‘The Indian roads sector has got into revival mode with improved intervention from the Central government’

by / Thursday, 01 September 2016 / Published in News & Updates

The Indian roads sector has got into revival mode with improved intervention from the Central government, says SAPNA SETH

A renewed commitment by the Narendra Modi government to spur the investment potential of the domestic infrastructure vertical has led to the spotlight being focused on the road sector, with a fresh slew of projects and investments in the pipeline.

The enhanced role of the government in propelling the road sector to the next curve of development assumes great importance at a time when the private sector is grappling with heavy debt on its books and is bogged with steadfastly rising NPAs of PSU banks. With a focus on scale, transparency and increased Return on Investment (RoI), the government has initiated several noteworthy measures to harness the huge investment potential of the country’s around 4.8 million km road network, the second largest in the world after the US. With hardly 24 per cent of national highways having four lanes and comprising a mere 1 per cent of the overall road network, the sector offers huge potential in the form of increasing lanes for speedy movement of goods and services along with renovation and construction of new state highways for facilitating faster intra-state traffic movement.

The government has formulated a comprehensive road network expansion exercise wherein it is likely to award road projects to the tune of 25,000 km in 2016-17 as compared to project awards of 10,000 km in 2015-16. A capital-intensive sector which requires huge amount of capital infusion at timely intervals, the road sector has seen revamped expenditure outlays with the government upping the annual spend from Rs 21,100 crore in fiscal 2013 and 2014 to a staggering Rs 71,700 crore over the last two years.

A unique initiative of the government towards expansion of highway development projects, through enhanced private sector participation in the country, has been the implementation of the hybrid annuity model. Forty percent of the project expense, under the hybrid annuity model, is to be borne by the government for supporting the construction effort of private developers and the remaining 60 per cent is slated to be released as annuity payments over the period of concession with a provision for interest component to the developer on outstanding amount.

The road sector has seen revamped expenditure outlays with the government upping the annual spend from Rs 21,100 crore in fiscal 2013 and 2014 to a staggering Rs 71,700 crore over the last two years.

This model also provides for separate payments for operations and management to the developer by the government. With an added incentive of inflation indexation, the developer enjoys the advantage of not having to bear inflation risks. Under the newly framed project delivery model, the government plans to award highway development projects worth Rs28,000 crore in the current financial year. This is slated to be the largest public-private partnership (PPP) sectorial investment in the country since 2010.

Durgapur_Xpressway - Singhi AdvisorsThere has been an uptick in inorganic activity in the BOT (Build, Operate and Transfer) space in the road sector. While, on one hand private equity (PE) players have been buying projects with promising operational potential from developers, there are other players who are consolidating their interests in road projects with strong financials. Private players along with other investors are likely to show greater interest in future BOT projects with strong financial prospects in anticipation of growth in road traffic and a fall in interest rates.

The resuscitation of the road sector in the country has largely been led by changes in regulations to deal with present-day project challenges and increase in government expenditure to kick-start the capex cycle. A credible dispute mechanism, speedy project clearances, last-mile funding and simplicity in exit norms for companies are other commendable moves initiated by the NDA government to provide the much-needed push to the development of this crucial infrastructural sector.

The government has formulated a comprehensive road network expansion exercise wherein it is likely to award road projects to the tune of 25,000 km in 2016-17 as compared to project awards of 10,000 km in 2015-16.

Though the government has achieved significant success in largely expediting road projects, certain impediments remain in their smooth execution.Stressed valuations and difficulties in raising working capital owing to prolonged project gestation periods have hampered the operational potencies of developers, leading to a significant drop in participation in road projects floated by National Highways Authority of India (NHAI).  Projects also face delays owing to difficulties on account of rampant encroachments on project sites, delays in acquiring land, multi-layered governmental approval systems at various project stages and lack of environment clearances.

(The author is Associate Director, Singhi Advisors)

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ACE ADVISOR

Singhi Advisors is a global investment banking firm, focused on providing merger, acquisition, divestiture and corporate advisory services to domestic and international companies. With a team of 40 aggressive & experienced professionals, working across different offices in India and Australia, Singhi Advisors have exclusively advised over 100 transactions valued over $ 4.2 billion in the recent past, covering 18 sectors and sub-sectors, across 20 countries dealing with global giants. The firm’s Global Building & Infrastructure Group has advised leading firms selling into construction and infrastructure related end markets on sell-side, buy-side and capital raise transactions. The group has completed several assignments, making it one of the most active middle market investment banks in the space. Its dedicated global building and infrastructure bankers have a deep understanding of trends in the engineering and construction sector throughout the globe with industry bankers in all major economies.

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