Potholes make drive on this stretch nightmarish
November 14, 2013
Prakash Samaga, TNN |
Vinayak Chatterjee: Highway premia revisited
November 14, 2013
The recent restructuring exercise of road contracts demonstrates India’s adaptability but a road regulator – not a committee – is needed
On October 8, 2013, the Union Cabinet gave an “in-principle” approval to a one-time premium restructuring package for a slew of premium-based road contracts that had become “stressed” on various counts. The government subsequently constituted a committee under C Rangarajan, chairman of Prime Minister’s Economic Advisory Council (PMEAC), to detail out the eligibility conditions and terms of the scheme. The committee empanelled five members, and is expected to come up with its recommendation in December. The five members of the committee are ministry of road transport & highways (MoRTH) Secretary Vijay Chibber, Planning Commission Secretary Sindhushree Khullar, PMEAC Secretary Alok Sheel,
National Highway Authority of India (NHAI) Chairman R P Singh and Expenditure Secretary R S Gujral. A representative from the private sector, an independent business leader, would have been a useful addition considering it is a public-private partnership (PPP) matter.
The “in-principle” Cabinet approval was welcomed by all the concerned developer groups, many of whom are currently incapable of supporting their projects in their existing form. This is because of their own financially stressed positions, unexpectedly low traffic, delays in sovereign deliverables, and in some cases – aggressive and irrational bidding. The relief package involves back-ending the scheduled premium payments in the initial years when traffic is lower, growth drivers indeterminate, and capital requirements and debt servicing at their peak. This relief in the initial years is to be compensated by higher premia in subsequent years, so that the net present value (NPV) of the promised cash flows to NHAI remain protected.
The opposition to the scheme is primarily on the issue of moral hazard and the adverse impact that any such ex-post accommodation mechanism has on the sanctity of bidding processes.
Although one cannot obviously question the imperative to avoid such events in the future, for now at least, practical considerations point towards going ahead with the reset for the following seven reasons:
(1) Renegotiations need to be understood, accepted and imbibed as an integral part of PPP processes, especially at the early stage of their evolution. An overview of more than 1,000 PPP concessions studied by the World Bank Institute in Latin America and Caribbean from 1985-2000 throw up these characteristics of PPP renegotiations:
- 41.5 per cent have undergone renegotiations.
- Out of the total concessions in transport infrastructure sector, 55 per cent of the concessions underwent renegotiations.
- 85 per cent of renegotiations occurred within four years of concession awards and 60 per cent occurred within three years.
- Renegotiations occurred mostly in concessions awarded through competitive bidding.
So, renegotiating a PPP project is by itself not taboo.
(2) It is clear in hindsight that the magnitude of risks and the ability of different stakeholders to manage them had not been adequately assessed. The private sector has shown through its overaggressive traffic estimation, high-debt leveraging and exuberant bidding that it often lacks management maturity, as well as risk assessment and forecasting skills. NHAI has also conclusively demonstrated its inability to eliminate outlying bids, procure sovereign clearances, perform timely land acquisition and clear due processes in clearly defined and accountable time frames. The need for contract renegotiations becomes inevitable till such shortcomings are addressed.
(3) From NHAI’s point of view, the high premiums accruing to it, even after the reset, would no way compare to the expected low or vanishing premia if the projects were to be put up for rebidding in the current adverse investment mood and environment. NHAI is estimated to receive more than Rs 1.51 lakh crore over the next 20 years from developers in return for awarding projects. If the projects were to be rebid, it is not unlikely that over-cautious developers could consider a 30 to 40 per cent decline in traffic projections that could effectively wipe out any premium, or even bring the bidding to a request for viability grant.
(4) Rebidding will inevitably lead to huge delays in getting these projects off the ground, and would mean further increases in project costs. It would adversely affect all downstream benefits of gross domestic product growth, job creation, spur to the construction sector, capital-goods sector order-book accretion and a required resurgence of the investment sentiment, particularly PPP sentiment.
(5) The NPV-neutrality, as a public-policy paradigm, passes the test of transparency and fairness. It legitimises the eligibility of the highest bidder to continue. GMR, for example, under the back-ended schedule, is believed to have to pay up in Rs 59,000 to 65,000 crore over its 26-year period as against Rs 32,000 crore originally.
(6) Annulling of the previous bids will send serious negative signals to domestic and global investors.
(7) Unlike the recently allowed compensatory tariff dispensation by the Central Electricity Regulatory Commission (CERC) for imported coal-based ultra mega power projects, there is no alteration in user charges (toll) as part of the restructuring.
At an office discussion led by Rajeev Bhatnagar and Debal Mitra of the Highways Division, the following views were offered on some contentious points:
(i) Coverage and eligibility: The road ministry is considering the bailout of only 23 projects but the developer community has opined that the package should be made available to all affected premium-based projects (estimated at 40 plus in number) as similar financial impediments would be faced by most, if not all. A parameter-based “stress” ranking should determine nature and grades of relief to be considered.
(ii) Discounting rate: The 12 per cent discounting rate proposed by the Cabinet seems harsh, to the point of being unacceptable, considering it had approved a rate of 9.75 per cent for the spectrum fee deferrals by telecom operators last year. Besides, the rate is based on existing interest rate levels as benchmarks that are at the high end, whereas for a typical concession period of two decades or more, one should consider mirroring through-the-cycle interest rates. Burdening the already leveraged projects with higher discounting rates would defeat the purpose of the bailout. A 10 per cent discounting rate appears fair.
(iii) Penalty: The Cabinet has also proposed levying an exemplary penalty of up to 0.5 per cent of project cost, if the default is attributed to the developer. This is conceptually acceptable both as a penalty and as a deterrent.
(iv) Bank guarantee: There is a view that developers furnish a bank guarantee to the extent of the maximum difference between the earlier and current premium. Since the original concession agreement did not impose the submission of any bank guarantee for the premium, bank guarantees for the incremental amount seem illogical.
(v) Premium re-scheduling: Developers have demanded a moratorium of 6 to 8 years, while the Planning Commission has proposed a set percentage of premium gaps being backloaded every year. Given that the specifics of each project are different, the most appropriate stance will be to leave it to NHAI to decide the optimal schedule bilaterally with the developer.
(vi) Empower NHAI after committee decision: Once the Rangarajan Committee has conveyed the format, NHAI should be fully empowered to settle with concessionaires. Kicking the settlement can once again between the PMO, law, finance, Planning Commission, MoRTH et al should be clearly avoided.
(vii) Road regulator: As I have stridently argued in an earlier Infratalk (Road regulator needed by yesterday, July 3) having an empowered and credible road regulator would have allowed the system to effect a solution much earlier rather than this practice of creating ad-hoc committees for every problem that surfaces.
In conclusion, this highway premium restructuring exercise, along with the recent imported-coal price pass-through decision by CERC, is demonstrating India’s ability to gradually come to grips with PPP renegotiations as an inevitable process issue.
Council in limbo, citizens fume over bad roads
November 13, 2013
Stanley Pinto, TNN |
Physician Dr Kakkilaya wonders why there were elections to the city corporation at all. “It has been eight months and we are yet to get a mayor and the local body governing. It is indeed surprising that the political party, now at the helm both at the state government and at the city corporation, has not taken any interest in resolving the issue, apparently arising out of bickering within its own ranks,” says the physician. Without mayor, all development and even maintenance works within the city seem to have been stalled.
The Tulunadu Rakshana Vedike on Monday took out a protest demanding immediate repairs and asphalt to the Kulshekar-Shakthi Nagar road.
Arun Kumar, president of the vedike, observes that many vehicles have met with accidents. Vehicles hitting pedestrians or going off the road while avoiding potholes are common.
Dr Kakkilaya notes in the absence of an approved budget for an entire year, it is impossible to know the flow of money into and out of the corporation’s coffers. “The only decision that seems to have been taken, and a dubious one at that, is the re-appointment of the retired health officer, who was under suspension for some time during his last tenure. If that is any pointer, then nothing much can be expected, even if a new mayor were to take office in the near future,” he adds.
Neil Rodrigues, senior project manager at Infosys, also chairman of Mangalore Round Table, points out that Kodialguth East road is in a deplorable condition. “With no proper garbage clearance system in place, residents have converted an empty plot into a dumping yard,” Neil said.
But in some cases, the corporators seem to respond despite not being inducted into council officially.
Ruchir Agarwal of Shivbagh says things were in a bad shape with weeds growing all over. “Corporator Sabitha responded to my call promptly and started the work of grass cutting which is almost complete as of now,” he says. However, he notes that there is garbage dumped indiscriminately on road sides by some people which needs to be cleared up.
Larsen & Toubro to develop Odisha road for Rs.1,293 crore
November 13, 2013
Press Trust of India |
“L&T IDPL has been awarded a contract by the government of Odisha for developing a road project estimated at a total cost of Rs.1,293 crore,” it said.
The road project issued by the Odisha Works Department, will be built under the public-private-partnership model. L&T IDPL had bid for a grant of Rs. 465.30 crore for four-laning the Sambalpur-Rourkela section of the state highway.
“The stretch extends for 161.73 km and has been offered for a concession period of 22 years, including construction period of three years. This will be L&T IDPL’s first road project in Odisha to be executed on a BOT basis,” it said.
The concession agreement for the project was signed between Sambalpur Rourkela Tollways Ltd, a special purpose vehicle formed for the project by L&T IDPL and the Government of Odisha.
“Currently, the road has two lanes and has to be widened to four lanes along with other facilities such as flyovers, underpasses, bridges, bus bays, rest areas and service roads,” L&T IDPL said.
L&T IDPL will be entitled to collect appropriate tolls after the completion of construction, based on a pre- determined toll policy issued by the state government.
MC Road widening to be delayed further
November 12, 2013
Jisha Surya, TNN |
THIRUVANANTHAPURAM: Widening of Chengannur-Ettumanoor-Muvattupuzha stretch of Main Central Road under the second phase of the Kerala State Transport Project (KSTP) is likely to get delayed as the state government is still pressing World Bank to accept the lowest bidder, which is falling short in meeting the qualifying criteria. The government file containing a set of correspondences between the World Bank country office and the KSTP office, accessed by TOI under the Right To Information Act, revealed that the tug of war between the bank and the project office over the tender process is still continuing.World Bank, which funds the second phase of the KSTP, had refused to give NOC to Chennai-based NAPC Ltd, the lowest bidder for the 47-km Chengannur-Ettumannur road and 40.96-km Ettumannur-Muvattupuzha road widening project. According to it, the bidder has fallen short in meeting the qualifying criteria of production rate of Gabion wall. Gabion wall is the retaining wall made of stacked stone-filled steel wire cages to abate erosion. Compared to concrete retaining walls, Gabions are environment-friendly and long-lasting.
As per World Bank guidelines, the bidders must have constructed Gabion retaining wall of 7,200 cubic metres. NAPC has a shortfall of 15% in the individual package evaluation and 35% in combined evaluation. Since World Bank refused to give NOC the steering committee led by chief secretary has decided to suggest three options. In a letter dated October 4 the bank expressed willingness to accept the third option which is to give the second lowest bidder Essar the first stretch and NAPC the second. However, the government is still pushing for the first option. In reply to the letter sent by the chief secretary it has been stated that the government preferred to consider NAPC for both stretches.
PWD minister V K Ebrahim Kunju said that if one stretch is awarded to the second lowest bidder, it will result in excess cost of Rs11.45 crore. Also, there is a chance that the lowest bidder may go for litigation, which might delay the project, he added.
For the Rs242.65-crore project of the first stretch from Chengannur-Ettumannur, NAPC has quoted Rs 233.94 crore and Essar Sacyr Rs 245.39 crore. For the Ettumannur-Muvattupuzha stretch of Rs166.75 crore, NAPC quoted Rs171.49 crore and Essar Sacyr Rs 204.70 crore.
Meanwhile, the state government argues that Gabion wall construction is an insignificant work and most bidders do sub-contracting of the work. It also asked World Bank to consider experience of Vince Group, parent company of NAPC, in Gabion wall construction for the qualifying criteria.
Mohali-Patiala road to be four-laned
November 11, 2013
Vibhor Mohan, TNN |
A large number of regular commuters between Patiala and Chandigarh have begun using the Sirhind-Patiala road link due to relatively lesser traffic and better road. The route is particularly used by those coming to PGI or Panjab University as they get a direct link to these institutes.
A Punjab government official said Punjab Infrastructure Development Board is working on widening of the SAS Nagar – Landhran – Chunni -Sirhind – Patiala road link and request for proposal for preparing the detailed project report has already been invited by the board.
Both the projects would be taken up by raising loans from the World Bank and in public-private partnership. For this, commuters will have to pay at toll plazas to be set up on the basis of surveys conducted by consultants.
The proposed upgradation of the state highway will include construction of bus bays and bus shelters and truck lay byes located near check-barriers, places of conventional stops of the truck operators. Pedestrian and cattle crossing by way of unnderpass/overpass will be provided on the basis of traffic count assessment.
The existing national highway is single lane and prone to accidents as the road is not just narrow, it has no road dividers and railing is missing at most places on narrow bridges on water bodies.
On the Zirakpur-Patiala stretch, toll plaza will be set up at one point between Zirakpur and Rajpura and another between Rajpura and Patiala.
Queensland firm Global Road Technology Australia has landed a $116 million ($US110M) deal to lay its “instant highway” technology on 7,000 kilometres of road in India.
November 8, 2013
The firm, whose biggest projects to date have included infrastructure linked to resource industry development in Queensland, secured the deal with Indian construction and energy giant Triace this week.
It would see the firm’s road stabilisation technology applied on the ground through a joint venture with Indian firm Pearls Group – to be called Pearls GRT.
GRT director Ben Skinner said the technology was expected to create a road network that would transform regional Maharashtra – India’s third largest state.
“Our partnership with Pearls and the signing of the agreement in India demonstrates the demand for our products and their potential to provide infrastructure solutions globally for any number of industries and applications,” Mr Skinner said.
The technology would allow the construction firm to lay up to 6,000 square metres of road a day compared to traditional methods that could take up to a month per kilometre, he said. That meant rollout time from planning to finished road took a matter of days with GRT technology.
The firm expected to have a team of surveyors, geologists, civil engineers and industry consultants on the ground to assist with the project.
Among the firm’s biggest selling points was the fact that its technology was tested under some of Australia’s harshest conditions – at mining sites where haulage roads must remain open 24 hours a day to boost productivity.
The firm was already working across India, North and South America, he said, in major mining, oil and gas developments, and with government sector.
Source-http://www.couriermail.com.au
Government entices foreign developers to build roads in India ahead of general elections
November 8, 2013
Dailybhaskar.com |
New Delhi: The Ministry of Road Transport and Highways (MRTH) is to conduct road shows in foreign lands to entice companies abroad to take up road projects in India. The ‘road shows’ are to be conducted primarily in Australia and China over next few months, according to media reports.
IL&FS Transportation ties-up Rs. 3000 crore loans for road projects
November 8, 2013
Press Trust of India |
“The company was issued a Letter of Award by the National Highways Authority of India (NHAI) for development and operation of six laning of Barwa Adda Panagarh Section of NH-2…in the states of Jharkhand and West Bengal,” the company said in a filing to BSE.
“The financial tie-up of loans aggregating to Rs. 1,704.40 crore has been achieved and the loan agreements have been executed with IndusInd Bank and IL&FS Financial Services Ltd,” the company said.
The project, estimated at Rs. 2,434.86 crore, is on toll basis with a concession period of 20 years, including construction period of 910 days, the company added.
In another filing, the company said it has been awarded project by NHAI “for four laning of Khed-Sinnar Section on NH-50…in the state of Maharashtra under NHDP Phase IV on design, build, finance and operate and transfer basis.”
“The financial tie-up of loans aggregating to Rs. 1,325 crore has been achieved and loan agreements have been executed with Yes Bank Ltd,” it said.
This project, with an estimated cost of Rs. 2015.29 crore, is also on toll basis with a concession period of 20 years, it added.
Infra funds throw a lifeline at road projects
November 7, 2013
Some deals are stuck because developers are demanding high valuation, even though they are facing a liquidity crisis and banks aren’t lending to them
Merchant bankers say almost every developer is looking at doing some kind of a deal today as nearly all of them are facing a cash crunch. The National Highway Authority of India (NHAI) has bid out 240 odd projects under private-public partnership so far, entailing an investment of Rs 200,000 crore. Of these 240 projects, 80 are operational road projects and 160 are under construction. According to investment bankers, developers are looking at doing a transaction-either equity dilution or outright sale-for nearly half of these operational assets.
In the last six months, at least six large deals involving nearly Rs 6,000 crore have happened where strategic investors/funds have acquired stakes in operating road assets. Some of the big players in the segment are SBI Macquarie Infrastructure Fund, IDFC Alternatives, Piramal Enterprises and Uniquest. And many other large foreign entities are sniffing around.
Despite the slowdown and policy paralysis that has hurt India’s infrastructure sector, foreign funds-sovereign, pension and infrastructure funds-are keen to acquire projects that will earn them annuities. According to investment bankers in the know, nearly 40-45 operating road assets are up for grabs. Subahoo Chordia, head of Infrastructure and investment banking at Edelweiss Financial Services, says that most developers are in various stages of discussion to monetise their assets as their other main business is going through liquidity issues. He says: “Other than known infrastructure funds, new platforms are also coming up which are interested in acquiring road assets in India. A few pension funds from Europe and Canada too are looking for opportunities to pick up stakes in operating roads in India. The currency volatility and other macro issues have slowed the pace of deals, but a few could be announced soon which will help in attracting further investment in the sector.”Road deals
There are four or five big players in the sector who are interested in buying road assets in India which are cash positive and operational. Suresh Goyal, chief executive officer and managing director of SBI Macquarie Infrastructure Fund, says: “The roads sector is an important sector for us and we have invested about $300 million in road assets over the last nine months. This is the first time we have picked up majority stakes in two road projects as so far our investment has been through minority stakes. This is changing as promoters are now more willing to divest assets, at least in the roads sector.” Macquarie owns infrastructure assets worth $100 billion across the globe and is a nascent player in India in the infrastructure space. The fund now runs road projects and has put a team in place to look after it. Unlike private equity funds, infrastructure funds look at managing the asset through its lifetime and earn annuities in return. Other infrastructure funds are also actively looking at acquiring majority stakes in operating assets, especially roads. While buyers are willing to buy a part of a developer’s portfolio, foreign funds are not looking at stressed assets which are facing cash flow issues or are unviable. However, contractors are willing to sell controlling stakes in projects if their overall portfolio is stressed.
Valuation matters
At the same time, not all deals in the road sector are due to stress. Some developers are also getting premium valuation in the market. Satish Parakh, managing director of Ashoka Buildcon, which has raised Rs 700 crore from SBI Macquarie Infrastructure Fund, believes the sector holds promise for investors as only 2 per cent of India’s highways are national highways and plenty of work needs to be done on the existing roadways. He says: “The sector will see a revival as serious investors who have a portfolio of assets globally are looking at India. However, players with viable experience in execution will score. We formed a holding company with seven road projects (six national highways and one state highway), and of this six are tolling. Macquarie has given us a premium valuation for the 34 per cent stake picked up in the holding company.”
However, not all projects are going for a premium, even if they are not being sold below book value (cost of building the asset). Developers are still not climbing down from their expectations, which is why a number of deals are stuck, but many of them could materialise soon. MK Sinha, CEO of IDFC Alternatives, which has also acquired a couple of road projects, does not think that deals are happening below book value. Also, merchant bankers say that since these are operating assets, they are valued on the basis of the cash flow they generate and not on the cost incurred in building the asset.
Valuations of road projects are also being driven by their viability. The road sector projects can largely be classified into two distinct phases. Projects that are most viable were bid between 2003 and 2006. Thereafter, things went awry and overbidding became the norm by 2007. Jayesh Desai, head of investments at Piramal Enterprises, which has acquired a stake in Hyderabad-based road developer Navayuga Engineering, says: “Road projects which were bid before 2006 are viable and have an internal rate of return, or IRR, upwards of 15-16 per cent.” While things did improve marginally in 2008-2010, the “blue-sky bidding” came back into vogue with developers offering unrealistic premiums to NHAI as order inflows started drying up from 2011 onwards.
Investors are looking at consistent returns rather than high returns, explains Parakh of Ashoka Buildcon. Even though traffic growth has fallen 4-5 per cent on a year-on-year basis, investors are happy to put their money in road projects that have been tolling for three to four years. Investors believe that things are unlikely to worsen from here and once interest rates start coming down, the IRRs will inch up from 16 per cent levels to around 20 per cent. It’s the anticipation of an improvement in the macro-economic environment and possibility of a fall in interest rates that is driving these deals.
ONE FOR THE ROAD
ROAD PROJECTS WHICH HAVE SEEN INVESTOR INTEREST IN THE LAST SIX MONTHS
ASHOKA BUILDCON
Assets on the block: Seven highway projects, of which six are tolling with concessionaire period of over 20 years
Investor/Acquirer: SBI Macquarie Infrastructure
Size of deal: Rs 700 crore. The holding company with these roads gets premium equity valuation (30 per cent of project cost) of Rs 2000 crore
Deal Structure: SBI Macquarie picked up 34 per cent in a holding company with seven road projects for Rs 700 crore
NAVYUGA ENGINEERING
Assets on the block: Seven road projects in different stages of development. Company owns 100 per cent in these assets
Investor/Acquirer: Piramal Enterprises
Size of deal: Rs 530 crore is what Piramal has invested in the holding company with seven road assets
Deal Structure: Investment through convertible debentures, stake rises or falls depending on the performance of the roads
GMR JADCHERLA EXPRESSWAYS
Assets on the block: Farukhnagar-Jadcherla highway in Andhra Pradesh
Investor/Acquirer: Macquarie SBI Infrastructure Fund & SBI Macquarie Infrastructure Trust
Size of deal: Rs 206 crore
Deal Structure: Acquiring companies buy 74 per cent in the road project
GMR INFRASTRUCTURE
Assets on the block: Sells 74 per cent in its Ulundurpet highway project in Tamil Nadu stretching over 73 km
Investor/Acquirer: IDFC Alternatives
Size of deal: Rs 222 crore paid to acquire 74 per cent in the special purpose vehicle
Deal Structure: Acquisition is in a single road project that will earn annuity for the investor
IVRCL
Assets on the block: Three road projects in Tamil Nadu: Salem Tollways, Kumarapalayam Tollways and IVRCL Chengapally Tollways
Investor/Acquirer: TRIL Roads, a Tata group company
Size of deal: Rs 2,200 crore
Deal Structure: Salem and Kamarapalayam project have been tolling for the last few years and the controlling stake gives buyer annuity income.
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