SPEED BUMPS

Why India’s ambitious $13 billion roads and highways plan might remain a pipe dream

Quartz india
Quartz india

Last month, finance minister Arun Jaitley’s budget speech underlined the Narendra Modi government’s emphasis on infrastructure, with an allocation of over Rs2 lakh crore ($28.6 billion) in the coming financial year.

With the global economy cooling, and consequent contraction of international trade volumes, bolstering this sector is critical. The prime minister’s flagship “Make in India” scheme will make indigenous products competitive and cost-efficient only if better infrastructure facilities are provided.

India’s roads sector needs urgent maintenance, upgradation, and expansion. That is why it will attract an allocation of Rs97,000 crore ($13.86 billion) in 2016-17—Rs15,000 crore ($2.14 billion) to be raised by the National Highways Authority of India (NHAI) through bonds, and Rs19,000 crore ($2.71 billion) through Pradhan Mantri Gram Sadak Yojana, which is focused on rural connectivity.

In 2015-16, NHAI has so far awarded 43 projects to build 2,624 kilometres of roads. Of this, seven projects are under public private partnership (PPP). If PPP does not prove viable (including, failure to attract private interest), NHAI proposes to go for the engineering, procurement, construction (EPC) mode and the hybrid annuity model.

The budget includes two other key milestones for the year: approval of 10,000 km of national highways and up-gradation of 50,000 km of state highways to national highways.

The budget has also proposed some new PPP initiatives:

  • Introduction of the public utility (resolution of disputes) bill in parliament, to streamline institutional arrangements for dispute resolution in infrastructure-related contracts, PPP and public utility contracts
  • The issuance of guidelines for renegotiation of PPP contracts
  • Development of a new credit rating system for infrastructure projects

In all, it is an ambitious plan for a vital sector. However, a few challenges remain.

Financing conundrum

While land acquisition and engineering-related issues will continue to hamper the sector, the bigger challenge will be finance.

NHAI plans to add 50,000 km of roads in the next five to six years, involving nearly $250 billion in capital expenditure. Government resources are inadequate to build these on EPC basis. With banks already grappling with bad assets in highways, they would be reluctant to increase exposure till they are recapitalised.

While government funding may continue for some time, future development can happen only by attracting private investment through the BOT (build-operate-transfer) structure. However, bidders are likely to be few and conservative, considering the rising tally of failed projects.

Fixing the risk

Existing projects can be made more viable by providing an exit option to shareholders, in favour of long-term institutional investors (such as pension funds). Refinancing through cheaper debt, including external borrowings, should also be encouraged.

Also, an understanding of risks and their optimal allocation is important for successful completion of projects.

An analysis of contracts shows that the initial development and construction stages involve significant risks. Post-completion, however, the biggest uncertainty is related to traffic. These arise primarily out of non-fulfilment of demand projection, and oversights while making assumptions about market conditions.

A balanced contract could divide risks fairly—those arising from development and “traffic” to be borne by government authorities, and those from construction and operation, by the private developer.

Lastly, the announcements and initiatives proposed in Arun Jaitley’s budget must be implemented in a timely manner. This, in turn, may see the return of private investment and interest to the sector, without which the accelerated development of India’s roads & highways may remain a pipe dream.

Soumya Kanti De Mallik, associate partner at HSA Advocates, contributed to this article. We welcome your comments at ideas.india@qz.com.

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