Easy exit for road developers ahead

November 5, 2012

To tide over the lull in the highway sector — development of which has slowed down considerably this fiscal — the road ministry is considering a proposal to allow developers to exit immediately after its completion. This is expected to help developers free up equity locked up in completed projects.

Presently, developers who have taken up highway projects on built-operate-transfer (BOT) mode after 2009, are allowed to exit a project two years after its completion. For projects awarded before 2009, developers do not have an exit option.

“We are moving a cabinet note in this regard,” said road secretary AK Upadhyay.

Once a developer exits the project, the ministry proposes to transfer equity and ownership of the project to new players.

As against 7,957 km of projects awarded in 2011-12, till September this year, the National Highways Authority of India (NHAI) has managed to award a little over a 600-km- stretch of highway projects. Developers are citing non-availability of equity to invest in fresh projects.

“Many of them have committed their available equity for ongoing projects and are finding it difficult to raise fresh resources,” said a NHAI official.

In August, RP Singh, the NHAI chairman, had also written to the road secretary to liberalise the policy for equity dilution in completed projects.

Apart from helping reduce the loan liability of developers and allowing them to invest in new projects, the proposal, if approved, will also open up the sector to many foreign as well as domestic investors interested in taking up the operation and maintenance of completed highway projects, according to M Murali, director general, National Highway Builders Federation.

source: http://www.hindustantimes.com

Written by ITW Editor · Filed Under Highway, NHAI

Contractors line up for govt-funded projects

October 29, 2012

NEW DELHI: Highway contractors, who have been facing financial crunch, have lined up for road projects to be built with 100% government funding. In the past two weeks, at least 50-60 companies for each such project on engineering-procurement-construction (EPC) mode have applied for pre-qualification to bid for these works.

Initially, National Highways Authority of India (NHAI) has identified eight such projects in Rajasthan and the second set of such works in Uttar Pradesh would be out soon. “All types of road construction companies including the big ones like L&T, GMR and Gammon have applied for pre-qualification. We expect good response when financial bidding starts,” a senior NHAI official said. All the eight projects in Rajasthan are in the range of Rs 200 crore to Rs 500 crore. Officials said projects have been designed in a manner where contractors won’t get more than 10% profit in executing these works.

Industry insiders said that response for such projects is much more since companies don’t need to raise loans from banks.The risk of EPC projects is with the government. “You will get back the entire amount. All responsibilities of clearances are with government. There is no need to invest from your pocket whereas in the build-operate-transfer (BOT) projects, getting loan has become difficult,” a private contractor said.

Source: http://timesofindia.indiatimes.com

Written by ITW Editor · Filed Under BOT, Highway, NHAI

Highway contractors line up for government funded projects

October 22, 2012

NEW DELHI: Highway contractors, who have been facing a financial crunch, have lined up for road projects to be built with 100% government funding. In the past two weeks, at least 50-60 companies for each such project on engineering-procurement-construction (EPC) have applied for pre-qualification to bid for these works.

All the eight projects in Rajasthan are in the range of Rs 200 crore to Rs 500 crore. Officials said the projects have been designed in a manner where contractors won’t get more than 10% profit in executing these works.

Industry insiders said that response for such projects is much more since companies don’t need to raise loans from banks. Moreover, the risk of EPC projects is with the government. “You will get back the entire amount. All responsibilities of clearances are with government. There is no need to invest from your pocket whereas in the build-operate-transfer (BOT) projects, getting loan has become difficult,” a private contractor said.

National Highways Builders Federation ( NHBF) secretary general M Murali said EPC projects will get more takers since financing BOT projects has become difficult. “In the past couple of years, interest rate has increased from 8.5% to 15%. Banks have become stringent. Moreover, how can you get at least Rs 2.1 lakh crore finance that you need to execute 7,500 km highways work for three continuous years,” he added.

NHAI officials feel contractors in the BOT segment will come for good projects. In fact, after almost a six-month lull, NHAI received two bids for a BOT-Toll project last week. The four-laning of 154 km Salasar-Haryana border project costing Rs 601 crore was cleared by the Cabinet last week. NHAI officials said while the government had set 33% viability gap funding (VGF) for this project, one of the bidders quoted 27% VGF. GR Infra and Galfar Infrastructure are the two bidders for this project.

“EPC is certainly less risky for contractors. Medium and small players, who were earlier sub-contractors, would take more projects. But we feel the big players will eye viable BOT projects since greater risk can bring more revenue,” a highway ministry official said.

Source: http://timesofindia.indiatimes.com/

Written by ITW Editor · Filed Under NHAI

Govt may miss road award target

October 15, 2012

NEW DELHI: Private highway developers, who are struggling to get finances for projects, are likely to impact government’s target of awarding 9,500 km during this fiscal. With only 600-odd km road stretches awarded during the first half of the financial year, now even senior National Highways Authority of India (NHAI) officials are conceding that they can award not more than 5,000 km till March, 2013.

At least 23 road projects awarded last year have missed their timeline to tie up funds. NHAI gives six months to contractors to get funds from banks and financial institutions for all build, operate and transfer (BOT) projects.

Source: http://timesofindia.indiatimes.com

Written by ITW Editor · Filed Under NHAI

Infrastructure companies going slow on highway projects

September 13, 2012

Faced with a tough business environment, infrastructure and construction companies are treading cautiously on tollways and build, operate and transfer mode (BOT) PPP projects of the National Highway Authority of India (NHAI).

They now prefer the engineering, procurement and construction (EPC) mode projects .

IVRCL on Monday indicated that it has decided to take a holiday from bidding for BOT projects to focus on EPC. This is not an isolated case; most infrastructure companies are in a pause mode re-strategising looking at EPC projects.

Interaction with leading infra sector firms shows that they are all faced with difficulties of high interest costs, challenges of achieving financial closure, as banks and lenders have hit sectoral cap, and have been demanding more equity in a market where equity is hard to come by.

M. Gautham Reddy, Executive Director of Ramky Infra, said the number of projects that have come up for participation are less and companies have become extra cautious, given the market conditions. They are looking at the opportunity to take up EPC mode projects where NHAI will pump in funds.

The Chief Financial Officer of Madhucon Projects, S. Vaikuntanathan, said most companies enjoy being EPC contractors, but NHAI wanted BOT projects, forcing developers to take to them.

“Developers are facing difficulties in meeting the equity requirements for BOT projects as equity markets have dried up and foreign investors are wary to come in. Most developers want to exit, making it a tough situation,” Vaikuntanathan said.

Madhucon has nine road projects with four being operational, three under development, and two close to financial closure.

T. Adi Babu, Chief Operating Officer, Finance, Lanco Infratech, said with lenders demanding higher equity participation up from 25 to even 40 per cent, difficulties in securing right of way and local implementation issues, are all creating problems for developers.

AGGRESSIVE BIDDING

“The aggressive bidding in the past by some companies is also taking a toll. All projects are not like the Gurgaon highway,” he felt.

R. Balarami Reddy, Executive Director Finance, said the traffic projections are often high and this causes unexpected expectation from developers. This is also one of the reason why NHAI needs to look at PPP mode projects closely and restructure contracts.

An independent regulator would help.

[email protected]

SOURCE: http://www.thehindubusinessline.com

Written by ITW Editor · Filed Under BOT, Highway, Infrastructure, News, NHAI

More road projects via EPC on cards

August 28, 2012

In a bid to provide much-needed impetus to the fund-starved highways sector, the road transport ministry is looking at increasing road projects to be awarded through Engineering Procurement Contract (EPC).

For the current fiscal, the target is to award around 4,000 km of road projects.

“We have to meet our target of awarding 9,500 km of road projects during the current fiscal. If the projects do not find takers on the public-private partnership (PPP) mode, we may award them on EPC, as funding them is not a problem for us,” said a top road transport ministry official, who did not want to be identified.

The official further said that there is a fund crunch for road projects in the market, as the banks have exhausted their quota for loans for road projects.

“Lot of companies, who got projects last year, are also in the process of achieving financial closure and may not be interested in our projects on offer on PPP mode,” he added.

Two PPP modes on which the projects are awarded, include Build, Operate and Transfer (BOT)-toll and BOT-annuity.

The third mode is EPC, where the project is funded by the government and the road developer is obligated to build the highway within the stipulated time.

Currently, the road transport ministry and the National Highways Authority of India (NHAI) have to achieve an award target of 9,500 km of road projects as set by the PMO.

NHAI, however, feels that awarding projects on EPC will take time and awarding projects in time, and not money, may become a problem.

SOURCE: http://www.indianexpress.comn

Written by ITW Editor · Filed Under News, NHAI

Speedier exits for highway developers in offing

August 13, 2012

There is good news for highway developers such as L&T, Reliance and GMR with the National Highways Authority of India (NHAI) formulating a plan to speed up the exit of contractors, who take up projects under the build-operate-transfer (BOT) route.

The move follows a virtual standstill in the award of new contracts as developers are strained for equity and are unable to raise fresh resources to take up new road stretches. Apart from a weak equity markets preventing public offers, such as those by IL&FS Transportation Networks a few years ago, even private equity funding has dried up in recent months because of the global economic environment and the resultant slowdown in India.

Since 2009, the rules allow developers to exit two years after a project is completed. Developers of around a 100 projects, which run into thousands of crores, do not have this option for projects bagged before 2009.

The new plan is to permit exit immediately after construction is completed in all BOT projects, helping developers unlock value from these projects where cash flow has begun. Last month, the NHAI board decided to amend the rules but a final decision will be taken by an inter-ministerial group.

NHAI feels once they are also allowed to 100% divestment of their stake in the already completed projects, these companies will have more equity available with them. As they exit from the project, firms of similar net worth specializing in operation and maintenance would take over the project for rest of the concession period.

Officials said several international majors such as Macquarie and Morgan Stanley have evinced interest in running projects after taking them over from the developer. In addition, NHAI has sounded out Indian banks to scout for other potential investors, although the sale needs to be approved by the highway authority. The developers are, of course, cheering the move. “Why should companies be made to stick to a project for 15-20 years when they can take up new projects? Allowing them to exit from completed projects will improve investment scenario,” O B Raju, managing director (highways) of GMR said.

Raising the concern of private equity drying up, Singh in his letter has said shares of many highway developer companies those case out with IPOs four-five years back are going to the market at “steep discounts.”

SOURCE: http://timesofindia.indiatimes.com

Written by ITW Editor · Filed Under GMR, Larsen & Toubro Ltd. (L&T), News, NHAI, Reliance

NHAI to award nearly 55 projects on BOT basis in FY13

June 7, 2012

The National Highways Authority of India (NHAI) cancelled two projects awarded last year because they couldn’t achieve financial closure. In an interview to CNBC-TV18 AK Upadhyay, chairman, NHAI said these projects would be now put up for fresh bidding.

“In the history of last three years starting from 2009 out of 147 projects awarded these are only 2 which have failed to achieve financial closure. So, I would say that the market is mixed,” he added. He don’t see further cancellation of projects due to funding issues.

Meanwhile, NHAI has set a target of awarding 9,500 kilometers of road projects in FY13. Out of which about 3,000 kilometers would be awarded on engineering procurement and construction (EPC) basis. Around 5,000-6,000 kilometers (50-55 projects) of the total will be awarded on build -operate-transfer (BOT) toll or BOT annuity basis.

Below is the edited transcript of Upadhyay’s interview with CNBC-TV18. Also watch the accompanying videos.(http://www.moneycontrol.com/video/business/nhai-to-award-nearly-55-projectsbot-basisfy13_714645.html?utm_source=Article_Vid)

Q: The market is quite concerned about the fact that two projects you awarded last year have been cancelled because they couldn’t achieve financial closure. What exactly happened and is this now up for a fresh bid or have they been passed onto the L2 bidders?

A: They have to be put up for fresh bids. But to look at it in the perspective, in the history of last three years starting from 2009 out of 147 projects awarded these are only 2 which have failed to achieve financial closure. Now let us look at another picture. Three projects were seen to be very aggressive last year, one was Ahmadabad-Udaipur-Kishangarh, it had a premium of Rs 636 crore and it was for GMR. That project has achieved financial closure in time.

The Ahmadabad Vadodara which had Rs 309 crore premium also achieved financial closure. The Pali-Beawar-Pindwara which had Rs 251 crore premium also achieved financial closure for L&T. So, all these three mega projects which were seen as very aggressive last year and all the big companies have achieved financial closure.

Two projects which we awarded first in this current fiscal have also gone on a very high premium. So, I would say that the market is mixed. For the two projects which failed to achieve financial closure, I would say that for one case it was their internal problem. I would say one case has failed and that’s not such a bad situation, because at the same time we are also getting big projects getting financial closure.

Q: Who were the two companies that were involved with these two projects that have now faced cancellation and what kind of premiums and size of projects were we talking about?

A: I won’t like to take names. You already mentioned they are two projects. Let’s leave at that. We hope that there should be no problem because we are also having a dialogue with the bankers and concessioners in general, we are brainstorming and looking at what are the generic problems across the sector. As of now we don’t see a matter of concern.

Q: You had set out a target of 8,800 kilometers for FY13 in terms of road projects and the Prime Minister revised this target upwards. In your sense how doable do you think this target is of 9,500 kilometers for FY13 and the bigger problem has been follow through or implementation of these. On that account how easy do you think it will be for both financial closure and for implementation of these projects?

A: Let me mention two or three points. One is that out of these 9,500 kilometers, a fairly good number would be also EPC (Engineering Procurement and Construction) now. Last year all the 62 projects taken together of ministry of about 8,000 kilometers were PPP projects, but necessarily as we award the better projects we would have some stretches which may not be viable on BOT toll. So, we are expecting that about 3,000 kilometers out of this target would be EPC, cash funded projects.

That doesn’t depend on the financial closure or the lenders or the investment. So that is government funded and we are well funded for that. So take out 3,000 kilometers. We are talking about essentially 6,000 on BOT toll. When the PM revised the targets upwards we also got an assurance and confer that as we go along in case we face any difficulties and there will be intervention from the highest level to resolve those difficulties. We saw that last year and we are all aware that last year our very impressive achievement was also in account for the support from the topmost level including PMO.

SOURCE: http://www.moneycontrol.com

Written by ITW Editor · Filed Under BOT, NHAI

Road runners are back in business

June 4, 2012

As highways worth Rs 60,000 cr flounder, L&T, Reliance Infra look at parallel opportunities

Aggressive bids for NHAI road projects may have forced major developers such as Reliance Infra and Larsen & Toubro (L&T) to the sidelines, but the latter are now having the last laugh. The tables have turned full circle after a drought of two to three years as the big developers are being approached by several project winners to sell their stakes as smaller firms find raising adequate equity in a volatile market and bank loans in a worsening NPA scenario, tough to come by, said company officials, analysts and bankers that Financial Chronicle spoke to.Lalit Jalan, chief executive officer at Reliance Infrastructure said, the competitive intensity in the road sector picked up in the past few years hence they decided to stay away from fresh bids. “We are looking at around 20 secondary assets since we decided not to bid for fresh projects at negative margins. The secondary assets we are looking at are those where developers are finding it difficult to complete the project as they have not been able to complete financial closure due to weak market conditions or where toll collections are not in line with their bullish estimates,” said Jalan. “The situation is so bad that there could even be distress sales by these firms,” he added. However, he declined to divulge the names of the projects they were buying out before posting them on the stock exchanges.

K Venkatesh, senior vice-president of L&T BOT projects said, lots of projects have come to L&T for sale, but the company looks at only those assets that can increase their current overall internal rate of return of high double digits. “We have bid for most of these projects and lost, so we know all the technicalities. Hence, it is not difficult to find the right valuation or the rate of return. We take the projects which interests us,” said Venkatesh.

Abhinav Bhandari, infrastructure analyst with Elara Capital said, “Around 80-100 projects would be up for sale or part stake sale in the current financial year. The value of these projects, at an average project cost of Rs 700-800 crore, would be around Rs 60,000 crore. This is almost same as what NHAI allocates in a year. It’s like a parallel system that has come up in the road sector.”

Hyderabad-based infrastructure company GMR that won a mega highway project from NHAI, said they might also look at selective secondary projects. But the rate of return on operational projects is not very high. “People are playing a waiting game as to how long they can sustain the won project.

The developers who have bid aggressively don’t really lose much. At most they will lose the retention money, which is around one per cent of the project cost, and one year of black listing,” the GMR official said.

Investment bankers that Financial Chronicle spoke to cited various reasons forcing developers to exit these projects. Many bids were driven by the desire to build their order books and puff up top lines rather than with an eye on profit margins.

“In many cases the margins built in were hardly 5-10 per cent. Any sensible bidder would look at a margin of 15-20 per cent,” said an investment banker with SBI Caps.

Unfortunately for several of the winners, banks have also become very rigorous in stress testing projects and critically analysing estimates given by companies on toll collection as well as the capital expenditure. “The banks are appointing their own consultants and evaluating on their own, before sanctioning loans for BOT projects,” said an SBI Caps official. In BOT projects, as opposed to straight RPC contracts, the project risk too is borne by the developer.

Some of the companies that won road projects in the past three to four years were IVRCL, Madhucon, Gayatri Projects, Nagarjuna Constructions, Soma Developers, Patel Engineering, Navayuga, Lanco and Essel Infra.

While IVRCL faced a potential takeover bid from the Essel group, several others are facing varying degrees of financial stress and need to improve cash flows to service outstanding debt. Sale of projects may be a step in this direction, said industry experts.

SOURCE:http://www.mydigitalfc.com

Written by ITW Editor · Filed Under Larsen & Toubro Ltd. (L&T), NHAI, Reliance

Road-building companies, hit by crushing competition at home, should explore greener pastures abroad

June 2, 2012

Ask a foreigner about his perception of Indian roads, and chances are he will tell you they are bumpy, littered with potholes and don’t allow for a smooth ride. Same is likely to be the plight of companies that make them: they are in for a bumpy ride, and perhaps driving towards a dead end.

At the turn of this century, roads was one of the most attractive sectors: National Highways Authority of India (NHAI) was building the golden quadrilateral and the national corridors spanning more than 14,000 km, competition was modest and returns were attractive. Alas, the sector has lost its sheen: intense competition, abysmally-low return expectations, over-reliance on NHAI as the primary client are some of the challenges plaguing the players.

Intense competition is perhaps the sector’s biggest bane. From 2007 to 2011, the average number of players shortlisted per bid have increased from six to 30, bids are being won at abysmally-low return expectations – often below cost of capital – and numerous frustrated players haven’t won a single bid from the dozen-odd they have participated in the last 1-2 years. Sector veterans are bidding ‘irrationally’ to defend their turf, new entrants are bidding low to build their order books and credentials and smaller companies flush with private equity funds are bidding aggressively to deploy their funds – and in this game, NHAI seems to have benefited the most.

On a present-value basis, while NHAI had estimated an expenditure of Rs 661 crore towards grants for projects awarded since April 2011, actual bids should provide it with receipt of Rs 15,371 crore from successful bidders. If you ask winners, they will all give you good reasons for their bids; but they do need to ask if they are in for a winner’s curse. And their private equity investors should ask if they will recover their investments if their investee companies continue to win bids at these rates.

Another bane plaguing the sector continues to be excess dependence on NHAI as the primary client. Poor NHAI target achievement remains a key issue with only 40% of project award target being realised in the last two years. Economic slowdown, land acquisition issues and senior management vacancies have led to significant delays in NHAI awards. A reduction in new NHAI project awards will further increase competitive pressure to win projects.

Other construction sectors are facing similar issues with increasing competition for a shrinking pie. Environmental issues, lack of next-generation reforms and more restrictive regulations like land acquisition and mining Bill will further reduce the opportunity in other construction sectors.

In this situation, what should Mr Roads Magnate, who has built a Rs 2,000-crore empire, do? If he wants to grow his revenues by 30% per annum, he needs to build an order book of ~ Rs 30,000 crore in the next five years – a tall task given the above challenges. He has three options: (a) stay put and wait for sanity to return to the sector, (b) enter other infrastructure sectors in India, or (c) build roads in more attractive global markets. Option 1 suffers from uncertainty around the length of the winter that has set upon roads and the construction sector in general. While consolidation opportunities may arise, ‘wait-and-watch’ may not be the most prudent strategy to meet the organisation’s growth objectives. While option 2 is interesting, does there exist a ‘virgin’ infrastructure sector that offers attractive returns, low competition and a relatively certain policy environment? It is unlikely that Mr Roads Magnate will be able to find one; perhaps he could take a cue from Warren Buffett, “Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” The next vessel could be Africa.

SOURCE : http://economictimes.indiatimes.com

Written by ITW Editor · Filed Under NHAI

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