Generous outlay, but bumps remain for roads

• Posted in Infrastructure
• on February 2, 2017
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The Centre’s infrastructure outlay, especially for the road sector, continues to improve. First, the government has budgeted ?64,900 crore to be spent in 2017-18, which is about 24 per cent higher than the revised estimate for 2016-17.

Secondly, to facilitate an increase in coastal trade, it plans to add close to 2,000 km of coastal roads. The total allocation budgeted for the rural road programme, however, stands flat compared to last year, at ?19,000 crore.

The Background
Over the past one year, roads got built at a robust rate — from around 10 km per day at the start of the year to about 18 km per day by the end of the year. Despite this, the Centre may fall well short of the 10,000 km national highway target planned for this fiscal, with only 5,700 km bid out for construction till the end of December 2016.

Unlike last year, when most of the road projects were built using pure construction contracts — in Engineering, Procurement and Construction (EPC) format — this year saw close to 30 per cent of the projects bid out using the Hybrid Annuity Model (HAM) contract. HAM is a mix where a road project is built 40 per cent through EPC format and while the other 60 per cent through the Build Operate Transfer – Annuity model.

But, the worrying sign is, that increasingly EPC projects are bid at a cost that doesn’t cover the government’s estimate for the project. A similar case of aggressive bidding is also witnessed in HAM projects.

The Verdict
With banks reeling under increasing levels of non-performing assets from the infrastructure industry, they will be averse to lend further — especially to highly-leveraged road construction players. Moreover, only 25 per cent of the HAM projects till end of December 2016 have reached financial closure.

However, with increased allocation by the government for roads, orderflow for companies will continue to be robust. The key beneficiaries include IRB Infrastructure, Ashoka Buildcon, L&T, Sadbhav Engineering, IVRCL, MEP Infrastructure and NCC.

The next round of reforms for the road sector depends on how well the Investment trust (Inv-IT) model is accepted by investors, and how well the implementation of the Toll Operate and Transfer (TOT) model (that is, long-term leasing of operational projects) is carried out by the Centre.

Besides, the issue of stalled projects and the effectiveness to release project funds stuck under arbitration with government bodies still needs to be watched Donald Trump Womens Jersey

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