Reviving Road Infrastructure sector in India–Challenges & Concerns

The article takes a look into the challenges facing the Road Infrastructure sector in India and possible solutions.

Nitin Gadkari, the new Union Minister, Road Transport, Highways and Shipping recently undertook a state-wise review of the national highways projects and analysed targets and achievements of these projects. The slow progress in the completion of highways was a source of concern and the need for urgent measures to overcome prolonged delays and bottlenecks – liquidity crunch facing the concessionaires, land acquisition problems and environmental & forest department clearances etc.

A new exit policy for highway projects that was formulated by the earlier government in 2013 after 11 months of deliberations failed to revive the interest of prospective developers. Various sources have pointed to problems with the exit mechanism as it requires the formation of a new special purpose vehicle (SPV) instead of simply allowing the lead concessionaire in the existing SPV to directly sell equity. Other concerns about the SPV are the costs involved and whether the tax benefits will pass on to the new SPV or not.

A representation was also made by the National Highways Builders Federation (NHBF) to the NHAI regarding the issue. The Federation felt the substitution circular presented a large number of legal, commercial and taxation challenges that investors and sellers would not be prepared to deal with. Prominent among them were whether the tax holiday that the first SPV was eligible for would be passed on to the new SPV, additional cost of new stamp duty for forming a new SPV, usually 2.5% of the value of the transaction, and imposition of penalty for exiting the projects.

The new government has promised to remove all bottlenecks in the execution and completion of highway projects and has given top priority to re-energising the sector.

TrafficInfraTech spoke to some of the prominent highway infrastructure companies to gauge their reactions to the new developments in the sector.

“Several steps are essential to relieve the road sector from some chronic issues and thereby re-energize the sector. There has to be a timely approval for change of scope of the contract and adequate compensation to the concessionaire. Further, vandalism at toll plazas should be curbed and toll non-payment must be made a criminal offence. In keeping with the PPP spirit, such revenue loss should be shared by the Authority through reduction in payable premium. Further, all exemptions from toll payment should be removed. Concessionaire should be adequately compensated for increase in royalty on mining, post-bidding. Alternative funding options with non-stringent norms are needed to address the funding gap in the sector. Also, fiscal incentives like no MAT during tax holiday, exemption of tax during construction for six-laning projects, allowing set off of losses on a portfolio level etc are required to support project cash flow, at least in the initial years. There should be a time-bound judicial process, with stringent additional penalties for unduly delaying the settlement process. The land acquisition and clearances should be completed in a timely manner. Before the appointed date, 90% of the land acquisition should be completed till the 3G stage, i.e. all compensation payment should be complete. The Total Project Cost should be assessed in a fair and transparent manner for termination payment. The government should provide a solid support by timely land acquisition, clearances, shifting of utilities and ensuring law & order at toll plazas.

The new transport ministry’s proposal to empower NHAI board to amend contract terms is a welcome step towards bringing in much-needed efficiency in the bureaucracy. However, in the name of flexibility, the Authority should not be empowered to put coercive pressure on the concessionaire to waive off fulfillment of Authority’s Condition(s). There should be a precedent and a proper process for availing COD Certificate. Land availability and clearances must be made a time-bound process and the concerned ministries must be held accountable for the same.

Adoption of IT in Indian highway projects is currently in an evolutionary phase. Broadly, the wide-scale implementation of IT here faces the following challenges:

a. Lack of standardization, including absence of compatibility between various service providers

b. Dearth of enterprise-wide solutions, i.e. no single IT solution addressing enterprise-wide requirements

c. Absence of adequate regulatory framework for bringing in standardization (eg. number plate standardization) and enforcement of law to ensure commuter and worker safety.

Once these challenges are appropriately dealt with, the numerous technologies available would play a crucial role in driving efficient and effective project management by interlinking different sub-systems of an enterprise, not just during the construction phase but also in case of toll operations.”

“BOT road projects have longer gestation period and banks lend for the projects with a maximum time frame of 15 years, on a floating rate derived from the base rate. There should be an integrated policy for facilitating long term financing of road projects with a fixed interest rate mechanism, or the differentials should be passed on by the government so that interest rate fluctuations do not lead to project cost escalations. There is an immediate need for a robust dispute resolution framework to be put in place. Multiple agencies are involved and various approvals are required across the different stages of the project cycle. In the case of the road sector, a single window clearance will be able to address all these concerns.

Poor project planning and engineering designs during the tendering phase further add to the woes. PPP road projects should be structured with adequate care, keeping in mind the interest of the users. Since the investment requirements for the private sector participants to be able to invest in the road sector are significant, there should be a positive policy framework which will bring in foreign players, including large size contractors as well as pension and mutual funds. They can make investments as well as bring in technical expertise to undertake large and complex projects. Along with these, the Ministry should abolish MAT for the road projects and section S10 (23G) should be reintroduced. This will permit banks to save tax on net income on lending to infrastructure projects as approved under Section 80 (IA) and provide exemptions from capital gains. These changes will definitely re-energise the sector in the future.