Indian road sector reviving on policy measures: ICRA

Indian road sector is showing signs of revival drawing on several measures announced by the government over the last 18 months including a policy decision to award projects only after acquisition of 80 per cent of land, ICRA said today.
There has been a 69 per cent increase in project awards by National Highways Authority of India (NHAI) during the first eight months of 2015-16 to 2,649 km from 1,572 km in the same period of the previous fiscal.
"Long hindered by execution delays, project cancellations, stalled projects, loss of lender confidence, leveraged balance sheets of developers and sluggish traffic growth, the sector now appears to be on the path to regain its lost sheen," the rating agency said.

It also said that under the new land law though the cost of land acquisition has risen by 122 per cent to Rs 30 million per hectare from Rs 13.5 million in FY 2015, it would not impact the private sector.
ICRA said efforts made by the government to clear bottlenecks in execution have started yielding results and are reflected by the 45 per cent increase in the pace of execution to 4.96 km/day during April-November 2015 from 3.41 km/day during April-November 2014.
"At this pace, execution during FY2016 will exceed 1,800 km, which would be higher than the figures for both FY2015 (1,500 km) and FY2014 (1,779 km)," the agency said.

It has listed policy measures like "award of projects only after 80 per cent right of way is secured; focus on quick resolution of stalled projects; delegation of power to regional offices to grant forest clearances; and allowance to file online applications to construct rail under and over bridges" as the key drivers of faster execution of projects.

Other measures like compensation to developers in case the delay is not attributable to them and relaxation in exit norms should address the liquidity issues faced by developers, it said.
According to Rohit Inamdar, Senior Vice-President, ICRA, "While the one-time fund infusion by NHAI for languishing road projects shows positive intent, first charge creation has become a challenge in implementing the one-time fund infusion scheme as the exposure of existing lenders will become subordinate to funding by NHAI."

Similarly, as far as the 5/25 scheme is concerned, although deferment of loan obligation eases the pressure on cash flows during the initial years of operations, the acceptability of this scheme is in doubt, given that road projects have a finite life and the key parameters affecting revenues are beyond the control of the developer, he said.
ICRA said upfront land acquisition, approvals and larger
proportion of engineering, procurement and construction (EPC) contracts have increased the interest of developers and contractors in road projects.
Also, swift amendments made to hybrid annuity model will improve its market acceptance, it said.
The first project under the hybrid annuity model for four-laning of the Solan-Kaithalighat section in Himachal Pradesh did not attract a single bidder on account of issues like lack of clarity on approvals.

Inamdar said, "Subsequently, NHAI made several amendments to the draft concession agreement, including a revised annuity payment schedule envisaging payment of - around 24.2 per cent of the completion cost to be paid in first five years as against 7.7 per cent earlier."
Swift amendments made to concession agreement will improve its market acceptance, he said.
It said till date two projects under Delhi-Meerut Expressway were awarded under hybrid annuity mode (HAM) aggregating to a total of 30.66 Km of road length for a total cost of Rs 18.99 billion.
"NHAI had set an award target of 1,400 km for HAM, around 28 per cent of project awards of 5,000 km during FY2016. Till January 2016, bids for 16 projects totaling 764.69 Km worth Rs 150.99 billion were called for under HAM which are to be awarded before March 2016 - given these, the target of 1,400 km, is likely to be missed," it said.

On land acquisition, the rating agency said compliance with Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (RFCTLARR) Act, 2013, pushes up land acquisition cost.
For land acquired during current fiscal, compensation was increased to four times the market value in rural areas and twice the market value in urban areas, it said.
"The cost of land acquisition for some of the expressway projects is expected to be in the range of 37-55 per cent of TPC (total project cost); the figure was around 16 per cent in 2012 and 9 per cent in 2009," it said.

For 1 km of greenfield 4-lane highway, the minimum land required is 6 hectares, which puts the land acquisition cost at Rs 180 million/km at current prices; for a 6-lane highway, the cost could be as high as Rs 270 million/km, it said.
Inamdar said, "As compliance with the RFCTLARR Act, 2013 is limited to compensation; the impact would be only on the cost of land acquisition in the near term...Since land acquisition in the road sector is the responsibility of NHAI or the state government concerned, the increase in the land acquisition cost will not impact the private sector."

Around 14,000 km of length was still to be awarded by NHAI under the National Highway Development Programme (NHDP) programme as of September 2015.
Given the varying requirements for different types of national highway projects and assuming an average of 4.28 hectares of land per km, "total land acquisition cost alone would be in the range of Rs 1,800-1,950 billion over the next 3-3.5 years," it said.