Analysts say that Indian infrastructure is set to get a boost following Prime Minister Narendra Modi’s plan to have 100 Smart Cities.
Once the land bill before parliament gets into the statute book, infrastructure building, especially roads, will see dynamic growth with private players back to the highways sector.
After finding it difficult to award highway sections to private developers, the government has shifted its focus from the BOT (build, operate, transfer) model to the government-funded EPC (engineering procurement construction). It also introduced the new method — the hybrid annuity model — for projects granted from October 1, 2015.
Under the new model, the National Highways Authority of India will provide an initial grant of up to 40 per cent of the cost and the developer has to chip in with the rest and complete the project according to schedule, newspapers have reported.
In August last year, the Cabinet Committee on Economic Affairs cleared a proposal to allow infrastructure companies to divest 100 per cent of their equity after two years of completion of construction for all projects given under the BOT model, irrespective of when the contract was handed out.
Data from India Ratings and Research — a unit of Fitch Ratings — shows that 21 highway projects worth Rs 260 billion failed to attract bids over the last two fiscals. As a result, NHAI had to fall back on EPC contracts to plug the gap.
Disputes too are hampering completion of projects. Data from the road ministry shows 112 cases involving Rs 250 billion were pending under arbitration between the NHAI and developers till end-April 2015.
Added to this is the fact that an underdeveloped bond market has forced PPP road projects to mainly depend on debt from commercial banks — Rs 1.67 lakh crore till February 2015, up 384 per cent from Financial Year 2008.
A challenging target for project awards through the public-private-partnership route is likely to be set for the coming fiscal — at close to 5,000 km of highway sections worth over Rs 450 billion.
These include bids for the proposed Bharat Mala project that entails road development along the international borders and the country’s coastline and the Char Dham connectivity project that envisages linking up the religious tourism circuit.
A bigger challenge is the task of managing project risk in older projects. An estimated 7,500 km of highway projects have been deemed to be at high risk of not being completed, including 5,100 km under construction and 2,400 km operational sections that were awarded mostly between fiscals 2010 and 2012 on the BOT format.