India’s road sector is on a transformative path. Propelled by the Bharatmala Pariyojana – an ambitious plan to construct 34,800 km of new highways and expressways – the country’s highway network expanded by 60% in the decade to 2024. However, roadblocks remain, clouding both the near- and the long-term view. In the current fiscal year, owing to a host of issues (including national elections), the government is likely to fall well short of its target of building or upgrading 13,000 km of highways. From a longer-term perspective, it remains a challenge to ensure strong private-sector participation in the sector. After experimenting with various models of public-private partnership (PPP), the government has now returned to the tried-and-tested Build-Operate-Transfer (BoT) model, albeit with revised norms that help address past inefficiencies and attract private participation. We spoke to several industry leaders to arrive at a clearer, ground-level view of the pluses and minuses of the current approach. On the whole, despite continuing challenges, they are optimistic about the sector’s long-term potential.
Path to Growth: Managing Debt and Leveraging PPPs
The government’s road-building targets have been steadily running up against financial strain, with the outstanding debt held by India’s nodal road-builder-cum-regulator, the NHAI, jumping nearly 15-fold, to Rs 3.5 trillion, since 2014. Underlying this surge in debt are a shift, around FY16, from private-led BOT models to government-funded EPC and HAM (Hybrid Annuity Model) projects; rising land acquisition costs; project delays; and underperforming toll revenues. In recent years, most of the funding for new highway projects has been routed through the NHAI, involving a mix of budgetary support and direct, NHAI-sponsored debt financing. While necessary to achieve long-term economic growth and enhanced connectivity, this growing reliance on borrowings may be unsustainable. This is where public-private partnerships (PPPs) come in. By mobilising private capital, managerial expertise and technological innovation, PPPs can help ensure the timely completion of large-scale projects while facilitating risk-sharing and reducing the burden on public finances. Though out of favour for several years, recent changes to the rules and regulations around PPPs are a cause for optimism.
A PPP Renaissance: Addressing Past Pitfalls
Poor planning and flawed risk-sharing mechanisms undermined the BoT model, which was popular in the mid-to-late 2000s. Private players often bore disproportionate risks, compounded by optimistic traffic projections. Delays in land acquisition and environmental clearances led to cost overruns, further worsened by inadequate technical data, which impacted project design and execution. These shortcomings were visible in such projects as the Bangalore Elevated Tollway and certain stretches of NH1 between Amritsar and Kolkata. Revenues often fell short of projections, exerting financial stress on the private operators, who were then compelled to renegotiate terms with the government.
The HAM model, which was seen as a game-changer when first introduced in early 2016, had the government covering 40% of project costs and assuming traffic risk, enabling private players to focus on execution. By shifting some of the failure risk to the public sector, it reduced uncertainty for private investors. However, after some initial success, HAM projects began to face challenges around land acquisitions and financial closure, and the NHAI has had to bear much of the financial brunt. Private-sector interest waned and bids dried up. This forced the government, in early 2024, to pivot back to BoT and ToT (Toll-Operate-Transfer) models, but with clearer and more attractive terms and greater accountability.
The revised model concession agreement (MCA) for BoT projects provides for equity and construction support of up to 40% of the total project, whereas previously, support was capped at 10% of total equity value. Concessionaires are also required to furnish smaller amounts than before as performance guarantees – 3% of estimated project cost vs 5% of total project cost previously – and non-banking financial corporations (NBFCs) have been allowed to act as lead financiers for such projects, opening an important new source of capital. Significantly, the new MCA explicitly allows concessionaires to seek an extension of the concession period if toll revenues fall short of projections (the previous MCA mentioned ‘compensation’ for such shortfalls, but did not clearly define the terms). Clearer terms have been set for what constitutes a ‘breach of contract’, and there are provisions for early buy-back of the project when traffic exceeds capacity for two years or more. At the same time, however, a revised construction delay clause offers termination rights if progress falls below 75% of schedule, putting the onus for delivery on contractors, with limited room for delays due to external factors such as land acquisition or environmental clearances. While this helps ensure timely project completion, it adds to the financial risk for builders.
Meanwhile, the ToT model has been strengthened through enhanced toll collection monitoring vias the use of technologies such as electronic toll systems, GPS tracking and data analytics. Oversight is provided by the NHAI, with periodic audits to verify collections. Additionally, concession period adjustments are triggered if actual fees deviate by more than 5%, down from the previous threshold of 20-30%, creating some breathing space for concessionaires. These changes will make projects more bankable ahead of rollout. Notably, 100% of the ToT projects put up in FY24 attracted successful bids, reflecting better alignment between project offerings and market demand.
Clearing the Path: Overcoming Persistent Barriers
These changes are likely to improve the viability and appeal of PPPs. However, truly transformative change will require addressing several major hurdles that continue to dog the sector.
Operational loopholes
Delays in project completion – often attributed to land acquisition hurdles and/or the need for utility shifting – remains a pressing concern. Additionally, contractors cite frequent payment delays, the result of a requirement for them to integrate their billing with the Public Financial Management System (PFMS) portal, a platform for tracking and managing fund disbursement. Although considered necessary from a compliance perspective, this strains contractors’ working capital position and creates an unnecessary bottleneck. These ongoing issues underscore the need for NHAI to refine its operational processes, ensure timely payments and thus help streamline project execution.
Long project timelines…
Typical project timelines, from announcement to commencement, are long drawn, often extending to 15-16 months. If a project is announced in, say, January, the bidding may not occur until July or August and financial closure might take another five months. Smaller players, in particular, find it challenging to operate under such conditions. Industry associations have urged NHAI to streamline the process, suggesting that bidding should take no more than 3-4 months, followed by expedited financial closure. For now, rather than enduring a protracted bidding/approvals process, many infrastructure players prefer to focus on the secondary market, where M&A activity is booming.
…and issues in the secondary market
Yet even secondary-market transactions face issues, such as lock-in periods and the requirement for NHAI approval for any stake transfer. New operators must meet strict qualification norms, and disputes over project valuation (based on factors such as traffic forecasts and the balance concession period) tend to stall deals. Adding to the complexity, lender consent is often required for refinancing or debt restructuring. Correcting/streamlining these issues would go a long way towards boosting private participation in general.
Ineffective dispute resolution
Dispute resolution is a fraught issue in the infrastructure sector. Unlike in the domain of income tax, where the appellate body is functionally independent of the assessing officer, infrastructure disputes suffer from a lack of ‘Chinese walls’ between the contracting authority and the dispute adjudicator. In fact, the two are often either the same entity or closely related. At the first level, disputes go to the Dispute Resolution Board (DRB), where the lack of independence is most clearly felt. If still unresolved – as most cases are – the matter moves into arbitration or, failing that, the courts. Even a favourable arbitration award or court judgement is no guarantee of resolution; the default practice is for the contracting authority to appeal any arbitration award or court judgement. In 2010, for instance, L&T won a case at both, the arbitration and the High Court level, but the Ministry continues to appeal the matter to this day. In the absence of stronger mechanisms for settling disputes, achieving the government’s ambitious targets may remain a challenge.
Lack of true partnership
Last but not least, road companies express concerns that, despite their significant equity investments in large projects, they are often viewed by government officials as mere contractors, rather than as true partners. This perception undermines collaboration, misaligns risks, limits decision-making authority, erodes trust and discourages future participation, ultimately affecting project viability.
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