Founder, India Business Analysis | IIT Roorkee, IIM-C alumnus
Construction of national highways seems to have made a comeback, as per the performance details for 2018 released recently by the ministry. The sector had lost way sometime back, when several companies had surrendered their projects upon failed execution. The crisis even led to bankruptcy of some of the construction companies; while several others had referred to the National Company Law Tribunal (NCLT).
National highways—connecting major economic, commercial, and other centers—act as the backbone of an economy, even though the aggregate road network remains the lifeline. As per the Ministry of Road Transport & Highways (MoRTH), national highways currently handle as much as 40% of road traffic, with just about 2% share in total road network of over 56 lakh km (the share would be higher if the number of lanes is also taken into consideration).
National Highways/Expressways, with a total length of 1.3 lakh km currently, gained prominence around the turn of the century, when the golden quadrilateral was mooted—widely considered as an important reason for the economy’s revival. Incidentally, this also marked the participation of the private sector in development of highways, which was earlier undertaken only by government agencies.
The year 2017–18 was an inflexion point in highways development, with construction of almost 10,000 km during the year (as compared to 8,200 km in FY’17 and 4,300 km in FY’14). Contracts were awarded for 17,000 km, entailing a total investment of INR 1.5 lakh crore in FY’18, as compared to just 3,200 km in FY’14. Actual investment in FY’18 was INR 1 lakh crore—about one-third of which was invested by private sector companies, thereby indicating returning confidence.
The progress appears to have gained further momentum in FY’19, with construction of 5,800 km in the first nine months—up from 4,900 km completed during the same period last year (completion in the last quarter of the financial year is usually lot more than that in the first three quarters). Overall, more than 61,000 km of road projects, costing more than INR 6.5 lakh crore, are in progress at present, as per the MoRTH report.
Construction of highways is carried out on projects basis, with the National Highways Authority of India (NHAI) being the nodal agency. While construction is relatively easy, the real challenge lies in land acquisition. A case in point is the recently conceptualized Mumbai-Nagpur Expressway, where the project commissioning date has been advanced with successful completion of significant part of land acquisition. Even cost of construction is reasonable, with an average cost of INR 9 crore per km for the projects awarded in FY’18. The average rate would put the cost of a project connecting landlocked Nagpur to the port city of Vishakhapatnam—covering nearly 750 km—at less than INR 7,000 crore, which is not really a huge figure for Corporate India.
The earlier model of construction involved ownership by the developer, and significant project risk. The model received tremendous response around 2006–10, with the share of private sector in total investments going up from less than 5% in FY’06 to over 40% in FY’12. However, projects started getting stuck around this time, due to issues in land acquisition, lack of financial closure, and difference in interpretation of contract clauses. It may be noted that projects totaling 8,200 km, entailing cost of over INR 1 lakh crore were stuck primarily due to delay in land acquisition. Out of these, almost INR 60,000 crore worth of projects have been rebid and re-awarded.
The sector has now got impetus with the change in development model of the projects from earlier BOT, BOOT to the Hybrid Annuity Model (HAM) introduced in 2016. While the contractor was entirely responsible for financing the project in the earlier model, the government provides 40% of the project cost in the HAM mode. Further, ‘traffic risk’ has been transferred to the government, which pays a fixed annuity to the contractor based on the initial bid, irrespective of the actual toll collection. Projects worth INR 52,000 crore have been awarded based on this mode.
The development of highways network in the North-Eastern region deserves special mention, particularly because of the difficult terrain and greater difficulty in laying rail network. Projects totaling 13,000 km, worth INR 1.6 lakh crore, are under various stages of planning and construction.