Marking the beginning of what India hopes will be an ongoing stream of public-private partnership deals, a consortium of Australia’s Leighton, the U.K.’s Balfour Beatty, France’s Vinci and the Hindustan Construction Co. submitted bids this month for the $1.2-billion concessionaire contract to build a 570-kilometer highway from Rajasthan to Gujarat. This road is the first of nine megaprojects conceived by the National Highways Authority of India.
India has set a target for constructing 35,000 km of highways in the next five years under the National Highways Development Program. Out of the $60-billion investment, $40 billion is to come from the private sector. Overhaul of India’s infrastructure has become critical to the growth of Asia’s third-largest economy.
The government is considering doubling the investment from 2012 to 2017, and it expects as much as 70% of the additional investment to come from private sources. The planning commission, which sets five-year plans for the economy, expects India in 2010 and 2011 to build 2,500 km of roads, or 6.8 km put in place each day. The Kamal Nath-led Union Ministry of Surface Transport has set an ambitious target of increasing that to 20 km of roads a day.
Thirty-eight state highway projects spanning 3,000 km are to be built through public-private partnerships through 2012. According to the planning commission, half the projects from 2011 to 2012 will be in Uttar Pradesh. Currently, 41 projects involving 4,531 km are presently out to bid.
“India’s underdeveloped bond market, with few takers for long-term debt, [has] further choked the flow of funds for infrastructure. However, the government’s plan to launch a $11-billion infrastructure fund will help develop the domestic bond market and refinance high-cost debt, which may partially address the concern,” says Vishambhar Saran, president of the Indian Chamber of Commerce. Focus on monitoring and tracking has increased, he adds. “The government has provided further stimulus to the roads sector in the 2010-11 budget. The sector is likely to witness interesting deals over the next few years. These include private-equity deals, consolidation among sector players and exits from build, operate and transfer projects,” Saran says.
A recent report by global accounting firm Ernst & Young notes India’s vigorous roadbuilding efforts, including a timely review process of road development policies, bidding documents and model concession agreements to resolve past issues. “We expect the market to witness considerable concession-based M&A activity,” says Rajesh Samson, an Ernst & Young partner for transaction advisory services.
National highways account for approximately 2% of India’s total 3.3-million-km road network, yet they support 40% of the country’s total road traffic. Another 130,000 km are state highways, and around 3.14 million km are major district and rural roads.
Foreign participation from 2002 to 2007 was limited to companies from Southeast Asia. Initiatives such as the new model concession agreement for BOT projects has attracted participation from global players such as John Laing, Isolux Corsan, Cintra, CR-18, Atlantia and others.
Despite regulatory uncertainties on issues such as conflict of interest, market sentiments began changing in 2009. Since mid-November 2009, the National Highways Authority of India has received bids for 52 projects. A large number of developers have expressed their willingness to take projects on a revenue-share basis, according to the E&Y report.
Ongoing challenges include resolution of local issues on land acquisition, project accountability and enhancing the skilled-labor supply. A key issue for foreign investors is making sure there are no regulatory impediments to realizing returns from their investments.