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.
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.
Q: Last time you were telling us that bids have not been coming in very aggressively for many of these road projects. Can you throw some more light on that and tell us which are the companies that are finding it difficult to raise funds and perhaps not bidding that aggressively?
A: For the top companies I don’t see any problem. The top companies are still bidding. L&T, GMR, IRB, HCC have bid very good projects this year. The first project on high premium went to HCC and this was the Narmada Bridge on NH8 and the premium was Rs 222 crore. For Walajapet Poonamallee the premium was Rs 162 crore. So we have this example also.
In this current fiscal as recent as last month we have two more projects one is on a very small premium and the other is on grant. We are having a mixed kind of situation and the reason is not so much inherent problems with the sector, but the kind of roads which are available now.
Q: Of the tranches that come up in the second half how many toll based projects will NHAI be putting bids out for?
A: To give you a very ballpark figure, out of 9,000 if we take about 3,000-4,000 as EPC contracts, remaining 5,000-6,000 if we take the average size of 100 kilometers we are talking about 50-55 projects on BOT toll or BOT annuity and remaining on EPC.
Q: Can you give us a timeline in terms of how soon you would have decided on these two bids, on who the fresh bidders will be and some details on the size exactly of these bids?
A: These projects are about 130 kilometers. The other is also about that size and once those bids are withdrawn, those LOAs are cancelled we would put out afresh. It will be our e-tendering, open bidding, so we don’t know who will be the bidders. But we are very sure that one project which is six laning I don’t see any inherent reason why it shouldn’t be very profitable.
As you are aware six laning projects are intrinsically very, very viable, because from the day one you start getting toll. My impression is that that project the party could not achieve financial closure because of their own internal problems. I am sure of that that project would again go on good premium.
Q: Because of this do you think overall the competitive intensity has reduced compared to what it was the last time around and like you were mentioning established players are doing well, do you think that these established players will get a higher IRR on many of these projects henceforth?
A: The market will even out in the long run. If the bids are very aggressive there will be auto correction. As I mentioned for the competitive projects, we have had bids like 19 qualified bidders made bids. We also have one or two cases where we are getting single or two bids.
So that’s the part of the business. The bids which are of single bid or two bids or not as per our petition we have a process of taking to the board and making a judgment whether it’s worthwhile or not. Therefore some cases would go to the board for approval. But that’s the part of the normal industry practice.