States leverage 'ribbon' to build roads

When the Tamil Nadu government acquired land for building an outer ring road recently, it acquired the right-of-way over a 122-metre corridor, which is more than double the 40-50 metres typically required for a six-lane road. Part of the additional land has been set aside for what is called “ribbon” development, which means commercial developments along a road.

The logic is that the real estate play cross-subsidises road development and makes these projects viable.

“The states do not have finances and the tolls will not suffice to make the project viable,” explains Jayesh Desai, national director at Ernst and Young.

 

The first year toll for the Rs 2,000-crore Mumbai-Pune expressway, for instance, was a mere Rs 48 crore.

This is hardly enough to cover the interest cost, the financing cost, the principal repayment and the equity return.

“At Rs 250 crore income, the project just about becomes viable,” argues Desai.

In such situations, leveraging land is the only alternative left with state government. “I think you will see more and more of such projects coming up,” adds Desai.

In the case of Tamil Nadu, it is the government that will benefit from real estate development along the road, says Sunil Palwal, managing director at the Tamil Nadu Road Development Company, which is building the road on a design-build-finance-operate-transfer (DBFOT) basis.

The state can retain the right to development of the ribbon — as is the case with Tamil Nadu — or give the right of land development alongside the corridor to the project concessionaire, like Uttar Pradesh has done with the Rs 10,000 crore, 165-km Yamuna Expressway, where ribbon development of 25 million sq mt of land along the six-lane access-controlled expressway is planned.

In the case of the Rs 40,000-crore Ganga Expressway project spanning over 1,000 km in the state, the concessionaire gets the right of development on 30,000 acres along the expressway, which would mean a built-up area of 3.3 billion sq ft.

While state like Uttar Pradesh are already on to planned ribbon development, states like Karnataka are looking at various models of induced ribbon development.

Gujarat is working on a new road policy that will set out the rules for commercial development along the road corridor. “The policy will be in place in a few months,” A K Sharma, CEO of Gujarat Infrastructure Development Board, says.

Bunching risks
There is, however, a growing opinion against ‘ribbon’ development due to the risks of bunching real-estate and infrastructure projects.

“The ribbon is milked by land sharks and real estate developers. Why should the corridor developer not get a slice of the pie? That is the question being asked,” says Parvesh Minocha, managing director at consultancy firm Feedback Ventures.

But they are actually different projects requiring different competencies and different structuring. “I don’t think the two kinds of projects should be bunched,” says Minocha, citing the example of the Hyderabad Metro proposal which was bagged by Maytas Infra.

“The question is, do you want your infrastructure development plans to be exposed to the vagaries of real estate swings?” says KPMG’s director Ameeta Chatterjee.

There is no argument for not developing the ribbon but most consultants feel the optimal solution is to bid out the real-estate projects and the infrastructure projects separately.

Chatterjee cites the example of the Bangalore Mysore Infrastructure corridor, which was 15 years in the making.

“It would have moved much faster if the project had been bid out as independent parcels — of road and real-estate,” she says.

Another aspect that needs to be looked at for a successful real-estate-cum-roads play is project planning. It is almost like planning a new town along a new road, says a RITES official.

“This planning has to include all aspects, including social infrastructure,” the official adds.

The safety argument
There is also a view that any ribbon development along high-speed road corridors tends to “puncture” the corridor and poses a safety risk.

“Ribbon development should be avoided at all costs in the interest of safety of commuters,” says R P Indoria, secretary general at the Indian Roads Congress, a technical body comprising highway engineers.

He suggests 15 m of harrowed land (soft land) on either side of the road to reduce fatalities rather than opt for commercial development.

Industry officials, however, say that if the roads are to be built, real estate will have to be a part of it. The debate should be on whether the real-estate component should be 20 per cent or 40 or 80 per cent or more.