Road Sector Update: June 2011

While the road ministry has set a goal of awarding 7,300 km of national highways projects in 2011-12, Prime Minister expects them to exceed this target. With infrastructure projects getting derailed, how likely is it to over achieve the target is something to ponder.

Negative Grant

In case of a road construction project on a BOT (toll) basis, if there arises a gap between the investments required for a project and the gains arising out of it, then the Government steps in to increase the viability of the project by bridging the gap. And the assistance takes the form of capital grant.

Road Sector Update

I was reading through an interview of JN Singh, Member Finance of National Highway Authority of India (NHAI). Following are the highlights:

• NHAI has set a target to award 7,300 km of roads during the financial year 2011-12
• This is 44% higher than 5,083 kms awarded in FY 2011
• About 75% of the work is expected to be awarded on Build Operate & Transfer (BOT) basis
• A ballpark figure of Rs9.5 per km for 4-laning and Rs3.5 crore for developing 2-lane roads is taken into consideration

RFQ – Request For Qualification

NHAI has eliminated the requirement for filling RFQ each time a bidder bids for road construction projects.

NHAI has introduced an annual qualification system whereby the companies/bidders can fill their annual RFQ before 25 April each year. They need not fill the RFQ each time they bid for a project during the year the annual RFQ is filled. This will result in reduced paperwork and improve the process of selection and award of projects.

A brief on the Qualification Criteria for bidders of road construction projects:

• For project cost less than Rs 2,000 crore — Financial networth of Minimum 25% of the project cost is required
• For project cost between Rs 2,000 -3,000 crore — Financial networth of Minimum 50% of the incremental project cost over Rs 2,000 crore is required
• For project cost more than Rs 3,000 crore — Financial networth of Minimum 100% for every incremental cost over Rs 3,000 crore is required

Thus, naturally larger projects will attract bigger companies.

Roadblock to Road Developments in India

The government had set a target of spending $500 billion on infrastructure between 2007 and 2012. However, the progress across sectors has been uneven.

Taking the case of roads in particular, Kamal Nath, the road transport and highways minister, had set an ambitious target of building 20 km of road length per day and had taken several steps to meet this target. However, problems like land acquisition, dispute resolution and funds continue to be roadblocks despite over 80 land acquisition units being set up in the states. A road network of a mere 2,008km was added during FY10 compared to its target of 7,000km.

Also, NHAI’s road construction activity, which picked up during the four months ended March 2010, has slowed down again.

Indian Infrastucture Development: Achievement vs Target for 2010-11

The Planning Commission website — a wealth of information– provides a link to the Infrastructure Targets & Achievement for 2010-11 (quarter by quarter). Very insightful indeed.

Roads Target Set Lower Than Last Year

A road network of 2,008 km was added during FY10. The Planning Commission announced its plans of building new highways totaling 2,500km in the year April-March 2010-11. This target is way below the 7,000km (20km per day) target set by roads minister Kamal Nath.

Road projects under PPP rise to 1 lakh crore

It is estimated that the national exchequer loses over Rs 20,000 crore every year due to sub-standard and inadequate roads.

Kamal Nath, the road transport and highways minister, has repeatedly promised to achieve his target of building a road network of 20 km per day, 7,000 km each year and 35,000 km in the next five years.

EPC/ Turnkey Contracts in Highway Sector

Engineering procurement and construction (EPC) contracts are the most common form of contracts used to undertake construction works by the private sector on large-scale and complex infrastructure projects, such as power plants, petroleum and LNG terminals, steel mills, roads, etc. 

Under an EPC contract, a contractor is obliged to deliver a complete facility to a developer who need only turnkey to start operating the facility, hence EPC contracts are sometimes called turnkey construction in contracts. The price and date for delivery of the contract is fixed, failing which a contractor has to incur monetary liabilities.

Dr. Indrasen Singh, Dean, National Institute of Construction Management and Research in Goa has through his study tried to highlight the reasons why several road developers would choose the EPC route compared to the PPP route–which is being pushed by the government, in times of financial crisis.

A Road Less Taken… A look at the fresh net worth criteria for road projects

Kamal Nath, road transport and highways minister, is termed as the “man in a hurry”. Just after he took over the ministry in June 2009, he announced a plan to build a road network of 20 km per day, 7,000 km each year and 35,000 km in the next five years. This target was set in spite of a not-so-impressive track record of the National Highways Authority of India’s (NHAI) which has built only 5-6 km of roads per day over the financial years 2005-09. Shockingly, NHAI was reported as taking an average of three years to award a contract and another three to complete the construction!! With this backdrop, his target of achieving 20 km a day seemed like just another target set by a ministry. However, the minister has taken some concrete steps towards  enabling development of road network. One such step includes alteration of the net worth criteria announced in March end.