Roads and Highways Sector–Current Trends and Future Road Map

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Roads and highways sector–Current trends and future road map

September 2019

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KPMG in India Foreword

I am happy to share with you KPMG impact. In the realm of road is also a key requirement. New in India’s paper on ‘Roads and transport, the Motor Vehicles asset monetisation options like highways sector – Current trends (Amendment) Act-2019, enhanced Infrastructure Investment Trusts and future road map’. focus on road safety and adapting (InvIT)s and securitisation of toll technology enabled solutions also revenue are being considered. All The sector has been witnessing played major roles. above are expected to be taken high construction rates over the forward in a sustainable manner, last few years. A host of policy The current focus on construction keeping in mind green initiatives initiatives undertaken by the of roads and highways is expected and increasing focus on e-mobility. government in recent past covering to continue over the next five aspects like expeditious land to six years. Post that the focus CII INFRANET 2019: Building acquisition, solving operational is expected to shift to efficient Roads and Highways: IMPERATIVE issues, revival of languishing operations and maintenance FOR NATION’S GROWTH is projects and time bound resolution of roads and enhanced service an important milestone in the of disputes in an affordable manner provisions to road users. In addition journey to sustainable and focused have gone a long way in ensuring an to this, multi-modal integration development of the sector. enabling environment. In addition, is expected to gain further As the ‘Knowledge Partner’ to the launching of the Bharatmala significance, both in passenger conference, KPMG has prepared Pariyojana in 2017 and introducing and freight transport. Road safety this elaborate paper covering new project implementation and increasing use of technology various pertinent aspects of the models like the hybrid annuity, are other areas of priority for the roads and highways sector. operational asset monetisation government. Better utilisation models like Toll- Operate-Transfer of existing sources of funding I am confident you will find the (TOT) have also made a significant and searching for new avenues paper informative and thought provoking.

Davinder Sandhu Partner and Head Transport Sector Infrastructure, Government and Healthcare

CII Foreword

India is one of the fastest growing the roads and highways sector agreed by arbitration panels and economies and is entering into an is commendable. India has against variations carried out after era where infrastructure will be undoubtedly become the fastest due approvals etc are causing too at the core of country’s economic highway developer in the world much of stress in the system. development. In recent years, the with 27 kms of highways built Similarly, methodology of TOT government has embarked on each day and the aim is to increase bidding, approvals for change of series of measures to accelerate this target to 40 Kms a day. New ownership of assets and modalities infrastructure development. bids have however slowed down of payments for considerably and many major Engineering-Procurement- As a result of some of these Detailed Project Report Construction (EPC) contracts need initiatives, India’s rank in terms of (DPR)s have been cancelled, immediate attention. Government overall infrastructure development raising questions about the should consider addressing as per the Global Competitive pipeline. industry’s apprehensions arising out Ranking of the World Economic of the recent news of NHAI’s role Forum, has vastly improved from The sector is confronted by as developer or only asset manager. 87th position in 2015 to 63rd a number of challenges viz. Lenders’ reluctance to provide position in 2018. competing demands leading to credit or non-fund based support is insufficient budgetary support, The Roads and Highways Sector also resulting in more challenges. contracting companies in plays a critical role in the growth of financial stress, lack of feedback Therefore, there should be broad Indian economy as around 64.5 mechanism, challenges in bidding based consultations with active per cent of goods are transported process, shortcomings in DPR involvement of all the stakeholders via road and nearly 90 per cent of preparation amongst others. to chalk out a long term strategy for passenger traffic is by road. The Pending payment against routine roads and highways. Government of India’s efforts to bills, against awards already fasten pace of construction in

Parvesh Minocha Chairman, CII Northern Regional Committee on Infrastructure Chairman, CII INFRANET 2019, Group Managing Director Feedback Infra Pvt Ltd

© 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1. Executive Summary...... 06 2. Introduction to the roads and highways sector ...... 08 2.1 Sector background 10 2.2 Sector trends 12 2.3 Current priorities for the sector 14 3. Evolution of PPP in roads and highways ...... 16 3.1 Risk Perception in highway projects 18 3.2 Evolution of PPP in road sector in India 21 3.3 Future of PPP in India 22 4. Roads and highways sector issues ...... 24 4.1 Overview of issues in the sector 26 4.2 Financing issues 27 4.3 Operational issues 27 4.4 Other issues 28 5. Recent policy initiatives by the Government ...... 30 5.1 Operational initiatives 33 5.2 Revival of languishing projects 33 5.3 Amicable dispute resolution 34 5.4 Other initiatives 34 6. Road sector financing in India ...... 36 6.1 Fund requirement 38 6.2 Sources of fund 38 7. Global perspective in highways sector ...... 40 7. 1 Information, Communication and Technology (ICT) in roads 42 7. 2 Funding from multilaterals 43 8. Recent technological advancements in the sector ...... 44 8.1 Types of technological advancements in the sector 46 8.2 Technological initiatives in road infrastructure 47 8.3 Technological initiatives in public transportation 47 8.4 Technological initiatives in road safety 47 9. Investment/ business possibilities ...... 48 9.1 Stakeholders involved in roads and highways sector 50 9.2 Opportunities for developers, developers and operators 50 9.3 Opportunities for investors/lenders 51 9.4 Opportunities for consultants 51 10. Road map for the roads and highways sector ...... 52 10.1 Way Forward 54

India has the second largest road Trusts (InvIT) and securitisation approach levers are to better costs network in the world. Ministry of toll revenue are also under across the various phases of road of Road Transport and Highways consideration. development, improving existing (MoRTH) is planning to develop sources of funding and exploring MoRTH is targeting completion around 60,000 km of roads in the new avenues and policy reforms of 60,000 km of NH in the next next five years at about 40km/ including new PPP models. five years1 at an average road day. Road construction and award construction rate of 40 km per day. Global trends in infrastructure trends in recent years also give Assuming average construction indicate increased focus on optimism of achieving such high cost of approximately INR30 crore innovations, use of technology targets. Focus continues to be per km (including land acquisition tools based on data and analytics to on Bharatmala Pariyojana, with cost), and factoring in inflation unlock operational efficiencies, shift added stress on multimodal for road construction cost at a of focus to developing economies integration, road safety, increasing conservative 3 per cent, the total and mainstreaming of sustainability. use of Information Technology funding requirement over five Roads and highways sector is not (IT) applications, augmentation years is estimated at approximately an exception. The role of roads of existing funding sources and INR19 lakh crore which amounts to and highways sector in the overall emphasis on green initiatives. average annual fund requirement transport sector continues to be Also, enhanced passenger facilities of approximately INR3.8 lakh crore. globally recognised. and logistics efficiency are major Additionally, many issues have been considerations. Focus has been on institutional plaguing the roads and highways integration of transport Public Private Partnership (PPP) sector in India. Such issues include departments, increasing is the need of the hour. With aspects like land acquisition, use of green principles in reference to PPPs, roads and streamlined operations, financing, road development, adoption highways has a long history. operation and maintenance (O&M) of e-mobility as a service, The journey started toward the and revival of languishing projects. implementation of integrated beginning of the millennium The government has been taking payment mechanisms for multi- with road asset development a number of initiatives to solve modal transport, increasing use of and operation models like Build the various issues. These are in big data analytics, other technology Operate Transfer (BOT) (Toll) and the form of operational initiatives initiatives and flexible road pricing BOT (Annuity) and attracted high like process streamlining and initiatives. Enhanced road user participation. This gradually waned various technological initiatives to facilities is a focus area globally. post 2012 due to various issues increase operational efficiencies, including aggressive bidding and Highways development in the measures to revive languishing over-leveraged balance sheet country for bridging the required projects like equity divestment, of developers, shortcomings infrastructure gap is likely to be premium deferment and one time in project preparation activities over in the next five to six years and fund infusion, amicable dispute and land acquisition issues. The development/construction activities resolution by forming Society for Hybrid Annuity Model(HAM) was could reduce progressively. A Affordable Redressal of Disputes introduced to reinvigorate PPP shift is expected from highway (SAROD) and other initiatives like participation in the road sector after construction/ development to continuous evolution of PPP mode, interest in BOT projects waned. provision of quality service to developer friendly reforms for HAM It focused on proper allocation highway users, enhanced use of projects and safety related policies. of risk among partners. Further, technology applications, adoption operational asset monetisation Road development costs are of safety solutions, promoting models have gained prominence increasing and funding is getting sustainability and augmenting recently with the advent of the even more constrained. Increasing existing sources of finance. Toll-Operate-Transfer (TOT). Other costs, limited available funding

asset monetisation options like and waning interest of private 1. BJP manifesto: 60,000 kilometres of use of Infrastructure Investment sector in PPPs are challenges. The highways to be built in 5 years, Business Today, April 2019

© 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 10 Roads and highways sector - Current trends and future road map

2.1 Sector background

Creation and operation of quality India has the second largest road Development Corporations and the road infrastructure continue to be network in the world at 58.98 lakh Border Roads Organisation (BRO)5. major requirements for enabling km. Out of this around 1.14 lakh Roads in the jurisdiction of state overall growth and development km are National Highways (NHs)2. governments are under different of India in a sustained manner. Significantly, NHs constitute around categories like State Highways Bridging of existing infrastructure 2 per cent of the total road network (SHs) and Major District Roads gaps and creating additional in the country but carry about 40 (MDRs). They are being developed/ facilities to cater to the increasing per cent of the road traffic3. The upgraded through State PWDs population are equally important. density of India’s highway network and State Road Development Apart from providing connectivity -- at 0.66 km of roads per square Corporations. Pradhan Mantri in terms of enabling movement of kilometer of land – is similar to that Gram Sadak Yojana (PMGSY) is passengers and freight, roads act of the United States (0.65) and being implemented for rural roads as force multipliers in the economy. much greater than China’s (0.16) through the Ministry of Rural Affairs Further, roads play a significant or Brazil’s (0.20)4. with active participation by state role in times of natural calamities, The National Highways governments. Further, roads within wars and other such events in Development Project (NHDP) urban areas are mostly with Public terms of timely evacuation of the in the context of NHs is nearing Works Department (PWDs) and impacted population, carriage of completion- in seven phases. Urban Local Bodies (ULB)s. relief material and other associated Later, other highway development movements. Other innovative uses programmes like Special of highways include emergency Accelerated Road Development landing and take off for fighter Programme for Development 1. Speech of Nirmala Sitharaman, Union planes. Government takes of Road Network in the North Budget, July 2019 cognisance of this requirement and Eastern States (SARDP-NE), and 2. Industry and Infrastructure, Economic road infrastructure remains to be a the National Highways Inter- Survey 2018-19, Economic Survey, focus area. Accessed August 2019 connectivity Improvement Project The honurable Finance Minister (NHIIP) were also taken up by 3. Roadways, Business.gov.in, Accessed July 2019 in her Budget Speech for 2019-20 the Ministry of Road Transport re-emphasised the importance and Highways (MoRTH). Further, 4. Transportation in India, World Bank Group, Accessed July 2019 of connectivity and transport the Bharatmala Pariyojana is infrastructure: currently ongoing. For majority 5. KPMG in India’s analysis, 2019 based on secondary research of the projects under NHDP and “Connectivity is the lifeblood of Bharatmala Pariyojana, National an economy. The government Highways Authority of India (NHAI) has given a massive push to all is the implementation agency. forms of physical connectivity Other NH related programmes/ through Pradhan Mantri works are being implemented Gram Sadak Yojana, industrial through agencies like National corridors, dedicated freight Highways Infrastructure corridors, Bhartamala and Development Corporation Ltd Sagarmala projects, Jal Marg (NHIDCL), State Public Works Vikas and UDAN Schemes.1” Department (PWD)s, State Road

State Governments have a Figure 2: Length of NH awarded and constructed (in kms)9

significant role to play in ensuring For 2014-15 to 2017-18: connectivity beyond NHs – Awarded length = 51,073 kms development of Non NH roads Constructed length = 28,531 kms like SH, MDR, Other District 18,000 Roads (ODRs), ensuring last For 2010-11 to 2013-14: 17,055 15,948 mile connectivity, providing 16,000 Awarded length = 25,158 kms Constructed length = 16,505 kms strategic locations for logistic 14,000 facilities and passenger transport 12,000 amenities. States have varying 10,279 10,098 10,000 9,794 9,829 levels of maturity in terms of road 7,972 8,231 infrastructure development. Top 8,000 5,732 6,061 5 states as per length of NHs are 6,000 4,500 4,260 4,410 shown below: 4,000 2,013 3,169 2,000 1,916 Figure 1: Top 5 states by 0 length of NHs in India (in km)6 2010-11 2012-13 2011-12 2015-16 2016-17 2017-18 2013-14 Length of NHs (in km) 2014-15 Length of NH awarded (in kms) Length of NH constructed (in kms) 20,000 15,436 15,000 10,000 8,711 7,906 7,854 6,791 5,000 0 MoRTH is planning to construct 70 per cent during the same period, around 60,000 km of National as highlighted in the table at Highways in the next five years7. Figure 2. This underlines the importance of The above trend highlights the Karnataka Rajasthan roads and highways development

Maharashtra growth story in the road sector – Uttar Pradesh in India. A major reason is that in where pace has picked up recently. Madhya Pradesh addition to being a major carrier This pace is expected to gain Issues plaguing state governments for passenger traffic, roads and further ground in the future, with include adequate identification and highways also play a key role in the ambitious targets set by the prioritisation of projects, funding carrying freight across the country. ministry and the implementation shortfall in project execution, limited The share of road in freight of the Bharatmala Pariyojana. institutional capacity to implement transport is approximately projects and absence of adequate 60 per cent8. tolling guidelines and policies. In Road award and construction 6. Total Length of National Highways in the addition to budgets, multilateral Country, Press Information Bureau, July trends have significantly increased 2017 funding has been assisting the in recent years, highlighting the state governments to facilitate outstanding work being done by the 7. BJP manifesto: 60,000 kilometres of institutional capacity building, highways to be built in 5 years, Business government in the sector recently. Today, April 2019 providing Project Management The length of National Highways Consultancy (PMC) services, 8. Road Transport Scenario in India, Press awarded has almost doubled in Information Bureau, January 2013 supervision support and public the years FY15 to FY18 compared transport and logistics facilities 9. Achievements of four years, Ministry of to FY11 to FY14. Length of NHs Road Transport and Highways, Accessed enhancement measures over and constructed has increased by July 2019 above road project development.

2.2 Sector trends

Lately the focus of the sector is a. Bharatmala Pariyojana Under Bharatmala Phase -I, not only on efficient award and Programme development/upgradation of 34,800 construction of roads, but also on km of NHs is envisaged over a Approval of the major highway smooth movement of passenger five-year period (2017-18 to 2021- sector programme Bharatmala and freight through enhanced 22) at an outlay of INR5,35,000 Pariyojana Phase I by the Cabinet logistics efficiency. This has crore10. Summary of the approved in October 2017 reiterated the focus been the guiding principle behind components under the programme is on optimising efficiency of freight Bharatmala Pariyojana. is as follows: and passenger movement across the country.

Table 1: Salient features of the Bharatmala Pariyojana11 Sr.No. Components Length -km Outlay -Rs crore a. Economic corridors development 9,000 1,20,000 b. Inter-corridor and feeder roads 6,000 80,000 c. National corridors efficiency improvements: 5,000 100,000 d. Border and international connectivity roads 2,000 25,000 e. Coastal and port connectivity roads 2,000 20,000 f. Expressways 800 40,000 Total: 24,800 385,000 Balance road works under NHDP 10,000 1,50,000 Total 5,35,000

Upto October 2018, 6,407 km of an estimated cost of INR12,000 Expressway, Bangalore-Chennai roads had been awarded under the crore13 Expressway, etc16. Bharatmala Pariyojana12. • Setu Bharatam: This project c. Road Transport - focus on b. Implementation of important aims to replace level crossings on smooth traffic movement projects and expressways NHs with ROBs/RUBs. This aims and enhancement of logistics to construct 174 such structures14 efficiency through A number of important projects multi-modal integration have been taken up in recent • Eastern peripheral and western years. Few of the important ones peripheral expressway: These Road transport is vital to India’s are: two projects connect NH-1 and economy. India’s road network N-2 from western and eastern carries more than 60 per cent of • Char Dham Mahamarg Vikas side of Delhi15. its freight and about Pariyojana: Project envisages 85 per cent of passenger traffic17. development of easy access Other such important Our growing economy has to the four dhams in India - expressways taken up for witnessed a rise in demand Gangotri, Yamunotri, Kedarnath construction are Delhi-Meerut for transport infrastructure and and Badrinath. Development of Expressway, Vadodara-Mumbai services. 889 km of roads is expected at Expressway, Delhi – Mumbai

10. Shri Gadkari says highways works worth 12. Year end Review: Ministry of Road Transport 15. Year end Review: Ministry of Road Transport Rs 8 lakh crore will begin before the end of and Highways, Press Information Bureau, and Highways, Press Information Bureau, 2018 under Bharatmala Pariyojana, Press December 2018 December 2018 Information Bureau, October 2017 13. Year end Review: Ministry of Road Transport 16. Year end Review: Ministry of Road Transport 11. Shri Gadkari says highways works worth and Highways, Press Information Bureau, and Highways, Press Information Bureau, Rs 8 lakh crore will begin before the end of December 2018 December 2018 2018 under Bharatmala Pariyojana, Press 14. Year end Review: Ministry of Road Transport 1 7. Transportation in India, World Bank Group, Information Bureau, October 2017 and Highways, Press Information Bureau, Accessed July 2019 December 2018

Passenger transport is gaining A number of measures have and services. A mobile application more of significance - increasing been undertaken to ensure system has also been launched mobility needs of the Indian easy and economic passenger for tag purchases and top up of population due to enhanced and freight movement in recent FASTags called MyFASTag. urbanisation and need to move years. Some of such measures f. Initiatives related to more for livelihood, education, are revision of axle weight augmentation of existing healthcare, fulfilment of social to bring down logistics cost, funding sources needs etc. Requirements are launch of ranking systems for improved public transport toll plazas, revision in maximum There is a gap between the actual facilities through enhancement speed of vehicles, encouraging funding required in the sector, of physical infrastructure development of Multi Modal and the funding which has been and rolling stock, operational Logistic Parks (MMLPs) incoming in the sector. This efficiency and enhanced and Inter modal stations for funding gap needs to be reduced passenger facilities including passenger transport. by exploring alternate sources of safety and information financing. A number of options d. Focus on Road Safety availability. have been taken in this direction Road safety has been taken up as such as raising capital from Life In today’s scenario of high road a priority. A number of initiatives Insurance Corporation, Employee congestion, and increasing have been taken regarding this, Provident Fund Association and pollution, the focus is shifting such as black spots rectification, issuing rupee-denominated masala towards increasing use setting up driver training institutes, bonds in London Stoke Exchange. of public transportation. SukhadYatra app and toll-free Asset monetisation models like Important considerations emergency number, capacity Toll-Operate-Transfer (TOT) have are seamless integration of building of officers, etc. Trainings already been implemented and multimodal options, first and have been conducted for NHAI Infrastructure Investment Trusts last mile connectivity, integrated field officers, concessionaires, (InvITs) and securitisation of toll technology solutions enabled consultants, contractors, etc. revenue are also being explored by ticketing, enhanced passenger Road safety audit is mandatory NHAI. safety and information in all NHAI projects through availability g. Emphasis on green initiatives independent safety consultants19. Freight transportation in the A number of green initiatives e. Increasing use of Information country is predominantly road have also been taken up in the Technology (IT) applications based– more than 60 per cent recent years to check the issue of total freight. Issues include IT applications are being of environment pollution. Battery high logistics cost– around 14 progressively mainstreamed in operated vehicles, and vehicles per cent of the nation’s GDP all aspects of the road sector. driven on methanol and ethanol as against 8-9 per cent for A number of IT applications have been exempted from permit. developed nations18, existing have been developed to aid A Green Highway Division has logistics inefficiencies - delays on ground operations. Some been set up by NHAI to carry out in interstate border crossing, major IT applications are; use plantation along highways and manual toll collection, non- of Electronic Toll Collection medians. A number of initiatives availability of bypasses for busy (ETC), development of Bidder have been taken in Union Budget urban stretches and integrated Information Management System, 2019-20 to encourage adoption logistics facilities like Multi Bhoomirashi, etc. MoRTH, NHAI of electric vehicles (EVs), such as Modal Logistics Parks. and NHIDCL have also adopted reduction of GST on EVs and tax an e-procuring and e-tendering benefits for buying an EV. system for procurement of goods 18. Debunking India’s logistics myths, Livemint, March 2018 19. Annual Report 2017-18, National Highways Authority of India, accessed August 2019

2.3 Current priorities for the sector

The current sector trends give an indication of the various priorities for the sector. This can be visualised as below:

Figure 3: Current priorities in the road sector20

Key sector trends 1 2 3 4 5 6

Bharatmala Ease and Focus on Increased Alternate Emphasis Pariyojana and economy of road safety use of IT sources of on green other projects traffic applications funding initiatives movement

Priorities 1 2 3 4 5 6 Maintenance Focus on Bettering costs, Increase Adoption of Adoption of and capacity multimodal exploring new priority on more IT enabled environment augmentation transport fund sources road safety solutions friendly green of huge road integration and new PPP transport network models solutions

Bharatmala Pariyojana Phase I of quality services to road users. Both the factors are swiftly gaining is to continue until 2022. Post This may result in reorientation of significance and this is expected to that, infrastructure creation is skills and sectoral requirements continue in the future. expected to continue at a reduced and the government needs to start Other priority areas include focus level and eventually a saturation planning now for the same. Private on multimodal transport integration is to be expected. Construction is capabilities and efficiencies in and bettering costs, exploring new progressively expected to decline operation and maintenance of road funding sources and introducing post that phase. assets will be of importance. new Public Private Partnership During that phase, the focus may In addition to this, the current focus (PPP) modes. Sustainable green shift to efficient operation and on road safety and increased use development is also gaining maintenance of the existing road of IT applications is only expected significance. assets and sustained provision to increase in the coming years.

20. KPMG in India’s analysis, 2019 based on secondary research

© 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 18 Roads and highways sector - Current trends and future road map

3.1 Risk Perception in highway projects

Public Private Partnerships (PPPs) have been a major contributor to the success story of the roads Financing Construction and highways sector in India. The risk risk effectiveness, efficiency and acceptance of a PPP model hinges on appropriate risk allocation between the government and private developers. Revenue Operation and A brief understanding of various risk maintenance risks in a PPP road sector project is risk as follows:

Figure 1: Various risks in a PPP road sector project Construction risk O&M risk

Financing risk Revenue risk

Project development Construction phase Operation phase phase

d. Operation and a. Financing risk b. Construction risk c. Revenue risk maintenance risk

In the construction A project faces a The financials of a road Adequate operations phase of PPP projects, number of intrinsic project are dependent and maintenance financing is done by a risks during on the revenue the is required in a road combination of debt construction. This road project generates. asset. The operations and equity and in poses a threat to the Primary and only and maintenance cases, supported by project because delays source of revenue expenses consist government grants. in the execution can in the case of a NH of the following Equity is usually put lead to overall stunted project is toll revenue. heads – toll plaza in by the developer/ development. So So the toll revenue risk expenses, routine promoter of the construction risk is a is a critical factor for maintenance, major project. Debt is put in major risk to consider a project, as the cash periodic maintenance, usually by a financial in a road project. flows generated are etc. In addition to institution like a bank, essential for servicing this, sometimes through the developer. of debt, meeting equity climatic situations There is a risk of the return expectations entail unexpected equity and debt not and enabling efficient maintenance coming into the project operation and requirements on the at the appropriate time, maintenance of the road assets. resulting in cost and project. time overruns.

PPP modes have been used in India for both development and operation and maintenance of road assets. The major PPP modes prevalent in India are as follows:

a. PPP modes for road asset of up to 40 per cent of the designing, building, financing, development – BOT (Toll), BOT project cost which is paid by operating, maintaining and (Annuity) and Hybrid Annuity the government in the form of transferring the project to Mode (HAM) a Viability Gap Funding (VGF). the authority at the end of The concessionaire earns the concession period. The b. PPP modes for road asset revenue primarily in the form of responsibility for tolling on operation and maintenance– toll revenue, which depends on the road stretch is with the Operate- Maintain – Transfer traffic that needs to pay toll on government. The concession (OMT), TOT the road stretch. Toll rates are period is project specific While the asset development based standardised and regulated by construction period and a PPP model has been the more the government through rules. fixed operation period of 15 traditional PPP model, operation years. An inflation adjusted b. BOT (Annuity)2 and maintenance based PPP construction support of 40 per models like TOTs are also gaining In a BOT (Annuity) project, the cent of the bid project cost is significance. concessionaire is responsible for provided by the government designing, building, financing, to the concessionaire during A brief description of the various operating, maintaining and the construction period, in five road asset development PPP transferring the project to equal installments of 8 per cent modes in existence in India is as the authority at the end of each of the bid project cost. follows: the concession period. The Hence, only 60 per cent of the a. BOT (Toll)1 responsibility for tolling on bid project cost is to be arranged the road stretch is with the In a BOT (Toll) project, the by the concessionaire during government. The concessionaire concessionaire is responsible for the construction period. This is earns revenue primarily in the designing, building, financing, paid to the concessionaire by the form of pre-determined semi- operating, maintaining, tolling government in the form of semi- annual annuity payments which and transferring the project annual payments. In addition to are made by the government to to the authority at the end of this, interest on reducing balance the concessionaire. the concession period. The and operations and maintenance cost are also paid semi-annually concession period is around 30 c. Hybrid Annuity Mode (HAM)3 years, but is project specific. by the government to the In a HAM project, the Depending on the viability of concessionaire. concessionaire is responsible for the project, there is a provision HAM model is explained as below: Figure 2: HAM model – key features4

1. Annuity payments (biannually) for 15 years 40 per cent of project cost (construction support) by govt. 2. O&M payments COD 3. Interest payments (on reducing balance @ bank rate + 3%)

Hybrid Annuity Project

O&M by 60 per cent of project cost Toll collection by concessionaire arranged by concessionaire for govt. financial close Operations period Bid parameter – NPV of the quoted bid project Construction period cost + NPV of the O&M cost for the entire operations period

1. KPMG in India’s analysis, 2019 based on 3. KPMG in India’s analysis, 2019 based on secondary research and industry discussions secondary research and industry discussions 2. KPMG in India’s analysis, 2019 based on 4. KPMG in India’s analysis, 2019 based on secondary research and industry discussions secondary research and industry discussions

A brief snapshot of risk sharing in the various PPP road development projects is mentioned below:

Table 1: Risk parameters for road PPP models5

Mode Financing risk Construction risk Traffic risk O&M risk

Reducing risk for BOT (Toll) Concessionaire Concessionaire Concessionaire Concessionaire concessionaire BOT (Annuity) Concessionaire Concessionaire Authority Concessionaire HAM Concessionaire (partly) Concessionaire Authority Concessionaire

In addition to the road funded highway projects, long- road asset is transferred to development models, the term O&M responsibilities the concessionaire without maintenance of such a huge and tolling rights are assigned any rights for capacity network of national highways to developers/investors after augmentation. Concessionaire will require efficient operation construction completion. is given the right to collect toll and maintenance of the road This is done after a few years on the road asset. In return, assets. In addition to this, there of successful operation of a the concessionaire pays is an opportunity to monetise project once the traffic on it an agreed premium to the future toll earnings of completed stabilises. An upfront fee is government. The model brings highway assets. paid by the concessionaire to in private sector efficiencies in the government in exchange operation and maintenance of A brief description of the various of the right to toll, operate road assets. Responsibilities road asset operation and and maintain the road asset of the concessionaire include maintenance modes in existence for the concession period. routine maintenance, periodic in India is as follows: In the current scenario, the maintenance, traffic incident a. Toll-Operate-Transfer (TOT) concession period is 30 years. management and traffic flow management. This is an effective model that b. Operate-maintain-transfer ensures efficient Operation (OMT) An understanding of the and Maintenance (O&M) of various PPP modes is critical Under the OMT mode, the highways on a long-term basis to understand the road concessionaire operates and and generates resources sector scenario in India. The maintains the completed upfront that can be invested in next section discusses the road asset for a smaller new highway projects. In this evolution of PPP in the road duration - ranging from four model, for operational public sector in India. to nine years. An operational

5. KPMG in India’s analysis, 2019 based on secondary research and industry discussions

3.2 Evolution of PPP in road sector in India

PPP in the road sector in India has Figure1: Length of road projects awarded to BOT private players (in km)6 passed through a number of distinct phases: Projects awarded to BOT private players (in kms) a. Build-Operate-Transfer 7,000 6,144 6,067 (Toll and Annuity) 6,000

b. Hybrid Annuity Mode 5,000

c. Toll Operate Transfer 4,000

A brief description of the phases is 3,000 2,677 provided below: 2,000 a. Build-operate-transfer 1,116 1,000 877 742 873 (Toll and Annuity) 369 464 470 0 An investor friendly climate in FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 the first decade of the twenty- first century attracted private investment into the roads and unrealistic traffic projections and semi-annual payment streams highways sector. quite a few projects getting stalled by the government as described in the construction. This resulted earlier which cumulatively form However, as an aftermath of the in decline of interest in BOT mod- the revenue earned by the global economic meltdown in 2008- els post 2013, which paved the concessionaire irrespective of 09, major issues cropped up for the way for the emergence of HAM in toll revenue collection. Hence, sector. B.K. Chaturvedi Committee 2016. no traffic related risk is borne by was formed in 2009 to work out the concessionaire. suitable recommendations, which b. Hybrid Annuity Mode (HAM) The introduction and strong included the following: HAM was introduced to implementation of HAM has seen reinvigorate PPP participation in • Suitable modifications in the HAM become the preferred PPP the road sector after interest in template project documents mode in India. Till March 2018, BOT projects waned. The main 112 road projects of 6,325 km in • Empowering MoRTH to make advantages to the developer length had already been awarded amendments in Request for include the following: Qualification (RFQ)/Request under HAM. The estimated cost for Proposal (RFP) on basis of • To reduce the initial funding of these projects is approximately recommendation from NHAI requirement in PPP projects: INR1,26,750 crore7. As 60 per cent of the bid project In addition to introduction of HAM • Waterfall mechanism in mode of cost is to be arranged by the which resulted in reduced initial implementation of projects. concessionaire, assuming a investment requirement from the 70:30 debt equity ratio, around Significant improvements in private government in highway projects, 18 per cent of project cost to be participation were observed. Private efficient O&M of completed put in as equity is required to sector participation in BOT projects highway assets and augmenting be put in by the concessionaire peaked till Financial Year (FY)12. But existing sources of funding for during the construction period a steep decline in PPP participation the sector was also thought to be as opposed to 30 per cent in a was observed in FY13 and FY14 important. A model was introduced BOT project. This reduces the with many viable projects unable by the government that takes initial equity requirement and to attract even a single bid. This is care of O&M requirements of an encourages participation by evident from the Figure1 which increasing highway network and mid-sized developers to invest shows the projects awarded to also facilitates monetisation of in PPP projects. Further, debt BOT private players in km: toll receivables for operational requirements goes down from highways –this was the Toll Reasons include over-leveraged 70 per cent to around Operate Transfer (TOT) model. financials for limited number of 42 per cent of project cost highway developers in the country, some banks reaching the ceiling • To eliminate traffic risk of the 6. Transportation in India, World Bank Group, Accessed July 2019 as per sectoral exposure norms, concessionaire: Concessionaire is paid three pre-determined 7. Achievements of four years, Ministry of Road aggressive bidding based on Transport and Highways, Accessed July 2019

c. Toll-operate-transfer (TOT) Three TOT bundles have been floated by NHAI so far. Details of these bundles are as follows:

Figure 2: Details of TOT bundles bid out8

TOT Bundle 1 • 9 stretches of length ~682 kms in the states of Andhra Pradesh and Gujarat

• Authority assessed IECV of INR6258 crores

• Highest bidder bid at ~1.5 times the IECV. Financial closure of bundle was achieved in August 2018

TOT Bundle 2 • 8 stretches of length ~586 kms in the states of Rajasthan, Gujarat, Bihar and West Bengal

• Authority assessed IECV of INR5362 crores

• Bids received were less than IECV and hence not awarded

TOT Bundle 3 • 9 stretches of length ~566 kms in the states of Uttar Pradesh, Bihar, Jharkhand and Tamil Nadu

• Authority assessed IECV of INR4995 crores

• Bid process is ongoing 3.3 Future of PPP in India

a. HAM to continue as a major on suitable risk allocation should NHAI is also exploring PPP road development mode also be tried. securatisation of toll revenue, which can be one of the most cost- As evident, pure play PPP projects b. Asset monetisation modes effective ways to raise capital. NHAI like BOT (Toll and Annuity) have to gain significance is exploring a similar instrument dried up recently, paving the way Asset monetisation models like with the State Bank of India, where for innovative modes like HAM. TOT have also gained prominence in it intends to monetise road projects Reasons include recent years. This trend is expected with high traffic density. In this • Dearth of high traffic stretches to continue, with NHAI having arrangement, SBI will be providing a which are being bid out by the identified approximately 6,400 km loan to NHAI against toll receivables authority of roads to be bid out on TOT9. NHAI from a selected bouquet of is also looking for mechanisms to projects11. • Developers/investors being fund TOT through Infrastructure generally hesitant to participate Debt Funds. In addition, NHAI is in traditional PPP projects due to 8. Request for Proposal for TOT Bundle 1, also exploring other monetisation increased risk perception National Highways Authority of India, 2017, techniques like Infrastructure Request for Proposal for TOT Bundle 2, • Legacy of projects languishing Investment Trust (InvIT) and National Highways Authority of India, 2018, Request for Proposal for TOT Bundle 2, post award. securitisation of toll revenue. National Highways Authority of India, 2019, Road Projects under TOT Model, Press So HAM is expected to continue NHAI is expecting to get cabinet Information Bureau, July 2019 as the major mode of PPP for road approval and float its Infrastructure 9. Road Projects under TOT Model, Press development projects at least Investment Trust (InvIT) by the end Information Bureau, July 2019 for the time being. Innovative of this year10. This is expected to be 10. NHAI plans to raise 75,000 crore from market, implementation models with focus an important instrument for funding says chairman, Livemint, July 2019 of Bharatmala Pariyojana. 11. NHAI, SBI in talks to monetize highways, Economic Times, July 2019

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4.1 Overview of issues in the sector

The roads and highways sector has its own set of issues This can be classified as follows:

Figure 1: Overview of issues in roads and highways sector over project life cycle1

Project Construction stage O&M stage development stage

• Higher land acquisition • Limited funding option • Debt servicing and cost • Fading interest of PPP investment returns for • Project implementation developers private developers Financing mode choice • Lender’s averseness • O&M expense issues • Increased project cost

• Sub-optimal alignment • Delayed approvals and • O&M requirements leading to higher cost clearances due to adverse weather • Land acquisition delays • Local/ enforcement issues conditions • Cost overrun due to delay • Toll collection pilferage Operational • Construction material • Safety issues issues shortage • Road user facility deficit

• State Support Agreement • Disputes and claims due • Disputes and claims due • Other pre-project related to delayed construction to O&M issues and lesser delays • Cost overrun than projected revenue generation Other issues

1. KPMG in India’s analysis, 2019 based on secondary research

These issues have been discussed in the following section: 4.2 Financing issues

Following is a brief description of various financing issues observed throughout the project development life-cycle:

a. Project-development stage b. Construction stage c. O&M stage

Land acquisition cost has There is a lower appetite for There is uncertainty on equity increased more than 30 per private developers to absorb returns in existing operational cent since 20172 primarily due to construction risk as well as traffic PPP projects along with enhanced compensation payment risk based on legacies – e.g. difficulties faced in servicing requirements as per languishing projects and projects debt. This is due to uncertainty ’The Right to Fair Compensation needing premium payment of toll revenue collection and and Transparency in Land deferment. variation of collected toll revenue Acquisition, Rehabilitation and Road sector projects are compared to projected levels.

Resettlement Act’. This discourages private sector increasingly facing financial - interest. The increase in O&M In addition to this, current project closure issues. Reasons include costs are also affecting the implementation modes like wariness of banks to lend, high project returns. EPC and HAM put high stress share of NPAs, asset liability on government resources, thus mismatch and banks reaching limiting the number of projects infrastructure lending caps. that can be taken up at one go. 4.3 Operational issues

Following is a brief description of various financing issues observed throughout the project development life cycle:

a. Project-development stage b. Construction stage c. O&M stage

Delays in pre-construction Road development process Often unforeseen weather activities (such as land requires a number of approvals conditions require unplanned acquisition, relocation) is such as environmental clearance, O&M, over and above affecting project timelines. These forest clearance, railways the routine and periodic processes consume considerable clearance, etc. Each of these maintenance activities. This time. Land acquisition for road activities take considerable time results in enhanced O&M projects involve various stages. and non-adherence to timelines expenses. In addition to this, Each stage involves a number result in cost overruns due to there is a general lack of road of stakeholders and regulatory delays. In addition, other factors user facilities. Safety related bodies. The completion depends like enforcement issues and issues are also observed on on other factors like geographical lack of construction material many road stretches such as location and hence, the process also result in delays. Managing high accident response times, is challenging. Inadequate problems of sub-contractors etc. technical due diligence at and holding them accountable the time of preparation of is also a major issue faced. Sub- Detailed Project Report (DPR) contractors also face payment can also lead to high project issues. costs due to aspects like sub- optimal alignments leading to enhancement in construction cost.

2. NHAI ordering to slow down, land costs to remain stable till 2020, Financial Express, January 2019

4.4 Other issues

Following is a brief description of various project related issues observed in the roads and highways sector:

a. Project-development stage b. Construction stage c. O&M stage

All state government authorised Claims arising out of disputes The returns on projects is not projects are not backed by a between the concessionaire/ upto expectations because of state support agreement, which contractor and the government improper DPR and traffic reports results in low interest in such authorities is also a significant in the feasibility stage. Actual projects. cost which can lead to large traffic is much less than the liabilities. anticipated traffic, and so the lower returns deeply affects the financials of the project. Arbitration issues also result in

project delays, which cause- cost and time overruns.

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The government has introduced a number of policy initiatives to ensure an enabling environment for various stakeholders involved. The policy initiatives can broadly be categorised into the following:

Figure 1: Overview of policy initiatives in roads and highways sector1

Operational initiatives Revival of languishing projects

To enable process streamlining To revive, complete and make Overview through policy interventions and Overview operational languishing projects. enhanced automation.

Mode of delivery determination, 100 per cent equity divestment Specific increased appraisal and approval Specific 2 years post COD, premium Policies threshold, Bhoomirashi, Bidder Policies deferment, rationalised Information Management System, compensation, one time fund platform interlinking etc. infusion.

Amicable dispute resolution Other initiatives

To enable time bound resolution Augmenting funding sources, Overview of disputes in an affordable Overview easing out operational issues, manner. enhancing road safety and ETC.

Continuous evolution of PPP Specific Dispute resolution through 3 tier Specific modes, changes in HAM Policies stage, formation of SAROD. Policies regarding mobilisation advance and construction grant, safety related policies etc.

1. KPMG in India’s analysis, 2019 based on secondary research

5.1 Operational initiatives

Process streamlining is being Centre, to create Bhoomirashi, This system aims to simplify the increasingly taken up by the a web portal which digitises the qualification process of bidders ministry to ensure smooth appraisal cumbersome land acquisition for road construction contracts. and approval of road sector process, and also helps in This helps in faster evaluation of projects. Some of the major steps processing notifications relating technical information provided by for process streamlining are: to land acquisition online. the bidders Processing time, which was a. Mode of delivery – MoRTH e. Interlinking between various earlier two to three months has is empowered by a Cabinet platforms - The two IT initiatives come down to one to two weeks Committee on Economic Affairs Bhoomirashi and BIMS, have now3 (CCEA) decision to decide on now been integrated with the mode of delivery of projects b. E-procurement system: NHAI Public Financial Management is using the e-procurement System (PFMS). PFMS allows b. Increased threshold for project portal for tendering of all kinds for the compensation amount appraisal and approval – of goods and services. This has to be paid to the concerned MoRTH was authorised through led to greater transparency. The person directly, rather than a CCEA decision to appraise and system currently in use by NHAI being deposited with the CALA approve projects up to INR1000 is the Central Public Procurement (Competent Authority for Land crore2 Portal by National Informatics Acquisition). In addition to this, many Centre (NIC) Introduction of Goods and Services technological initiatives have been c. FASTag: A mobile application Tax (GST) created some initial adopted by the ministry to aid the has been launched for purchase issues such as change in material execution and operation of a road of tag and top up of FASTags. cost and addition of new tax. project. Some major technological FASTag has penetrated very But in long term it will lead to initiatives are: rapidly. In one year, it has decongestion, accelerated demand a. Use of Bhoomirashi – The breached 1.5 million new users4 for logistics services and interstate ministry has corroborated flow of goods5. d. Bidder Information with the National Informatics Management System(BIMS)– 5.2 Revival of languishing projects

Projects which were languishing b. Premium deferment in the extent of delay provided. The for a number of years have been stressed projects – The policy original operation period remains attempted to be revived, with permits rescheduling of premium unchanged. the help of a number of policy committed by concessionaires d. One time fund infusion – measures taken by the government. during bid stage for awarded The policy enables revival Some of the policy measures have projects. and physical completion of been discussed below: c. Rationalised compensation languishing BOT projects that a. 100 per cent equity divestment to concessionaires for have achieved at least two years post COD – The languishing NH projects in 50 per cent physical progress, policy enables private developers BOT mode for delays not through one time fund infusion to take out their entire equity and attributable to concessionaires by NHAI, subject to adequate exit all operational BOT projects -The policy enables extension due diligence on a case to case two years from commercial of concession period for basis. operation date (COD) languishing BOT (Toll) projects to

2. Policy Initiatives by Ministry of Road Transport & 4. Annual Report 2017-18, National Highways Highways, Press Information Bureau, July 2018 Authority of India, accessed August 2019 3. Bhoomi Rashi Portal, Press Information Bureau, 5. GST is good and simple tax, Ministry of Road January 2019 Transport and Highways, accessed August 2019

5.3 Amicable dispute resolution

Efforts have been made by NHAI This entailed a settlement of process, and for fast dispute for dispute resolution through claims amounting to INR381 crore redressal7. The main objectives the established mechanism of for an amount of approximately of SAROD were to reduce cost Alternate Dispute Resolution INR30 crore in FY18. In 2017, NHAI due to the arbitration process and through the three tier stage of: has also established Conciliation pendency of disputes, efficient through Committee of Independent disposal of disputes and to develop a. 3-CGMs committee Experts (CCIE)6. experts for the arbitration process. b. Independent Settlement 347 arbitrators have already been 04 Society for Affordable Redressal of Advisory Committee (ISAC) and empanelled8. Disputes (SAROD) was formed in c. Executive Committee/Board of 2013 by NHAI to reduce cost and NHAI for settlement of disputes time overruns due to the arbitration 5.4 Other initiatives

A number of other initiatives have been taken by the government to bring in efficiencies and safety into the road sector. Some of such initiatives have been described below:

a. Continuous evolution of c. Safety related policies – • Through various applications, PPP modes – After BOT (Toll) Ministry has also introduced users have been entitled and BOT (Annuity) models a number of safety related to report road quality data, failed to pique the interest of measures in recent years. accidents, potholes, etc. It private investors post FY12, Some of the important also provides users with real MoRTH came up with the measures are as follows: time data like waiting time, and HAM model in 2016. HAM other key places of interest • Ministry has proactively tried to reduce the risks near toll plazas identified black spots and is borne by private players, by working on its rectification. • An institution, Asian Institute reducing the financing risk As of 31 December 2018, of Transport Development, of private investors (40 per 789 road accident black spots has been announced as an cent of bid project cost paid have been identified in various apex body for capacity building by the Government during states of which 651 are on in the area of road safety. Till construction phase) and also National Highways and 138 are October 2018, over 1,400 eliminating revenue risk. on state roads9 professionals have been The HAM mode was very trained in road safety and road successful and resulted in • Ministry has been trying safety audit11. many new developers also to strengthen the various participating in the mode. institutes for driving, Policy initiatives by the MoRTH also introduced the TOT in association with government have created a mode in the roads and highways various stakeholders sustainable environment for sector to attract institutional like corresponding the road sector development in investors into the road sector. states, manufacturers, India. But another major factor – etc. Government is also road sector financing, also has a b. Developer friendly reforms for implementing a scheme huge impact on the road sector HAM mode – HAM mode has for developing Institute of development. This is discussed in been constantly updated over Drivers Training and Research the subsequent section. the years to bring in developer (IDTR). 16 such institutes friendly policies. Some of were functioning as on 31 such reforms are early release December 2018 10 of mobilisation advance and construction grant

6. Annual Report 2017-18, National Highways 8. Annual Report 2017-18, National Highways 10. Year end Review: Ministry of Road Transport Authority of India, accessed August 2019 Authority of India, accessed August 2019 and Highways, Press Information Bureau, 7. Annual Report 2017-18, National Highways 9. Year end Review: Ministry of Road Transport December 2018 Authority of India, accessed August 2019 and Highways, Press Information Bureau, 11. Year end Review: Ministry of Road Transport December 2018 and Highways, Press Information Bureau, December 2018 © 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 35

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6.1 Fund requirement

MoRTH is targeting completion funding requirement over five However, current sources of of 60,000 km of NH in the next years is estimated at approximately funds are projected to meet five years1 at an average road INR19 lakh crore which amounts to only approximately INR2.46 lakh construction rate of 40 km per day. average annual fund requirement crore of the average annual fund Assuming average construction of approximately INR3.8 lakh crore. requirement with an average cost of approximately INR30 crore This analysis only considers fund deficit of approximately INR1.36 per km (including land acquisition requirements due to development lakh crore per annum only for cost), and factoring in inflation of 60,000 km of NHs irrespective of road development part at the rate for road construction cost at a mode of delivery. of 12,000 km per annum. This is conservative 3 per cent, the total depicted in the following graph:

Figure 1: Projections for MoRTH – Funding available and required (INR lakh crore)2

Projections for MORTH: Funding available and required for building 60,000 km NH* 5.00 4.05

. 3.93 4.00 3.60 3.71 3.82 2.64 3.00 2.28 2.37 2.45 2.54 2.00 1.32 1.34 1.37 1.39 1.41

INR Lac Cr 1.00 0.00 2019-20 (BE) 2020-21 (P) 2021-22 (P) 2022-23 (P) 2023-24 (P)

Total available funding Total funding required Deﬁcit

While it is imperative for MoRTH funding gap in order to realise its key reasons for increasing gaps to explore new avenues and infrastructure targets, it is also between available sources of opportunities to bridge the important to explore and address funding and actual funding required. 6.2 Sources of fund

While the costs are rising, the and MoRTH with very limited assessment of the various financing funding is getting ever more options to explore in order to heads to address the future fund constrained leaving the government bridge the funding gap. The requirement is as follows:

Table 1: Assessment of sources of fund for MoRTH3

Financing head Assessment

Competing demand from other ministries - limited allocation to 1 GBS: Gross Budgetary Support MoRTH Limited increment as fund usage broad based to 2 CRIF: Central Road and Infrastructure Fund include other sectors 3 PBFF: Permanent Bridge Fee Fund Limited quantum available on annual basis 4 Proceeds from TOT projects Set to increase with extensive use in coming years. 5 IEBR: Internal and Extra Budgetary Resources Can be increased with caution considering MoRTH’s future liability 6 Others: National Highway Fund (NHF), Overall contribution to funding is low (5-10 per cent) National Investment Fund (NIF), Nibhaya Fund

1. BJP manifesto: 60,000 kilometres of highways 2. Achievements of four years, Ministry of Road 3. Achievements of four years, Ministry of Road to be built in 5 years, Business Today, April Transport and Highways, Accessed July 2019, Transport and Highways, Accessed July 2019, 2019 KPMG in India’s analysis, 2019 based on KPMG in India’s analysis, 2019 based on secondary research secondary research

As evident IEBR is the current used extensively in the coming b. Limited options within the funding route which can be years. current prevailing ecosystem to explored further, but with caution enhance funding As evident, major funding and keeping in mind future liabilities. project related concerns can be c. Fading interest of highway sector Apart from aforementioned summarised as under: developers in PPPs. sources, private investments in the form of PPPs is another source a. Increasing cost of highway A broad framework to address key of funding for road infrastructure sector projects leading to higher concerns are as follows: projects. TOT is expected to be fund requirement

Figure 2: Framework for current funding challenges and related approaches4 1 2 3

Key challenges identified

Limited scope of Waning interest Increasing costs fund raising through of private sector + traditional routes + in PPPs

Solution levers

Existing sources – Policy reforms Optimise costs increased funding across phases including new + and new sources – + PPP models to explore

The approaches presented above Monetisation of road assets has monetise road projects with high form the basis for bridging the been picking up in recent years. traffic density6. funding requirement for the sector Some of the particular approaches New implementation modes like in the coming years to maintain the in asset monetisation are TOT, least present value of revenue pace of road development that was InvITs and securitisation of toll which explores the concept of observed in the past few years. revenue. TOT has been explored variable concession period can recently by NHAI. TOT is expected Augmentation of current funding also be looked into. Introducing to be used aggressively in the sources and conceptualisation of such new implementation modes coming years to unlock more value. innovative ones is the current need can help reignite private sector NHAI is also expected to come up of the hour. Three possible ways interest. IEBR can be beefed with its own InvIT by the end of this to achieve this is by encouraging up with increasing use of tools year5. Securitisation of toll revenue monetisation of road assets, like value capture financing to is also being explored by NHAI. looking for new implementation enable recovery of a portion of A similar instrument is already models and augmenting IEBR with the appreciation in value of land/ being explored with the State appropriate instruments. property by the government. Bank of India, where it intends to

4. KPMG in India’s analysis, 2019 based on 5. NHAI plans to raise 75,000 crore from market, 6. NHAI, SBI in talks to monetise highways, secondary research says chairman, Livemint, July 2019 Economic Times, July 2019

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Global trends in infrastructure In some countries like Canada, of transport departments, indicate increased focus on Singapore etc., focus is on creating increasing use of green principles innovations, use of technology multimodal integration of the in road development, adoption tools based on data and analytics various modes of transport to of e- mobility as a service, to unlock operational efficiencies, ensure integrated development. implementation of integrated shift of focus to developing While in other countries where road payment mechanisms for multi- economies and mainstreaming of infrastructure development is still modal transport, increasing use of sustainability. Roads and highways impending, issues like financing big data analytics, other technology sector is not an exception. The of road assets are major areas of initiatives and flexible road pricing role of roads and highways sector consideration. initiatives. Enhanced road user in the overall transport sector facilities is a focus area globally. Focus has also been observed continues to be globally recognised. on institutional integration 7.1 Information, Communication and Technology (ICT) in roads

Technology is already beginning road transport sector, some of the security, passenger information to play a pivotal role in easing the solutions lie in encouraging online system, digitisation of records etc. problems prevailing in various processes for transactions, real transportation sectors. For the time monitoring for safety and

ICT Solutions in Australia1

The Australian Government is that are designed to require no services are providing a viable encouraging the development and human control alternative to car ownership for deployment of new technologies some consumers. This could • Connectivity: Next generation and is working with states and accelerate long-term trends of connected vehicles, which territories towards a nationally away from car ownership, and involve Cooperative Intelligent consistent policy and regulatory impact on travel patterns and Transport Systems (C-ITS), environment. infrastructure use will be able to communicate Major focus areas are: with other vehicles (V2V), • Zero emission vehicles: road-side infrastructure (V2I) Falling costs and new storage • Automation: Most major and other devices, such as options are likely to make vehicle manufacturers, as well mobile phones (V2P) for a wide electric-powered vehicles as several large technology range of safety and efficiency and other alternative fuel companies, are developing applications technologies (such as hydrogen vehicles with higher levels of fuel cells) more popular in the automation, including vehicles • Sharing economy: Innovative future. car-sharing and ride-sharing

1. KPMG in India’s analysis, 2019 based on secondary research

7.2 Funding from multilaterals

Multilateral funding institutions related risks and improve the improves the investment credit provide funding and/or guarantees financing health of projects. They quality, reduce risks and ensure in countries like Brazil, Nepal offer a host of benefit to private project bankability. etc. to encourage private sector investors such as access to use investment, mitigate government of AAA rated instrument which

Sao Paolo State Sustainable Transport Project2

• Problem: Project was for Solution: Broadly the following Benefits: The benefits envisaged rehabilitation of 650 kms of solutions were proposed: are as follows: roads and reconstruction • Partnership with the World • Insured against political risk of 2 bridges. Total cost was Bank’s agency to provide estimated at $729 million. A loan • Better freight and passenger guarantees of $300 million was approved transport leading to logistical by World Bank. But additional • Projects were bid out to efficiency debt funding could not be commercial banks • Long term increase in quality procured, although assistance • Guarantees were issued to a of life. was provided by the state of Sao bank on a $300 million loan. Paolo

2. Brazil bridges infrastructure gap with innovative funding solution, The World Bank, November 2014

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8.1 Types of technological advancements in the sector

A number of technological advancements have been observed in the roads and highways sector in various modes of transport. Technological advancements can be bifurcated into the following modes:

a. Road infrastructure b. Public transportation c. Road safety Technological advancements Technological interventions required Technological initiatives are are required both at the for public transportation, efficient paramount for road safety initiatives construction and operations improvement in fields of congestion like prevention of accidents, stage. management, ticketing, data/ expediting response etc. information availability etc.

A brief description of some of the issues posed and approaches are as follows:

Figure 1: Framework for technological approaches in the road sector1

Road infrastructure Public transportation Road safety

Construction stage – • Congestion management Need for enhanced road safety – prevention Absence of limited systematic • Ensuring efficient operational of injuries, fatalities, monitoring and facilitation of efficiency project progress, bottleneck expedite response to • Efficiency in issuance and delivery of identification, foreseeing incidents tickets operation stage requirements • Ensuring availability of data/ Operation stage - Issues information for enabling seamless related to systematic travel monitoring and facilitation of • Ensuring passenger safety and road operations, electronic toll security collections, O&M requirements, road asset management, • Enabling multi-modal integration bridge/structure assets through integrated tickets, others management system

Technology initiatives Technology initiatives Technology initiatives

Road Infrastructure monitoring Intelligent Traffic and evaluation Transportation management and Road safety solution System (ITS) surveillance Automated Fare Collection Electronic Toll 1. KPMG in India’s analysis, 2019 based on Solution (AFCS) Collection (ETC) secondary research

8.2 Technological initiatives in road infrastructure

Technology based initiatives in passenger and freight transport. Management Information System the road sector are increasingly Road safety is another important which has been developed by NHAI being adopted – right from the area of application. and is currently used to monitor initial stage of project preparation more than 3,000 projects2. Many such technologies have to construction and O&M phases been adopted, such as the Project and in enhancing service levels for 8.3 Technological initiatives in public transportation

Significant technology interventions that are being adopted for the road transport sector are as follows:

Intelligent Traffic management Automated fare Electronic toll Road infrastructure transport system and surveillance collection system collection system monitoring solutions enable system aims to offers an integrated aims at eliminating approaches – these interaction between reduce traffic system for managing the delay on toll approaches include passengers, buses, congestion and tickets issued to the roads by collecting infrastructure bus stops and provide various commuters of public tolls electronically monitoring and command centres to options to the vehicle transport networks through RFIDs. This addresses specific communicate much driver to reach their like buses, metros, uniquely identifies issues during needed information destination. Key railways, etc. It each vehicle and construction and such as bus location, components include helps generating thus helps make the operations phase bus ETA at a certain video surveillance financial and other toll collection system of the road asset bus-stop, bus system, traffic useful information efficient creation. Major schedule monitoring, management system for monitoring components etc. They also and alert system the performance may include 5D check for possible and improving the Building Information violations decision-making Modelling (BIM), drones survey and business analytics system.

Electronic Toll Collection (ETC) has already been implemented throughout India. NHAI is also working to convert all lanes into ETC enabled lanes. 8.4 Technological initiatives in road safety Road safety approaches are citizen control centre, provide real time road quality details and real time centric and aim to provide road information about accidents and information on waiting time. quality-related information or to routes to avoid and minimise report any accident or pothole on accident response times. 2. Annual Report 2017-18, National Highways the roads. They provide information NHAI has already launched the Authority of India, accessed August 2019 on diversion in traffic, bottlenecks SukhadYatra app, which helps in and safety through command reporting of accidents, as well as

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9.1 Stakeholders involved in roads and highways sector

A number of stakeholders are involved in the road development and operation life cycle. Brief is as below:

Figure 1: Brief of stakeholders involved in the roads and highways sector1

State governments MoRTH Appraisal/Approval

• Land acquisition Policy and regulatory PPPAC/SFC/EFC/CCEA level framework • Approval and clearance • Utility shifting Implementing agency Financial Stakeholders • Enforcement (NHAI/State PWDs etc.) • Banks • FIs Consultants Concessionaire/contractor • Investors /PEs • Technical • Lead arrangers • Financial • Sovereign funds • Legal • Merchant bankers Suppliers material/equipment • Const. supervision • Regulators • Technology expert • Strategy expert O&M contractors/toll • Safety Consultant operators

Highway users 9.2 Opportunities for contractors, developers, and operators

The various opportunities for contractors, developers and operators in the present environment are as follows: • The opportunities for developers • The opportunities for contractors typically for a duration of four to are in the form of PPP projects, are in the form of constructing nine years. Additionally, generally i.e. predominantly HAM projects the project via EPC mode or TOT projects are bid by investors. coming up in recent years. With rehabilitation of roads. EPC These investors typically hire 60 per cent of the projects being projects have a number of OMT contractors for operations floated on HAM mode, a number developers, throughout high, of the road assets. This is of mid-range developers have medium and low turnover expected to pick up significantly also joined the PPP bandwagon. categories in the coming years. BOT (Toll) projects are also • The opportunities for operators expected to come up with the are in the form of short-term 1. KPMG in India’s analysis, 2019 based on government keen on offering secondary research OMT contracts floated by the 10-20 per cent of NH projects in 2. Govt to offer 10-20% of national highway government. These contracts are FY20 on BOT basis2 projects on BOT basis for bidding, Business Standard, July 2019

9.3 Opportunities for investors/ lenders

Banks have been the traditional debt providers for road projects. But a new kind of investors have come up. These are the institutional investors who invest in long-term operation assets. They invest in two kinds of assets:

• TOT bundles being floated by the • Buying of portfolio of operational government which gives them the road assets from Indian developers. right to collect toll on road assets This is in the form of road assets for a long-term concession period, which have already been developed while operating and managing and are operational. the project. This is in return for an upfront fee paid to the government. Additional investment opportunity in the future can be in the form of monetisation of high traffic SHs and MDRs authorised by state governments

In addition to this, various have already come up in the roads can spur the future InvIT market in upcoming opportunities are and highways sector. NHAI’s InvIT India. Securatisation of toll revenue expected to come up in the near is also expected to come up by may also attract investment once it future. These may be in the form the end of the year, to fund the starts gaining popularity. of InvITs and securitisation of toll Bharatmala Pariyojana. Such kind revenues. Private placed InvITs of acceptance by a central authority 9.4 Opportunities for consultants

There are a number of opportunities for consultants in the current scenario. This has been highlighted below:

• Project related opportunities are • Advisory in road safety including • Freight transport like demand in the form of feasibility study and road safety approach design estimation, strategy formulation project management unit (PMU) and implementation, technical and operational improvement for roads studies, road safety audit including • Advisory to state governments identification and addressal • Advisory in policy matters for projects funded by of blackspots and organising including regulatory, financial and multilaterals in areas of Project workshops legal aspects Management Consultancy (PMC), • Passenger transport like transport capacity building, feasibility of • Advisory and implementation planning, business strategy specific projects like expressways, support in technology including formulation and operation road safety and IT application technology solution ideation, improvement development and implementation. development, deployment and operation

© 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 54 Roads and highways sector - Current trends and future road map

10.1 Way forward

Highways development in the use of technology applications the next five to six years shall also country for bridging the required will be a key requirement here. be an important consideration. infrastructure gap is likely to be Promoting sustainability will be The above road development cycle over in the next five to six years and another significant focus area with is likely to be broadly observed development/construction activities increased reliance on e-mobility, across different states in terms of could reduce progressively. A use of bio fuels and eco-friendly SHs and other roads also, though in paradigm shift is expected from development/construction. Further, a staggered manner. highway construction/ development augmenting existing sources of to provision of quality service to finance in order to complete the Based on the current sector trends, highway users, both for freight and required highway construction in following are the priorities of passenger transport. Enhanced the sector which are likely to be addressed in the immediate future:

a. Shift from construction to O&M and capacity augmentation work

As mentioned above, a shift can State governments also need In addition to this, capacity be observed from construction to to embrace the TOT mode to augmentation work may also be O&M and capacity augmentation monetise operational high traffic observed in the upcoming years work. The monetisation of state highways and major district due to many high traffic road existing roads offer the following roads, to create an additional stretches breaching capacity. benefits: funding source which can be This is expected to be an used in development of new additional source of business for • Efficient O&M of the roads roads. contractors in coming years. • Augmentation of existing fund for the authority.

b. Focus on efficiency of freight and passenger transport

Bharatmala Pariyojana was 35 MMLP locations have been In addition to this, a number of planned for efficiency of freight identified under Bharatmala IT enabled solutions are also and passenger transport, and this Pariyojana. Availability of land being used to ensure ease focus is expected to continue. has been confirmed for seven and efficiency of freight and locations1. Development of such passenger transport. These are in MMLPs have been at the heart MMLPs is expected to pick up the form of e-ticketing, discovery of this development. Multimodal in the coming years as ease and of flexi-routes by e-tracking, Logistics Parks are aggregation efficiency of travel gathers more multimodal online smart tickets, and disaggregation centres for significance. use of security devices, etc. freight. Their primary objective is to ensure smooth migration to Intermodal stations for passenger Convergence with other transport faster transport modes such as transport are being considered ministries is also essential to rail, coastal shipping, etc. This at select urban locations in order ensure an integrated and holistic helps in decongestion of roads. to facilitate enhanced services to approach leading to multi-modal passenger transport. integration.

1. Annual Report 2017-18, National Highways Authority of India, accessed August 2019

c. Increased priority on road safety

Road safety is expected to garner continue garnering significant country, and witness more more focus in the future. Some of attention enrollments the priority areas include: • System of IT based alerts: IT • Safety features in vehicles: • Addressing of black spots: based alerts about accidents, More safety features in The government is taking many bad quality of roads and vehicles are likely to be active steps in this direction. potholes is expected to gain adopted, such as adaptive This is expected to continue further acceptance cruise control, automatic going forward emergency braking, blind • Driver and staff training: spot detection and safety exit • Reduced response time to Driver and staff training assist. accidents: Response time to institutes are expected to accidents is a factor leading come up throughout the to fatalities. This is likely to

d. Adoption of more IT enabled solutions

A number of IT applications have of improving performance and integrated border been adopted in recent years, during construction, project management system and this trend is expected to management and use of • Technology initiatives in continue. unmanned aerial vehicles road safety are also expected • Road infrastructure • New technological initiatives to be adopted in a big way. monitoring and evaluation in public transport are also Some of the likely solutions is expected to be aided by expected to be observed. include intersection collision technology solutions, and use Some of such initiatives can avoidance systems, dynamic of such solutions is expected be in the form of a logistics curve warning systems and to be more widespread. Such marketplace or an automated automatic crash detection. solutions can be in the form

e. Exploring innovative financing mechanisms

To address the funding gap which of future liabilities. The likely • Policy reforms including is being observed in the sector, options to raise capital are new PPP modes: A number the approach levers that have bonds, masala bonds and of policy decisions have been been identified earlier need to be debts from Multilateral Funding taken by the ministry lately. built upon. Institutions (MFI)s. Other This needs to continue into the funding mechanisms like Value future. Other measures that These approach levers are: Capture Financing (VCF) can can be explored are reduction • Bettering funding also be explored. In addition to of tax on infrastructure bonds from existing sources this, monetisation techniques and extension of tax holiday and leveraging other like InvITs and securitisation to infrastructure developers. mechanisms: As discussed, of toll revenues can also be Some innovative PPP modes funding sources are limited. explored. Funding from TOT similar to Least Present Ministry has to tap into internal needs to be tapped into with Value of Revenue can also be extra budgetary resources aggressive bidding out of explored. as much as possible, subject project bundles in the future to keeping tab on the extent

f. Adoption of sustainable transport approaches

Adoption of sustainable transport storage solutions, smart grids, Pradesh, Maharashtra, etc. have approaches can also be adopted etc. they also promote the come out with EV policies. This is in a widespread manner in adoption of electric vehicles expected to be adopted by more the future. This is because by the people through states environmental issues are fast incentives proposed therein • Use of biofuels has been gaining significance. Some of the like subsidy on purchase of encouraged, with the ministry ways to help ensure sustainable an electric vehicle, purchase issuing a notification regarding development are: and installation of charging the blending of gasoline with station, etc. Such incentives • Adoption of EV has been methanol in order to reduce are expected to be continued encouraged in the latest vehicle exhaust emissions. in the future budget. While these policies Such measures are expected promote investment in battery A number of states like to continue in the future. charging infrastructure, energy Karnataka, Gujarat, Andhra

1. Annual Report 2017-18, National Highways Authority of India, accessed August 2019

About KPMG in India

KPMG in India, a professional offices across India in Ahmedabad, provide rapid, performance-based, services firm, is the Indian Bengaluru, Chandigarh, Chennai, industry-focussed and technology- member firm affiliated with KPMG Gurugram, Hyderabad, Jaipur, enabled services, which reflect a International and was established in Kochi, Kolkata, Mumbai, Noida, shared knowledge of global and September 1993. Our professionals Pune, Vadodara and Vijayawada. local industries and our experience leverage the global network of of the Indian business environment. KPMG in India offers services to firms, providing detailed knowledge national and international clients in of local laws, regulations, markets India across sectors. We strive to and competition. KPMG has

About CII

The Confederation of Indian competitiveness and business engine for achieving this target. Industry (CII) works to create and opportunities for industry through With the theme for 2019-20 as sustain an environment conducive a range of specialised services and ‘Competitiveness of India Inc - to the development of India, strategic global linkages. It also India@75: Forging Ahead’, CII will partnering industry, Government, provides a platform for consensus- focus on five priority areas which and civil society, through advisory building and networking on key would enable the country to stay and consultative processes. issues. on a solid growth track. These are - employment generation, rural- CII is a non-government, not- Extending its agenda beyond urban connect, energy security, for-profit, industry-led and business, CII assists industry to environmental sustainability and industry-managed organisation, identify and execute corporate governance. playing a proactive role in India’s citizenship programmes. development process. Founded Partnerships with civil society With 66 offices, including 9 Centres in 1895, India’s premier business organisations carry forward of Excellence, in India, and 10 association has around 9000 corporate initiatives for integrated overseas offices in Australia, China, members, from the private as and inclusive development Egypt, France, Germany, Singapore, well as public sectors, including across diverse domains including South Africa, UAE, UK, and USA, SMEs and MNCs, and an indirect affirmative action, healthcare, as well as institutional partnerships membership of over 300,000 education, livelihood, diversity with 355 counterpart organsations enterprises from around 276 management, skill development, in 126 countries, CII serves as a national and regional sectoral empowerment of women, and reference point for Indian industry industry bodies. water, to name a few. and the international business community. CII charts change by working India is now set to become a US$ closely with Government on policy 5 trillion economy in the next issues, interfacing with thought five years and Indian industry leaders, and enhancing efficiency, will remain the principal growth

© 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. About CII

List of Abbreviations

NH: National Highway NHDP: National Highways Development Project Special Accelerated Road Development Programme for Development of Road Network in the SARDP-NE: North Eastern States MoRTH: Ministry of Road Transport and Highways NHAI: National Highways Authority of India NHIDCL: National Highways Infrastructure Development Corporation Ltd PWD: Public Works Department BRO: Border Roads Organisation

SH: State Highway

MDR: Major District Road

PMGSY: Pradhan Mantri Gram Sadak Yojana

ULB: Urban Local Body

EPC: Engineering-Procurement-Construction

MMLP: Multi Modal Logistics Park

IT: Information Technology

TOT: Toll-Operate-Transfer

InVIT: Infrastructure Investment Trust

EV: Electric Vehicle

PPP: Public Private Partnership

BOT: Build-Operate-Transfer HAM: Hybrid Annuity Mode OMT: Operate Maintain Transfer

VGF: Viability Gap Funding

O&M: Operation and Maintenance

MCA: Model Concession Agreement BKC: B K Chaturvedi RFQ: Request for Qualification

ODR: Other District Road

PMC: Project Management Consultancy

ROB: Road Over Bridge

RUB: Road Under Bridge

GDP: Gross Domestic Product

BIMS: Bidder Information Management System

List of Abbreviations

RFP: Request for Proposal

FY: Financial Year

HNI: High Net Worth Individuals

PE: Private Equity

IDF: Infrastructure Debt Fund

DPR: Detailed Project Report

CCEA: Cabinet Committee on Economic Affairs

TPC: Total Project Cost

COD: Commercial Operation Date

NIC: National Informatics Centre

BIMS: Bidder Information Management System

PFMS: Public Financial Management System

ISAC: Independent Settlement Advisory Committee

CCIE: Conciliation through Committee of Independent Experts

SAROD: Society for Affordable Redressal of Disputes

IDTR: Institute of Drivers Training and Research

GBS: Gross Budgetary Support

CRIF: Central Road and Infrastructure Fund

PBFF: Permanent Bridge Fee Fund

IEBR: Internal and Extra Budgetary Resources

NHF: National Highway Fund

NIF: National Investment Fund

PMU: Project Management Unit

AI: Artificial Intelligence

ISA: Intelligent Speed Adaptation

MFI: Multilateral Funding Institutions

VCF: Value Capture Financing

GST: Goods and Services Tax

ICT: Information, Communication and Technology

ITS: Intelligent Transport System

AFCS: Automated Fare Collection System

BIM: Building Information Modelling

ETC: Electronic Toll Collection

Acknowledgements

1. The work done on this publication are based on extensive research done by the KPMG team. The KPMG team of experts who prepared this Knowledge Paper include:

• Davinder Sandhu

• Sameer Bhatnagar

• Abhishek Mukherjee

• Gaurav Vaish

• Abhisek Das

2. Special mention to the team from CII namely Parvesh Minocha and Dr. Rajesh Kapoor for providing important insights.

3. Brand and Compliance team

• Anupriya Rajput

• Sharon D’silva

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