Connectivity—through roads, rail or waterways— is vital for stable GDP growth. At the micro level, it offers better access to education and income opportunities. Within this framework, the present Government has been doing a lot. In order to understand these activities of the government more deeply and the impact it could have, Free Press Journal in conjunction with Moneycontrol, organised ‘India’s road ahead’. Gracing the event was Nitin Gadkari, Minister for Road Transport & Highways, Shipping and Water Resources, River Development & Ganga Rejuvenation in the Government of India, who delivered the keynote address at the conference. This was followed by two panel discussion. While first panel was moderated by R N Bhaskar, Consulting Editor, FPJ; second panel was with Santosh Nair, Editor, Moneycontrol. Edited excerpts by Pankaj Joshi.
The unfolding opportunity
Sudhir Hoshing, Joint MD, IRB Infrastructure: We have 35 years of experience in the sector. We started with a few thousand rupees, and we vividly remember how a contract of Rs 4 crore was a major achievement. Today each project talks of 1,000 km and above, instead of 50-100 km sizes. For the sector, the real game-changer was the implementation of the Golden Quadrilateral plan by the Vajpayee government in 1999-2004. In terms of size, I can say that the previous plan of such a big scale was the Grand Trunk Road renovation and extension, by Sher Shah Suri (in the 16th century).
Rajat Gupta, Director, McKinsey and Company: We are building 50,000 km of rural roads in a year, spending around Rs 30,000-50,000 crore. This is a huge connector and poverty alleviator, and this programme is going really well. Money is flowing to the executing agencies, the progress is being monitored, when you travel to the interiors you can see it panning out.
Indranil Pan, Economist, IDFC Bank: We always think that India is running a sprint, whereas actually it is running a marathon. Today infrastructure integration is visible and wealth creation scope is enhanced on a large scale. It is likewise an employment multiplier at all levels— direct, indirect and induced employments.
I looked at some data points from a working paper of the International Labour Organization, reflecting the employment multiplier and types of employments, which were quite startling. Type one is the direct employment multiplier, which can be talked of in GDP terms. Type two is the second round in direct employment multiplier, which emerges out of the demand that the construction industry on roads and other projects actually can generate.
Then there is another type—an induced multiplier, which is the inference that whoever is working on that project would not have had that work opportunity earlier, and since he has gainful employment now, the consumption bias of the economic can improve to that extent.
The study looked at two states, Gujarat and West Bengal, and what emerged was that Gujarat saw type one and type two multipliers at 2.6 and 5 respectively while for West Bengal it was as high as 3 and 8. While not getting into the discussion of why there is a difference, it is clear that GDP multipliers are quite high and it is also statistically proven that road-driven GDP growth is higher in the case of road-building in rural areas. India’s rural areas are ripe for growth—there is much arable land, there is good quantum of produce. Roads can enable the marketable surplus to reach areas of demand and get proper value realisation. It will have a strong positive impact on the profitability of farming in general.
Another impact of road-building is improved access of rural areas to education and healthcare facilities. These two are vital constituents of life and from an economic sense their deprivation is a drag on individual productivity and national GDP. Once there is an improvement in this area, it will have a huge long-term positive impact on the regional GDP, if not the national GDP. Our agricultural GDP growth fluctuates— it may be 8 per cent or go negative. With better linkages, we could enable a more stable agri-sector growth, especially with the research in the Krishi Kendras coming up as well, and ease out stress on farmers.
CP Joshi, Secretary, Roads, PWD: Today Maharashtra has around 95,000 km length of roadways. The enhancement plan includes upgradation of existing national highway network, as well as co-ordinated selection of tourism and industrial locations and enhancement of road network for those places. The programme includes upgradation of 10,000 km of state highways, and construction of 14,000 km of new roads.
The investment requirement through the HAM (Hybrid Annuity Model) model would be met. With almost 60 per cent (across two years) coming from the government where the money is very much in place. The remainder 40 per cent of investment is through deferred annuity payments over ten years. We aim to provide are toll-free roads of international standards. The HAM model was the path breaking initiative from the Maharashtra government.
Change in approach required
Rajat Gupta: What is amply clear from the Minister’s speech is that there is a deluge of infrastructure projects coming up, and that this pipeline is moving at different levels of progress. We need to start thinking about infrastructure in a more integrated way and focus on optimisation. There has been a notification from the Ministry of Commerce, for creation of a department which is overall in-charge of logistics for a national logistics strategy and other such dimensions.
In India, 60 per cent of goods movement take place via road, whereas this is below 50 per cent in most other nations. Regarding the coastal shipping, China moves 24 per cent of goods traffic this way. Today, India’s railways have 18 per cent share in long-distance container movement, which should move to 25 per cent. Obviously, we have a long way to go and solutions will be intermodal in nature. Road transport share must be brought down to 50 per cent in a goods traffic growth scenario.
Similarly in aviation, passenger demand in aviation has doubled in six years to 225 million currently. In the next 10 years it could further triple. Against that, look at the top 20 airports, 12 out of them are today clogged either on the runway side or in the terminal side. By 2021, all the 20 will be short of capacity. I hope there is a Hawai Mala coming, which will fill needs of travellers and create opportunities for vendor businesses.
On inland waterways, the ecosystem needs to develop. Is the software component capable for collection and taxation requirements? Not likely. A lot of procedures need to be in place – taxation, cabotage and so on. There is a strategy planning element to be put in— China’s exports travel around 150 km to get to the coast, whereas for India the figure is 700 km.
The opportunity in this space is immense when you factor in the Bharatmala and Sagarmala projects. We will see new industries emerging—sand manufacturing, the aircraft MRO business. Manufactured sand is not an industry that exists in India, but we are not going to build this level of infrastructure out of river sand. MRO for aircraft is a new industry that will get created, today we do itsy-bitsy amounts of it. Same is the case for even non-core service activities at transit points like stations and airports.
Between 2002 and 2012, the EPC business went up tenfold, and companies which were Rs 300-500 crore could grasp an opportunity to grow to Rs 3,000-5,000 crore. I am hopeful this scale of growth will happen again.
CP Joshi: Maharashtra has been a leading state of India. We have implemented the first expressway and have connected lands across rivers and creeks through bridges. In three years, Maharashtra will be among the best road networks in India. Maharashtra has the honour to have their Vice President in the Indian Roads Congress, which is a parallel body of specifications, known internationally.
Anil Taneja, CEO, India Infrastructure Finance Company Ltd: It is important that betterment of habitats should have been planned in conjunction with development of urbanised areas. My focus would be on the rural areas right now, but then 56 per cent of Maharashtra is urban. Hence initiatives must be taken to regulate construction, and simultaneously find ways and means to improve current conditions, and also manage the future through smart cities. That initiative has been taken, and governing bodies have been formed, not only for smart cities but in cities like Pune and Mumbai city. Simultaneously, MSRDC has been mandated to look after the agro hubs.
We have adopted a 2040 vision— what infrastructure is needed to be in place that has been the debate in government. If you meet officials in Urban Development, you will come to know many other things. Whatever we do is a small part of all this. The CEO of Smart Cities could explain in more detail the government initiative for the urban spaces.
Funding the dream
Rajat Gupta: Today there are only a handful of EPC contractors who have revenue size of Rs 1,000 crore and above. Against that, we are looking at 5-10 times order pipelines of some individual players. Forget technical aspect of execution, the question then is— is the balance sheet and net worth up to required standards for the financial aspect of execution? Normally you build projects, build surplus, enhance net worth and go to the next level of activity. But when projects are coming so fast down, how do we rate such businesses for financing?
Second is the scale of individual work orders. Today, we are talking of expressway and ring road projects, which are individually in the size of Rs 10,000-20,000 crore. That, in historical perspective is a huge rise and funding is not necessarily through government sources or toll income monetisation. New funding mechanisms have to be developed.
Anil Taneja: IIFC today finances up to 20 per cent of project cost in direct lending terms, plus an additional 10 per cent in take-out financing. It is our considered view that finance today will not be a problem for India’s infrastructure projects, with the presence of dedicated government bodies like IIFC. You may recollect the recent international agency upgrade of India’s rating. IIFC’s UK arm is on hand to provide dollar financing, through the USD 5 billion line that they can access. We are on the lookout for building a pipeline of eligible projects.
The current government’s thought and implementation have increased optimism among investors. Today we have access to 50 billion JPY from the Japan International Co-operation Agency, and a USD 250 million line from the European Investment Bank. The calls for sovereign guarantee as a backup for lender comfort are no longer there, because we are ‘AAA’ entity. We can also look at refinancing of completed projects. We also enhance the project rating through our presence, and then the project can access soft loans from the market on its own strength.
A decade back, if a road project contractor would go to a bank for financing, he would be laughed at. They would ask – what is the project collateral? Today, the existence of infrastructure finance companies, the improvement in ease of doing business, tie-ups with agencies, all contribute to comfort in fund-raising. The numbers given are Rs 1 lakh crore coming in from PPP-type projects, another Rs 2.19 lakh crore from the government side— bonds and so on. Another Rs 34,000 crore coming in from TOT that is monetisation of toll projects. Beyond that is Rs 2 lakh crore through other schemes like EPF. That is how the Rs 7 lakh crore estimate for Bharatmala is built up.
Sudhir Hoshing: There was a time when everything was build– operate– transfer (BOT) and then a time when everything was EPC. In such cases, competition becomes extreme and when the dip comes, it is very severe. So people get into trouble. Now when there is the mixed HAM model, both types of players can be involved.
Technical evolution & challenges
Rajat Gupta: From user viewpoint, optimisation is a challenge. In China, 1,400 km of container movement takes 5-6 days and for India the figure is 7-14 days. The variance at the upper end is disturbingly high.
Sudhir Hoshing: We have witnessed changes in execution, wherein labour element has been substantially replaced by mechanisation, even as the scale of operations has grown multi-fold. We have studied execution methods of different countries. I especially went to see sites across many countries— how are they doing their work and how are we going about it, where are we getting delayed. I went to China. I went to the U.S. and to European countries. I found no difference. We can safely say that India is on par in terms of level of technology and mechanisation in the execution process. Similarly after demonetisation, we have seen cashless collection go up from 1 per cent to around 25 per cent in some places. Earlier the debate was that for an underdeveloped nation like India, is it necessary to invest in roads? Today, be it roads, metro systems or other transport mechanisms, such debates no longer happen.
Indrajit Banerjee, Deputy GM, Afcons: Our order book today contains quite a few projects to be implemented in hilly terrain— Jammu and Kashmir, Himachal Pradesh, the North East. The major challenge here is that the Himalayas are a young mountain range in geological terms and therefore we don’t know what challenges can emerge. A proper geo-technical study is in order alongside the DP submission, which honestly is not a common occurrence. Secondly, a young mountain range can spring its own surprises. Be it Rohtang or Zoji La, from avalanches to water incursions, we have to face many unplanned element in the execution process. Other physical challenges include altitude, climate, snow-capped environment, changes in soil types and their impacts on both manpower and mechanical assets.
In all this, the formation of contract agreements is another operational difficulty, if the process here is one-sided in nature. Initially what happens is that the bureaucrats preparing the contract just think that the contractors are trying to mint money, which as you can see is not an accurate assessment in the context of our operations. What is needed is a win-win situation because once the contract is signed between two parties, we have to follow the terms. The agreement is the Bible which we have to follow, and whatever the DPR information available, whatever the challenges coming up – all must be tackled.
Our key success always remain standard in any project—execution time, method and cost—but the uncontrollable factors are many. Impact of different factors—from delays to loss of vehicles to avalanche damage on sites to hazardous operating conditions—reflect on project investment returns and yet there is not much that can be pre-stated in the bid.
In technology terms, we are at par with global standards. There is a need to scale-up and technology absorption experience. If we are looking at tunnelling of 8,000-9,000 km in the next 6-7 years, we have to grow our resources. Today we are suffering from quality scarcity in implementation, which will be mitigated with time.
Indranil Pan: Whether all initiatives would show a big GDP upside immediately – I do not warrant that. As I said, this must be looked at as a marathon. And rather than having huge volatile swings and encountering problems, it is better to have a curve going slightly and steadily upward. That would, in my opinion, enable sustainable wealth generation.
Sudhir Hoshing: Going forward, the travel process will see more ease and fewer issues. On the bad side, we see that with more lanes being added, the frequency of accidents has gone up, be it over-speeding or drunken driving cases. At some level, it indicates that the approach to driving has to be changed. I very emphatically want more roads and those roads to be very safe. Overseas, for getting a driving licence, there is a proper curriculum which has to be studied and then the licence exam should be attempted. That is how people there approach driving, and that is how we can see more of safe roads.
Rajat Gupta: Coming to new models, you may have heard of a logistics company called Rivigo, valued close to a billion dollars in three years of operations— the largest buyer of trucks in India today. They have innovated in two ways. They basically have a relay driver model so that the driver comes back home in say zero to one night of staying out. They also have put the Internet of Things to use— for tyre pressure, fuel, telemetry and so on. They have been able to halve the transportation time.
Samruddhi rollout and implications
C P Joshi: While we cannot dispute the model shifts towards waterways, the fact is that, even with speedy implementation, it will take a decade to come up. So till that time roads have to sustain. If I want to maintain and increase the competitive advantage that Maharashtra has, then the road conditions must be the best. Therefore, we are coming up with the Samruddhi corridor and also developing a better state highway network.
Kiran Kurundkar, Joint MD, MSRDC: Samruddhi project is conceptualised as a super commercial expressway for Maharashtra. In the 701 km corridor, it will cover ten districts, 26 tehsils and 392 villages. Starting from zero at Nagpur, we reach Aurangabad district border at 575 km, beyond that is a backyard, a black hole –Buldhana, Amravati, Wardha.
Beyond Wardha again there is some development, but in between is the suicide zone of Maharashtra. The soil there is rich but irrigation is limited and so farmers are dependent on a single crop which again cannot be transported to bigger markets due to linkage limitations. This expressway will provide the opportunity of being able to market their produce in APMC at Navi Mumbai or other cities.
When all these 24 rural districts of Maharashtra come on this four-lane expressway, they will be immensely benefited. Likewise, for a container to reach JNPT from Nagpur takes 40 hours, and passenger traffic time is 16 hours. We are targeting the container transit time to be 16 hours and the passenger traffic to come down to 7-8 hours.
The primary purpose and focus of the Samruddhi project is the development of agro-prosperity. Agro-prosperity would mean more processing units, cold storages coming up, logistic hubs evolving etc. All these would generate employment. Our study shows each hub would generate around 20,000-25,000 jobs, which today are not available in those backyards of Maharashtra.