Tuesday, August 25, 2009

[Investors Please Listen] “Road Development in India” organized by Indian Infrastructure NHAI sets target of awarding 13,393 km in FY2010

Key takeaways from road development conference


We attended the 4th annual conference on "Road Development in India" organized by Indian Infrastructure. Here are the key takeaways.

Key Takeaways

Ambitious target of 20 km/day

The past couple of years were pretty unimpressive for road development in India with factors like concerns over multiple clauses in the Model Concession Agreement (MCA), the economic slowdown and the liquidity crunch taking its toll on the road sector. However, the re-election of the Congress led UPA Government and a dynamic minister like Mr. Kamalnath has infused a fresh wave of hope and vigor towards reviving the speed and momentum in road development. This is clearly evident from the ambitious target of constructing 20/km day set by the ministry.   

NHAI sets target of awarding 13,393 km in FY2010

The government has realized that to achieve the target of constructing 20 kms/day, it will have to award approximately 21,000 kms a year (assuming average completion time of three years for a project). And to achieve this task, NHAI has set a target of 135 projects covering 13,394 kms with an investment of close to Rs1000bn to be awarded in FY2010. Out of these, NHAI plans to award 70 projects covering 7,968 kms with an investment of close to Rs616 bn over the next two quarters.

Key policy initiatives - to speed up road development in the country

Identifying favourable environment and institutional framework as the key ingredients for the success of PPP investments in the road sector, the Government has introduced significant policy changes in the last year. Adoption of MCA and standard bidding documents for PPP projects for faster and transparent bidding process are amongst the key changes.  Land acquisition has been a perennial issue for executing road projects in India and in order to expedite the land acquisition process, the government is planning to set up 150 special land acquisition units. Enacting and adhering to "state support agreements" are other initiatives for cutting through cumbersome process of shifting utilizes. 

Steps to attract bidding interest

To attract bidding interest for road PPP projects NHAI has made some key changes notable amongst them are increasing total project cost estimates (TPC) by 20% and 10% for projects where Detailed Project Reports (DPRs) were prepared before 2007 and post 2007 respectively. Also Viability gap funding (VGF), which was earlier provided at 20% during construction phase and 20% during O&M, is now entirely being provided during the construction phase.

Industry perspective on policy initiatives

Even though the outlook and opportunity in road sector is encouraging, the sector is still plagued by key issues like massive differences in the estimates of TPC by NHAI and developers, cumbersome process of land acquisition, utility shifting etc and non adherence to state support agreements. Further issue like the Termination clause and Conflict of interest clause in the MCA impedes investor and lender interest in the sector.  Also the biggest risk PPP projects carry is the policy changes like the recent increase in MAT rate from 10% to 15%. Such risks are practically inconceivable to price in and hence, can render a significant blow to the interest of developers and lenders.


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