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India to Pay for Highways for First Time in 14 Years: Freight

October 12, 2012

India to Pay for Highways for First Time in 14 Years

Cars, pedestrians, carts and motorcycles move down a congested street in Mumbai, India. Photographer: Kuni Takahashi/Bloomberg

India will end a 14-year policy of solely depending on private capital to build major roads as it grapples with infrastructure worse than Guatemala’s.

The government will award $2.3 billion of state-funded highway contracts by the end of March after a credit crunch left builders unable to find bank loans, Road Transport Minister C. P. Joshi said Oct. 8 in New Delhi. India has previously relied on construction companies funding new roads with loans, which they then repay from income including toll fees.

The collapse in private bids has worsened congestion that costs Asia’s third-biggest economy $5.5 billion annually and leaves fruits and vegetables rotting on the way to market. Traffic is so bad that trucks take 65 hours to travel the 1,374 kilometers (854 miles) between Mumbai and New Delhi and an estimated 3.5 million cars and trucks will be sold this year.

“There is no way we can achieve the target for road building unless the government figures out some way of funding it,” said Manish Saigal, a partner for transport and logistics at KPMG in Mumbai. “Liquidity has been a serious problem.”

Only 600 kilometer-lanes of projects have been awarded since April 1, compared with a full-year target of 8,800 kilometers.

The need for direct state spending on highways marks a shift from earlier this year when builders were paying the government for the right to build and operate roads. The companies were then confident they could make a profit on the contracts, which generally run for 30 years, because of rising traffic. The National Highways Authority of India won payments for at least 32 projects in the year ended March 31.

Fading Optimism

That optimism has faded because of an economic slowdown, said Shankar Raman, chief financial officer at Larsen & Toubro Ltd., the nation’s biggest engineering company. Growth may drop to a decade-low 4.9 percent this year, according to the International Monetary Fund.

“There aren’t very many willing bidders today because they are all stuck with aggressively bid projects,” Raman said. “The government has been smart to realize the situation.” Larsen didn’t overbid for projects, he said.

Local banks, which lent money for road projects worth 680 billion rupees last year, have also cut loans after reaching lending limits imposed by the central bank, according to the roads ministry.

Bank Talks

The government is talking to banks in a bid to revive lending, Joshi said. Borrowing from overseas is difficult as India faces the risk of a downgrade in its sovereign rating, according to Mumbai-based Angel Broking Ltd.

“There have been some challenges in project financing,” Joshi said. “Government spending will boost confidence.”

The government may also pay for some highways next fiscal year, said A. K. Upadhyay, secretary at the Ministry of Road Transport and Highways. It will also try to persuade the World Bank and Asian Development Bank to lend money to private builders, according to a ministry document.

Prime Minister Manmohan Singh is seeking to attract a total of $1 trillion by 2017 for investments in roads, ports and power plants as the country tries to improve infrastructure that’s ranked 84th out of 144 markets worldwide by the World Economic Forum. The nation could also save $12 billion a year in fuel through better road, according to a study by Transport Corp. of India and the Indian Institute of Management, Calcutta.

About 40 percent of India’s fruit and vegetables rot before they are sold because of a lack of cold-storage facilities and poor transport infrastructure, according to an estimate by India’s Planning Commission.

Wider Roads

The state money, which will mainly come from bonds sold last year, will pay for 4,000 kilometer-lanes of highways, Joshi said. The work will be widening one-lane highways into two, he said. India has about 20,000 kilometers of single-lane highways, according to the roads agency.

The plan will benefit companies including Larsen (LT) and IRB Infrastructure Developers Ltd. (IRB), which have in-house construction arms, more than infrastructure investors such as Reliance Infrastructure Ltd. (RELI) and GVK Power & Infrastructure Ltd. (GVKP), said Vishwas Udgirkar, a senior director at Deloitte Touche Tohmatsu India in New Delhi.

State funds “will help speed up infrastructure development,” he said. “Construction companies will clearly benefit.”

Asset Sale

The lack of access to credit means that builders are selling assets to raise funds. Larsen, based in Mumbai, is offering a stake in a road-building unit L&T Infrastructure Development Project Ltd. to raise cash, Raman said.

Billionaire Anil Ambani’s Reliance Infrastructure plans to offer as much as 25 percent of its shares, according to its annual report. Punj Lloyd Ltd. (PUNJ) will sell assets including properties in six to nine months, Director of Corporate Affairs Luv Chhabra said in August.

Larsen has surged 66 percent this year because of expansion overseas and local rail and defense demand. That’s the best performance on the BSE India Sensitive Index (SENSEX), which has risen 21 percent. The stock fell 0.2 percent to 1,650 rupees at close of trading in Mumbai today.

India has relied on private funding for highway construction since introducing a national development program in 1998. Highways carry about 65 percent of the nation’s freight and 80 percent of passenger traffic. The government has always paid for the land that the roads sit on, along with some maintenance costs.

Government Goal

The roads agency has so far failed to meet a goal of building 20 kilometers of highways a day that was set by the government in August 2009. In about six years through October 2011, it oversaw 5,182 kilometers of construction, including new highways and improvements.

This year, it has canceled tenders for at least four projects, according to its website. The deadline for two other projects, including a 114-kilometer highway in the southern state of Tamil Nadu, have been extended at least three times.

“What’s important for general economic activity is that investment should come back,” said Larsen’s Raman. “It underlines commitment for infrastructure development and it’s also good from a project point of view, because projects will see the light of the day.”

To contact the reporters on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net; Siddharth Philip in Mumbai at sphilip3@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net


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