The government has announced several large-scale infrastructure programmes, while Budget 2019 served to ensure that these multi-year programmes received their fair share of funding. These programmes will now be on autopilot as the government will need to focus its efforts elsewhere. EPC&I takes a look at the road ahead and see if any old challenges could derail the initiatives.

In the past three years, the government has announced several large-scale infrastructure programs, such as Bharatmala, Railway Electrification, Smart Cities, AMRUT and UDAN. Budget 2019 too served to ensure that these multi-year programs, especially rural related infrastructure programmes, received their fair share of funding. The FM allocated `19,000-cr for construction of roads in the rural areas under the PMGSY. He also allocated a higher amount towards the Roads and Highways sector – up ~16 per cent YoY to `71,000-cr.

In doing so, the FM has indicated the government’s shift from planning stage to implementation stage. Infrastructure programs should, henceforth, be on autopilot as the government focuses its efforts on rural and agricultural sectors. The journey has finally begun! Or, has it?

For the last three years, the government has been ironing out issues hampering growth of the Roads sector. In FY17, early signs of revival in the sector became evident, with project awards at 16,270km (up 56 per cent) and construction at 8,230km (up 37 per cent). The government has set steep targets for FY18 to award 25,000km and construct 15,000km.

Moving ahead, the trend looks promising, with industry reports indicating that NHAI would award over 31,000km of road projects executable over FY17-21E, entailing an estimated investment of `3.6-tn (civil construction works). Industry observers expect awarding activity to stabilize at 15,000km per year, and execution activity to pick up – 9,300km in FY19 and 10,000km in FY20.

Budgeted, and ready to go
Budget 2019 turned out to be a continuation of the government’s well-articulated focus on infrastructure. The government had previously announced large-scale infrastructure creation programs in roads, railways, urban infrastructure, ports and airports. These programs are targeted to be implemented over the next 5-10 years. In that context, Budget 2019 ensured that these infrastructure sectors received their required annual outlay.
The budgeted outlay for NHAI in FY2019 stands at `917-bn, up 10 per cent YoY and ~2X the spending in FY2017. The government has subsumed the balance works of ongoing NHDP program under the umbrella scheme of Bharatmala with a total outlay of `5.3-tn. Excluding Bharatmala’s PPP component, the program will require ~`1.0-tn of allocation as annual run-rate over the next four years.
The government expects `620-bn – or, nearly, 2/3rds of the outlay – to be funded by NHAI’s internal and extra-budgetary resources (IEBR). Disciplined flow of cess funds to NHAI will provide comfort to lenders for extending such funding. The government’s assertion of completing 9,000 km of highways by end-FY2018 indicates a pickup in execution.
In that sense, the outlook for the Roads sector looks promising. It has improved considerably over the last two years, with roads being a key focus area for the government to revive capex activity in India. It may be recalled that in its previous tenure as well, the NDA government had chosen the Roads sector to accelerate the capex cycle and had awarded 23,000km over its five-year tenure.
In its current tenure, it has set an ambitious target to ramp up road construction activity from 23km per day to 40km per day and has prepared a strong pipeline of road projects, which entails an investment of `7.0-tn (centre and state put together). Multiple states like Maharashtra, UP, Telangana, and Karnataka have a strong pipeline of projects. Between the centre and the states put together, there exists an opportunity of over `7.0-tn (Center: `4.0-tn; States: `3.4-tn).

Bharatmala – the Umbrella programme
The Bharatmala project has been launched as an umbrella program with primary focus on optimizing the efficiency of the movement of goods and people across the country. This program envisages a corridor approach in place of the existing package-based approach, which has resulted in skewed development.
It is an umbrella project, with estimated project cost of `5.4-tn to build 34,800km of roads, of which Phase-I includes projects worth `3.5-tn (24,800km). The Government intends to award the projects under Phase-I over the next two years and complete the projects over the next five years. DPR preparation for projects with 9,000km is already undertaken.
Key Schemes envisaged under the Bharatmala project include:
Economic corridor: Bharatmala project intends to develop corridors of economic importance, which are expected to carry 25 per cent of the freight over the coming years. The Government has identified 50 corridors in a scientific manner by:
a) Survey of freight movement across 600 districts,
b) Automated traffic surveys across 1500 points,
c) Identifying shortest route for all origin-destination movement, and
d) Satellite mapping of corridors for identifying upgradation requirement.
Once the network of Economic corridor (along with its feeder and inter corridor routes), and national corridor is developed, it is expected to carry 70-80 per cent of the freight traffic. Around 26,200 km of Economic Corridors have been identified to be developed out of which 9,000 kms are being taken up in Phase-I of Bharatmala.
National Corridors Efficiency Improvement: The existing Golden-Quadrilateral and NS-EW corridors carry 35 per cent of India’s freight and these would be declared as National corridors. The National Corridors have developed choke points impacting logistics efficiency and, thus, there is a requirement to build Ring Road and bypasses/elevated corridors in addition to lane expansion to decongest these National Corridors.
Development of multimodal logistics parks: To improve the efficiency of freight traffic movement across the country, 24 logistic parks have been identified, which will cater to production and consumption centres accounting for 45 per cent of India’s road freight. Logistic parks intend to develop ‘hub and spoke’ model, which will facilitate consolidated movement of freight by deploying larger carrying capacity truck between the two hub points.
Once developed, these routes are expected to bring efficiency of freight movement on existing corridors and reduce logistic cost by 25 per cent. Around 5,000 kms are being taken up under this category in Phase-I of Bharatmala.
Border and International connectivity roads: 3,300 km of border roads have been identified to be built along the international border for their strategic importance. Around 2,000 km of roads are required for connecting India’s major highway corridor to International trade points so as to facilitate Export-Import (EXIM) trade with our neighbours: Nepal, Bhutan, Bangladesh and Myanmar. 2,000 kms are being taken up under this category in Phase-I of Bharatmala.
Coastal and Port connectivity roads: 2,100 km of coastal roads have been identified to be built along the coast of India. These roads would boost both tourism and industrial development of the coastal region. Of the 2,100 km of coastal roads, 2,000 km of port connectivity roads have been identified to facilitate EXIM trade with an emphasis to improve connectivity to non-major ports. The roads identified have been synergized with the Sagarmala program and are being taken up under this category in Phase-I of Bharatmala.
Green-field expressways: Certain sections of National and economic corridors have traffic exceeding 50,000 PCUs and have also developed several choke points. About 1,900 km of these stretches have been identified for development of green-field expressways. Around 800 kms are being taken up under this category in Phase-I of Bharatmala.

Scientifically indentified corridors
Scientific study has been conducted to identify the corridors for development. This includes Origin-Destination based study of freight movement across districts to identify focus areas for development. The process also identified shortest available route which was different than the preferred route.
Advanced technologies like satellite mapping have been increasingly used for traffic surveys and to identify which corridors require upgrades. This, along with the investments, would lead to massive sector transformation with multiple corridors, higher freight movement and increased number of districts connected to four plus land highways.

NHDP scheme being implemented in seven phases
The National Highway Development Program (NHDP) is the government’s flagship program. It encompasses building, up gradation, rehabilitation and broadening of existing national highways. The program is executed by the National Highways Authority of India (NHAI) in coordination with the Public Works Departments (PWDs) of various states.
NHDP is being implemented in seven phases. As at the end of FY17, NHDP has completed 58 per cent of the projects, 22 per cent are under construction, and 20 per cent are yet to be awarded.
Major awarding now would happen from Phase-IV projects, which involve upgradation of two-lane highways – construction of paved shoulders on two-lane national highways and four-laning of some stretches. Most projects under this phase are likely to be awarded on EPC and HAM basis, as traffic volumes are lower, and are thus, less attractive than Phase-III and Phase-V projects. Implementation of this phase is expected to require an investment of around `730-bn.

Rebidding for terminated contracts
NHDP had terminated ~4,500km of the 9,297km of road projects awarded in FY11 and FY12. During FY11-12, most projects were awarded at premium, as the economy was growing at 7-8 per cent and the demand-supply equation favoured road developers. However, for a number of these projects, construction activity could not pick up, as NHAI failed to arrange encumbrance-free land and obtain forest and environment clearances.
These projects are now coming up for rebidding after obtaining adequate encumbrance-free land and clearances. Given that the demand-supply equation is now unfavourable for road developers, the rebidding is likely to be at more favourable terms, leading to improved business economics.

North East Connectivity Project
The Ministry of Road Transport and Highway (MoRTH) has assigned special emphasis to the development of highways in the North East region and has incorporated a company called National Highways & Infrastructure Development Corporation (NHIDCL) in 2014. NHIDCL primarily addresses the concerns of sluggish pace of implementation of infrastructure projects in the North East Region and Strategic Areas of the country that share international boundaries.
NHIDCL is currently handling 134 national highway and other infrastructure development projects covering about 8,000km to be executed at a cost of about `1.0-tn. These include important projects such as Chandkhera-Kurti Bridge, Rhenok-Pekyong (26km), four-laning of Dimapur-Kohima section of NH-39, Imphal-Moreh section of NH-39 alternative alignment, etc.

Chardham Project
The project envisages connecting Kedarnath, Badrinath, Gangotri and Yamunotri through 888km of disaster-proof two-lane roads in Uttarakhand at a cost of `120-bn. The Finance Ministry has approved an extra budgetary support of `20.7-bn for the project. The project will be executed in seven packages. The government has approved two packages – Rishikesh-Rudraprayag (Package-I) and Rudraprayag-Mana village (Package-II) – on EPC mode.

Setubharatam Pariyojana
The Setubharatam Pariyojana project aims at elimination of railway crossings in India by constructing 1,500 major bridges and 200 railway over-bridges (ROBs) or railway under-bridges (RUBs), with an investment of `508-bn. It aims to make all national highways free of railway level crossings by 2019 to prevent the frequent accidents and loss of lives at level crossings.
208 ROBs/RUBs will be built at the level crossings at a cost of `208-bn as part of the program. In addition to this, about 1,500 old and worn-down bridges will also be improved by replacement/widening/strengthening at a cost of about `300-bn. Detailed project reports (DPRs) have already been received for 73 ROBs.
Besides these, there are abundant opportunities and ambitious plans by states to revamp road infrastructure.

Policy Amendments – Need of the hour
To achieve its ambitious target and revive the Roads sector, the government has adopted a multi-pronged strategy. Key initiatives like:
(a) Amendment to the model concession agreement (premium rescheduling, deemed termination of project),
(b) Bidding of tenders only after 80 per cent procurement of land, and
(c) Exit option available to developer after two years of project operation, will go a long way in improving the business dynamics and transparency in the sector and revive the interest of the stakeholders.
The Roads sector received strong impetus post the amendment of the model concession agreement (MCA) by the Ministry of Roads and Highways for awarding projects on BOT basis. Changes like rescheduling premium payments and deemed termination of project will help revive the confidence of key stakeholders.

Achche Din ahead?
The Ministry had set an ambitious target of 2.5x increase in award and construction of national highways for the year 2016-17. This target was set against the award of 10,000km in 2015-16. The construction target was set at 15,000km against the 6,000km constructed in 2015- 16.
Of the total length of national highways targeted for award, 15,000km would fall under the target of NHAI and 10,000km would fall under the target of the Ministry and National Highways and Infrastructure Development Corporation (NHIDCL).
NHAI’s target for construction was fixed at 8,000km while the Ministry and NHIDCL’s target was 7,000km. Of this, NHAI and MORTH have been able to award 16,270km and construct 8,230km of highways. For FY18, ordering activity is expected to stabilize around the FY17 level. However, industry analysts expect construction activity to show traction as most of the new projects have been awarded post 80 per cent land acquisition, which will ensure timely execution of projects.
Industry reports indicate that NHAI would award over 31,000km of road projects from 2016-17 to 2020-21, with an estimated investment of `3.6-tn. With Build, Operate and Transfer (BOT) projects losing flavour among developers in the last two years given (a) their weak financial position, and (b) weak economic activity impacting traffic growth, NHAI has been awarding more projects through the EPC and HAM route. Analysts expect EPC and HAM projects to attract greater player interest, as they require limited upfront capital and involve lower risk than BOT projects.
In the near term, about 50 per cent of the projects would continue to be awarded on an HAM basis, and the balance 45 per cent on the EPC basis. Current NHAI project pipeline indicates project worth `600-bn to have been bidded out by December 2017, of which `269-bn was on HAM basis, `269-bn on EPC basis, and balance `63-bn on ToT basis.

HAM introduced with intention to reduce risk for developers
Given the distress in the sector on account of high leverage and stretched balance sheets of major players, the government has introduced the hybrid annuity model (HAM). In HAM-based road projects, the government would fund 40 per cent of the construction cost and the balance 60 per cent would be paid as annuity to the developers.
HAM has completely taken away the traffic risk from the developers. Even their equity contribution has halved from 30 per cent to ~15 per cent. The Ministry has prepared a strong pipeline to be awarded on HAM basis. In FY17, 54 per cent of the projects were awarded on HAM basis, 38 per cent on EPC basis, and only about 8.0 per cent on BOT basis.

Money, Money, Money
To meet the capex requirement of constructing 83,677km of roads, Government has laid out clear cut plan of funding the same. Of the total anticipated cost of `6.9-tn, major source of the funding (65 per cent) would be met from raising money from market borrowing (`2.1-tn) and central road fund (`2.4-tn).
Central road fund was introduced by the government (cess on petrol and diesel sales) to meet the funding requirement for the development and maintenance of national and state highways. The road cess on petrol and diesel has been one of the major sources of funding for NHAI projects over the years (from `60-bn in FY13 to `96-bn in FY15). It was tripled in the FY16 budget to `6.0/litre from `2.0/litre on petrol and high-speed diesel. However, NHAI’s share of the road cess was reduced in 2016-17.
While it was given `150-bn in 2015-16 from the Central Road Fund, the budgeted amount for 2016-17 is only `121-bn. Government allocation of `2.4-tn fund to CRF will bring in stability and certainty of funds available for road development in the long run.
Moreover, MORTH has developed the Toll-Operate-Transfer (TOT) model to free up capital, which will help to fund the equity requirement of upcoming projects. Under the TOT model, the right of toll collection for operational public-funded national highway projects will be assigned for a pre-determined concession period (30 years) to concessionaires against upfront payment of a lump-sum amount.
Initially, 75 public-funded national highway projects with aggregate length of around 4,500km and annual toll revenue collection of around `27-bn have been identified for the TOT model. The model concession agreement (MCA) has been developed and the first round of bidding for projects is expected to be taken up in 2HFY18.

Conclusion
For the road sector, which has plausibly looked up in recent times, the government’s infra development focus – including the Bharatmala project announcement – is nothing short of a booster shot. Post the announcement, NHAI has revised its FY18 road award target from 6,500km to 10,000kms and its project pipeline is worth >`500-bn of projects. And, although project implementation would be critical given past challenges like land acquisition, the gigantic outlay is a massive business opportunity for developers.
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The government’s assertion of completing 9,000 km of highways by end-FY2018 indicates a pickup in execution. In that sense, the outlook for the Roads sector looks promising.

Advanced technologies like satellite mapping have been increasingly used for traffic surveys and to identify which corridors require upgrades. This, along with the investments, would lead to massive sector transformation with multiple corridors, higher freight movement and increased number of districts connected to four plus land highways.

For the road sector, which has plausibly looked up in recent times, the government’s infra development focus – including the Bharatmala project announcement – is nothing short of a booster shot.