Roadway Infrastructure Development and Opportunities in India

The Indian economy is growing at a remarkable rate and is estimated to become the third largest economy by 2050, according to a report by PricewaterhouseCoopers (PWC). The Indian Government has put forth liberalized policies and deliberate sector strategies that have helped in creating growth and opportunity areas for infrastructure companies. As a result, all major infrastructure sectors have also witnessed growth trends, with the roads and highways sector showing tremendous activities in the recent past. Various Government initiatives have also resulted in increasing the number of Public Private Partnerships (PPPs) in this sector.

Among the various reasons behind the rationale to invest in the Indian infrastructure sector, the main motivation is the fastest growing economy, very few limitations on Foreign Direct Investment (FDI) for infrastructure projects, tax holidays for developers of most types of infrastructure projects, some of which are of limited duration, and opening up of the infrastructure sector through PPPs. In fact, as per statistics, the projected spending during the financial year 2007-2012, within various infrastructure segments include US$ 167 billion for the electricity sector, US$ 65 billion for railway sector, roads and highways stood at US$ 92 billion and the port sector is expected to accumulate over US$ 22 billion spending during the same period.

Projected Investment in the Road & Highways Sector in the Eleventh Plan (US$ Million)

Source: Ministry of Road Transport and Highways

This growth in the infrastructure sector is directly due to the rise in the developing services and manufacturing sector in the country which is mainly driven by increased spending of the middle class and Government’s intention to improve the socio-economic conditions of the country. Construction is the second largest economic activity in India after agriculture, and recognising this, the Indian Government has already planned US$ 500 billion worth of investment into India’s infrastructure sector in the Eleventh Five Year Plan.

Indian Road Transport

With a road network of 42.36 lakh km, India has one of the largest networks of roads, comprising of highways, state highways, district roads, rural roads, expressways and other major state / district highways.

India's highways development project, the largest PPP programme in the world, is likely to attract a whopping investment of US$ 41 billion, including FDI, from private sector. It has been anticipated that over the next few years, that the total projected investment is around US$ 70 billion, and the approximate investment from the private sector would be (which also includes FDI) US$ 41 billion. The Road Ministry has unveiled an ambitious programme to construct 35,000 km of roads by March 2014 and has called for foreign investment to meet the financial requirements.

Private Equity Investment in Road Infrastructure

A number of private equity firms have invested into the Indian road infrastructure sector. With US$ 407 million already invested into the sector within the first five months of the year, the largest deal in the PE sector was in the form of joint ventures. Some of the notable deals that took place are –

• Venture between Infrastructure Development Finance Co. (IDFC) and Khazanah Nasional Berhad, the investment holding arm of the government of Malaysia that plans to establish a infrastructure development company with a focus on India's roads.
• Morgan Stanley Infrastructure Partners entered into a $400 million joint venture with Spain's Group Isolux Corsan SA to invest in the Indian Road Sector.
• Tata Realty and Infrastructure and Actis, a private equity firm, signed a $2 billion joint venture to invest in the sector last year.

An amount of INR 35,681 crore (US$ 7.2 billion) has been targeted to be spent during the year 2010-11 for construction of various projects of National Highways Development Project (NHDP) and up till December 31, 2010 an amount of INR 20,809.21 crore (US$ 4.5 billion) has been spent.

Allocation from the Central Road Fund (INR in Crore)

Source: Ministry of Road Transport and Highways

The road network in the country caters to 60 per cent of the total freight traffic and 87.4 per cent of the total commuter traffic. The national highways form only 1.7 per cent of the total Indian road infrastructure but allow passage to about 40 per cent of the total road traffic in the country.

The main national highways have been categorised as per the width of the highways. Single lane highways with a width of 3.75 m and multilane highways with a width of 3.5 m per lane is the standard size of the country’s highways.

Year wise Trend of Budget Provision and Actual Expenditure (INR in Crore)

Source: Appropriation Accounts

Trouble free accessibility, flexibility to personal requirements, and effective cost are the major factors that favour road transport across the country. The road network in the country is a feeder to other forms of transport such as rail network, ports, and airports. The growth in total number of registered vehicles during the period (1991 to 2006) reflects a compounded annual growth rate (CAGR) of about 10 per cent with variation across vehicle categories. Therefore, it is important that the Indian roads and highways network is subjected to rapid expansions, easier accessibility, increased road safety and higher efficiency for better commuter experience.

During 2009-2010 and 2010-2011, the total projects awarded for the development of roads and highways in India, aggregated 3,360 km and 5,059 km, respectively. In order to achieve project viability and cost effectiveness, it is required to award 7,300 km per year. The government has thereby identified 10,000 km to meet this target for the current year 2011-2012.

Grant of the Department of Road Transport and Highways for 2009-10 (INR in Crore)

Source: Appropriation Accounts 2009-2010

Government Initiatives

The Indian government has undertaken a number of initiatives to improve and augment the Indian road and highway infrastructure. Among the different projects undertaken by the Indian government, some of them are described in brief.

• National Highways Development Project (NHDP) - The Central Government has initiated the National Highways Development Project (NHDP), which is the largest project undertaken by the government until now both in terms of budget and size. National Highway Authority of India (NHAI) is the governing authority for this project. The NHDP programme has been planned with Phase I and Phase II as described below:

  Under the NHDP Phase I & II, the government has planned to develop 4/6 laning of about 14,000 km of National Highways, at a cost of INR 65,000 crore (US$ 13.1 billion). The two phases mentioned above include the Golden Quadrilateral (GQ), North-South & East-West Corridors (NSEW), Port Connectivity and Other Projects. The GQ covers four major metros in the country - Delhi, Mumbai, Chennai and Kolkata consisting of 5,846 km. The NSEW corridors comprising a length of 7,142 km connects Srinagar in the north to Kanyakumari in the south including a spur from Salem to Kochi and Silchar in the east, to Porbandar in the west, respectively.

  Likely Cost of Different Projects (At 2004 prices) for the Year 2005-06 to 2011-12 (INR in Crore)

  Project	Likely Cost	To be met out of				Private Sector Participation
  		Budgetary Support (Excl. Cess & EAP)	EAP	Market Borrowings	Total
  NHDP Phase-I & II (For the balance 9,000 km)	42,000		10,000	28,000	38,000	4,000
  NHDP Phase-III (10,000 km)	55,000	10,000	10,000		20,000	35,000
  Accelerated Road Development in North-East Region	2,500	2,500			2,500
  NHDP Phase-IV (20,000 km in first 7 years)	25,000	13,000	10,000	2,000	25,000
  NHDP Phase-V (6-laning of 5,000 km)	17,500	1,500			1,500	16,000
  NHDP Phase-VI (Expressway of 1,000 km)	15,000	2,000			2,000	13,000
  Others	15,000	6,000			8,000	7,000
  Total	1,72,000	37,000	30,000	30,000	97,000	75,000

  Source: Ministry of Road Transport and Highways

• E-Governance Programme – The Ministry of Road Transport and Highways has initiated a “Mission Mode Project” to target the automation of the Regional Transport Offices (RTOs) / District Transport Offices (DTOs) at all centers in the country, along with interlinking these RTOs/DTOs with each other and setting up computerised databases for State and National Register of motor vehicles. The main motive behind introducing e-governance within the sector is to facilitate easier creation and allow easy accessibility to vehicle database. As per current statistics available, in the Annual report 2010-2011 presented by the Ministry of Road Transport and Highways, India, 100 per cent computerisation has been achieved in 27 States/union territories (UTs). At present 100 per cent connectivity has been achieved in 29 States/UTs. With e-governance being introduced, it is expected to provide enormous advantage to other organisations such as banks, insurance companies, police and intelligence agencies also. The Ministry of Road Transport and Highways also intend to launch a National Register and State Registers of Driving Licenses and Registration Certificates of motor vehicles in near future.
• Special Accelerated Road Development Programme for North Eastern Region (Sardp-Ne) – This project initiative relates to the development of road connectivity between the State Capitals and District Headquarters within the North Eastern region. This project comprises of improvement in the present conditions of 10,141 km of roads (National Highways - 4798 km and State roads -5343 km). The project will be executed in three separate phases A, B and Arunachal Pradesh Package for Roads and Highways.
• National Highway Development – In order to further improve the existing highways in the country and develop more highway facilities, the Government has initiated a programme under the NHDP that is targeted to be executed by the end of 2015 with an investment of INR 2,35,690 crore (US$ 47.4 billion) to be dispersed in phases.
• Central Road Fund Initiative - The Central Government has set up a dedicated fund under the name of Central Road Fund (CRF). This fund is basically a collection on the cess on Petrol and high speed Diesel oil. Currently, the existing cess charge duty on petrol and diesel, is INR 2 (US$ 0.04) per litre and the collected funds are disbursed for the effective development and maintenance of national highways, roads, rural road network, bridges, and other safety norms under the Central Road Fund Act, 2000.

Rules and Regulations Governing FDI and Private Participation

The Indian government in order to provide a boost to the private sector and FDI funding’s into the sector has announced a number of incentives. These policies include the following –

• The Government will bear the cost of -
  • Project Feasibility Study
  • Land that will be allotted for the right of way and way side facilities
  • Shifting of facilities
  • Land and Environment clearance costs
• The government allows 100 per cent FDI in the road sector in the country.
• In order to improve the project viability, the government will provide 40 per cent subsidy which will be decided on individual case basis.
• The government also offers 100 per cent tax exemption in any consecutive 10 years out of 20 years after the project has been commissioned.
• The government has removed any kind of import duty on high capacity and modern road construction equipments.
• The Road sector has been allotted the status of a separate industry (Infrastructure as defined in section 18(1)(12) of the Infrastructure Act includes Roads).
• Introduction of liberal external commercial borrowing regulations for private sector further promotes private participation.
• The government has given the rights to the private sector companies involved in BOT projects to retain Toll – Toll rates are indexed to the wholesale price index.

Private Sector Involvement

A total investment of US$ 500 billion is foreseen in the Indian infrastructure sector as per a report by KPMG, titled 'Opportunities in Infrastructure and Resources in India'. Along with high level private sector participation both at the construction contracts and Build Operate and Transfer (BOT) levels, the major private sector initiatives in this sector includes -

• Reliance Energy – with an estimated cost of US$ 762.42 million, the company is involved into three contracts to develop four-lane 400 kilometers of highway and four-laning of five national highway projects in Tamil Nadu that covers 400 km.
• L&T inter-state Road Corridor Limited – The engineering and construction major has undertaken a project to develop a four-lane, 76 km highway between Palanpur and Swaroopgunj on the East-West Corridor.
• Jaiprakash Associates - The infrastructural industrial conglomerate is implementing the 165 kilometers long Taj Expressway project, which connects Greater Noida to Agra at a cost of US$ 554.93 million.
• Lanco Infratech – The construction and Energy Company, is developing a four-lane, two highways in Karnataka at an estimated cost of US$ 247.41 million.
• DS Construction – A leading construction company, has undertaken the development of the Gwalior-Jhansi section on NH-75 that includes four-laning at a cost of US$ 159.9 million.
• Maytas Infra Private Limited and Nagarjuna Construction Company Ltd – Under a Joint Venture, the two companies are engaged in the development of a four-lane the highway from Tindivanam and Pondicherry, at an estimated cost of US$ 70.09 million.
• Era Constructions India Limited and Karam Chand Thapar & Bros Limited – These two companies are involved in the construction of a section of the Delhi-Haryana Border to Rohtak and four-laning of Gwalior by-pass at a cost of US$ 73.8 million.
• Madhucon-Projects - Executing ongoing BOT projects with four toll-based road projects.

As per existing data available with the Ministry of Finance, India, the Public-Private Partnership Appraisal Committee (PPPAC) has granted approval to a total of 87 projects including 77 highway projects since January 2006. The PPPAC also approved infrastructure projects worth US$ 5.98 billion during November 2008 which includes 21 highway projects to be taken up under NHDP Phase III and V.

To encourage private sector participation, Government has announced several incentives like tax exemptions, duty free import of road building equipments and machinery etc. It has been decided that all the sub-projects in NHDP phase-III to Phase-VII would be taken up mainly on Public Private Participation (PPP) route following either Built Operate and Transfer (BOT) toll mode or BOT (Annuity) mode.

International Participation

There is also an increased participation encountered in the sector with a number of multinational companies investing into the sector. 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 between 10 to 51 per cent in various highway projects that have been floated by the NHAI and other state governments across the country.

Forty road construction projects are under execution in the country which involves international participation from foreign companies from China, Russia, U.K., Dubai, Singapore, Italy, South Korea, Malaysia, Spain and Thailand. Sixty four road projects of 3,463 km worth US$ 35.91 billion have already been finished and 40 projects are under implementation for 3,810 km worth US$ 63.82 billion.

The government has been constantly pursuing efforts to augment international cooperation in the sector. In order to benefit from the various systems that are employed in other countries to address challenges like overcrowding, environmental effects, aging infrastructure, altering demographics and the affect of climate, the Indian government has signed some major Memorandums of Understanding (MoUs) and other mutual agreements that related to transfer of knowledge. These mutually beneficial technical expertise transfer agreements will offer long term benefits of the Indian infrastructure sector.

Recent Sector Trends

Addressing at the “2nd ASEM Transport Minister’s Meeting & Transport Development Forum” at Chengdu, China, the Indian government has indicated the initiation of mega projects of about 400-500 km estimated at US$ 1 billion, that would attract international investors, contractors, and concessionaires.

Another project covering the districts of Sundargah and Deogarh in Orissa, with a total project estimated cost of INR 1,098.90 crore (US$ 0.2 billion), was approved to develop four/two laning with paved shoulder of Birmitrapur-Barkote section on NH23 and four laning of Vijayawada-Machlipatnam section of NH 9 in Andhra Pradesh at a cost of INR 736 crore (US$ 0.1 billion). The two projects aim to reduce the traffic congestion and generate employment opportunities for local people in the region.

At a conference on “Public Private Partnership (PPP) in National Highways: Challenges and Opportunities” organised by the Ministry of Road Transport & Highways with the assistance of the Planning Commission, the industry pioneers associated with the Indian infrastructure (roads and transport sector) offered valuable insights and insisted for a single window clearance system, expeditious and time bound land acquisition proceedings, utility shifting etc. the government was appreciated for introducing more enhanced transparency and fair competition for the PPP projects.

World class infrastructure holds the key for India to become a globally competitive economy and attain the objective of sustained development. Coupled with a quantum growth in the infrastructure sector of the country, an efficient road and highway network is significant for rapid growth across all sectors as it provides access to rural areas, easy approach to markets, besides opening up new regions for investment opportunities. With the backdrop of active government initiatives, friendly policies and rising investment trends in the sector, the Indian transport sector offers promising growth trends and opportunities.