Roads sector hopes govt spending to continue in budget for 2024-25; eyes on new concession models

The road and highway industry in India hopes that the government will unveil a long-term plan and timeline for expanding highways capacity and building highway ancillary infrastructure in the country when the Budget for 2024-25 is presented on July 23.

The roads and highways sector hopes that the government will unveil a long-term plan and timeline for expanding highway capacity and building ancillary infrastructure when the budget for 2024-25 is presented on July 23.

The sector has reported robust growth over the last 10 years with the Bharatiya Janata Party-led government spending around Rs 10,37,616.39 crore between 2014 and 2024 to construct 54,858 km of national highways.

Even in the interim budget for 2024-25, the government raised the allocation to the Ministry of Road Transport and Highways (MoRTH) by 2.8 percent to around Rs 2.78 lakh crore from Rs 2.7 lakh crore a year earlier.

Along with long-term plans, the highway industry indicated that all eyes will be on the price rationalisation of the first few projects awarded under the new model concession agreement for build-operate-transfer (BOT) and tolling, operation, maintenance and transfer (TOT) projects amended by the government in March.

However, while many industry experts have lauded the efforts to increase the pace of highway construction, they have pointed out that the government needs to prioritise safety and quality measures in the construction sector.

Long-term plan for national highway construction

"When the finance minister had as part of the budget for 2022-23 announced that 25,000 km of national highways will be constructed in the next two years, it set the agenda for the industry. A similar announcement will help drive growth in the sector further," a senior executive with the Hyderabad-based construction company NCC Ltd told Moneycontrol.

Similarly, accounting firm Deloitte in a recent report had pointed out the highways sector in India could grow at a rapid pace in the next half a decade with many marque projects achieving their completion in the coming years.

"The focus of the government is expected to shift from asset creation to asset management," Kushal Kumar Singh, partner, Deloitte India, said in the report.

The long term-plan for the sector is especially important at a time when order inflows fell in FY24 and India’s pace of road construction is expected to slow in 2024-25.

A slowdown in building roads usually happens in an election year as the project execution is delayed with the model code of conduct coming into effect and awarding of projects is deferred in the financial year before the Lok Sabha elections, rating agencies CareEdge and India Ratings and Research had said in May 2024.

CareEdge expects MoRTH and the National Highways Authority of India (NHAI) to construct around 11,100-11,500 km of road in 2024-25, against around 12,349 km of national highways constructed in 2023-24.

India saw a 30.7 percent on-year fall in orders awarded by NHAI and MoRTH in FY24 to only 8,581 km versus the targeted 13,290 km.

Eyes on new concession agreements

MoRTH in March 2024 made over a dozen changes to the model concession agreement for BOT and TOT models, including construction support to the concessionaire to complete projects on time and longer tolling period to tide over losses.

The first projects under the new models will be awarded after the budget for 2024-25 is announced. Back in December 2023, road transport and highways minister Nitin Gadkari had indicated that his ministry was looking to bid out projects worth Rs 1.5 lakh crore to Rs 2 lakh crore on the BOT model.

Industry participants have pointed out that while the government looks to have addressed cash flow problems that contractors had faced in the earlier BOT model, profitability of the new concession agreement is yet to be tested.

"If eligibility criteria for BOT projects is eased when the government awards projects under the new model, projects may be awarded at very low rates which may lead to cash flow issues once again," a senior executive from the Mumbai-headquartered IRB Infrastructure Developers told Moneycontrol.

He added that timely payment to contractors awarded BOT projects will also be a key monitorable for projects awarded under the new concession agreements.

According to India Ratings and Research, NHAI's recent attempt to revive the BOT model will augur well for the road sector and revive private capital expenditure (capex) in the industry.

The Fitch group agency expects the new amendments to take care of most of the historical concerns that had led to private sector aversion from highway contracts, but toll estimation risk continues and traffic diversion due to competing roads remains a key factor to monitor.

“The NHAI amended the model concession agreement for BOT in FY24 and for bidding purposes, has identified 53 projects worth over Rs 2.2 trillion covering a length of 5,200 km. India Ratings and Research (Ind-Ra) opines that the NHAI, via the changes in the BOT concession agreement, shall help to increase the share of BOT projects to 20 per cent in FY25, however, lenders’ interest is to be closely monitored over the short term,” the agency said.

In an article on July 9, Vatsala Kamat, associate editor at Moneycontrol, also pointed out that "the lower book-to-bill ratio that reflects lower order intake may push developers to bid for projects" while pointing out that the overhang of past failures under this model may deter developers from taking the fresh bait.

Safety and quality of road projects

The industry also expects the government to increase its focus on safety while pushing for the timely upgrade of infrastructure.

Tata Projects managing director and chief executive officer Vinayak Pai advocated a two-pronged solution—stricter eligibility criteria for bids and increased accountability—to minimise these reverses.

“There are a lot of leading indicators which are very important. At Tata Projects, we track and control our leading indicators. The industry should focus on of course the lagging but also the leading indicators, which I think is missing,” Pai told Moneycontrol in an interview on July 10.

Similarly, industry experts pointed out that the Centre needs to quickly come out with standard operating procedures for the construction of bridges and tunnels to avoid safety incidents seen in the past year.

Officials had told Moneycontrol that the SOPs would be announced in March but that hasn’t happened as yet.

Industry bodies also had pointed out the need for a rework of India's current framework for tunnel and bridge construction.

The National Institute of Public Finance and Policy has said in its report titled ‘Regulating Infrastructure Development in India’ that the current framework allows for gaps and overlaps in standards.

As many as 1,68,491 people died in India due to road accidents in 2022, marking a 9.4 percent rise when compared to 2021, as questions about road safety swirl in the country, despite the best efforts of the government to make Indian roads safer.

Last month, MoRTH said that it will soon make it mandatory for road contractors to get all expansion joints on bridges and roads certified to avoid mishaps arising out of premature failure or deterioration of joints that may result in accidents.