Transport Growth Boosted By Road, Rail Investments

BMI View: India's transport sector will see higher growth rates in the coming five years on the back of increased government funding for road and rail projects, reform measures and new policies encouraging private participation. The sector will continue to fall short of its full potential, however, as bureaucratic hurdles and concerns about the financial feasibility of projects remain.

India's transport infrastructure sector will experience elevated growth rates over the next five years on the back of increased government investment, especially in roads and railways, and a gradually improving environment for private investors and public-private partnerships (PPPs). The latest FY2017/18 Union Budget increased allocations for National Highways Authority's (NHA) by 24% and Indian Railways by 8.2% - to support significant expansion plans. Additionally, the government proposed a new Metro Rail Policy aimed at easing and encouraging the use of PPPs for urban transit projects, expanding the number of opportunities for private parties to invest in infrastructure. Our latest forecast is for India's transport infrastructure sector to grow by 6.1% in real terms in 2017 and average 5.9% annually through 2021 - the fastest-expanding component of the country's infrastructure sector.

Government Expenditure To Help Fill Backlog

Roads and Rail Lead
Thailand - Transport Infrastructure Sector Forecasts (2016-2021)
e/f = BMI estimate/forecast. Source: National Sources, BMI

Transport Growth Boosted By Road, Rail Investments

BMI View: India's transport sector will see higher growth rates in the coming five years on the back of increased government funding for road and rail projects, reform measures and new policies encouraging private participation. The sector will continue to fall short of its full potential, however, as bureaucratic hurdles and concerns about the financial feasibility of projects remain.

India's transport infrastructure sector will experience elevated growth rates over the next five years on the back of increased government investment, especially in roads and railways, and a gradually improving environment for private investors and public-private partnerships (PPPs). The latest FY2017/18 Union Budget increased allocations for National Highways Authority's (NHA) by 24% and Indian Railways by 8.2% - to support significant expansion plans. Additionally, the government proposed a new Metro Rail Policy aimed at easing and encouraging the use of PPPs for urban transit projects, expanding the number of opportunities for private parties to invest in infrastructure. Our latest forecast is for India's transport infrastructure sector to grow by 6.1% in real terms in 2017 and average 5.9% annually through 2021 - the fastest-expanding component of the country's infrastructure sector.

Roads and Rail Lead
Thailand - Transport Infrastructure Sector Forecasts (2016-2021)
e/f = BMI estimate/forecast. Source: National Sources, BMI

Government Expenditure To Help Fill Backlog

The government's increased commitment to funding transport projects will help India bridge its sizable infrastructure deficit, especially in the road and rail sectors. Within the roads sector, the NHA has plans to build 50,000km of roads worth INR17trn (USD250bn) by 2022 as part of a long-term goal of doubling the length of the national highway network to 200,000km. Within the rail sector, Indian Railways plans to commission 3,500km of new line and renovate 500 stations in the upcoming year, part of a long-term USD65bn plan for modernizing the nationwide network. Construction on the 508km, INR1.0trn (USD15bn) Mumbai-Ahmedabad High-Speed Railway, financed by the Japan International Cooperation Agency, is also scheduled to begin in 2018. These projects, aimed at alleviating transport bottlenecks, will help lower logistics costs, aid in the development of less-accessible regions and ultimately improve India's overall business environment.

Rising Expenditures
India - Union Budget Allocations for Road and Rail, INRbn (2012-2017)
* Data for railways unavailable prior to FY2015/16; Rail budget was reported separately prior to 2016. Source: Ministry of Finance, BMI

Growing PPP Opportunities

PPPs will become increasingly important when financing and operating many upcoming transport projects, as the government seeks to tap private capital to supplement its limited fiscal capacity. The new Metro Rail Policy, proposed as part of the FY2017/18 Union Budget, is aimed at easing and encouraging private participation in urban transit projects by allowing the use of tax-free bonds and assigning the responsibility of securing all regulatory approvals to the state governments. This comes after the introduction of a hybrid-annuity model for highway PPPs in 2016, in which the private partner is responsible for construction and receives fixed payments from the government operator.

Past transport PPPs in India have registered mixed success. While projects like Delhi International Airport, which has been run by a consortium consisting of GMR Group, the Airports Authority of India and Fraport AG since 2006, have seen strong revenue and passenger growth and improved service quality, others such as the ongoing Mumbai Metro project have been mired in years of delays caused by prolonged permitting and land-acquisition processes as well as legal disputes over compensation and asset-transfer terms. These risks will remain pertinent, but an improved environment for launching and operating PPPs will generate additional investment and participation opportunities for private and foreign companies, especially given the significant growth potential of India's transport sector.

Most PPPs in Transport
India - No. of PPPs by Sector
Out of 1,494 PPP projects. Source: Department of Economic Affairs, BMI

Project Environment Improving, But Risks Remain

Ongoing improvements to India's regulatory and operating environment will help spur private investment in the transport sector, but challenges such as acquiring land and maintaining a stable revenue stream pose risks to potential participants. We previously highlighted that state governments are beginning to implement land reform policies similar to the controversial amendment proposed by Prime Minister Nadrendra Modi in Parliament in 2015. While we expect that the laws to improve construction timelines on projects within the state - such as airports and urban transit systems - we note that they will have a more limited impact on projects spanning multiple states, such as long-distance highways and railways ( see 'States' Embrace Of Land Reforms Positive For Construction', November 4 2016). Additionally, while most projects in India experience construction delays, we previously noted that private projects - including PPPs - tended to be less delayed than public ones, which helps improve their attractiveness to potential investors ( see 'Chronic Project Delays Take Greater Toll On Public Over Private Projects', November 25 2016).

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