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www.InfrastructureToday.co.in40 Infrastructure Today September 2013

If you thought only BOT projects were in trouble, think again. The faltering roads sector is increasingly dependent on sentiment, and this dependence is clear from the recent negativity that has crept even into EPC. Bringing back investor sentiment should now be supreme. This as damage control, the model should foster innovation, sustainability and a genuine sense of ownership, writes Sumantra Das.

Indian road sector, hailed as the lifeline of India’s infrastructure growth story, is at crossroads as road developers are looking ways to exit route from the

projects than looking for any further investment. A majority of road developers those are aggressively went for bidding in the golden ages between 2007 and 2011, now find it difficult to sustain the business as the sector finds itself up against post-bidding issues, including a threat in projects on PPP mode. Issues range from subdued funding, optimistic traffic estimates and delayed execution stressed the balance sheets of developers.

The balance sheet of these developers went so stretched that even after recent tenders of National Highways Authority of India’s (NHAI) road projects on EPC mode also unable to attract them. The situation

went so worst that NHAI told the highway ministry that it won’t be able to award any more projects on toll mode during 2013-14 if the prevailing conditions don’t improve. According to a recent newspaper report, the nodal authority of the road sector has informed the ministry that 33 projects covering around 3,500 km awarded during the past two financial years are yet to take off mainly because dearth of finance, equity, clearances and land availability. Moreover, 17 BOT (toll) and three BOT (annuity) projects did not get any response last year.

BOT: lOsing grOundIn the current circumstance, road developers such as

Reliance Infrastructure have become more cautious on

What’s wrong with EPC?EPC in rOads

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40 Infrastructure Today September 2013

Feature

www.InfrastructureToday.co.in42 Infrastructure Today September 2013

The road sector is witnessing waning interest from private participants, and several structural changes in the BOT model and governing policy regime seem necessary. While these changes will take some time to revive the sector, to immediately clear the backlog of road project targets, the government should consider the EPC mode of project execution.

Advantages of EPC

Limited financial commitment required: The lower require­ment of capital investment will suit the players already reeling under high debt.

Risk mitigation: EPC contracting will unbundle risks and limits the exposure of private player to only construction related risks. The risks related to regulatory clearance, financial closure, land acquisition, social unrest etc. will be borne by the government

Reduced uncertainty: Factors such as traffic projection, changes in policies, development of competing road etc. lead to very high uncertainly for the private player over the long duration of road projects. EPC mode of project execution will avoid most of these uncertainties for the private contractor.

In addition, EPC has inherent advantages for the private bidder, viz:

Faster financial return: Since the duration of contract will be till the completion of road construction and defect liability period, the private players will be able to churn their resources more frequently and thus generate better returns.

Scope for innovation & cost saving: Since the engineering, procurement and construction will be responsibility of the private player, EPC mode will give more rewards for innovation. The players will have an incentive to deploy modern construction techniques to save time and cost of project execution, which will be a winning proposition for both government and private players.

Thus, switching to the EPC mode will immediately revive bidding in the road sector. However, the government has to also take steps to ensure that the projects are not stalled during execution. Some of the key considerations for the project developing authority should be:

­ Ensuring complete land acquisition and availability of all required approvals before the award of project to EPC contractor.

­ Identifying sources for the massive financial investment required by the government

­ Faster decision making at the execution level such as faster design clearance, timely inspection and approval of work etc.

­ Government has to put in place a robust monitoring system to oversee the project execution by EPC contractors and ensure that they meet the quality requirement within the time and cost specified.

-Shripad Ranade, Senior Principal, and Mittal Shah, Project Leader, Tata Strategic Management Group.

sector, the developers want to stay away from further projects (PPP or EPC) at least for some time. But it is more important to bringing back investor sentiments and to do so, it is very important that there has to be a prompt approach. Government clearly has to be one of the largest fund providers across sectors including roads.

Goutham Reddy, Executive Director, Ramky Infrastructure, says, “It is very important to bringing back investor sentiment, be it on BOT or EPC mainly because the sector is going through a tough time now and fundamentally things are not right as what they were earlier.

There were a few assumptions which completely went wrong over the years. Assuming that equity was going to be available, debt will cost reasonable around 9-10 per cent, government will make payments on time and assuming a lot of other positive things that aggressive bidding from bigger developers took place in the road sector. All these have failed due to various reasons and

to bring back the sentiment, government should declare its intention clearly on road projects. The government has been talking about towards premium payment for many years but nothing has happened. Road developers now refuse to believe that the government wants to do it for the sector. ”I believe if the government start releasing all the overdue payments, most of the issues will resolve there itself. Unless resolving all these issues, some aggressive road developers may look our for overseas ventures which also cannot be ruled out,” Reddy says.

Way fOrWardIt would be reasonable to expect coordinated efforts

from multiple authorities in order to further streamline and shorten the clearance process even for EPC model which may appear as short term solution which may be able to bring back developer sentiments.

The finance minister’s proposal of setting up of a regulatory body for the road sector is likely to be a saviour.

EPC to clear backlog

IT