Company.

Meanwhile, to date, three Vietnamese independent investors have also registered the investments in the two projects, namely Xuan Truong Construction Company and Xuan Thanh Investment and Development Joint Stock Company, a subsidiary of Mai Linh Group.

There is a surprise that the La Son-Tuy Loan highway, the project which has been considered as less attractive, has also received the investment registrations from the joint venture of seven Vietnamese and South Korean investors, headed by Shinhan E&C, who plan to invest under the mode of BOT (build-operation-transfer).

Click here to read full story

M S V Ramu
Profession – Contract Manager
Date: May 4, 2010
E-mail: msvramu@yahoo.com

Introduction: with a need a build good infrastructure and lack funds available to finance these Highway project government has undertaken to built highway on Public Private Partnership either toll based or annuity based.
The private developers who bids and undertake constructions of Highway on toll basis needs to implement a through pertinent “risk” management system with the help of the government to mitigate all the risks that come with development.

To understand the various consequence of “tolled” roads there needs to through study to undertaken which is not my purview at the moment. Hence I dwell over some of these consequences based my exposer these projects.

Toll based Highways:
The idea of “Toll based” highways was imported into India from experiences of others countries like Europe, Malaysia or North America. The model “Concession Agreement” was drafted by the Government to suit India needs.

The toll categories of roads are those wherein there are sufficient traffic which can be tolled by the Concessionaire and recoup the investment made him and also make profit. In the event there are not enough tollable traffic to recoup the investment made, it will be offered on annuity basis or with VGP (Viability gap funding) by the government.

The tolled based roads wherein the Government grants private developer specific rights to design, finance, construct operate and maintain the roads. The developer called “Concessionaire” develops covers the investment costs and carry commercial risks since he relays on operation revenue from the tolls remunerated. At the end of the concessional period the road reverted back to government at no extra charges. However if the estimated revenue does not materialize during Concession period the Concessionaire may have to negotiate the concession period (as in other countries) which is yet to happen in India as we are just starting!

In south America there is method of bidding known as “Least Present Value” wherein the winning bidder is the one who asks for “smallest Net Present Value” and period of the concession period ends when the present value of revenue equal to winning bid. This model has not been tried in India.

Risk management in “Toll based” Concession

In the present circumstances the Concessionaire undertakes risks to constructs road which is generally divides normally into three parts:

1. Certainty – decision maker know exactly the outcome
2. Uncertainty – here the decision maker does not know the risks due to non availability of any data
3. Risks – are those which can be determined by statistical terms and can be analyzed but it differs from uncertainty

In risk management all the risks are quantified and analyzed and decision taken by the Concessionaire to mitigate the same by way of disciplined approach to critical situation

Developmental risk involves “Land Acquisitions” needed for the project. This is one of the biggest risk faced by the Indian developers as most of the times project gets delayed due non-availability of Land. NHAI does not meet the contractual requirements specified in the Concession agreement thereby causing unnecessary hardship to concessionaire. This risk falls under “uncertainty” which can not be quantified

Financial Risk: Soon after award of Project, the Concessionaire needs to raise the necessary capital required for execution project

There are two major risks involved:

1. Ability to raise the finance and make financial close as required by the Concession agreement.
2. High interest rate during the currency of concession period (due to floating interest charged by lenders) – mitigation of this risk in extremely important).

Construction risks

Whether the construction undertaken by the Concessionaire himself or by other contractor there are many risk involved

1. Poor performance of the contractor
2. Different site condition which normally experience contractor many not have thought off which is problematic and end up in high cost due additional items of work to be executed.
3. High price escalation of all the inputs of construction – Example: steel pricing going through roof last year.

All above risk has to be born by the Concessionaire which needs proper approach in the initial stages itself

Operational risks

Operation risk involves mainly the following

State support agreement – needs to signed by the concerned state and they shall support the collection of tolls which important to the concessionaire. NHAI who are promoters of the project should take full responsibility in getting the agreement signed with Concessionaire as Concessionaire can not exert any pressure on the states

Toll Level: the estimated toll level uncertainty during pre-bidding stages can lead to inaccuracies in revenue estimation which the Concessionaire has based his bid. Hence this risk needs to shared by the NHAI

The traffic volume projected in financial model may not materialize as it completely depends on economic growth projected during pre-bidding stage

Any fall in traffic volume will automatically bring down the IRR value projected. Expert estimate that 10% drop in volume of traffic will result in reduction of 1-7% – 1.9% percent reduction in IRR.

Toll collection
The Concession agreement does give any standard specification for the installation of tolling equipment. This has resulted in haphazard manner the tolling equipment being installed by the different Concessionaire. This needs to change. For example a RFID card issued at New Delhi should also hold good down south. By such an arrangement the road user can travel effortlessly any ware in India.

The technology used by the Concessionaire needs to be streamlined on all India basis for all Concessionaire.

Toll fee: The price escalation of “toll/Fee” charged by the Concessionaire is based on all India WPI index. This is incorrect as in some states it may be very high. In my opinion there should be “Toll Regulator” on all India basis to regulate toll based on each state WPI or any other base model

HTMS: Here there is no comprehensive approach. For example the “variable message system” is limited to one project length only! This also needs an all India approach.

Suggestion: at the moment there are so many “Toll” based road are in operation and also on the horizon. All the toll based roads owners are “Special purposed vehicle” promoted by the concessionaire.

So why not a “over the counter” stock listing be arranged of these SPV and listed in Stock exchanges which can also traded in F&O section. I am sure this arrangement will automatically will mitigate many risks and also give scope for improvement in roads as the Concessionaire would like increase the traffic by enhancing the many amenities for road users.

Thanks for taking time for reading this articles.

Also, a large number of these projects are on Build Operate and Transfer (BOT) and annuity basis, which means the companies will have a steady flow of cash through annuity or toll. This development spells good news for investors who can make full use of this golden chance and earn high returns in the long run.

WHY NOW?

The question that may cross your mind is why now? Ever since Kamal Nath took over as the Union minister for roads and transport, the Indian road segment has taken a new turn. He created various milestones since he was given this portfolio.

The most important announcement he made was the construction of the national highway at the rate of 20 km per day to expedite the achievement of National Highway Development Programme (NHDP) targets. This is significantly higher than the current execution rate of about 6 km per day. The ministry has also been working towards faster clearances related to procedures, land acquisitions and other formalities.

CREATION OF FUNDING

Kamal Nath is aware of the fact that improved road network in the country would not just lead to better connectivity but would also lead to increased energy efficiency in transport operations. He also travelled across different countries on road shows to international investors to highlight opportunities and potential in the Indian road sector.

Through these measures, the government has and will be able to rope in huge investments needed for the sector from international and national long-term investors.

Earlier it was difficult to raise money for more than five years or so as money was available only for a short period. However, now that the corporate debt market is developing, long-term investors like pension funds, mutual fund houses, insurance companies and even banks are coming forward to provide long-term capital. Most road projects, particularly the BOT ones need huge long-term investments in the form of debt and equity to fund them.

INCREASING VIABILITY

In terms of the less viable projects, the government increased the viability gap funding (VGF) or grant to 40% from 25%. Formerly, the grant used to be given after the completion of the project. But now it is handed over at the beginning of the project. In this manner the construction of the project does not get delayed for want of funds.

The government is also working on creating innovative ways of structuring non-viable projects like allotment of land, which can be monetized by developers so that the returns on investments are reasonable.

Other aspects like increasing the role of private players through public private partnership (PPP) and awarding of projects on BOT basis would mean that private players now have a bigger role to play in the construction of viable road projects.

A LONG WAY TO GO

India currently has about 33 lakh km of road network spread across the country. This is the third largest network in the world. But, in terms of density and quality of roads, India still lags behind many developed and developing countries of the world.

In relation to our population, the country’s roads are about 3 km per 1,000 persons, which is significantly lower than the world average of about 7 km per person. In terms of quality, about 80% of our roads are in a poor condition and require huge investments for repair, renovation and increase in the number of lines.

Majority of India’s roads are single line in spite of increasing traffic and congestion. Even the conditions of our existing roads are so bad that India’s logistical cost as a percentage of total production cost is considered to be about twice the world average of 7%.

No wonder due to the poor road infrastructure, India is ranked 87th in the world on the basis of quality of roads, which is very low and considered to be the biggest hindrance for economic growth as envisaged by the government for the coming years.

Surprisingly, within this vast network of roads, only about 2% is accounted for by national highways and a very minuscule part is accounted for by express highways, which is very critical considering that about 40% of the total road traffic is handled by national highways.

The slow transportation of goods has also affected the movement of goods among states, delaying exports and imports of the country. Especially, in the case of transportation of perishable goods like milk, vegetables and flowers among other things, which are procured from the hinterland takes so much time that they become stale or get destroyed before they can actually reach the end consumer and the export market.

This leads to wastage of goods due to the delay in reaching the markets. Express road connectivity to the main ports of the country and to major cities is very important to improve trade volumes and discover better prices for farm goods.

WHAT IS CHANGING?

The government has realized the importance of better roads in the country so that it can support the growth of the economy in the coming years. Roads are critical for any economy, especially a growing economy like India with a large population and different topographies.

The role of roads is of paramount importance for commercial and economic activities in the country. In India, passenger traffic is growing at about 12% per annum, while cargo traffic is growing over 15%, which will continue to rise as economic activities improve along with the increase in foreign trade.

India’s foreign trade is growing at 10-12 % and there is an immediate need to connect all the major ports of the country. The government has taken the first step in this direction. Under the NHDP (phase II), the government will connect major ports and build freight corridors, which will connect many states from the eastern part of India to western India.

In phase III of the NHDP, all major capitals will be connected with highways. Also major cities and points that could not be connected in phase II will be connected with better road infrastructure. Besides, plans are afoot to improve and connect rural India to major cities of the country soon.

EASING HURDLES

Most of these plans are not just on paper. In fact the government has already awarded projects to achieve this goal. The government formed the BK Chaturvedi Committee, which presented its findings and suggestions to make progress in the sector.

Based on the findings of the committee report, several changes have been incorporated and more importantly, the government is seriously working on the recommendations, which are quite innovative and provide solutions to various problems that the companies have been facing.

Changes have been incorporated with regard to land acquisition, which is the biggest problem for construction of roads in the country.

Now, NHAI will work along with the state governments for facilitating land acquisition and all state governments have been directed to coordinate for the same. NHAI now awards road projects only after 80% of the land has been acquired.

FEW SPEED BREAKERS

Tackling delays in approvals, decision-making, faster resolution of disputes and coordination among different departments are few other highlights of the recommendations of the committee report.

Essentially, most of the changes are already in effect and new orders are awarded to interested parties. The flow of new road orders in the last few months was the highest in the last several years. This itself speaks volumes about the commitment of the government and its intention to put things on ground.

Also, the projects which were not viable and did not attract private participation were given extra focus and restructured within time frame along with consultations of private players while changing the terms and conditions of the project. There are other measures also which have attracted private participation in road projects.

Large projects will be built on a BOT basis, which are expected to have a higher return of about 18% to 20% on investments as compared to 14% to 16% earlier. Additionally, the new guidelines that have been framed are such that once a project is awarded for a particular road, the private player is given an assurance that there will not be any competition or construction of road, which will make sure that the cash flow in terms of the collection of the toll is protected.

What is more remarkable is that the government now has experts as representatives from development agencies like the World Bank, the Asian Development Bank, who make sure that the projects are not delayed and hurdles are resolved.

These representatives keep track of projects and act as a liaison between government agencies and private parties. They also bring their experience to structure the project in such a manner that it gets executed.

QUANTUM OF OPPORTUNITY

There are different estimates about the size of the opportunity. But there is little or no doubt that the opportunity is far bigger than what it used to be a few years ago.

When we talk about 20 km per day of the construction of roads, this in itself is self-explanatory. This means that the country will have to build about 7,300 km of roads every year. This is significant as the current run rate is just about 2,500-3,000 km of roads built every year.

One could also imagine the kind of work that will now flow. For the eleventh five year plan which will end in 2012-13, about Rs 3.14 trillion will be invested as compared to Rs 1.45 trillion invested in the tenth five year plan. This is still the tip of the iceberg. India’s investment in the roads segment is expected to be in the range of Rs 10.5-11 trillion over the next decade.

In the near term, about 5,000 km of new expressways will be built and the projects will be awarded for the same. Also, NHAI has plans to award work for about 37,000 km of roads over the next three years.

Besides, under the NHDP’s different phases, the government will award work relating to the upgradation of about 55,000 km of roads over the next 8-10 years.

WHO WILL BENEFIT?

Most construction and infrastructure companies are focusing on this particular segment and their exposure has gone up in the recent past. IRB Infrastructure and IL&FS Transport Network (ITNL) are popular in the roads segment having the highest exposure to the road segment. In the case of IL&FS, the company has recently come out with an IPO and was listed recently.

ITNL is amongst the largest private sector BOT road operators in the country having integrated business model providing service for projects, from conceptualization, construction to operating and maintenance of the road projects. The company has already bagged about 19 road projects.

Apart from roads, the company is also looking for opportunities in airport segments and plans to bid for more projects in this segment. The company’s advantage is its large portfolio of BOT assets and a long experience in the sector. The company has presence across different parts of the country and has about 9,397 lane km of road projects under its belt.

IRB Infra too is a leading player in the roads segment generating almost 100% of its revenue from this segment. The well-known Mumbai-Pune highway, one of its kind in India, is operated by IRB Infra.

The company has an integrated business model having large experience in toll roads and highways sector. The company has about 1,100 km of road projects in its kitty, which is the second largest among private players in the whole of India.

As opportunities are growing, the company should be able to procure more projects and increase its current portfolio. The company will not only benefit on account of the construction of these projects but also due to the collection of toll and annuity from these projects, providing stable future cash flow.

Also most of its projects are strategically located in major traffic areas like Mumbai-Pune, Mumbai-Surat, etc. The company also won projects in other states like Rajasthan and Punjab and is gradually focusing on becoming a pan-India player in the road segment.

Source: stockmarketsreview.com