Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.This is an entirely free service. No payments are to be made.
An Indian Brand Equity Foundation (IBEF) report on the Roads sector noted that Indian roads carry almost 90 percent of the country's passenger traffic and around 65 percent of its freight. Roads play a key role in providing last mile connectivity. Road transportation has improved gradually over the years, enhancing connectivity among the cities, problems though still persist.
Road transport and highways minister Nitin Gadkari, earlier this year held talks with leading banks and financial institutions to try and find a solution to a number of stalled highway road projects. The minister urged the banks to continue to lend to these projects. An ambitious target was set for average rate of road construction i.e. around 30km a day. Six months later, according to a data from National Highways Authority of India (NHAI), out of 30 projects which were scheduled to be completed by first quarter of 2017, only 7 projects were completed. Despite the governments best efforts, road projects continue to languish.
In fact, some projects are yet to be completed even four years past their original deadline. These projects continue to face headwinds mainly on account of land acquisition and financial issues. Land acquisition has been a huge problem for the government. This is despite paying up a much higher compensation to land owners. Past records indicate that unless a majority of the land is acquired upfront, it takes longer and gets more expensive to complete the project. In addition, there is dependency on clearances from other departments like Railways or environment ministry which adds to the delays.
The other aspect involved in these projects are financing options. Most of these projects are undertaken with a fair amount of debt. The debt raised for the project gets even more expensive if there is any adverse impact on ratings assigned to these projects. Additional interest costs and escalation of other costs lead to further deterioration in the credit profile of the borrower. With the banks and lending institutions facing higher scrutiny from the RBI due to their rising non-performing loans, this has resulted in even more restricted lending by the banks thus impacting the borrower.
The government has taken many steps to revive the pace of construction of roads. The hybrid annuity model was introduced wherein the cost of project would be shared in the ratio of 40:60 between the government and the project developer, respectively. It was also decided to offer a one-time financial assistance to revive stalled projects, the eligibility for the same being that 50% of the construction should have been completed. The process of disbursement of funds were also made easier so that land owners got paid on time.
While we believe the government has been proactive in providing help to get these projects completed. But a more concerted effort is required on the part of the government, lenders and borrowers to ensure that the pending work is expedited and completed as early as possible. The focus area for the government must continue to remain cost effectiveness and timely execution.
For information on how to pick stocks that have the potential to deliver big returns, download our special report now!