The sector witnessed a surge in private participation, leading to a marked rise in number of contracts awarded by NHAI to 38 in 2009-10 from 8 in 2008-09  Abysmal condition of roads in India has prompted the government to lay an increased emphasis on road development in recent times, leading to the launch of road development programmes such as the Pradhan Mantri Gram Sadak Yojna and the Special Accelerated Road Development Programme. These schemes, together with the National Highway Development Programme have considerably scaled up road development projects in the country over the last few years. Still, participation of private sector road developers remains low, thereby restricting the growth of PPP[i] models in the sector.
“Land acquisition is the key impediment for any infrastructure project in India,” opines Gautam Patel, principal consultant at Coordinates Infrastructure Consulting, an Ahmedabad-based well-known advisory firm.
Speaking further to a TJCD correspondent on the factors that are holding the private sector participation in the road sector, Mr Patel points out to a not-so well defined work scope resulting in cost escalation for contractors in most times, delay in approval processes and variability in toll policy across the country.
ICRA’s observations
Leading credit rating agency ICRA Ltd has recently come out with an elaborated study on the same subject, titled ‘Toll Road Projects: Challenges impeding private sector participation’.
In case of a BOT[ii] project, developers face some major problems starting from the bidding stage to the operations stage, consequently impacting the growth of the Indian road sector, states the ICRA study.
According to the study, the key bottlenecks that discourage developers to participate in the bidding process include several procedural drawbacks, stringency with respect to bidder selection and ambiguity over certain clauses in the Model Concession Agreement (MCA). Surprisingly, the National Highway Authority of India (NHAI) designed the MCA to expedite the process of awarding contracts for toll road projects.
In addition, the time gap between bid invitation and Detailed Project Report (DPR) preparation comprising design specifications, cost estimates and traffic projections is also responsible for the lukewarm response from the private sector. The reason being these private players depend on the DPR to conduct a cost-benefit analysis prior to bidding; however, the time gap reduces the relevance of the report.
Lack of long-term project loans and alternative funding options, delays on government’s part to hand over encumbrance-free work sites to private developers due to problems in land acquisition and exposure to interest rate risks impacting project cost are some of the other challenges faced by developers in various phases, outlines the study.
Furthermore, developers are required to recover their costs and returns through toll collection, in case the project is awarded under the BOT Toll model. Therefore, variations in traffic flow, WPI[iii] movements (toll fixation is determined by movements in WPI) and significant regulatory changes impact cash flows to a great extent, indicates the study.
Recent govt initiatives
To attract more and more private developers, the Road Ministry brought in certain changes with respect to policy reforms, project rewarding process, land acquisition and fund availability. For instance, according to the new clause, a developer who has completed road projects equal to the current project value over the past 5 years is entitled to bid. Earlier, developers executing projects double the current project value qualified as eligible bidders.
Such concerted efforts, coupled with the growing economy are encouraging private participation, leading to a marked rise in number of contracts awarded by NHAI to 38 in 2009-10 from 8 in 2008-09.
Moreover, the limit on FDI for road development projects has also been raised from 74% to 100%; however, aforementioned hurdles restricted foreign players from aggressively investing in the sector.
Industry analysts and sectoral experts opine that developing a stable and progressive policy regime can provide the much-needed comfort to private players and lenders, boosting PPP models.
Jeeta Bandopadhyay
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