NHAI sees drastic drop in bids for road projects

May 28, 2012

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The NHAI, responsible for managing a network of highways in India, is expecting the number of pre-qualified bidders for road projects to drop drastically this fiscal as the sector heads for a consolidation phase.

Last year, 99 firms had qualified for the annual pre-qualification process which ensures that companies can submit financial bids instead of going through the two-stage bidding process.

“The market is somewhat indifferent. A couple of companies have defaulted on their financial closures recently. The number of companies may come down but fewer players will emerge stronger,” said a senior official of NHAI, who thinks the time is ripe for a shake-up.

Abhaya Agarwal, executive director and leader PPP, at Ernst and Young, says the current year may see a limited number of projects being put up for award than in the past because fewer detailed project reports (DPRs) got completed.

The official also said a lot of projects might find it extremely difficult to achieve financial closure. “Newer players are coming in and bidding without measuring risks. Some banks are of the view that total project cost calculated is not being subjected to the scrutiny that should be done. We may see bigger companies buying out projects from smaller companies at lower valuation,” said the NHAI official.

Agarwal also said tightening of the liquidity situation has made financing of future projects difficult as banks have exhausted their infrastructure fund and are close to reaching their exposure limit for road funding.

“In addition, financial closure for more than 70% of the NHAI projects is yet to be achieved, the concession agreements for which were signed last year and would require huge funding. Hence, in terms of loan disbursement to the infrastructure sector, we may not see the same rate of expansion in the next two years as we have seen in the past two,” added Agarwal.

Companies like Reliance Infrastructure and IRB Infrastructure, which have a chunk of their order book in the road sector, view this phase as a challenging one.

“Consolidation is due in the sector as roads industry today is fragmented with around 90 players. There are players who have entered with a view to increase order book and are finding it difficult to manage construction challenge. Traffic revenue in projects, which have been bid aggressively, will find it difficult to honour commitments to NHAI premium and debt servicing,” said a Reliance Infrastructure spokesperson.

“The bids have been very aggressive and banks have found it difficult to fund these projects. Financial closures have been made based on over-optimistic revenue models. Yes, the proverbial bubble is ready to burst,” said Virendra Mhaiskar, managing director of IRB Infrasructure Developers Ltd, one of the largest road developers in the country.

Mhaiskar feels that consolidation has already begun with IRB taking over a BOT asset in Tamil Nadu and Essel making an attempt to take over a major player like IVRCL. According to Fitch’s report, the actual first year traffic is usually lower by around 45% in many toll projects.

SOURCE:http://economictimes.indiatimes.com/