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Indian government has finally realized the importance of road sector

Huge opportunities are unfolding in the Indian road sector. This means most Indian infrastructure and construction companies will benefit from the announcement of new orders or projects in the long run.

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

Infrastructure sector set to receive

More bank credit will soon flow to build infrastructure in the country with the Reserve Bank of India (RBI) on Tuesday reducing the level of provision against substandard loans to the sector from 20 per cent to 15 per cent.

The central bank’s decision to treat annuities and toll collection rights under build-operate-transfer (BOT) road and highway projects as tangible securities has also come as a major relief to infrastructure companies.

Banks and institutional lenders said the move on provisioning would enable lenders to loosen their purse strings for the infrastructure sector where long gestation projects often end up with issues that are beyond the control of both the lender and the borrower.

“There are many uncertainties in the infrastructure sector. Often there are delays due to reasons such as obtaining environment clearances and delay in equipment supplies that lead to assets becoming substandard. The RBI move will definitely encourage banks to go ahead and provide more advances to the infrastructure sector since it will provide a comfort factor,” SS Kohli, chairman and managing director of India Infrastructure Finance Company (IIFCL), the government’s flagship infrastructure finance company, told Financial Chronicle.

SBI chairman O P Bhatt said the announcement on infrastructure lending would help banks to finance such projects. “The treatment of annuities as tangible securities under BOT scheme will help attract private equity and give a boost to infrastructure sector,” he added.

UCO Bank chairman and managing director SK Goel echoed the view. “RBI move will reduce the burden of banks since loans to infrastructure projects often become substandard due to technical reasons. With only 15 per cent provisioning requirement, banks will be encouraged to lend more,” he said.

CMD of Bank of Maharashtra (BoM), Allen C A Pereira, said banks have been raising concerns over project delays and asset-liability mismatches in their infrastructure portfolio.

“Infrastructure projects are long gestation projects and several times things do not work out the way it was originally planned. Therefore, there was a strong case for easier provisioning norms for substandard assets. The RBI move is to ensure that banks do not suffer,” Tourism Finance Corporation of India CMD Archana Capoor said.

According to the planning commission, projected investment in infrastructure such as ports, airports, railways, power, irrigation, water supply and sanitation during the 11th plan (2007-11) is Rs 20,54,205 crore. The huge demand for funds can be gauged from the fact that the road ministry alone plans to award projects to build around 18,000 km during this financial year worth more than Rs 1,50,000 crore. Of this, 65 per cent of projects would be on BoT toll basis, 20 per cent on annuity and remaining 15 per cent on engineering, procurement and construction (EPC) model.

However, bankers said the RBI move was not to make banks meet their overall credit growth target when of offtake to sectors such as real estate has slumped. “These issues are not linked. The slowdown in overall lending and to the housing sector may be due to other reasons. Housing loan borrowers may be adopting a wait-and-watch approach,” Pereira of BoM said.

UCO Bank’s Goel agreed: “This is purely to encourage flow of funds to infrastructure sector. Overall credit growth and trends for specific sectors cannot be linked.”

Meanwhile, infrastructure companies have welcomed the decision to treat annuities and toll collection rights under BOT projects as tangible securities, saying the decision would give private road developers easier access to funds at lower interest rates.

At present, in BOT road projects, there is nothing that can be considered as tangible asset. This is because the concessionaire has to transfer the land either to the National Highways Authority of India (NHAI) or the state government after about 30 years of the agreement. Toll collection is also uncertain and therefore treated as an intangible asset. This makes it difficult for developers to obtain loans under the secured category.

“Now that the RBI has allowed annuity and toll collection rights as tangible securities, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, it will make banks pro-active to lend to the sector,” Issac A George, chief financial officer of GVK Power and Infrastructure, said.

In its credit policy, RBI said annuity and toll collection rights should be treated as tangible securities subject to the condition that banks’ right to receive them is legally enforceable and irrevocable.

“Most banks offer loans to road developers under secured categories. However, there are lots of provisions and agreements that the parties work out among themselves. The developers also pay a higher interest rate of up to one and a half per cent for unsecured loans. The RBI announcement will help developers to save the additional interest cost and avoid legal troubles,” said Vishwas Udgirkar, an executive director at PricewaterhouseCoopers.

The move is also expected to lower the cost of road projects. “The RBI move to treat annuities and toll collection rights as tangible securities will create a healthy market for securitisation of toll portfolio, thereby reducing the cost of road projects after construction,” said Hemant Kanoria, chairman and managing director of Srei Infrastructure Finance.

Source: mydigitalfc.com

Ministry unlikely to pay highway companies for higher input costs

The Ministry of Road, Transport and Highways is unlikely to accept a demand of private contractors engaged in the construction of national highways for reimbursement of increased costs, incurred due to the unprecedented hike in cement and steel prices.

A senior official in the Ministry of Road, Transport and Highways said: “We have received the demands of the highway contractors. However, it is very difficult to rework the cost escalation norms and reimburse the escalated price in a running contract. The government has taken several measures to address the price issue and in the coming days the prices of steel and cement are expected to come down”.

He added the projects undertaken on a public-private partnership (PPP) basis always have a risk element involved.

The risk is addressed to a certain extent as the contract is based on the star rate (the base rate at which the contract is signed for any given commodity used) and in which there is a provision to reimburse the escalated price.

Brahmdutt, president, National Highway Builders Federation, said: “The unanticipated sharp rise in the price of cement, steel, bitumen and other raw materials over the last year have hit hard the contractors undertaking National Highway Authority of India’s (NHAI) projects. The escalation clause of most contract documents are insufficient to accommodate the large variations in prices of construction materials. As a result such variations transfer themselves to the contractor in the form of increased costs”.

Over the last year, prices of steel, cement and bitumen have increased at an average of 76.96 per cent. This has led to increase in cost of building a 1 km four lane project from Rs 6 crore to Rs 7.84 crore

Ankideedu Maganti, director, Soma Enterprises Ltd, which is undertaking a couple of National Highways Authority of India, projects said: “At the time of bidding we assume a inflation of 7-8 per cent on materials.

But right now, our assumptions are not able to accommodate the 40-50 per cent rise in the price of raw materials”.

Source: www.business-standard.com

SA’s Intertoll barred from NH projects

NEW DELHI: After Chinese, Malaysian and Korean firms, the National Highways Authority of India (NHAI) has blacklisted South Africa’s infrastructure firm Intertoll for undertaking road sector projects in the country. Intertoll-led joint venture Intertoll-ICS-Cessons O&M, which had bagged the contract to operate and manage Gurgaon-Jaipur stretch (206 km), has been barred from carrying out any highway project in the country for the next 10 years. “The company has failed to comply with the obligation. It was also found that there was leakage in toll collection. After shooting off showcause notices five times to the firm we have now barred them for the next 10 years for undertaking any project directly or indirectly,” a government official told ET. Last year, the government had put nine firms including Lanco Construction and Essar group in the non-performers’ list. Foreign contractors in the list included Korea’s You-One Engineering Construction, Saudi Arabia’s Sticco, China Coal Construction Group Corporation and Moscow-based Centrodostroy. Four Malaysian companies — UEM Builders, Dolomite Industries, Pati SDN Bhd, and Bhumihighway — were also in the list of non-performers. All highway contractors were blacklisted on account of delay in completing highway projects and poor performance. The dispute between joint venture partners also lead to delay in the projects.“Before we bar any contract we give multiple chances to perform. In case of Intertoll we gave them three years’ time to comply with the contractual obligation,” the official said. Intertoll got the Rs 169-crore contract through competitive bidding to operate, manage and collect toll on the Gurgaon-Jaipur highway for eight years. Foreign infrastructure companies are, however, betting big on the country’s road sector. Recently, these firms won three highway projects out of five offered by NHAI under national highways development project (NHDP)-V. All the three companies — Emirate Trading Agency, Isolux Corsan Group and IJM Corp — which bagged various projects roped in an Indian firm. Source: http://economictimes.indiatimes.com 

Plan to upgrade 19 State highways to NHs pending with Centre

Hyderabad, March 18:The proposal to convert 19 State highways into National Highways for a length of 4,832.7 km is pending with the Ministry of State Road Transport and Highways (MoSRTH).“We are waiting for their approval,” Roads and Buildings Minister T Jeevan Reddy informed A Uma Madhava Reddy (TDP) and others during the Question Hour in the Assembly on Monday.The minister said that seven roads for periodical renewal works of the length of 68.84 km at a cost of Rs 16.85 crore have been taken up and completed with the funds provided by MoSRTH. Extensive repair works to the badly damaged National Highways have also been taken up to ensure free flow of traffic.The widening of Hyderabad-Vijayawada section of National Highway-9 was being taken up by National Highways Authority of India on BOT basis and the prequalification bids have been invited, the minister said.To another question by P Rajanna Dora, the minister said that Kottaki bridge across Votti Gadda river in Vizianagaram district was in bad shape and a new bridge would be constructed at a cost of Rs 5 crore.Agriculture Minister N Raghuveera Reddy informed K Ramulu (Janata Party) that Chief Minister Y S Rajasekhara Reddy would write a letter to Prime Minister seeking Padma awards to best farmers. He said that awards to the best farmers would be given at mandal levels by the State Government. Source: http://www.siasat.com 

GPIL announces IPO of 1.65 crore equity shares

CHENNAI: With an aim to fund some of its major projects in India, Gammon Infrastructure Projects Limited (GPIL) on Friday announced an initial public offering of 1.65 crore equity shares of par value Rs 10 each for a cash price to be determined through a 100 per cent book-building process (Issue). The price band has been fixed between Rs 167 and Rs 200 pewr equity share. Pervez Umrigar, Managing Director, GPIL, told reporters here today that the Issue’s proceeds would be utilised in the design, construction and maintenance of projects including the four-laning of the 99.5 km of Vadape-Gonde section between Mumbai and Nasik on NH-3, being developed and maintained by the special purpose vehicle (SPV), the Mumbai Nasik Expressway Limted (MNEL). ”We currently have 14 infrastructure projects, including the Vishakaptanam port project in Andhra Pradesh and Mattanchery bridge project in Kerala among others in the operation phase, with respective special purpose vehicles (SPVs) in place to develop and maintain them,” Umrigar said. The Rangit-II hydroelectric power project on River Nimbi in Sikkim, and the MNEL among others were in the development phase, he added. According to a company release, the Issue comprises a net issue of 1.49 crore equity shares to the public (Net Issue) and a reservation of 16.55 lakh equity shares for employees. While at least 60 percent of the Net Issue will be allocated on a proporationate basis to Qualified Institutional Buyers (QIB), at least 10 percent of the same would be available for non-institutional bidders and 30 percent of the Net Issue for retail investors on proportionate basis. The issue opens on March 10 and closes on March 13, 2008. Source: http://economictimes.indiatimes.com

4-LANING OF DELHI-DEHRADUN NATIONAL HIGHWAY

Delhi – Dehradun National Highway has been identified for 4 laning under National Highway Development Project (NHDP) Phase III on Build, Operate & Transfer (BOT) basis. Widening to 4 lane work in Meerut-Muzaffarnagar section is in progress and delayed due to initial problem regarding tree cutting & land acquisition and is targeted to be completed by March, 2009. Widening to 4 lane work in Muzaffarnagar-Haridwar section could not be awarded as only single bid was received and the same was cancelled. For re-bidding of this section, updation of Detailed Project Report (DPR) as per new Model Concession Agreement (MCA) as decided by Public Private Partnership Appraisal Committee (PPPAC) is in progress.The Haridwar-Dehradun section is passing through Rajaji National Park and clearance is to be obtained from the Central Empowered Committee constituted by the Hon’ble Supreme Court of India. After clearance from Central Empowered Committee and PPPAC, bidding process is to be taken up for award of 4 laning work. This information was given by the Minister of State for Shipping, Road Transport and Highways, Shri K.H. Muniyappa in a written reply in the Lok Sabha today.  Source: http://pib.nic.in 

Hit the road: Infrastructure growth is revving up

The indian infrastructure story is just waiting to unfold. It is a foregone conclusion that the need for infrastructure to facilitate economic growth in India, both immediate and long-term , is ever more pressing. The growth rates witnessed in the Indian economy today are indicative of the change to follow —infrastructure has been expanding at an accelerated pace to support the economic growth rate of 9%. India’s infrastructure development has so far been predominantly financed publicly. The urgent need of the hour is an enhanced approach that would create a balance between public and private sector roles, complemented by transparent public policies. The Government has already taken many proactive measures such as opening up a number of infrastructure sectors to private players , permitting foreign direct investment (FDI) into various sectors, introducing model concession agreements and taking up projects such as the National Maritime Development Programme and National Highway Development Project, among others. The next four to five years will witness implementation of some key infrastructure projects such as additional power generation capacity of 70,000 MW; development of 16 million hectares through irrigation works; modernisation and redevelopment of four metro and 35 non-metro airports; six-laning 6,500 km of Golden Quadrilateral and selected National Highways. Focus will be on key infrastructure sectors of highways, ports, airports, railways and power. Having been part of the Indian infrastructure history, we at GVK have always believed that the key to developing a sustainable infrastructure in India is to build for the future. India will see an investment to the tune of $500 billion in infrastructure in the next five years. Coupled with government support, this investment will fructify in the form of key infrastructure projects to strengthen India’s cities. The next four years will bring a sea change in infrastructure and as a result, in another ten years, we will see the emergence of a new India. Source: http://economictimes.indiatimes.com

Reliance Energy Ltd(REL) to hive off infrastructure projects

NEW DELHI: In a bid to separate the power and infrastructure projects, Reliance Energy Ltd. (REL) has now decided to transfer all its infrastructure projects to a separate wholly-owned subsidiary.

The REL board had already given its approval to the proposal.

The move comes hot on the heels of REL deciding to hive off its power generation business as a separate company — Reliance Power Limited (RPL).

RPL has filed a draft red herring prospectus with the Securities and Exchange Board of India (SEBI) for an initial public cffering (IPO) of around Rs. 12,000 crore.

The decision to hive off infrastructure portfolio to a new subsidiary comes in view of the increasing portfolio of the company on this account in recent months.

REL is developing highways for the National Highways Authority of India (NHAI) under the build-own-transfer (BOT) scheme.

It is involved in five National Highway projects in Tamil Nadu, covering a length of 400 km at a cost of Rs. 3,100 crore. In addition, it is pursuing road projects, including the proposed Rs. 5,000 crore Western Freeway sea-link project connecting Worli and Nariman Point in Mumbai and the Rs. 6,000-crore Jaipur Ring Road project.

On the real estate side, the REL-led consortium had emerged as a winner for developing a business city in Hyderabad with an estimated investment of Rs. 6,500 crore. The city will be built in 77 acres, which will include a 100-storey trade tower. It has also bagged the metro rail project in Mumbai that involved the development and operation of a fully-elevated metro rail.

The total cost of the project is around Rs. 2,500 crore. It has also bid for line 2 of the Mumbai metro elevated track between Mankhurd and Charkop with an estimated investment of Rs. 6,500 crore. The company is also bidding for the Rs. 6,000 crore Mumbai trans-harbour link.

Source : The Hindu

New path or alleyway

Are contractual ‘innovations’ holding up the showpiece highway project?

It continues to be a slow trudge on the fast lane. Barely 35 per cent of the contracts for the North-South East-West corridor (NHDP-II) have been awarded. This lethargy in the awarding of contracts by National Highway Authority of India (NHAI), under the UPA, is predictably bound to lead to long delays in the construction of the highway network across the country.

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