• Gaining momentum: Private players hit the road as new model fuels project pace

    A steady ramp-up in the revival of private sector interest in the country’s highways sector is evidenced by an over two-fold increase in sections offered this fiscal for bidding under the government’s new project implementation format — the hybrid annuity model (HAM). This, alongside a pickup in the resolution of stranded projects, has infused fresh traction in the country’s roads sector.
    Progress on the ground offers some pointers. The average pace of construction for the first quarter of the current fiscal — April-June 2016 — is pegged at 21.86 km per day, up from a daily average of 16.60 km last fiscal and just over 12 km in 2014-15, according to Ministry of Road Transport and Highways (MoRTH) estimates.
    Since 2014-15, the Centre’s efforts to revive the roads sector saw it progressively shift focus from the default BOT (build-operate-transfer) model to projects being awarded through the EPC format — the engineering-procurement-construction model — which is less capital-intensive and where the developer is responsible for just the delivery of the completed project and thereby remains insulated from the traffic risk.
    The fact that the private sector is warming up to the new HAM format — a combination of EPC and BOT-annuity models where the Centre bears only a part of the traffic risk — offers fresh evidence of a turnaround in the risk-reward appetite among developers and is being construed as a pointer to renewed optimism in the sector.
    The numbers offer some indication of the revival in sentiment. As against 92.676 km of highway sections that were awarded under the HAM in the year 2015-16 (worth about Rs 2,582.34 crore), the projects likely to be awarded under this format in the current fiscal are over two-folds higher at 208.21 km (worth Rs 4,363.84 crore). Another 17 projects totalling 873 km have been proposed under this format in 2016-17, government officials involved in the exercise said.
    Adding to the renewed sense of optimism in the roads sector, widely touted as the only glimmer of hope in an otherwise bleak core sector narrative, is the progress on the resolution of stuck projects.
    An estimated 46 projects that were identified two years ago by the National Highways Authority of India (NHAI) as “languishing”, totalling a length of 4,860 km and entailing a total project cost of Rs 51,338 crore, is now down to 19 projects. The inherent hurdles have been resolved in 27 cases, which frees up private sector capital and equipment to be deployed in fresh projects.
    “Currently, no new project is launched unless the pre-construction activities are fully complete, that means in case of PPP projects, 80 per cent land has to be available and for the EPC projects, 90 per cent of land has to be available,” an official said. Apart from this, to address the paucity of equity capital and improve liquidity, the steps taken by the Centre in the last two years include permitting the securitisation of future cash flows, deferment of premium in stressed highway projects, substitution in financially stressed highway projects and 100 per cent equity divestment after two years of construction for all highway projects under PPP (public private partnership) mode.
    Two other key measures taken by the Centre to speed up project lead time, officials said, pertain to green clearances and coordination with the Railways. Environment clearance procedures have been eased to ensure that EC is not required for length of 100 km and even beyond 100 km, it is not required if widening is restricted to 40 metres and realignment to 60 metres. For the construction of Rail Over Bridges (ROBs) and Rail Under Bridges, the procedure for GAD (General Arrangement Drawing) approved by Railways for ROBs has been simplified and made online. Maintenance charges, which were hampering the progress of many projects, have been waived off by Railways while the standard design has been put online.
    The private sector participation in the road sector had witnessed severe liquidity crunch in the years 2012-13, 2013-14 and 2014-15, which resulted not just limited or no participation in the new projects awarded on the default BOT-toll format, but it also resulted in delay in completion of ongoing projects. Under the BOT model, the developer funds the project and earns returns from toll collection for the duration of the concession, resulting in the capital being locked in for a long period with the risk of revenue not adequately covering for construction and debt servicing costs. Under the HAM model, the government commits up to 40 per cent of the project cost over a period, even as it hands over the project to the developer to start road building work.
    A majority of road stretches offered under HAM since April this year has seen a progressive warming up of interest, with over nine road developers bidding for each of the five projects where bids submission happened. This compares with up to four bidders for each of the hybrid annuity projects announced during January-March this year. Even in sections offered under the BOT format, an uptick is palpable, with a total of 27 projects of the NHAI having achieved financial closure during the last three years.
    In case of EPC projects as well, increased participation among developers has translated into extremely competitive bids in recent months. Of a total of 52 EPC road projects (worth about Rs.26,700 crore) that were awarded between January and June this year, close to 40 projects were won below the NHAI’s estimated cost, according to data compiled by brokerage Equirus Securities Pvt Ltd. Pernell McPhee Womens Jersey

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