Road projects face serious bottlenecks

Most of the road projects being awarded by National Highways Authority of India (NHAI) are on Design,Build,Finance,Operate and Transfer (DBFOT) model through ‘Public Private Partnership’ (PPP) route.

Under such a model, the developer builds and finances the project, operates and collects the toll charges for the specified concession period and later transfers the project free of cost to the government at the end of concession period. Hence here, all the project execution risks and investment risks are with the developer. NHAI and the government’s role is that of an enabler.

The Union ministry for surface transport has set an ambitious target of building 20 km of roads per day.The finance minister, in the last budget speech, had announced a target of award of 8,800 km of roads by NHAI for 2012-13. But by mid-January, only 1,000 km have been bid out. The NHAI is trying to partly fill the gap through award of some of projects under ‘engineering, procurement and construction’ (EPC) mode for about 2,000 km in the remaining 2 months of the financial year. In EPC projects, the government pays the entire cost of the project and the winning construction company does not need to take any risks.

Recently, GMR and GVK have pulled out of two high-profile PPP road projects. GMR has pulled out of Rs 7,200 crore Kishangarh-Udaipur-Ahmedabad road project and GVK has pulled out of Rs 3,000 crore Shivpuri-Dewas road project in Madhya Pradesh.

Environmental clearances

The two companies have cited issues surrounding environmental clearances as the reason for pulling out of these projects. However, as per industry insiders, the real reasons could be the inability to raise the required equity to be put in by the parent company and also difficulties in raising the debt in the project-specific SPV Company.

The financial viability of these projects has also been adversely affected as the forecasted toll collections are unlikely to materialise as the exports and GDP growth rate have declined. Many companies have also aggressively quoted for the road projects. For example, GMR Infrastructure had bagged the Kishangarh-Udaipur-Ahmedabad road project by quoting an aggressive premium of Rs 636 crore. The viability of these projects was also affected because of escalating input costs: the costs of key raw materials have risen dramatically in the past one-and-a-half years.
Aggregate and metal costs have increased due to various restrictions imposed by the Supreme Court and the state governments on quarrying. Bitumen costs have increased due to increase in the international prices of crude and sharp depreciation in rupee. Cement manufacturers have also jacked up the cement prices substantially.
The PPP model in road sector will survive, only if the following steps are taken:

* The developers need to sell off their operational road projects where toll or annuity collections have started. This will deleverage their balance sheets.

* NHAI should discourage the unhealthy trend of aggressive bidding, by restricting the number of bidders eligible to quote depending on the size of project.

* The developers (infrastructure companies) need to generate positive cash flows in their operations, instead of profits being locked in ever ballooning debtors & work in progress. Then only, they will be capable of easily accessing the private equity (PE) investors or capital markets for raising the fresh capital required for the new projects.

* Many banks have reached the sectorial caps for infrastructure financing. Such lenders need to re-finance some of their project funding through IIFCL or securitise the cash flows in the operational projects.

* The major hurdles in project execution like land acquisition, removal of hindrances and forest and environmental clearances need to be attended to expeditiously by the concerned agencies, so that the project cost does not escalate due to such time delays.

Price escalation clauses need to be incorporated in the bids to take care of input cost increases. And finally, road projects which are not financially viable on toll collection basis, needs to be awarded either on annuity basis or EPC basis by the NHAI.

(The author has worked as CFO in infrastructure companies)