Road building revival offers rare hope for India infrastructure overhaul

Road building revival offers rare hope for India infrastructure overhaul

Mon, Jun 17 2013

By Matthias Williams and Swati Pandey

NEW DELHI/MUMBAI (Reuters) – K. Ramchand, managing director at one of India’s biggest road builders, is doing something unusual to help dispel the gloom pervading much of the country’s infrastructure sector today: bidding for new projects.

His company, IL&FS Transportation Networks Ltd (ILFT.NS: QuoteProfileResearchStock Buzz), signed a $300 million contract in April to build a six-lane highway. The project will link an eastern industrial zone afflicted by some of India’s worst traffic snarls to mining districts such as Dhanbad, the nation’s coal capital.The IL&FS deal marks a sharp turnaround from last year when investor interest in public works plummeted. To rekindle investment in new, modern roads that India badly needs, the government has been rolling out a slew of policy measures, including a strategic shift in how projects are financed.

“Last year, I think, has been a typically bad year,” Ramchand said in an interview at a hotel in the business hub of Gurgaon outside New Delhi. “There is definitely an upswing, there is no doubt about it, because I think the mood is much better.”

The most significant policy change is that the government has moved away from its much-vaunted but troubled public-private partnership (PPP) model to fund projects.

Under the PPP model, developers finance construction out of their own pocket, often in exchange for the right to charge toll fares.

The government will revert to a form of contract where it funds part of the road building, taking on more of the risk of the project itself, said a top government official, speaking on condition of anonymity.

To give some idea of the scale of the change, the government will fund 70 percent of the 9,600 kilometres (5,965 miles) of road projects that it aims to award this fiscal year.

That is a sharp departure from the goal set earlier by India’s Planning Commission to build 60 percent of roads in public-private partnership.

The changes have even drawn the attention of foreign private equity players, with the likes of Macquarie Group Ltd (MQG.AX: QuoteProfileResearchStock Buzz) looking to acquire completed projects.

CHOKED AND CONSTRICTED

India relies heavily on roads to move freight due to its archaic railway network and under-developed river canal system. But its roads are often constricted, pot-holed and choked with traffic, slowing deliveries and hitting competitiveness.

“Road costs in India are higher by about 30 percent,” McKinsey said in a report, comparing them with costs in the United States. “This not only results in higher prices and lower competitiveness, but also hampers economic growth.”

The government plans to pour $1 trillion into infrastructure over five years. But its efforts to attract private investment have stumbled, partly because of red tape and cautious bankers.

India awarded less than 2,000 kilometres worth of new road contruction contracts in the last fiscal year, against a target of 9,500 kilometres.

To get investment in the sector moving again, the government has tweaked its policy so that developers no longer have to wait for clearance from forest authorities to start construction – a hassle that had stalled projects in the past.

Another boon is the central bank’s move to reclassify loans to road builders as secured loans rather than unsecured loans, which would give more comfort to banks to lend to projects.

Il&FS is hoping to add $880 million of new orders this fiscal year, Ramchand said.

Rival Lanco Infratech Ltd (LAIN.NS: QuoteProfileResearchStock Buzz) said in an interview in May that it aims to sign one or two road projects this year. It last won a contract in 2010.

Another developer, KMC Constructions Ltd, which has a tie-up with the private equity firm 3i Group PLC (III.L:QuoteProfileResearchStock Buzz), is also scouting for projects to add to its $580 million order book.

“We’re looking at the projects, definitely, because this is the time to bid for the projects,” said Shashank Shekhar, vice president for business development at KMC.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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