On the road: A changing fortune, and Gadkari to the rescue

Order book of 50 EPC-focused road developers grew two-fold from Rs 41,000 crore in FY14 to Rs 85,600 crore in FY17. In the current fiscal year, the order book is likely to touch Rs 1 lakh crore considering the expected Rs 48,000 crore worth of orders.

Government’s strategy of moving away from the build-operate-transfer (BOT) model seems to be working. In 2013, all projects were under the BOT model but these have been reduced to just 20 percent by FY16 and in FY17 was only 10 percent.

Road developers are enjoying their day under the sun with order book to sales at around 2.5 to 3 times the revenue as compared to 1.5 times revenue when the present government assumed office in 2014.

There are a number of reasons why there has been an improvement in the overall performance of the ministry.

A Kotak Securities report quoting a member of finance at NHAI (National Highways Authority of India) says that a focused attention to implementation and smoothening the process helped improve performance. Out of 73 stuck road projects at the start of the current government’s term, only nine are still languishing for varied reasons. The clearance processes were expedited by the creation of inter-ministerial committees and a periodic review directly by the PMO (Pragati programme).

Rather than acquiring land after announcing the project, which resulted in time delays and cost escalation, NHAI now tenders new highways only after securing at least 90 percent of land along the corridor.

In a rare display of team work between central and state government bureaucracy, the central government has roped in various states and their departments/bureaucrats to help NHAI handle the large volume of projects on the anvil. States like Maharashtra are helping to prepare a large number of DPRs (detailed project report) for NHAI.

In order to incentivize private sector participation in roads, the government is clearing projects which are stuck in arbitration. In cases which are stuck in arbitration, the government has released 75 percent of the amount subject to bank guarantees even while hearings are on in higher courts.

NHAI has processed all 53 of such arbitration cases and has released payments in seven of them. The rest of the payments will be released as soon as bank guarantees are furnished by the private parties.

This move has helped build the confidence of private sector players who could not participate in bidding as a sizeable chunk of their money was locked up in arbitration.

Moving to a hybrid-annuity model (HAM) where 40 percent of the construction cost is being funded by NHAI over the construction period through five milestone-based payments, private players are comfortable taking these projects on as are banks who feel comfortable with NHAI putting in a sizeable amount of money.

However, the key to growth and implementation is the financing power of NHAI. Though the government has allocated Rs 64,000 crore for the ministry in the current fiscal, NHAI would need more resources to meet its borrowing plan of Rs 2.1 trillion over the next five years.

An Rs 5,000-crore denominated Masala Bonds issue is lined up by the company but it would still need more resources to keep the sector moving. Further, with a new avenue in the form of Infrastructure Investment Trust (InvIT) NHAI can securitize its highway assets and raise funds for future growth.

However, a parliamentary panel recently pulled up NHAI for failing to raise targeted funding. NHAI was given a target to raise Rs 59,279 crore during FY17 but it could raise only Rs 27,831 crore till January 2017.
Looking at the performances of road developers and their order books which gives a better visibility, Crisil upgrades are now twice as many downgrades in FY16. This is a sharp improvement to one upgrade for every nine downgrades in FY14, thus reflecting the changing fortunes of road sector.