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Stuck At The Tollgate

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Today there are more road developers looking to get out of road projects than those wanting to get in,” says Abhijit Bhaumik, director at Delhi-based Opus Advisory. Not surprising when you consider that so many road projects are floundering for want of money. Projects to build nearly 4,500 km of roads are unlikely to get started because of cash constraints (see Road Not Travelled). The amount needed for these projects is Rs 40,000 crore and developers are finding it hard to raise the finances. The extent of the trouble the roads sector is grappling with has been brought into focus by a recent list compiled by the National Highways Authority of India (NHAI). That’s a remarkable deterioration in conditions since the time when infrastructure companies were queueing up and making outrageous bids to bag projects and the NHAI was looking at a rosy balance sheet for years to come. 

The first company to sound the alarm was GMR, which announced the termination of the Rs 5,400-crore Kishangarh-Udaipur-Ahmedabad highway project that it had bagged earlier. To go back a little, in September 2011, when GMR won the 555-km highway-widening project for an annual premium of Rs 636 crore, rival companies had groused that GMR had overbid and that the project economics did not make sense. The Bangalore-based group, however, was confident.

But in December 2012, GMR — despite having achieved financial closure — served a notice on NHAI, announcing its intention to terminate the project. It said that it had been delayed for too long due to lack of clearances.

But few are willing to buy GMR’s story especially since another big infrastructure company is citing almost exactly the same reasons for exiting another high-profile project. The project for four-laning of the 332-km Shivpuri-Dewas stretch in Madhya Pradesh was won by the Hyderabad-based GVK group for Rs 4,000 crore. Within weeks of GMR’s announcement of termination, GVK also served notice.

Rivals say the problem was that the two companies had bid too aggressively. They point out that the second and third bidders had been far more conservative in their bids. That may be so, but there is no denying the fact that the business environment, too, has undergone a sea change.

There are a dozen other developers who are trying to figure out how to achieve financial closure before they can start building roads. For the NHAI, this is a nightmare because putting these incomplete roads for rebidding would actually increase costs. “If we have to put these projects up for re-bidding, the cost will go up by another Rs 4,000-5,000 crore. Therefore, we are keen that companies financially close these projects at the earliest,” says a senior NHAI official, requesting anonymity. He adds that while some of these projects will achieve financial closure in the next few months, there is the distinct possibility that a few developers may walk out of the projects, and that NHAI may be forced to invite fresh bids for these stretches.

Where’s The Money?
One reason why companies cannot find funds is the reluctance of banks to lend. Banks have become wary after many infrastructure companies failed to service loans. Several companies have now asked banks to restructure their debt. Says a GMR spokesperson: “A number of banks are not keen to finance toll-based projects due to the risk perception in the current economic scenario. Moreover, some developers are finding it difficult to meet upfront equity requirements or are unable to raise equity.”

But why were infrastructure companies unable to meet debt repayments? The biggest reason is that traffic projections were often unrealistic. An analysis by the National Highways Builders Federation shows that traffic fell short of estimates by over 20 per cent during January-December 2010. During May-August 2011, the shortfall was as high as 60 per cent. “Clearly, there has been lower growth due to a gap between what the bidders were counting on and what the actual traffic was,” says M. Murali, director general of the federation.

Another view is that the traffic estimates of the aggressive bidders were optimistic to start with. This is evident from the difference between the highest and the No. 2 and 3 bids — at least in one of the projects, the winner had projected a traffic double that of the No. 2 bidder.

Opus Advisory’s Bhaumik says that over Rs 3 lakh crore of debt has been restructured by banks, but even then there is a chance of a large portion of this debt turning into non-performing assets (NPA). This is a matter of concern since 18.5 per cent of bank lending to infrastructure is directed towards the roads sector.

Some relief — both for banks and borrowing companies — came when the Reserve Bank of India (RBI) announced on 22 March that debts of infrastructure projects that were being implemented under the private-public partnership (PPP) model and had model concession agreements would now be treated as secured lending. This is expected to ease some of the banks’ concerns on NPAs and make lending to road companies more attractive, thus, giving infrastructure financing a much-needed boost.

Old Habits
The relief, however, will end up being temporary if infrastructure companies do not change the way they channelise their funds. According to industry experts, road and highway companies do what the real estate sector in India is famous for doing: diverting funds from one project to another, and then finding that they don’t have the finances to complete the first project.

“How it works is that the company bags one project, sets up a special purpose vehicle for it, manages to get some debt funding and withdraws some of that money to use as equity component for another project. That’s why we fear that many of the projects that are under way may not be completed or at least not completed on time,” says a roads ministry official.

If what he says is true, the government and the NHAI will be saddled with a host of incomplete projects, many of which may have to be put up for re-bidding at huge cost to the exchequer. The road ahead seems bumpier than usual. 


(This story was published in BW | Businessworld Issue Dated 06-05-2013)