After Narendra Modi swept into power in May 2014, one of his government’s priorities was to resuscitate India’s road infrastructure.
India’s road sector had been stagnating since 2012, hamstrung by the economic slowdown and a lack of private sector participation. Between 2012 and 2014, the government could only award 5,000 kilometres of road projects or about seven kms a day. Modi, on the other hand, promised to build 30 kms of roads a day.
In February this year, the government also pledged to invest Rs80,000 crore ($12.6 billion) in the road sector in its annual budget.
Now, 16 months into his tenure, Modi’s aggressive push looks like it is delivering.
“We have addressed a number of challenges in the road sector already,” India’s road transport secretary Vijay Chhibber told Quartz. “There were some 77 projects that were languishing. Of this 34 were shut down and rebid. About 18 are revived through various means by governmental money and in the case of remaining projects, we are waiting for some clarity from the Cabinet Committee on Economic Affairs.”
This year, the government plans to award 10,000 kms of roads by March 2016. That’s a far cry from 2013 when the central government could only award 1,300 kms.
Back to the basics
To revive the road sector, the Modi government decided to rely on a tried-and-tested model of construction: the Engineering, Procurement and Construction (EPC) model. In this model, the construction of the road is executed by the private developer, but funded by the government.
This method is different from a decade-long practice adopted by successive governments since 2002 to build roads under the “Build, Operate and Transfer (BOT) model.” Under the BOT model, private developers invest their own money for constructing roads. They recuperate the investments through toll collection or by fixed annual revenue from the government.
Since 2012, facing a slowdown in the Indian economy and rising interest cost, many private developers had stayed away participating in the BOT model.
The Modi government also devised a new hybrid annuity model in April this year, where it would share project costs with the private sector in a 40:60 ratio. Under this model, the government provides 40% of the project cost to the developer to start work while the remaining investment will have to be made by the road contractor.
“This government has given the sector a much-needed push,” said Vinayak Chatterjee, chairman at Gurgaon-based infrastructure services company, Feedback Infra. “It has shifted from the BOT model to the EPC and the hybrid annuity model and that seems to be working. They have set a target of 10,000 kms this year and it is close to achieving that.”
The government, according to Chhibber, is now awarding between 23 and 24 kms of road projects daily. “We are also constructing 6,300 kms of roads this year, which translates to 18 kms of roads every day. In the next year, this will be raised to 23-24 kms,” the road transport secretary said.
“Certainly, the worst is behind us,” Amitabh Sharma, an infrastructure expert and partner at legal advisory firm, Khaitan & Co, told Quartz. “A revival is now on the cards and the groundwork has already been laid out. But the government has to take responsibility for now and ensure that it keeps rolling out projects.”
But the road ahead isn’t entirely smooth.
A number of old projects that was awarded between 2010 and 2012 are on slippery ground, according to credit rating agency CRISIL. This includes 5,100 kms of under construction roads that run the risk of remaining incomplete, and another 2,400 kms of operational roads, which are struggling to service their debt mainly due to lower than expected traffic.
These projects were awarded between 2010 and 2012 on the BOT model. Their combined debt stands at Rs45,900 crore ($7 billion).
“The government is making efforts to ensure that some of these projects get going through a number of schemes including an exit policy and reworking contracts,” Chatterjee said. Since April 2014, the government has put into place an easier exit policy, which allows companies to leave if they find a certain project unviable.
Still, the government will have to handhold the private sector into investing until roads become attractive once again. “Public sector funding will have to drive growth of highways in the near term because of the weak financials of private developers and limited capacity to take up more projects,” the CRISIL report said.
The early days of a revival may have arrived, but there’s a long way to go.