Lets look at how this system works - Part 1

For this we need to look at the sector outlook and policies regarding indian roads and highways:

Sector Overview
India’s road network of 3.34 million km is the second-largest in the world. Out of this, national highways account for 65,569 km, state highways for 130,000 km, and major district roads, rural and urban roads collectively account for 3.14 million km, as per statistics with the Ministry of Road Transport and Highways.

According to the ministry, roads remain the most important means of transport, accounting for 85% and 65% of passenger and freight traffic, respectively, in India. Broadly, the road network in India is divided into the primary system comprising national highways and the secondary system made up of state highways and major district roads. In addition, the network comprises expressways as well as rural and other roads.

National highways account for a mere 2% of the total road length, but carry 40% of the total road traffic. Between 2006 and 2009, the national highway network increased by 4,000 km and the state highway network increased by 170,000 km. Of the total length of the national highway network, about 27% is single-laned or intermediate-laned, 54% is two-laned and 19% is four-laned. The Ministry of Road Transport and Highways is planning to seek credit worth USD 2.96 billion from the World Bank for the conversion of single-laned, intermediate-laned and two-laned roads covering a total length of about 3,770 km. The project is scheduled for completion in 2014. The state highways and major district roads carry 40% of total road traffic and constitute 13% of India’s total road length.

Policy and Promotion
The government provides various incentives for private and foreign sector investment in the roads sector. 100% foreign direct investment (FDI) under the automatic route is allowed for support services to land transport such as operation of highway bridges, toll roads, and vehicular tunnels; services incidental to transport such as cargo handling is incidental to land transport; construction and maintenance of roads, bridges; and construction and maintenance of roads and highways offered on build-operate-transfer (BOT) basis, including collection of toll.

Highway-widening projects qualify for the 10-year tax break under Section 80 IA of the Income Tax (IT) Act. Other policy initiatives for attracting private investment are government to provide capital grant up to 40% of project cost to enhance viability on a case-to-case basis, 100% tax exemption for five years and 30% relief for next five years, which may be availed of in 20 years and concession period allowed up to 30 years.

FDI in construction activities (including roads and highways) sector from April 2000 to July 2011 in India was USD 9.3 billion. This amounted to 6.4% of the total FDI inflows, according to data released by Department of Industrial Policy and Promotion (DIPP), which formulates the FDI policy and is part of the Ministry of Commerce & Industry.

With the government permitting 100% FDI in the roads sector, most foreign investors in the Indian roads sector have formed consortiums with Indian companies to participate in the development of road projects in the country. As a result, construction companies are now being rewarded with large order books and portfolios of BOT projects.

In addition to the policy benefits, the government has announced several incentives to attract private sector participation. These include government to bear the cost of the project feasibility study, land for the right of way and way side amenities, shifting of utilities, environment clearance, cutting of trees, etc; duty free import of high capacity and modern road construction equipments; declaration of the road sector as an industry; easier external commercial borrowing norms; right to retain toll; increase in the overseas borrowing amount of infrastructure sectors to USD 500 million from USD 100 million; and full exemption from basic customs duty to bio-asphalt and specified machinery for application in the construction of national highways.

The ministry has also framed a ‘Special Accelerated Road Development Programme in North Eastern Region’ for improving road connectivity to remote places in this region. The estimated cost of the proposal is USD 2.53 billion. The Union Budget 2012–13 proposed an increase of allocation of the Ministry of Road Transport and Highways by 14% to Rs. 25,360 crore.

Further, the World Bank has approved a USD 975 million loan for developing the first phase of the eastern arm of the USD 17.21 billion Dedicated Freight Corridor Project in India. The Dedicated Freight Corridor Corporation of India Ltd. has tied up with the Japanese Bank of Industrial Cooperation for USD 14.56 billion funding as loan for the first phase and it is likely to be commissioned in 2016.

The World Bank and the Government of India have also signed a USD 350 million loan to accelerate the development of road network through the Second Karnataka State Highway Improvement Project. The Government of Karnataka has demarcated about 25,000 km of the most important traffic corridors and designated them as the state’s core road network. Also, a USD 301.38 million-worth project, ending 2016, for construction, upgradation and improvement of 433 km-long road in six north-east states, assisted by the Asian Development Bank, has been approved by the Cabinet Committee on Economic Affairs.

The Ministry of Road Transport and Highways had planned to award road projects covering 10,000 km of highways in 2011–12. About 80% of these road projects will be distributed on the BOT basis.

The Prime Minister Gram Sadak Yojana (PMGSY) is a scheme for development of rural roads in India. The Construction of Rural Roads Project (CRRP) is another initiative focused on rural development.

The fund wise ratio has been already posted in the post earlier.

Major Players
Some of the foreign investors that have entered into road and highway construction are Isolux Corsán, Vinci, Lighteon of Australia and a few Russian, Chinese, and Malaysian companies.

Isolux Corsán has entered into a joint venture with the Morgan Stanley Infrastructure fund (MSI), to jointly invest USD 400 million to develop new road infrastructure projects. Under this agreement, the company is building three toll roads within the framework of long-term concessions awarded as part of the BOT programme established by NHAI, whose programme for developing the Indian road network is amongst the largest PPP projects in the world; it was started in 1999 and is expected to cost nearly USD 50 billion by the time it is completed.

The major domestic private sector companies working in the Indian road sector are DS Construction Ltd., GMR Infrastructure Ltd., Hindustan Construction Company, Larsen & Toubro Ltd., Ideal Road Builders Infrastructure Developers, Gammon Infrastructure Projects Ltd. and Soma Enterprises Ltd.

Sector Outlook
The growth potential of the roads sector is tremendous in India with a fast-growing economy and a rising need for world-class infrastructure for better road connectivity. According to the ministry’s data, traffic on roads is growing at a rate of up to 10% per annum, while vehicular population growth is nearly 12% per annum. This spells out the need for fast growth of the roads network in the near future.

The Government of India plans to construct 35,000 km of highways by 2014 under the National Highway Development Programme at an investment of USD 60 billion. Moreover, according to the Planning Commission’s revised estimates, funds worth USD 58 billion are likely to be invested in the road sector in the 11th Plan. The ministry has also recommended a total expressway network of about 18,637 km in the country for the unhindered, high-speed and safe movement of traffic. Construction work on the country’s expressways will be initiated in three phases and is scheduled for completion in 2022. All this is also likely to result in increased opportunities for private players, as more projects will be awarded under the PPP mode.

Many states, including Andhra Pradesh, Gujarat, Tamil Nadu, Karnataka, Uttar Pradesh, Rajasthan and Madhya Pradesh, have formulated policies and established PPP cells to facilitate private sector participation in key road projects. The Delhi-Noida toll bridge, the Ahmedabad-Mehsana, Vadodara-Halol toll road, the East Coast Road and the Bangalore-Mysore State Highway (Phase I) are examples of completed PPP projects.

Private sector participation is increasing with the rising trend of awarding projects on toll and annuity basis. For instance, during March 2010, about 10 mega highway projects, spanning 5,000 km, have been identified, which will be awarded to private developers over the next two years. These projects are worth USD 9.3 billion and will be based on a revenue-sharing model.