Business Standard

A tough road ahead

Industry lacks enthusiasm for government tenders due to post-concession agreement issues

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The last financial year (FY12) was arguably the best ever for India’s and highways sector. During this period, the government awarded contracts for about 8,000 km, entailing a return on premiums of about Rs 3,000 crore per annum for the next 20 years.

However, FY13 has so far been gloomy for the sector. On the one hand, the government received dismal response from the construction industry to the tenders it floated. On the other, the industry was constrained as it found it tough to get financing. This is because lending institutions tightened rules following a directive from the banking secretary not to lend to projects without 100 per cent land and environment clearance.

Such has been the sorry state of affairs in the country’s key that observers described the first of the five years of the 12th Plan as a “maiden over.” In 2012, the controversial Delhi-Gurgaon Expressway issue showed how improper handling of projects could result in a major glitch.

“The infrastructure sector has led the mood of gloom and doom in the economy this year, as much as it led the euphoria few years ago. The investment appetite has been poor, with over Rs 25,000 crore of road projects seeking extension of financial closure,” says Manish Agarwal, executive director (capital projects and infrastructure), PwC India.

One reason for industry’s lack of enthusiasm for government tenders is related to post-concession agreements.

The industry wants negotiations even after the concession agreement is signed, as there are issues that cannot be apprehended in advance.

The government has not paid heed to this demand. “There are provisions for addressing all the problems in the concession agreement. If they want to suggest some changes to some clauses, they can let us know,” Minister for Road Transport and Highways recently said.

For the government, the next year heralds good news as it has received a token premium on a project in Rajasthan. Joshi said instructions to lenders will be relaxed to benefit the construction industry.

The ministry of road transport & highways expects the newly-formed Cabinet Committee on Investments to address environment-related concerns, a major worry for companies in the highway development sector.

“Several policy initiatives like the PMO’s tracking of priority projects and progress on infrastructure debt funds have had limited impact so far. But the year closing with clearance of the Land Acquisition Bill and setting up of the Cabinet Committee on Infrastructure raises hopes of a turnaround,” says Agarwal of PwC.

The road and highways ministry plans to go ahead with engineering, procurement and construction (EPC) projects in the remaining months of the financial year. Earlier this year, the Prime Minister had set a target for the award of highway projects at 9,500 km.

Recently, the road and highways ministry informed the PMO that they are confident of reaching up to 8,800 km. With just 4,000 km of EPC projects to be awarded and the uncertainty on the financial front still looming large for the road construction industry, the current financial year appears to be missing the targets.

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A file photo of Prime Minister Manmohan Singh with UPA chairperson Sonia Gandhi.

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