The Union Finance Minister has set a target of 8,500 km of roads to be completed during the current fiscal year, which simply means construction of about 35.5 km of road per day! In the last couple of years, we have not even averaged 5 km a day... So, how realistic is this target? EQUIPMENT INDIA trains its spotlight with views from the who´s who in the industry.
The recent drubbing Brazil got at the hands of Germany in the World Cup semi-finals will still be fresh on the minds of millions of fans, refusing to heal. Brazil, despite being rated a strong contender [at least that´s the way the dream was sold] on that eventful day, their defence just could not match the engineered precision, the lightening pace and moves of the Germans. Brazil was too dependent on Neymar (one-man show) and his absence led to a strong emotion that they played into Germans´ hands, or their defence was flawed right from the beginning. These arguments are still being debated. The matter of fact as everyone is aware of is that the ground realities were neglected. This, in no way, is to downgrade the ambitious target set by the new FM in his maiden Budget speach. Rather it is just to be rooted in the mud, like the stem of a lotus flower, which means to be connected to the ground realities, yet be able to spread its petal over the water, the lotus.
Maybe, a Zen story, can explain it better. Nan-in, a Japanese master during the Meiji era (1868-1912), received a university professor who came to inquire about Zen. He served tea. He poured his visitor´s cup full, and then kept on pouring.
The professor watched the overflow until he no longer could restrain himself. ´It is overfull. No more will go in!´
´Like this cup,´ Nan-in said, ´you are full of your own opinions and speculations. How can I show you Zen unless you first empty your cup?´
Which simply means, empty your cup - and connecting the same to the current scenario, it simply means - clear the bottlenecks...
The case in point is the target set by the FM in his Budget speech a target of 8,500 km of road by the end of the current fiscal that simply means construction of nearly 35.5 km of road per day! We are yet to achieve double-digit per day construction of road, and given the prevailing scenario we are not even averaging 5 km a day. To quote the Minister of Road Transport and Highways Nitin Gadkari, ´Right now, the average construction is to the tune of three km per day. After two years, I aim to take this target to 30 km per day.´ He seems to be more ´practical and realistic´ when compared to the target of 8,500 km by this fiscal. According to Gadkari, the previous United Progressive Alliance government had set a target of 20 km per day in 2009 but less than half that goal was achieved due to hurdles such as delays in getting environment and forest clearances and land acquisition. Have the ground realities changed for better? Do the contractors have the capability of constructing 30 km a day under the prevailing conditions? Or assuming that a contractor is given optimum situation land clearances, availability of finance etc - given the construction technology what we use, availability of men and material, and machines used, will he be able to construct 30 km a day? Considering the liquidity crunch, challenges in terms of land clearances, highly stressed out balance sheets of road construction firms, and the negative impact of stalled projects on them (over 260 projects amounting Rs 600 billion) in the road sector, the scenario becomes murkier.
The target and reality
It is simple. The case in point is the target set by the FM in his Budget speech a target of 8,500 km of road by the end of the current fiscal. The investment proposed is of Rs 37,880 crore for road sector which includes Rs 3,000 crore for the North-East. How realistic is this dream target.
Says DK Sen, Senior Vice President & Head - Transportation Infrastructure, L&T Construction, ´I strongly believe that the target of 8,500 km is for awarding the projects, not completing. In today´s situation, completing 8,500 km is not possible. The government has a substantial effort for an ideal situation in the next two years. We anticipate that once we get a project, we want to do it with no troubles such as land, environment clearances, etc. Our only concentration will be to complete the project. But this is a very ideal situation. There will be some problem in between because ours is a democratic country and the states are governed by different political parties and there may be some conflicts. These are the challenges. Otherwise, as a contractor of world repute, we are capable of doing any number of projects.´
Says M Goutham Reddy, Executive Director, Ramky Infrastructure, ´This target is surely unrealistic and we do not believe that it is possible. Further, all companies are facing financial issues, which will add to the delay and this includes our current competency.´ Vishnubhai Patel, Chairman & Managing Director, Sadbhav Engineering, had this to say. ´Given the current situation with relation to land acquisitions, environmental/forest clearances and lenders requirements, this target looks challenging.´ But on a positive note, he adds, ´Earlier the Budget allocation for roads and highways was very less. In fact, this has been increased many folds by the new government in the current Budget. With the increased allocation, we expect projects of approximately 4,500 km to come up for bidding under engineering, procurement and construction (EPC) mode in the current financial year, which would be commendable.´
According to Sudhir Hoshing, CEO, Roads Business, Reliance Infrastructure, the target of achieving 8,500 km by the end of the current fiscal - given the government´s past track record - is very difficult. He avers, ´The government is on a policy overhaul mission and needs other measures to energise the sector that may help getting near the target. A company like ours will be able to construct 35 km a day assuming availability of RoW and no issues in financing.´
However, AM Muralidharan, President, Volvo CE, provides a different perspective. According to him, the whole objective of giving a target is to better what has been the norm or do better than what we are doing today. He says, ´Even if we won´t be able to do 35 km a day, at least we can reach 20 km. The road projects of 3,500 km are not new ones but that got stuck during the previous government. So, if we start releasing the road blocks one by one, especially the major road blocks such as land acquisition, required clearances and cash flow, I am sure 20 km a day is quite achievable.´
He further adds, ´Many projects have not started due to various issues; the cash flow was down, and there are several cases where the bills are not cleared by government. Most of the contractors need to be paid huge amount of money.´ He also has a word of caution on the government´s plan to stick to the public-private partnership (PPP) mode. He says, ´The risk involved in PPP and the 30 years timeframe without an exit clause [now it is added, but the finer print is still not known] is huge. So the contractor does not want to risk 30 years putting all the money, and if he does not have any estimated traffic to collect toll... and at the end of the contract he does not want to be bankrupt.´ Says Samir Bansal, General Manger, India, Off-Highway Research, ´The construction target of 8,500 km of national highways in the current fiscal year would have taken into account the status of the ongoing projects, which are already at various stages of completion.´
Even though there is a question mark on achieving the current target, Bansal is optimistic on the government´s plans to build 30 km of roads per day on a sustainable basis after two years, and he points out some of the actions initiated by the government in the Budget, which include:
The recent Budget [to a great extent] is silent on the status of the stalled projects. In the following sections, we have tried to find out the impact of this on the contracting fraternity, which has already burned its fingers.
Impact of the stalled projects
´Actually the government is not completely silent on stalled projects. In fact, before the Budget, the Transport Minister and Environment Minister had said that they would do everything possible to start the stalled projects. There are a lot of activities going on currently. The Transport Minister recently called the concessionaires whose projects have been stalled to discuss how to restart those projects, says Sen. According to him, L&T´s four major projects have been stalled two of them are from external clients Kishangarh-Ahmedabad and Shivpuri-Dewas project; and the company´s internal projects of Amravati-Jalgaon project and Jalgaon to Maharashtra-Gujarat border project are the other two. All these four stalled projects are together worth more than Rs 9,000 crore.
Says Vipin Sondhi, Managing Director & CEO, JCB India, ´While PPP in relation to many new projects has been announced, a roadmap for execution of existing held up projects could have helped turn things quickly.´ Reddy echoes the sentiment when he says that it is high time that the Government acted on the stalled projects. Ramky´s two road projects worth over Rs 2,000 crore have been delayed or stalled for various reasons including land acquisition, environmental clearance and other reasons. He says, ´Currently all infrastructure companies are going through a significant pain and this pain needs to be alleviated before revival can commence, it is therefore essential for the Government to recognise and act on these stalled projects and those facing trouble.´ According to him, the company will not be bidding for new projects. ´We are not bidding for new projects and will wait until the environment improves.´
According to Hoshing, 11 of its build-operate-transfer (BOT) projects are well on track, with 10 projects already generating toll revenue. Certain sector-wide issues such as delay in land acquisition, clearances and authority approvals for structures affect the construction schedule and thereby, two of the company´s projects have suffered considerable delays. He says, ôThe Finance Minister has taken a review of stalled projects and assured intervention on matters such as expediting land acquisition and clearances, speedy dispute resolution mechanism, and providing adequate comfort to lenders and thereby facilitating debt disbursement.´
Says Patel, ´We expect projects, which are stuck due to non-achievement of financial closure, shall be terminated by the National Highways Authority of India (NHAI), while projects which are stuck due to land acquisition/environmental/forest clearance shall be up and running in coming months once the new Ministry has the policy in place.´
The way forward
So, what needs to be done? Sen Explains, ´Every developer has some reasons for not doing the project. Some of them are facing huge environmental clearance issues, for which projects get delayed and they have undergone a huge escalation. So the Government has to call every developer, understand the problems they are facing. Once the Government understands the problems, first of all it should fix the environmental issues, so that the developers will be able to get the forest clearance and land clearance. The developer should get at least 80 per cent of the land to start with the project. Once they get all the clearances, the next step is to address the escalation of price. The reasons for cost escalation are many. Number one is the economic slowdown with which the traffic got hampered, number two is because of the delay the price of the project is increased. So the Government should help these concessionaires in factoring the escalation of price by way of some relaxation in premium. In order to address the issue of less than anticipated traffic, the Government should give some help by way of restructuring or deferment of the premium. Once these issues are cleared, I am sure many of the concessionaires will start the projects. So the Government can fix all these issues, through the policies and right decisions.´
(Recently, addressing a public-private partnership summit organised by Ficci, Gadkari stated that the Government has decided not to float any tender without acquiring adequate amount of land for executing a project. He said, ´The government will not bid out any highway project without acquiring at least 80 per cent land for it. Around 300 road projects are to be bid out within the next 5-10 years after securing all necessary regulatory clearances.´)
According to Bansal, although the Budget does not specifically talk about them, revival of the stalled projects is government´s topmost priority. He says, ´The Budget has laid down a broad policy indicator of the economic journey towards stabilisation and sustained growth of 7-8 per cent within the next 3-4 years. Its focus is to revive the growth in manufacturing and infrastructure sectors, while reducing the fiscal deficit to 4.1 per cent in 2014, 3.6 per cent in 2015 and 3 per cent in 2016.´ He lists some of the measures being taken by the Government to quickly resolve these issues:
Lesser number of ministries to improve inter-department co-ordination and smoothen the bottlenecks in infrastructure development through a monthly meeting of cabinet secretary, principal secretary to Prime Minister and representatives of ministries/departments such as railways, defence, environment and forests.
Resolve all pending issues at the earliest and convert problems into opportunities.
The Prime Minister Group (PMG) working in co-ordination with states and government departments for quick resolution of the problems.
Many states are formulating state PMGs for projects valuing Rs 1 billion to Rs 10 billion.
The Reserve Bank of India (RBI) is calibrating its monitory policies in close consultation with the new government to meet the twin objectives of lowering inflation and increasing growth rate.
The rough estimated cost of a two-lane road (new) per km is about Rs 10-12 crore whereas the proposed investment is just Rs 37,880 crore. Given the liquidity crunch, where is the money going to come from?
Explains Sen, ´A two-lane road can be built within this rate. If we have to make a 4-lane road to a 6-lane road, the cost will be more. We have huge works going on in the Dedicated Freight Corridor Corporation (DFCC) project and Japan International Cooperation Agency (JICA) is funding for the same. So, there are people to invest in projects, like World Bank, Asian Development Bank (ADB), JICA, etc. Also, the Government should firm up the concessionaire´s contract, adhering to 80 per cent of clean land to be given and solving the local issues if any arises during the project implementation period. The state government should support the project in every sense; give special clearances for sourcing materials for the project. All these are premium projects and if an anticipated traffic does not happen after implementing the project, they should be able to de-risk the concessionaire. If all these happen, there is no risk in investments. Even the foreign direct investment can also come into these projects.´
Sen further adds, ´Nowadays, most of the loans available are for a short-term basis. If the developers gets long-term loans, they can go and bid for viable projects. NHAI can tie-up with agencies like World Bank for its projects. Roads have to be constructed for which, if money is needed, the Government can go to such agencies. Now BRIC Bank is being established. So if the Government has serious intention it can do this. If the Government can do provisions for defence and rail corridors, then why not road projects?
Says Hoshings, ´The allocation in the recent Budget is not very high. If the Government´s focus is more on the EPC mode, then the allocation really has to be high, or else build-operate-transfer (BOT) on viability basis is the preferred option.´ He adds, ´Innovative financing means could help address the liquidity crunch, such as tapping pension funds, bond market, etc. Recent government initiative of encouraging infrastructure bonds by banks is a small step in this direction.´
According to him, for BoT to contribute, this sector needs certain initiatives such as removing bureaucratic bottlenecks by streamlining processes; creation of innovative avenues of low-cost funding with non-stringent norms; fiscal incentives such as removal of MAT during tax holiday, allowing setoff of losses on a portfolio level, and no tax on toll collection during six laning, etc; creation of an efficient dispute resolution mechanism, and also protection against toll non-payment and vandalism.
Speaking about the investment scenario, Reddy had this to say. ´Certainly we do not believe that the Government would have been able to allocate more than the amount envisaged in the Budget. Hence funds are not the biggest of the concerns. The bigger concern is about resolving old pending issues like taking accountability for delays in the past.´ According to him, financial is the most important challenge, technology and resources constraint add to the key challenge.
Bidding for new projects
What is the capability of the contracting fraternity to bid for new projects in the given scenario? Will they be using advanced and sophisticated plant and machinery to achieve speed and better quality? Says Sen, ´L&T has never stopped bidding for projects. We have a developer/concessionaire arm called IDPL. So L&T-IDPL has been bidding even in this season, but we will bid the project as a developer only if it is viable. If somebody is funding for the project, we can go anywhere and do the projects, provided there are no local issues. I would say, if 80 per cent land is available, state support agreement is signed, and there is no environmental issue, then IDPL will definitely bid for projects.´ He further adds, ´We are using advanced hydrostatic pavers with sensors. They sense the level and do the paving accordingly. So we are using intelligent pavers in our projects. But it has nothing to do with the target. Even if we use these technologies, the government agencies, whether it is NHAI or state authorities, insist on testing of materials and the processes for approval.´
Patel is ready for the game. He says, ´We will bid for new projects because we envisaged that during the current scenario, very few bidders are left in the bidding process due to which projects can be bagged at an attractive return.´ Speaking on the major requirements that will help bidding he says, ´Land acquisition and environmental/forest clearance will have to be in place for all the new projects; government participation would be required for equity contribution, and aggressive bidding by the players needs to be curtailed by imposing stringent conditions in the bidding process.´
To sum up, the dream target is not either a bad idea. As Muralidharan puts it, ´We have reached about 15 km a day in the past, and achieving 20 km a day, is quite possible.´ Given the initiatives, the Government is taking to achieve the target of 30 km per day within two years, a lot can happen, of course, not over a cup of coffee.