Two months ago in November, an unusual set of visitors came to the IL&FS corporate headquarters at the financial centre of Bandra-Kurla in Mumbai. No, they weren't global fund managers interested in infrastructure, but nearly half the Assam state government led by the Chief Minister himself! And why were they there? They were there to sell the idea of investing in infrastructure in Assam to the specialist financial institution. "Can you believe it? They spent the entire day there," exclaims Ramesh C. Bawa, MD and CEO, IL&FS Financial Services.

Increasingly, it seems, IL&FS is having to play host to such visitors. A couple of months earlier, the Deputy Chief Minister of Bihar was also there with his retinue of relevant bureaucrats. This is some role reversal and assiduous courtship of financial institutions by government officials. And it probably defines the changing tenor of the infrastructure sector best.

What attracted these officials to IL&FS? The fact that it is executing around eight projects for state roads in Rajasthan with a total cost of around Rs 1,500 crore and these states want similar development. "We are holding discussions with four states, including Bihar, Chattisgarh, Jharkhand and Assam for state road projects," says Bawa, pointing to the acceleration in road development at the state level also.

So, a sign of momentum in roads sector picking up? Not entirely. Overall, the progress has been patchy at best in northern and eastern states. Improvement in rural roads too is becoming visible only in more progressive states under the Pradhan Mantri Gram Sadak Yojana.

The accelerating pace of activity is crucial as many of the road-related development is bogged down by state-level issues as has been seen in the showcase programme of National Highways Development Programme (NHDP). The Golden Quadrilateral, which was to be completed end-2005, is nowhere near completion, with land acquisition issues troubling the last 5 per cent of the programme. Though NHAI has cancelled some projects and awarded them afresh, it will take some more time. This has heightened the perception of a slowdown in the NHDP over the past two years. "Yes, there was a slowdown in the award of new contracts and in the dispute resolution in the existing projects," says Ajit Gulabchand, Chairman and Managing Director, Hindustan Construction Company.

The slowdown is most clearly visible in the contracts for 1,053 km that still have to be awarded in the North-South East-West corridor (see The Roads Story). The deadline for the completion of the corridor was 2008-end. With typical execution time from the award of the contract ranging from 30-36 months, the completion schedule is in serious danger of going awry.

Work-in-Progress

One of the major reasons for the slowdown has been the change in the financing pattern for road development. When NHDP was started during the NDA regime, it was visualised to be funded from public finances. However, as NHAI gained experience and the new government came in, the thinking changed towards greater private sector funding for infrastructure projects through the public-private partnerships. And build-operate-transfer (BOT) projects became the norm. In terms of charges, the toll model was favoured over the annuity model.

Along with this change in funding pattern came new processes, some of which are being fine-tuned even now. The PPP approval committee was set up to clear such projects. The model concession agreement (MCA) for roads has been a work-in-progress now for almost two years. The Planning Commission and the several ministries involved had differences on some clauses. "Finalising the MCA has taken more time than anticipated partly because it is a complex document and partly because several other ministries also need to agree with the document," says Amrit Pandurangi, Executive Director, PricewaterhouseCoopers.

The new MCA incorporates the experience of the previous five years and has clearer risk-sharing agreements between the private operators and the government and longer risk sharing over a period of time. However, increasingly a greater share of the development risk is being passed off to the private sector. "State support agreement, inter-ministerial coordination, land acquisition, associated activities such as utilities shifting or environment clearances-all these are jobs of NHAI. You can't pass them off to the private sector," says a financier of road projects.

One of the contentious issues included the minimum commitment from the government by way of land acquisition prior to award of contracts. The Planning Commission was in favour of higher percentages (80 per cent) of land being acquired prior to the award of contracts, but the NHAI officials believe it to be impractical. Now over the last few weeks, there seems to have been an agreement on a figure of 50 per cent. Though the private sector is uncomfortable sharing greater risks, it is also aware that sharing some risk is the only way forward. "Closer to 100 per cent land on the day of the award is certainly preferable but it is impractical," says G.V. Sanjay Reddy, Vice-Chairman, GVK Group.

Dispute resolution is a sticky and prolonged process. Currently disputes are referred to a dispute review board (dab) and then a dispute adjudication board. However, they do not have full powers. The next few stages can be an arbitration tribunal, which can be taken up by the high court for further decision. "If finally the disputes have to be resolved by process of arbitration, or adjudication in the high court, the role of dispute dab seem to be redundant. The cost involved may not have to be incurred," says Subhash Sachdeva, Executive Director, Punj Lloyd.

Another issue is that of the failing momentum at the organisation spearheading the NHDP-National Highways Authority of India. After the Satyendra Dubey incident, infrastructure industry people say there has been a fear psychosis in the organisation that has contributed to the predictable slowdown. Others say it has lost the missionary zeal with which it was set up. "There is sometimes excessive and wrong vigilance which stalls genuine progress," says HCC's Gulabchand. "To be fair, NHAI must also be given suitable powers along with responsibilities and accountability," notes Feedback's Chatterjee. The reorganisation of NHAI announced in the Budget speech in February 2006 is still being worked out. And the proposal is likely to be taken up by the Cabinet over the next two months.

Nevertheless, all is not dark. Despite some sluggishness in the initial phase of the UPA regime, the NHDP and the executing agency NHAI seem to be picking up steam. NSEW corridor work is underway on 5,295 km of the total of 7,300 km. During the calendar year 2006 up to November, 33 contracts for the length of 1405.29 km amounting to Rs 10,134.33 crore were awarded by NHAI. "The acid test for our performance is the participation by the private sector. If they continue to participate in road projects, we must be doing something right," says NHAI member P.B. Chaturvedi.

On that litmus test of private investment, NHAI has done well indeed. The construction companies have voted with their wallets. There were aggressive bids for "negative grant" BOT projects-with the NHAI garnering over Rs 1,800 crore over the last two years from their award. Negative grants is the money that the private sector pays to the government to build, operate and collect toll on the road for a specified period of time. The highest amount paid was Rs 504 crore for the 65 km-long Surat-Bharuch road by IDAA Infrastructure. "These were some of our best projects with internal rates of return between 25-30 per cent," Chaturvedi says.

Did we ever have doubts about the profitability of the roads sector? The roads sector is intimately tied to the general economic growth in the country. And traffic projections on many of these roads have been in line with the economic cycle. With the economy on a roll, more investors may feel emboldened to bet on the roads sector.