India Road Construction: Policy changes in favour of private developers
Key Beneficiaries: C&C, Valecha Engineering, Unity Infra, IRB Developers, Sadhbhav Engineering, HCC, IVRCL, NJCC, Madhucon and L&T
The regulatory framework is being tweaked to improve the risk-return
perception. The key policy changes in recent times or potential amendments
affecting highways and roads are discussed below. We expect some delays,
and re-runs of RfQ rounds of several of the projects in the pipeline because of
the changes.
Pre-qualification criteria
Recently, projects that have not attracted bids (38 of 60) were modified to reflect more
realistic costs, thus, attracting bidders in the next round of bidding. The cap on the
number of financial bids (six) has been removed. Instead, now the bidders should have
experience (Threshold Technical Capacity or TTC) of executing projects worth 200%
of the project bid on. The industry is demanding a reduction of the threshold to 100%.
However, NHAI will have the flexibility to reduce the TTC by 50% of the Total Project
Cost (TPC), that is: provide for TTC to be one-and-a-half times of TPC. This is
expected to increase the competition for smaller roads. However, very few players
would be able to pre-qualify for the larger road packages without partnering with large
foreign developers/construction companies.
Modification of minimum equity holding criterion on cards
In response to the industry demands, the government is now considering modifying the
minimum equity provision to promote investments in the sector. Relaxation of this
clause should also lead to matching risks and investor profile. For example, the
construction companies should be allowed to exit once the construction is done or the
construction risk is eliminated. The present agreement requires the developers to hold
at least a majority stake (51%) in the project for the first three years and 26%
thereafter.
Changes to tolling policy will increase toll rates
In order to attract developers to take traffic risks, the government has modified the
tolling policy to include a 3% (without compounding) fixed escalation plus 40% of
change in Wholesale Price Index (WPI). This change results in higher toll-rates to
developers. For structures (bridges, bypass or tunnels), the toll fee will be linked to the
capital cost instead of length implying a greater linkage between the cost of
construction and toll tariff. A provision exists for charging an overloading fee, if a
weighbridge is installed at a toll plaza. Given the rampant practice of overloading on
Indian roads, the implementation of this rule is circumspect.
Timing of viability gap funding
Those projects that had received a viability gap funding were facing the problem of
timing of cash flows as half of the viability gap funding was paid during construction
and the other half during the first five years of commencement date. The government,
in turn, has decided to meet the funding gap upfront, which has made such projects
more attractive.
Land acquisition
Land acquisition has been a major impediment for road project execution. The
government had proposed transferring 50% of land at the time of the award and the
remaining during construction. To facilitate execution further, it has now planned to
hand over 80% of land at the time of the award and the remaining during construction.
Separately, there were projects that were not awarded commencement certificates due
to the inability of the government to acquire 5-10% of land.
The private developer and lenders were not allowed to collect toll until the commencement certificate was awarded. Now, the private developers will be allowed to collect toll if they deposit 80% of the estimated cost of construction on the undeveloped stretch of road.
Termination clause
By introducing a termination clause, the NHAI essentially stripped the concessionaire
off of upside for taking traffic risks. According to the clause, the NHAI could end the
concession period if the traffic increases beyond the designed capacity of the road for
more than three years. However, the industry is lobbying strongly against this
provision and we expect relief in the near future.
Conflict of interest clause
Under the present scenario, two different bidders cannot directly/indirectly hold more
than 5% in the other. This threshold was raised from 1%. Furthermore, it excludes
banks, insurance companies, pension funds and public financial institutions from this
clause. Though this hike is expected to bring in more investments in the sector, it might
not be sufficient as a PE fund typically holds more than 5% stake in companies,
thereby still invoking this clause. It is likely that the limit will be raised to 25% as
appealed by the investor class.
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