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Are things looking better for the moribund roads sector? Not really, despite the government finally notifying an exit policy for highway developers and a committee headed by C. Rangarajan submitting its report on the rescheduling of premium payment. In fact, if anything, all current perceptions - unfavourable public policies, funding constraints, land acquisition concerns and rising attacks on toll gates - only reinforce the idea of a deep crisis in the sector.
While the twin policies on roads - one has already been notified, the other is expected to be approved by the finance ministry soon - were long awaited by highway developers, many believe the steps are not likely to help revive investments this year. The exit policy allows companies to pull out of existing special purpose vehicles (SPV) formed to develop roads and sell their stake to other developers. Rescheduling of premium, meanwhile, is intended at helping road developers defer payment of the premium, or the amount they had agreed to pay National Highways Authority of India, or NHAI, for presumptive future flow of traffic on the project they had bagged. Deferment of dues is expected to free up capital and help the companies service their debt burden.
"The government has been sitting on a number of key policies for a very long time," says M Murali, director general, National Highways Builders Federation, an industry body comprising infrastructure majors. "We have been asking the government to reschedule premium to free up equity for the past one year. There has been no decision on this yet. The exit policy that has been notified is not likely to yield any results either."
As a consequence, the roads ministry, which has awarded highway projects worth Rs 1,90,000 crore under the public-private partnership mode since 1999, could only come up with a meagre 500 kilometers of road projects in the past year due to disinterest in the private sector. Even these projects will be funded by the government.
Short on expectations
Road developers were largely disappointed by the Rangarajan Committee's report. The road developers as well as NHAI had asked the panel to defer payments by as much as 75 per cent during the first three years of a project, and to extend the leniency to 47 road projects till improvement in the economic environment. But the recommendations, which have been more stringent than expected, are only likely to benefit 10-12 road projects. "Cash can only be freed up if the government allows us to reschedule the premium," says a senior official of an infrastructure company.
Road companies also say that there is no clarity on the exit policy since it only permits the substitution of the concessionaire, which itself is subject to approval of the lenders. "All this takes a lot of time and we wish the government could make streamlined policies," says the official.
How things have gone wrong in roads is best exemplified by the Delhi-Gurgaon expressway project. Amongst the first to be conceived of under the government's PPP model, the busy road joining the capital with the corporate hub of Gurgaon in Haryana, long after completion, continues to be a major point of contention between the government and the private developer. While the government wants to terminate the project after the private developer allegedly raised loans without its knowledge, the lenders to the projects are against such a decision since they stand to lose the Rs 1,600 crore that they had lent to the project (See box "From lenders to operators').
The lenders are now negotiating a deal with the government and have agreed to remove a toll gate on the expressway which will cost them up to Rs 140 crore annually. "This is a clear case where the private developer cheated the project, so we cannot consider it as an instance of private investments suffering," says an industry analyst. "However," he adds, "a large number of private investors have been struggling in the past few years. Projects are not taking off, or they could not exit projects."
Industry experts now expect investments in the sector to resume only after a new government is sworn in post the general elections. Says Vishwas Udgirkar, senior director, Deloitte Touche Tohmatsu, a research and consultancy firm: "This is a period for introspection. We had a great run till now. Companies bid aggressively in the past, but we have suffered the perils of rapid expansion. We now need to plan our future models in the PPP mode keeping in mind the long tenure for projects to fructify and prepare the project reports assuming trouble. There should be flexibility in the contract to keep with the changing needs and a provision to change contractual terms."
Few takers for projects
As many as 22 road projects worth more than Rs 5,000 crore did not find any bidders last year forcing the government to look at countries such as China and Australia for investments before finally deciding to scrap the PPP projects altogether. Today, projects worth Rs 65,368 crore are in the construction phase and are scheduled to be completed by 2014-15, while projects worth Rs 83,000 crore have missed their deadlines, forcing developers, including big names such as GVK, GMR and Larsen & Toubro, to ask the government for changes in policy to help revive the momentum in the sector. A number of key projects awarded between 2011 and 2012 are yet to start construction and in all likelihood are expected to go for re-bids.
While the road minister has blamed land acquisition as a key problem, NHAI has blamed environmental clearances for the slow progress in the sector. "Land acquisition is the main problem for the ministry … but the state governments have to ensure that the process for land acquisitions is faster," Oscar Fernandes, minister for transport roads and highways, had told Business Standard earlier. On his part, NHAI Chairman RP Singh has written to the road ministry complaining that the delay in clearances from the environment ministry was to be blamed for the problems in the road sector.
India's road sector is now looking forward to a new government addressing some of its concerns. But the task may not be easy, considering that more than 30 road projects are likely to go in for re-bidding and the prevailing economic conditions are not likely to allow private road developers to bid as aggressively as they did in the past. The government, in all likelihood, will have to compromise on the high premium that they have received in the past few years if companies don't bid with gusto.
Additionally, the complete effects of the exit policy may also not materialise this year because the companies may not be willing to quit road projects without a fair valuation as well as the prospects after a new government comes in. Given the slowdown in the economy, many developers may be forced to opt for a distress sale or wait until the economy revives before selling their stake at a premium. One thing is clear, though. Whichever party or alliance wins the coming Lok Sabha polls will need to work overtime to sustain investments in the road sector.
THE SLOW ROAD TO PROGRESS
* Rs 1,90,000 crore is the worth of highway projects awarded since 1999 under the public-private partnership mode
* 500 kilometers of roads have been awarded under PPP in 2013-14
* 22 road projects worth more than Rs 5,000 crore did not find any bidders last year
* Rs 65,368 crore is the worth of projects which are under construction and scheduled for completition in 2014-15
* Rs 83,000 crore is the worth of projects which have missed deadlines
FROM LENDERS TO OPERATORS
The Delhi-Gurgaon expressway project was awarded as a build-operate-transfer (BOT) project to a consortium of Jaypee group and DSC in 2002 after they agreed to pay a premium of Rs 61 crore, the first instance of a premium payment. While Jaypee exited the project in 2004, the project was completed in 2008. The Delhi-Gurgaon Super Connectivity Ltd (DGSCL), the SPV for the project, owns the rights to operate the expressway and collect toll till 2023. The project has been in the news mainly for the horrendous traffic jams at the toll gates, prompting even the courts to direct the government to sort out the matter.
In December 2011, NHAI issued a termination notice to the concessionaire for committing fraud while raising a loan and for being unable to decongest the toll gates. DGSCL had acquired loans to the tune of Rs 1,600 crore from a consortium of lenders led by IDFC without informing NHAI when the concession agreement clearly stipulated the need of a developer to inform NHAI when it raised funds. The national highways body subsequently informed the lenders that it would not recognise them since the concessionaire had not informed it about the loans.
The lenders went to the Delhi High Court, contending that they would lose the money they had lent to the project. After several hearings, last week IDFC informed the court that they would take over the project from the concessionaire. It also said it would remove a toll gate to ensure free entry into Gurgaon to the relief of more than 250,000 motorists who pass the toll gate daily. In all likelihood, the proposal will be accepted and could signify the first time when a consortium of lenders has taken over a project.
