Infrastructural Develoment

ROADS

The development of a strong road network is essential to stimulate the economy and sustain a higher growth rate. In India, during the last 50 years, freight and passenger traffic have grown at an annual rate of approximately 10 per cent. In comparison, overall road length has grown at less than 5 per cent per annum. As a result, there is an urgent need to strengthen road infrastructure in the country.

In the USA, the development of a nationwide highway network after World War II contributed to the sustained economic expansion that occurred subsequently. In a similar way, a major road-building program in India is also likely to lead to large scale job creation in rural areas and provide a direct impetus to producers of construction material.

The investment required for creating this infrastructure is vast. The Rakesh Mohan Committee has estimated the cost of new development and expansion of the National and State Highways (including 4,000 km of expressways) to be around Rs. 90,000 crore over the ten year period from 1996-2006. In addition, the Planning Commission estimates that the total cost of providing connectivity to all villages is Rs. 60,000 crore. In comparison, the total plan expenditure (Centre and States) on the roads sector was around Rs. 13,000 crore for the five year period between 1992-1997.

Road projects typically have a low financial rate of return. However, the economic return to communities from such road development is substantially higher. This is mainly due to the many positive externalities that accompany road projects. These include increases in the overall efficiency of the economy and its rate of growth as well as increases in the value of land surrounding the road. These benefits, however, are usually difficult to measure and price since they accrue to the community as a whole. Only the Government can capture some of this value through an increase in the productivity of the economy and the consequent increase in tax revenues. Consequently, the Government needs to play a dominant role in the creation of road infrastructure.

At the same time, a significant role for private sector participation does exist. In fact, over the last few years, private investment has already commenced through the creation of short urban bypasses or bridges as well as short inter-urban stretches with high traffic density and easily demonstrable benefits. This involvement could be extended to the four-laning of congested stretches in the National Highway network.

In line with this perspective, the seven major recommendations for the roads sector are described in the subsequent sections.

(a) Shift focus from the construction of new roads to improving mobility along the Golden Quadrilateral.

Over the last 50 years, the length of the total road network has grown at an annual rate of approximately 5 per cent per annum. However, the National Highway network, which forms the backbone of inter-state road transportation in the country, has grown at only 1.2 per cent per annum. As a result, this network has been getting progressively congested. Today, the National and State Highways, which account for less than 10 per cent of the road length in the country, carry more than 75 per cent of the traffic. The pressure is most severe along the National Highways joining New Delhi, Mumbai, Chennai and Calcutta, which form the "Golden Quadrilateral". In these stretches, traffic density already exceeds 35,000 passenger car units (pcu). In this situation, any improvement made to this network would generate the maximum benefits for the economy. The Government should, therefore, shift focus from providing accessibility, by building new roads, to enhancing mobility, by strengthening the high-density corridors.

(b) Four-lane/Six-lane the corridors along the Golden Quadrilateral.

To enhance mobility along the National Highways, the Government has two main options:

• Improve the existing highway network, and/or

• Create new expressways.

The development of a new expressway has the greatest impact on enhancing mobility between two locations. However, the development of expressways is very expensive with costs per kilometre ranging between Rs. 8-10 crore for a six-lane expressway. To recover this high development cost through toll, without additional subsidies, calls for very high-density toll paying traffic. Also, since new expressways need to share the traffic with existing (toll free) facilities, an even higher level of traffic is required for their financial viability. It is estimated that a financially viable, toll based six-lane expressway requires initial traffic flows in the region of 40,000 pcu, which in turn implies a flow of 70-80 thousand pcu on the existing stretch. The length of existing stretches with such high traffic volumes is very limited.

In comparison, four-laning of the existing network (only 3.4 per cent of which is currently four-laned) costs between Rs. 3 to 4 crore a kilometre. It therefore follows that the short to medium term focus for increasing mobility should be on the four-laning of existing national highways on the Golden Quadrilateral.

 

(c)  A new expressway network should be planned over a 10-15 year time frame.

In stretches where traffic volumes exceed 70-80 thousand pcu or where land for four-laning cannot be acquired, new expressways can be developed on a selective basis. The development of an expressway network across the length and breadth of the country should remain the long term objective, to be achieved in stages over the next 10-15 years.

2. Separate the Policy Maker, Regulator and Implementer

Historically, road development has been the domain of the public sector. In the past, the Government has defined policy, enacted legislation, provided funding and implemented road projects. Given the tremendous social importance of roads, it is imperative that the Government continues to define policy for the development of the sector. This is all the more important since a multiplicity of agencies are involved in project development and funds provision. However, the regulation of the sector is becoming a specialised function requiring the full time attention of an empowered body of experts.

Moreover, there is an increasing need for the private sector to play a major role in the development of select road projects. To ensure a level playing field for all developers (public and private), and to enhance the utilisation of resources, it is necessary to define distinct implementation agencies at the project level. These agencies would then compete for projects within the framework defined by the regulator.

In view of its different needs and the agencies involved in the roads sector, it is necessary to segregate policy making from regulation and implementation. This should be done in a manner that ensures there is no overlap between the various agencies. This could be achieved through the following steps:

(a) Develop a policy statement that spells out the Government’s vision for the roads sector.

The Roads Wing of the Ministry of Surface Transport (MOST) should develop a policy statement that spells out its vision for the roads sector. This should broadly define the areas where the Government would lead development and others where the private sector would play a more active role. A time frame for achievement of objectives should also be indicated. The Ministry should allocate budgetary resources, earmarked for the road sector, to projects awarded by the National Highway Authority of India (NHAI) and to the State Governments.

In the States, the Public Works Ministry should be the policy maker.

(b) Establish separate regulatory authorities at the Centre and the States.

India has a variety of roads ranging from four-lane National Highways to low quality district and village roads. The nature of requirements, urgency for improvement and the extent of private sector involvement differ for various types of roads. In view of these differences, and keeping in mind the magnitude of the task, it is desirable that separate regulatory agencies be established at the State and the Central level.

Project implementation should be done through Special Purpose Vehicles (SPVs) as described in a later section.

3. Make NHAI the Sole Regulator and Facilitator for National Highways

The Government is currently attempting to involve the private sector in the construction of roads. For this to happen it is necessary that there exists only one agency that can invite bids for the improvement or construction of National Highways. This will prevent multiple agencies from inviting tenders for the same route and thereby reduce uncertainty for the bidders. NHAI should be the sole regulator and facilitator for all improvements to National Highways and on all new routes alongside existing National Highways. The steps that NHAI would need to take are:

(a) Prioritize and award specific projects through a bidding process.

As mentioned at the start, the resources required for improvements to the road sector are enormous. Due to this mismatch between the requirements and the availability of funds, the NHAI needs to explicitly prioritise the various initiatives at the central level, on a regular basis. The prioritisation should include the time frame for projects as well as the role of the private sector and the Government in their execution. The final objective should be to develop a perspective plan for highways which prioritises the various investments needed over a period of 15 to 20 years.

To achieve this objective, a review of the existing traffic data on National Highways is required. The NHAI should commission traffic studies to prioritise different stretches and build a database, using competent consultants on a time-bound basis. The information should then be used for prioritising areas for action, based on the need for up-gradation and the expected "viability" of the project. These decisions should be based on the existing traffic density, its expected rate of growth and the impact of improvements on the economy as a whole.

(b) Segregate feasible projects depending on the level of Government involvement.

Due to the high level of Government support required for the successful implementation of road projects it is desirable for the Government to retain a stake in major projects. The magnitude of the stake could vary from project to project. There would be two broad categories:

• Category 1: These constitute financially viable projects based on toll and tax concessions. As far as possible, these projects should be awarded as concessions to SPVs in the joint sector on a Build Own Operate Transfer (BOOT) basis.

• Category 2: These are projects that require larger subsidies for financial viability but generate substantial benefits to the economy/community, i.e., would be viable if all positive externalities could be priced and recovered from the beneficiaries. Such projects should be developed by a State-owned SPV.

(c) Obtain land and provide environmental clearance.

The timely acquisition of land and award of all clearances is critical for the successful implementation of road projects. Legislation has already been amended to ensure that land acquisition by the NHAI can only be challenged in Courts with regard to the extent of compensation and not on any other ground. The NHAI should, therefore, take on this responsibility for all National Highway projects.

(d) Undertake several other "implementation" responsibilities. These would include:

• Setting the terms as well as the extent of foreign participation in these projects.

• Developing well defined, concessionable projects for tendering.

• Awarding the project on the basis of competitive bidding.

The States should also set up regulatory authorities along similar lines. These should monitor the improvements to State Highways, the development of other district and village roads and the creation of new intra-state expressways.

4. Implement Projects through Special Purpose Vehicles (SPVs)

A major road project typically involves the simultaneous management of a variety of activities, including construction, real estate development, development of roadside amenities and raising finances. It is difficult for any one entity to possess the entire set of skills required. The SPV mechanism, however, can bring together the diverse capabilities needed for successful project completion. To successfully use the SPV approach the following steps should be taken:

(a) Set up SPVs as separate companies.

SPVs for BOOT projects should be distinct from existing Government and other agencies in this field. They should be set up as limited liability companies so that they have a separate balance sheet and can approach the capital market for funds.

(b) Ensure SPVs are professionally managed and governed by an independent board of directors.

The Board should ideally include reputed persons from the Government as well as the Private sector. The Chief Executive should enjoy the confidence of the capital market as well as of the promoters and Government agencies. The SPV should be professionally managed, be accountable for its performance and must stress quick decision making. Mechanisms to ensure that the cash flows of this entity are insulated, such as the setting up of escrow accounts, should be adopted.

(c) Ensure SPVs are of an optimal size.

For National Highways projects, individual SPVs need to be of an optimal size/critical mass. Being too small or too big can be counter-productive. A certain minimum scale of operations is required to attract the right managerial talent and financial resources necessary for effectively implementing the project. On the other hand, an inordinately large SPV may become too bureaucratic and ineffective. Therefore, it is vital that the SPV strikes the right balance between scale and effectiveness.

This can be achieved by defining the four-laning of each major corridor in the Golden Quadrilaterial as a single BOOT project. This will ensure that over any one major stretch, a single agency is responsible for mobility. Moreover, the concerned State Governments could become minority equity partners in the SPV to secure their continued support. Such an approach was followed by Konkan Railways for implementing the Mumbai-Mangalore rail link which passed through three States.

Further investment in six-laning or expressways for dense stretches in the corridor should be negotiated with the SPV on the basis of a pre-determined formula covering toll collection and an extension of the BOOT period.

Such steps will provide the SPV credibility in the eyes of the financial community. Furthermore, institutional investors, such as financial institutions and multilateral agencies, prefer to invest in SPVs since they offer transparency and permit some leverage over the management of the entity.

The Maharashtra Government has successfully used an SPV, the Maharashtra State Road Development Corporation (MSRDC), to implement a large number of road projects. The MSRDC is a successful example, of how the SPV approach can lead to quick implementation with limited equity resources from the Government (see Annexure 5.1).

The approach towards the construction of roads in India has remained unchanged over the last few decades. Most road projects in the country are commissioned and executed by the Public Works Department (PWD) of the State Government. The projects are usually awarded on the basis of the lowest price and inadequate attention is paid to the quality of construction. The technology used is largely obsolete and construction techniques are inefficient and time consuming. As a result, time and cost over-runs are common place.

To efficiently construct long stretches of a high quality road, as envisaged in the four-laning of the Golden Quadrilateral, it is critical that the Government adopt modern techniques of tender evaluation, project management and construction. The MSRDC is currently developing various roads in Maharashtra, including the Mumbai-Pune Expressway and 50 flyovers within Mumbai, entailing an investment of about Rs. 3,000 crore. Its impressive progress in initiating and managing a large number of road projects within a short time frame of two years offers important pointers for large-scale road development in the country (see Annexure 5.1). Some of the important lessons are:

(a) Adopt modern construction technology.

The use of modern construction techniques that save time and lower cost should be a pre-requisite when inviting bids for private participation. Some of the techniques that need to be encouraged include the use of hydraulic boring, pre-fabricated sections, pavers and ready mix concrete.

(b) Facilitate and create incentives for timely execution.

To prevent time over-runs, the Government should provide incentives for early completion and penalties for any delays. In addition, the Government should facilitate timely implementation by ensuring prompt payment (within seven days) to the contractors.

(c) Appoint project consultants for monitoring and providing technical solutions.

Project consultants should be used to monitor the progress of work and authorise payment. They should also be responsible for providing solutions to technical problems within a specified time frame, say, seven days.

In addition, the regulator should ensure that adequate weightage is given to the technical and financial strength of the bidders while setting the criteria for pre-qualification. Furthermore, certain anomalies, such as the levy of excise on pre-fabricated sections, discourage the use of new technology. These need to be corrected.

The immediate priority of four-laning the Golden Quadrilateral (6,000 km of National Highway) would require Rs. 18,000-24,000 crore. In addition, around 500 kilometres may need to be upgraded to six lanes or expressways, costing another Rs. 5,000 crore. The total fund requirement is around Rs. 23,000-29,000 crore. This far exceeds the funds that the Government can make available. The Government needs to overcome this mismatch by providing incentives to private investment in roads and by raising levies to generate funds for road development. To this end, the Government should:

(a) Provide fiscal incentives.

The existing tax holiday for road projects should be enhanced from 5 years to 10 years, as proposed by the Rakesh Mohan Committee. This is necessary to improve project viability. In addition, duty free imports of plant and equipment for specific projects should be continued. The current income tax exemption provided to bonds issued by infrastructure companies should be continued.

 

(b) Offer select guarantees to developers.

All project developers should be guaranteed against any changes in legislation that adversely affect the viability of the project. In addition, the Infrastructure Development Finance Company (IDFC) should enhance credit in the sector by providing counter guarantees to lenders. However, no guarantees should be given on the minimum return on investment, traffic levels etc.

(c) Make available 15 to 20 year funds for investment in roads.

Road projects typically have very long gestation periods ranging from 5 to 10 years. It is, therefore, necessary to have access to long term funds for the execution of these projects. Provident funds, as well as insurance companies, are naturally suited to providing long term debt to the sector. These companies should, therefore, be permitted to invest in the sector.

(d) Enhance road development funds through new levies.

The Centre should implement a one rupee surcharge on diesel, which would yield about Rs. 3,000 crore per annum. The proceeds should be earmarked for road development and divided equally between the Centre and the States. This should be in addition to the proposed cess on petrol the proceeds of which (about Rs. 800 crore) go to the Centre.

(e) Use new levies exclusively to provide equity for road SPVs.

The cess on petrol and the proposed (one rupee) cess on diesel, if implemented, will yield approximately Rs. 2,500 crore per annum at the Centre. With this amount as equity contribution to SPVs, it would be possible to raise debt from the capital market. At a debt/equity ratio of approximately 2.2:1, the funding capacity of these SPVs will be around Rs. 8,000 crore per year from Government equity funds alone. This will be further enhanced by private sector equity investment. These funds should be sufficient for the high priority four-laning projects (see Exhibit 5.1) needing Rs. 23,000-29,000 crore over the next 3-4 years.

Exhibit 5.1 :Fund Requirement vs. Anual Funding Sources for Four - Laning of the Golden Quadrilateral

 

The States’ share of the new tax on diesel would be in the region of Rs. 1,600 crore per annum. This should be used as seed capital for the State level SPVs (like MSRDC). With market borrowings at a debt/equity ratio of 2.2:1, an investment of around Rs. 5,000 crore per annum can be funded in the States. If the SPV enjoys a good track record of implementation, and has the confidence of the capital markets, the amount raised as debt can be increased substantially.

7. Four-lane the Delhi–Mumbai–Chennai Corridors as a Showcase Project

To demonstrate that the Government’s priority of four-laning the Golden Quadrilateral over the next four years is achievable, a "Showcase Project" should be awarded in the next six months for execution within the following 30 months. The project should cover a significant part of the Golden Quadrilateral, such as the Delhi-Mumbai-Madras route. The route could be extended towards the North, say to Amritsar, and the South, say to Kanyakumari, to link key locations with these corridors.

Two SPVs, one for the Delhi-Mumbai sector and the other for the Mumbai-Chennai route, should be established in the joint sector for executing the project. Appropriate lessons should be drawn from the Konkan Railway and the MSRDC experience.

An outline of the proposed project is provided in Annexure 5.2

Summary

• This should be achieved by four-laning/six-laning the Golden Quadrilateral.

• A new expressway network should be a long term objective over a 10-15 year time frame.

• Separate the policy maker, regulator and implementor.

• Develop a policy statement that spells out the vision for the roads sector

• Establish separate regulatory authorities at the Centre and the States

• Make NHAI the sole regulatory and facilitating agency at the Centre. It should

• Prioritise and award specific projects through a bidding process.

• Segregate feasible projects depending on the level of involvement of the Government.

• Obtain land and provide environmental clearances.

• Implement projects through Special Purpose Vehicles (SPVs)

• Implement Projects through SPVs

• Make SPVs separate companies.

• Ensure SPVs are professionally managed and governed by an independent board of directors.

• Ensure SPVs are of an optimal size.

• Adopt World Class Practices in the Management of Road Projects.

• Adopt modern construction technology.

• Facilitate and create incentives for timely execution.

• Appoint project consultants for monitoring and providing technical solutions.

• Raise Resources for kick-starting Development.

• Provide fiscal incentives.

• Offer select guarantees to developers.

• Make available 15 to 20 year funds for investment.

• Enhance road development funds through new levies.

• Use new levies exclusively to provide equity for SPVs.

• Carry out the four-laning of the Delhi-Mumbai-Chennai corridors as a Showcase Project

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The Corporation ensured that the projects put up for tendering had received all the necessary approvals and environmental clearances. The contracts were also awarded in a fair and transparent manner. The Corporation made the use of the latest technologies a pre-requisite for all builders. This has cut down the construction period from 36-42 months to 17-18 months. The contracts have also been structured so as to provide an incentive for early completion of the project and a penalty for each day of delay. As a result of these progressive measures, MSRDC has consistently met both time and cost targets.

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• Construction cost not over Rs. 4 crore per kilometre

• Concession period of 30 years

• A tax holiday for 10 years

• First year traffic density of 40,000 pcu, growing at 9 per cent per annum

• Maximum capacity for a four-lane highway is 60,000 pcu

• Maintenance charge not over 5 per cent of capital cost

• Toll inflation permitted at 6 per cent per annum

• Increase in operating and maintenance costs at the rate of 7 per cent per annum