The Indian road sector is showing signs of revival drawing on several policy measures announced by the Government over the last 18 months. Long hindered by execution delays, project cancellations, stalled projects, loss of lender confidence, leveraged balance sheets of developers and sluggish traffic growth, the sector now appears to be on the path to regain its lost sheen. The policy measures that ICRA expects will have a direct bearing on the pace of execution of road projects include: award of projects only after 80% right of way (RoW) has been secured; focus on quick resolution of stalled projects; delegation of power to regional offices to grant forest clearances; and allowance to file online applications to construct rail under- and over-bridges. Other measures such as back-ending of premium payment, compensation to concessionaires in case the delay is not attributable to them and relaxation in exit norms should address the liquidity related issues faced by developers.
According to Mr. Rohit Inamdar, Senior Vice-President, ICRA, “While the one-time fund infusion by NHAI for languishing road projects shows positive intent, first charge creation has become a challenge in implementing the one-time fund infusion scheme as the exposure of existing lenders will become subordinate to funding by NHAI. Similarly, as far as the 5/25 scheme is concerned, although deferment of loan obligation eases the pressure on cash flows during the initial years of operations, the acceptability of this scheme is in doubt, given that road projects have a finite life and the key parameters affecting revenues (viz. traffic volumes and toll rates) are beyond the control of the developer. While all the initiatives have been directed at expediting the award and execution of road projects and addressing the difficulties faced by stalled but viable projects, the currently unviable but operational toll projects will either continue to languish or they will have to be cancelled and re-awarded.”
Project awards, execution report sharp pickup
Upfront land acquisition, approvals and larger proportion of Engineering, Procurement and Construction (EPC) contracts have increased the interest of developers and contractors in road projects. This is reflected by the 69% increase in project awards by NHAI during 8MFY2016 to 2,649 km from 1,572 km in 8MFY2015. About two-thirds of the awards during this period involve EPC contracts. Further, the efforts made by the government to clear bottlenecks in execution have started yielding results. This is reflected by the 45% increase in the pace of execution to 4.96 km/day during April-November 2015 from 3.41 km/day during April-November 2014. At this pace, execution during FY2016 will exceed 1,800 km, which would be higher than the figures for both FY2015 (1,500 km) and FY2014 (1,779 km).
Swift amendments made to hybrid annuity model based on developer feedback will improve its market acceptance
The first project under the hybrid annuity model (HAM) — four-laning of the Solan-Kaithalighat section in Himachal Pradesh — did not attract a single bidder because of three major reasons: a) back ended annuity payments from NHAI; b) absence of clarity on payment by the concessionaire for maintenance of project stretch during construction and c) lack of clarity on approvals. Regarding approvals, several parts of the RoW were under arbitration and there was limited visibility on availability of land for the Kandhaghat bypass. Besides, there was little clarity on forest clearances and on hill cutting near the Kalka-Shimla track, a UNESCO world heritage line.
Mr. Inamdar added, “Subsequently, NHAI made several amendments to the draft concession agreement, including a revised annuity payment schedule envisaging payment of – around 24.2% of the completion cost to be paid in first five years as against 7.7% earlier. Maintenance of the existing road during construction has now been made part of the bid price, while on RoW/approvals the relevant clause has been amended such that if NHAI is unable to provide the remaining site within 180 days from the appointed date, the same will be removed from the scope of the work. Swift amendments made to concession agreement for HAM based on developer feedback will improve its market acceptance.”
Till date, two projects were awarded under HAM one each to Welspun and Apco Infratech (2 packages of Delhi-Meerut Expressway), aggregating to a total of 30.66 Km of road length for a total cost of Rs. 18.99 bn. NHAI had set an award target of 1400 km for HAM, around 28% of project awards of 5000 km during FY2016. Till January 2016, bids for 16 projects totaling 764.69 Km worth Rs. 150.99 Billion were called for under HAM which are to be awarded before March 2016 – given these, the target of 1400 km, is likely to be missed.
Compliance with Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (RFCTLARR) Act, 2013, pushes up land acquisition cost
For land acquired during current financial year, compensation was increased to four times the market value in rural areas and twice the market value in urban areas. This has pushed up the cost of land acquisition by 122% to Rs. 30 million per hectare from Rs. 13.5 million in FY2015. The cost of land acquisition for some of the expressway projects is expected to be in the range of 37-55% of TPC; the figure was around 16% in 2012 and 9% in 2009. For 1 km of greenfield 4-lane highway, the minimum land required is 6 hectares, which puts the cost of land acquisition alone at Rs. 180 million/km at current prices; for a 6-lane highway, the cost could be as high as Rs. 270 million/km.
On the increase in land acquisition cost, Mr. Inamdar added, “As compliance with the RFCTLARR Act, 2013 is limited to compensation; the impact would be only on the cost of land acquisition in the near term. At prevailing prices, land acquisition cost could be higher than the construction cost for some stretches. Since land acquisition in the road sector is the responsibility of NHAI or the State government concerned, the increase in the land acquisition cost will not impact the private sector. Around 14,000 km of length was still to be awarded by NHAI under the National Highway Development Programme (NHDP) program as of September 2015. This acquisition can be spread over 3-3.5 years, assuming 4,000-5,000 km of awards a year. Given the varying requirements for different types of national highway projects (2-lane, 4-lane, expressways, etc.) and assuming an average of 4.28 hectares of land per km, the total land acquisition cost alone would be in the range of Rs. 1,800-1,950 billion over the next 3-3.5 years.”
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