Public-Private Partnerships in India’s National Highways

September 15, 2011 Posted by India Briefing Reading Time: 5 minutes

Sept. 15 – The Indian government foresees Rs. 50,000 crore (US$10.54 billion) in private investments in the highways sector this fiscal as it awards contracts for building 7,300 kilometers (4,536 miles) of roads.

According to India’s Ministry of Road Transport and Highways, bids for about 4,600 kilometers have already been received or invited this year and the Ministry will award concessions for 7,300 kilometers before the year ends.

In the first four months of the current year, the government has awarded public-private partnership (PPP) projects with an investment of over Rs. 21,000 crore. The bids received are far better than estimated bids for these projects. This will give the government additional revenues of more than Rs. 10,000 crore.

Also, out of India’s 71,000 kilometer national highway network, up gradation projects for about 16,000 kilometers have been concluded, while about 15,000 kilometers are in different stages of projects being awarded.

As a result, about 40,000 kilometers will be left, which may be overlooked by the government. Specifically, 20,000 kilometers including single-lane roads which are more often than not in less developed regions.

Now, the government is planning to make these single-lane highways into two-lane highways through turnkey engineering, procurement, and construction (EPC) contracts to ensure timely construction without cost overruns. The Ministry is also planning concessions for expanding about half of the Golden Quadrilateral – which connects the metropolises of Delhi, Mumbai, Kolkata and Chennai – into a six-lane highway.

The government of India also initiating the steps to construct expressways in high density corridors and the Ministry is in dialogues with budding investors and concerned states to find innovative ways of financing these projects.

Regarding state highways, the Planning Commission will work closely with states to change these into world-class roads. So far 77 projects for a length of 7,801 kilometers have been fulfilled. The Ministry also showed confidence that the ambitious target of building 20 kilometers of roads a day will be achieved soon. The UPA-11 government has set up a goal of constructing 35,000 kilometers of highways by 2014.

The Prime Minister of India Manmohan Singh also insisted that government agencies should avoid of any favoritism while awarding projects to private players under the PPP mode.

The Planning Commission will be working in close collaboration with state governments to guarantee that state highways become world class. Projects have been able to draw investments of Rs. 21,000 in the first four months ending July 2011.

Financing in PPP mode
Regarding the financing of PPPs in the transportation division, state highways are not as easy to deal with as their national counterparts. Even though the Center and states are presently undertaking about 3,500-4,000 kilometers each of highway construction through the PPP route, funding agencies like the IDFC and IIFC seem to have a marked favorite for the former.

According to the CEO of IDFC, financier hesitation while funding state road projects results from lack of homogeneity in procedures adopted by states. States like Maharashtra, Madhya Pradesh, Gujarat, Punjab, Haryana, Rajasthan, Kerala and Karnataka have more PPP projects because they have a standardized Model Concession Agreement – a broad framework of rules concerning PPP projects. Also financiers like IDFC are also worried about the lower creditworthiness ease that states are able to provide, compared to agencies like the National Highways Authority of India. To diminish the risks arising from funding of state road projects, financiers are now in view of projects that are larger in dimension.

With the 11th plan foreseeing a doubling-up of investment in state and rural roads to Rs. 1.6 lakh crore, there is an imperative need for a sharp uptake in private sector investment.

Window for investment
According to the Parliamentarian panel, India needs to invest Rs. 200 crore every day for the next 20 years for road projects under National Highways Development Project and necessitates an efficient financing plan to meet this purpose. Accordingly, the government needs to raise Rs. 73,000 crore every year for the next two decades. The panel also stated that since government resources are not enough for such capital intensive activity, a proficient financing plan mobilizing all resources needs to be worked out to provide a balanced flow of funds.

In the month of July, six proposals from the Ministry of Road Transport and Highways have been approved by the government. These proposals are in five states. The predictable project cost of the permitted proposal is Rs. 9,773.85 crore.

Opportunity and potential
Road development is known as vital to maintain India’s economic growth and the constant focus on highway infrastructure development is targeted at annual growth of 12-15 percent for passenger traffic and 15-18 percent for cargo traffic.

The project has been attracting huge FDI and the government is planning to increase spending on road development significantly with funding already in place based on a cess on fuel. Several high traffic stretches have already been awarded to private companies on a BOT basis. Two successful BOT models are already in place:

The annuity model ; and
The upfront/lump sum payment model.

Government initiative
The National Highway Development Program, linking a total investment of Rs. 220,000 crore (US$ 45.276 billion) up to 2012, has been established.

100 percent FDI under the automatic route in all road development projects.
100 percent income tax exemption for a period of 10 years
Cabinet Committee on Economic Affairs has agreed upon the National Highways Fee (Determination of Rates and Collection) Rules, 2008 to establish uniformity in fee rate for public funded and private investments projects.

Global participation
Many global players have joined the group in the development and reform of the highway infrastructure in India and Indian road construction projects have become a profitable and rising investment opportunity for numerous international giants.

The various international companies to join the league are:

Berhad (Malaysia)
Deutsche Bank, Emirates Trading Agency (Dubai)
The Isolux Corsan Group (Spain)
Italthai (Thailand)
Baelim (Korea)
Dyckerhoff (Russia)
Widmann AG (Germany)
IJM Corporation, SDN and Road Builders (Malaysia)
Kajima and Taisei (Japan)

These companies have acquired equity stakes of 10 percent to 51 percent in various highway projects floated by the National Highway Authority of India and other state governments.

Dezan Shira & Associates is boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in India. To contact the firm, please email india@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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