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Introduction:

One of the signs of mis-governance in India has been the Roads sector, and the way the Policies have been created and executed.

Issues: 

The problems of the sector are obvious. Short of funds, the govt developed the PPP (Public Private Partnership) model to not just involve the private sector, but fund the entire project construction, pay govt the premium, and then recover this from citizen road users in the form of Tolls. In the initial euphoria of a new sector (2005-07) and some stock market excitement, there were a plethora of private sector bidders and premiums for winning bids were high.

Soon the excitement wore off. Who is going to fund large road projects for 20 years, and at what rates? Are the road investments viable? Soon the project execution started flagging. In the last 2 years, there were no bidders for many of the new NHAI projects. Saddled with high debt and project delays, companies are trying to sell assets. On most parameters, the government did not achieve the road development targets.

It was unfair for consumers too. Where earlier there was an option to take the old highway (untolled) or the new tolled one, we are increasingly seeing that travellers have no choice but to pay high tolls.

Roads are an essential building block of a country. It is a pre-requirement for economic growth. Tolling should be reasonable and the tolled road an option. And the government should own these assets.

News Today:

A policy change reported today provides some hope to this sector. See article from Mint, 14 Highway Projects get nod for EPC bids

Faced with failure, the bureaucrats are reverting back to the EPC model. In this, the road continues to be owned by the government, and the construction of the road is bid out to firms who execute the projects as per approved plans. This is a business friendly model. The firm can focus on project execution and quality; and they will exit from projects in the 1-2 year span it takes to construct. No large long term debts and revenue risks. In future, tolls may not be so common or compulsory as today.

Its time for common sense to return to this sector. For too long the difficult high risk PPP model has thrown a vibrant sector into disarray. And after several years of struggle, the Indian Roads sector can hope for a revival. 

Investors:

If the above policies are rolled out successfully, Infra conglomerates like L&T, Reliance Infra, GMR and Lanco may see incremental improvements. Bigger gainers will be roads focused firms like IL&FS Transportation, IRB Infrastructure, Ashoka Buildcon and Sadbhav Engineering.

Investors need to analyze each firm in depth in consultation with their investment adviser before buying securities.

JainMatrix Knowledge Base:

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