Business Today

In the fast lane

G. Seetharaman        Print Edition: July 22, 2012

After more than a year, the National Highways Authority of India (NHAI) finally got a full-time chairman on June 11 in Rajinder Pal Singh. His predecessor, Brijeshwar Singh, had retired in December 2010. Ordinarily, having to deal with a headless government body would have been a matter of concern for industry.

But Y.R. Nagaraja, Managing Director of Hyderabadbased Ramky Infrastructure, is smiling today, as are most of his peers in the highway infrastructure business. "It (the absence of a full-time NHAI chief) did not make any difference. Projects were awarded regularly," says Nagaraja. In 2011/12, NHAI awarded projects for 6,491 km, an increase of more than 25 per cent over the previous financial year.

Ramky Infrastructure bagged two of the 49 projects auctioned last financial year. The projects, in Karnataka and Uttar Pradesh, are worth Rs 2,240 crore. Ramky's rival Gammon Infrastructure Projects won five NHAI projects last year. "There was hardly any action in other infrastructure segments," says K.K. Mohanty, Gammon's MD. Gammon is also developing ports, alternative power plants and special economic zones.

PM for transparency in highway projects

Execution, too, has improved. Last financial year, on average, 10.39 km of roads were built per day, according to a statement made to the Rajya Sabha in May by Jitin Prasada, Minister of State for Road Transport and Highways. The figure includes NHAI stretches, projects of the roads ministry, state Public Works Departments, Border Roads Organisation and The target of port connectivity projects. Today, India's total road network stands at 33 lakh km, of which national highways account for 71,770 km.

"Even with delays, we should hit the target of 20 km a day by 2014," says Abhinav Bhandari, infrastructure analyst with Elara Capital. That target was set by former Road Transport Minister Kamal Nath in 2009. The ministry, now headed by C.P. Joshi, plans to award 9,500 km this financial year.

Most NHAI projects follow the Build-Operate-Transfer (BOT) model. A BOT project can be based either on tolls or on annuity. In a toll project, a developer builds a road, operates it for a specified period, earns revenues through tolls, and then turns the road over to the government. In an annuity project, the government pays the developer an annuity every six months and reserves the right to toll. While Bhandari is confident that land acquisition and funding issues will not derail India's road development programme, developers are not willing to take them lightly. S Vaikunthanathan, Director, Finance, Madhucon Projects, says it is rare for a project to be completed on time. "Show me one project where all the land is available when construction begins," he asks, adding that NHAI should set up a separate wing for land acquisition.

NHAI acquired 12,000 hectares (one hectare equals 2.47 acres) in financial year 2012, 40 per cent more than the previous year. A May 8 report by Motilal Oswal Securities notes that NHAI'S land acquisition cells across the country have contributed to the improved figure. "However, in states such as Goa and Kerala, land acquisition is a constraint," notes the report. In December 2011, NHAI cancelled a project it had awarded to IRB Infrastructure Developers in Goa because it could not procure land.
 

The Land Acquisition Bill, 2011, does not apply to highways. However, Parliament's Standing Committee on Rural Development has suggested that highways be brought under the Bill's ambit. If that happens, costs will increase as the compensation paid to landowners will be higher, making projects unviable. Moreover, there is also a fear that the Bill might require developers to acquire some of the land themselves.

NHAI acquired 12,000 hectares of land in financial year 2012, 40% more than in the previous year

While land acquisition problems have eased over the last year or so, funding has become more difficult. Experts say smaller developers cannot get roads financed without a promoter guarantee. "We do that on a case to case basis. It depends on our risk perception of the project," says M.S. Raghavan, Executive Director, Bank of India.

Developers say banks expect them to bring in more equity than before. "If we funded a project on a debt-equity ratio of 80:20 earlier, we now have to settle for 75:25 or 70:30," notes Ramky's Nagaraja. Constructing a kilometre of highway can cost Rs 8-15 crore, depending on the region and on whether it is a two-, three- or four-laning project. Developers are still largely dependent on domestic financial institutions for funding. The corporate bond market is barely developed and external commercial borrowings are not a viable option. "It's not cost-effective because most road projects are rated BB or BB+," says Bajrang Choudhary, President of Infrastructure Project Development at Srei Infrastructure Finance, which has 14 road assets.

These issues notwithstanding, roads are where the action is in infrastructure. Given that the power sector faces a fuel mess and that port and airport projects will take time to get off the ground, infrastructure companies will continue to bet big on highways.

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