22 October 2019

Industry Focus: Road Construction Equipment

Rolling out Fast-n-Furious

 

As the NHAI rolls out projects on the fast track, OEMs in the sector are revving up at the start line to race ahead and grab maximum market share. But the demand gradients are steep and potholed, with hairpin bends. Only those who can balance the Cost/Quality equation will race ahead.

 

India’s road sector is finally seeing plenty of traction on the back of project rollout on the fast track, and equipment OEMs are looking at robust demand climbing steep gradients. However, a slack pace in project execution could decelerate their speed. Against a set target of 41 km a day, actual construction is currently only 22 km per day. For 2016-17, the Road Ministry has set an ambitious target of 15,000 km, dividing to 41km per day. Commenting on the current situation, Nitin Gadkari, Union Transport Minister, said “Efforts are being made to further improve the road construction target to 40 km a day from the current 23 km per day. I had fixed the target of 40 km per day but I was not able to achieve that but... I am hopeful of achieving this target." He said 8,144 km of roads were constructed last fiscal, and on an average recorded road construction of 23 km a day as against 2 km a day when the UPA government was in power. Although the pace of project rollout decelerated during FY13 and FY14 after aggressive bidding during FY10-12, it has gained momentum during FY15 and FY16. The projects awarded during FY10-12 faced various issues which include delay in clearances, non-availability of adequate funds from sponsors, etc, which resulted in developers refraining from bidding road projects under Build-Operate-Transfer (BOT) model. The National Highways Authority of India (NHAI) attempt to clear the bottlenecks has resulted in increased pace of awarding of new projects and higher execution. Consequently, value of roads and bridges infrastructure in India is projected to grow at a Compound Annual Growth Rate (CAGR) of 17.4 per cent over FY12–17. The country's roads and bridges infrastructure, which was valued at $6.9 billion in 2009, is expected to touch US$ 19.2 billion by 2017. In fact construction of highways had reached an all-time high of 6,029 km during FY 2015-16, and the increased pace of construction is expected to continue for the coming years.

 

A total of 6,604 km out of the 15,000 km of target set for national highways in 2016-17 has been constructed by the end of February 2017, according to the Minister of State for Road, Transport & Highways, Government of India. In the Union Budget 2017-18, the Government of India has allotted Rs.64,000 crore ($9.55 billion) to NHAI for roads and highways and Rs.27000 crore ($4.03 billion) for PMGSY.

 

 

Robust Demand

A huge amount of projects are on the anvil, which including backlog of pending projects. Consequently, OEM companies in the roads sector are bullish and ramping up production to meet this projected demand. “Next two to three years are going be very good, probably the best in the last decade. There will be demand for newer products in road construction segment. This will include higher tonnage Soil compactors and recycling equipment,” says Rajinder Raina, GM- Marketing, Escorts Construction Equipment. “The share for the Indian Business market is growing. Over the past two years our business has tripled and our India group has grown roughly by 10 per cent and the strategy we had devised 9 years ago has paid off. WE worked on our manufacturing units. Our distribution network is spread across 21 locations in India. This enables us to interact with our customers on a direct basis to give them the best service possible.

 

Since we have a complete range of machines whether it is concrete or bituminous we have been tremendously benefited and this has reflected in our growth. We have tripled our growth from 350 crores and we hope to growth to 400 crores,” agrees Ramesh Palagiri, Managing Director & CEO, Wirtgen India Pvt Ltd. “Roads and highways continue to be a major driver for infrastructure growth in India and the Government’s focus is evident through the significant outlay it has made towards this sector in successive national budgets. With projects’ size getting bigger and time bound, we are seeing an increase in the demand of large and specialised machinery. JCB through its recently launched ‘Premier Line Road Construction Solutions,’ is committed to contributing and expediting the building of roads and highways in both, rural and urban India,” adds Jasmeet Singh, Head - Corporate Communications & External Relations, JCB India Ltd.

 

 

 

Most other OEMs in the sector share the enthusiasm. “Road construction has been the main driver in the demand for construction equipment in recent years. The government has focused on this key sector in the last three years and the results are showing now. It is expected that roads would continue to dominate the infrastructure building activity,” assesses Vikram Sharma, Advisor, India & South Asia, Kobelco Construction Equipment, India. “With a significant increase in allocation for infrastructure sector in general and for highways and roads sector in particular in the 2017 budget, the growth in road construction sector is expected to see the grow further in the months ahead. Overall, we expect 2017 to be a good year for the road construction industry, with growth rates in the range of 40-50 per cent from an optimistic viewpoint, says Anandkumar Dhanaraj, Regional Sales Director, Caterpillar India. “We expect significant growth and are positive in terms of increase in volume for the next year.

 

Hence, we are bringing new products to cater to the newer opportunities and customers who are becoming more deserving and demanding,” reveals Shalabh Chaturvedi, Head Marketing, Case India. Pointing to the shifting pattern in customer demand – of the new emphasis on Total Cost of Ownership (TCO), easy access to equipment finance, and all round aftermarket services – he adds, “The Indian customer is becoming increasingly discerning and demands products with higher efficiency and performance, especially in applications where the project needs to be delivered within a certain timeframe. Our company sells and supports complete family of construction equipment products, and with the market evolving, we offer our support by using our skills and expertise at their best.”

 

Road Ahead

In August 2016, the Cabinet Committee on Economic Affairs (CCEA) had authorized the National Highways Authority of India (NHAI) to monetize public funded National Highway (NH) projects which are operational and generating toll revenues for at least two years after the Commercial Operations Date (COD) through the Toll-Operate-Transfer (TOT) model. In the past, the toll collection and maintenance work was assigned to different entities viz. tolling agents and O&M contractors. Subsequently in 2009, to utilise the private sector’s efficiencies in operating and tolling, the toll collection and maintenance works were integrated into one single contract resulting in the introduction of Operate, Maintain and Transfer (OMT) contracts. The OMT is, therefore, a combination of tolling and O&M contracts. Although OMT contracts have annual concession fee obligations to the NHAI (in few cases, O&M support may be required); the primary objective in case of OMT contracts is to outsource O&M activity to ensure timely maintenance and are typically for a shorter tenure ranging between 6-9 years. In order to create a framework for attracting long-term investments on the strength of future toll receivables, the TOT model has been introduced wherein the objective is to monetise the projects (longer tenure contracts ~30 years) so as to generate the corpus to meet the NHAI’s funding requirement for new road infrastructure in unviable geographies.

 

Under this new TOT model, 75 operational NH projects totaling 4,376 km completed under public funding have been preliminarily identified for potential monetisation. Nearly 26 projects (35 per cent of total) are on a BOT(Annuity) basis and remaining 65 per cent are Engineering, Procurement and Construction (EPC) projects. For these 75 projects, the median vintage in terms of toll collection track record stood at 5.22 years. Of the portfolio, 25 projects (33 per cent ) are part of the Golden Quadrilateral (GQ) with high traffic density, where the average toll collection per day is at Rs.1.6 million whereas for the non-GQ stretches it is Rs.0.7 million per day. The total value of 75 projects proposed to be awarded through TOT route is estimated at Rs.356 billion. Assuming the average cost to the NHAI as Rs.0.13 billion per km (for a four-lane project), the proceeds from monetisation through the TOT route can be used towards construction of around 2,700 km. The government intends to attract institutional investors including pension and insurance funds, sovereign funds, etc for this model.

 

The government, through a series of initiatives, is working on policies to attract significant investor interest. The Indian government plans to develop a total of 66,117 km of roads under different programmes such as National Highways Development Project (NHDP), Special Accelerated Road Development Programme in North East (SARDP-NE) and Left Wing Extremism (LWE).

 

The government has identified development of 2,000 km of coastal roads to improve the connectivity between ports and remote villages.




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