Issues and financial hassle have upset the pace

Issues and challenges for road
sector

Restricted financial freedom of PPP
road developers:

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Funding restrictions and financial hassle
have upset the pace of development in the roads sector. The PPP model for road
construction and development acted as a catalyst and provided impetus to the
growth of the sector. In Fiscal 2008-Fiscal 2012, of the total 10,600 km of
national highways completed under NHDP, 50% was funded through BOT-toll model
and 10% through BOT-annuity model.

Delays in project execution and cost
overruns:

Delays in project execution have
posed one of the major hurdles in development of the road sector. Delays lead
to cost overruns which lower returns for developers as well as adversely affect
their debt servicing ability. Reasons for delays are numerous and include
issues in land acquisition, environmental clearances, forest clearances,
railway clearances, shifting of
utilities, religious structures and encroachments.

Hurdles in bank funding for road
projects:

Banks are reluctant to fund road
sector projects as they approach sector exposure limits. Moreover, to ensure
that delays due to land acquisition do not hinder the progress of a project,
they demand 80-100% of the land be available with the developer at the time of
the award of the project.

Reluctance to accept toll:

The Indian population has not yet
completely accepted the importance of tolls for road construction and
improvement of service delivery. Also, appeasement of people through provision
of subsidies has been a major tool for reaping political gains in India. There
have been instances of people, backed by various political groups, opposing
toll plazas. Such instances have also affected service delivery within the
sector.

Multiple steps taken by government
to revive sector

The Roads sector has been identified
as one of the top-3 capex themes by the current NDA government. The Ministry of
Road Transport and Highways (MORTH) has taken multiple steps to revive the
ailing sector over the last three years. We believe the framework required for
the speedy award and execution of projects is in place. We expect activity to
pick up, with the government addressing issues like:

Execution hurdles – awarding projects after 80% land
acquisition under BoT and 90% land acquisition under EPC
Funding arrangement – cess trebled from INR2/liter to
INR6/liter; market borrowing plans in place
Faster forest and environmental clearances
Change in project model to ease funding burden of
cash-strapped developers
Exit policy for developers to help unlock equity from
completed projects, making it potentially available for investment in new
projects
Premium deferment scheme to ease cash flow issues faced
by developers

Activity showing early signs of
pick-up

For the last three years, the
government has been ironing out issues hampering growth of the Roads sector. In
FY17, early signs of revival in the sector became evident, with project awards
at 16,270km (up 56%) and construction at 8,230km (up 37%). The government has
set steep targets for FY18 to award 25,000km and construct 15,000km. Moving
ahead, the trend looks promising, with industry reports indicating that NHAI
would award over 31,000km of road projects executable over FY17-21E, entailing
an estimated investment of INR3.6t (civil construction works). We expect
awarding activity to stabilize at 15,000km per year, and execution activity to
pick up – 9,300km in FY19 and 10,000km in FY20.