Hoping stalled projects will revive on policy tweaks: NHAI

The year 2012-13 was one of the most challenging years in terms of awarding of projects, says National Highways Authority of India (NHAI) chairman RP Singh.

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The original target of awarding 8,800 km was increased to 9,500 km by PMO mid-year; the target was lowered to 8,500 km and then to 5,000 km. However, NHAI ended up awarding 1,000-1,100 km. The poor performance was on a high base and construction per day was down from 16 km per day to approx 10-12 km per day.

Singh says award of projects is a market-driven phenomenon, adding that the NHAI is now looking to award projects only on EPC basis versus BoT as most developers do not want to bid for the latter due to funding constraints.

Banks are holding their funds towards the roads sector until assured of design and traffic growth details. NHAI believes the Indian road sector needs to get private equity players, along with other ways to pay premium. "We do not see NHAI taking up too many cash contract projects," he told CNBC-TV18 in an interview.

However, in a major relief to the road development sector, the Supreme Court on March 12, 2013 ruled in favour of the NHAI by delinking the environment clearance (EC) and the forest clearance (FC). Now, the contracting companies do not have to wait for the FC and can commence the construction work once the EC is received. This will allow projects to get completed faster, Singh believes.

The work on 20 stalled highway projects worth Rs 27,000 crore, which were stuck for a long time for want of EC, would be executed soon after the clearance from the Ministry of Environment and Forests (MoEF) and the projects are set to get back on track.

Meanwhile, the government has asked banks to ease funding for the road projects and consider toll revenues as tangible assets. The finance ministry has proposed RBI to treat loans to the roads project as secured. NHAI says if government's proposals are implemented, credit flows to the fund-starved sector could grow by at least 20-25 percent. The road ministry has been making a lot of representations to the Finmin lately to discuss sector issues.

On GMR exiting Rs 7,700 crore Ahmedabad- Kishangarh highway project, and GVK exiting the Shivpuri-Dewas Expressway in MP, Singh says NHAI is working out details to back-end premiums for GMR and GVK projects. "The companies exited the high profile projects as they turned unviable for them," he says. GMR, however, had indicated fresh interest in the project if the premium terms are tweaked.

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Below is the verbatim transcript of RP Singh's interview on CNBC-TV18

Q: 2012-2013 was not a great year for you. You started the year by saying you could do close to 9,000 kilometers. You have ended the year just by commissioning more than 1,000-1,100 kilometers. Is 2013 going to be vastly better?

A: As far as awards are concerned, they are market driven. So we had a bad year for the award, no doubt. But as far as the construction is concerned, we ended up with the highest construction in the history of NHAI. Last year we built 2,844 kilometers of road which is higher than the highest ever then, by nearly 200 kilometers.

With regards to awards, the market sentiment was very bad. Due to a downturn in the economy, there is lack of equity in the market. Last two years, projects were stuck up because of the environmental clearances. All those constraints further heightened the fear of the bankers and there was general aversion to give financial closure for all these projects. So, award of projects will depend upon the market. We will have to think of the mode of delivery that needs to be adopted in future.

For construction, you must compliment the NHAI that in spite of all the problems that we faced, lack of availability of aggregates, lack of funding by the banks, we were able to complete the highest ever target. We had a target of 3,000 kilometers put together with a ministry, both of us put together have almost reached the target that has already started but maybe it is not as large as I would have liked.

Q: How are conditions as you assess them at the start of 2014 fiscal? Is this year going to be better in terms of awards or you don’t have the confidence to project like you did at the start of 2012 - 8,000-9,000 kilometres of awards?

A: After what happened in the last three-four months, with the kind of mood prevalent today, I don’t think we will get much response in build operate transfer (BOT) contracts. Basis problem is the lack of equity in the market. There is general aversion on the part of the concessional to take the traffic risk, if the economy comes down, GDP growth comes down from 9 percent to 4 percent, viability of the project comes down accordingly.

Last two years saw very aggressive bidding in the projects. Many of the projects promised, recommended huge premiums, today, finding equity itself is getting difficult. I don’t think they will be in a position to find resources for raising equity as well as paying upfront premium, we will have to make certain policy changes, then only BOT can be revived. If it is the case of cash contracts, we will do very well.

We have a number of projects on the shelf and the construction will go on, there is no problem. But BOT contract that has been the mainstay in last three-four years will take up only when we make basic policy changes. The environment that has been mainly resolved now, the linkage that the environment ministry was insisting between the forest clearance and the environment clearance, no longer exists.

The Supreme Court has clarified that the Lafarge judgement will not apply to linear projects. The environment clearance has become much easier because the forest rights act will not be made applicable to the roadside plantations that was being done till recently. RBI has been able to declare the loans to infrastructure projects especially to road sector projects, BOT projects which were based on toll. Earlier, they were treated as unsecured loans. Recently, they have agreed with our request and this loan is going to be treated now as a secured loan. This will free the bank’s caps and based on that their appetite to lend will increase. We were able to resolve these issues in the last few months.

We have to create conditions where the private equity funds come in a big way into road sector. Private equity funds are averse to taking construction risk and the construction risk, only the contractor turned constructors will take. Unfortunately, these entities have got very limited resource availability. If we allow them to sell equity immediately after commercial operations date (COD), they can churn their equity and they can take up new projects.

There are private equity (PE) funds, other big construction companies who are not willing to take up the construction risk today but who are willing to buy projects with assured cash flows. So if we allow this kind of transition, there will be on guard new vertical developing, companies that will take up the operations and maintenance (O&M) activity. If we allow this to happen, then the equity will be free to the market and you will see a sudden activity taking place in this field.

Q: There are still a lot of clearances particularly at the state level that need to be addressed and may make awards difficult once again. Do you agree with their fears that this by itself may not be the big change that you were talking about?

A: Environment clearance should no longer be an issue. In the last two months, the kind of clarification issued by the environmental ministry should take care of all the concerns as far as environment clearance is concerned. The forest clearance will now not hold back the environmental clearance and environment clearance process will become much easier. This is because the earlier application of the Forest Right Act (FRA) under which each gram sabha has to agree for even where we have to cut the roadside plantation, so that kind of impediment has been now removed.

The forest clearance can wait, we can do the forest portion later. Other than the forest portion, the environment clearance will be given and we can start the work. With this kind of clarifications, the situation has undergone a sea change. So, environment will not be a major issue for linear projects at all. There are major issues of financing and equity availability.

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Q: If you think BOT projects will not revive anytime soon even in fiscal year 2014, through engineering, procurement and construction (EPC) route, how much can you award and get executed?

A: Cash contract, there is a constraint. It depends upon the availability of budgetary sources. I do not think we can take up too many projects under the cash contract, plus those projects that are basically viable under the BOT, it is not prudent to go for cash contracts there as well. There, our capacity to build roads will certainly get reduced.

We will like to revive the BOT to the extent possible. The RBI has now agreed to treat the lending to the sector as secured and that will make a big difference. The rate of interest should come down. The requirements of provisioning for the banks will come down. Hopefully, if there is a cut of 1 percent rate of interest, it will make a big difference to the viability of the projects.

There is an aversion to take profit risks in a downturn economy, we can address by maybe restructuring the nature or the type of the project where the whole traffic risk is not passed on to the concessioner and are working on that kind of thing.

The biggest constraint in this is the availability of equity. Even projects, where we have given the environmental clearances that have been ordered earlier in the last two years to restart those projects, if they are premium projects, we have to find a way of back-ending the premium because it will be very difficult for the concessioner to find resources for equity as well as upfront premium. So, if we make some basic policy changes, all those projects can see the light of the day.

Q: If BOT still remains in a difficult place because of many issues, will NHAI not be able to award more than 2,500-3000 kilometres of roads even in FY14?

A: We will do that in the shape of cash contract itself. There will be two lane projects where the cost of construction will be limited to around Rs 3.50 crore per kilometre. For bigger projects, we will like to revive with BOT mode. It is not very difficult in case we make some basic changes after a consensus. There are one or two departments that are not agreeing. There is some reluctance on the part of the planning commission. If we are able to move your capital note, get this permission to transfer equity in the earlier projects also and if the churning of equity takes place, the market can be revived.

Q: Give us one word on projects where large companies like GMR Infrastructure are exiting? What is the NHAI’s approach towards projects like the Ahmedabad-Kishangarh-Shivpuri project?

A: They were able to find an excuse in the environmental clearance that has now been incidentally obtained, but the basic reason why they exited was because the projects became unviable.

The growth that they were expecting in the traffic has not taken place because of the downturn in the economy. The bids were very aggressive. We are trying to find a way without any interference with the basic structure of the contract, whether it is possible to revive this project.

After discussion, they have given a proposal to backend the premium without disturbing the net present value (NPV) of the premium. After the repayment of the loan which is about 12th year and 13th year, there is enough meat left in the concession. The concession period in the case of GMR Infrastructure is going to be twenty-six years. So 14 years, there is going to be enough meat in the project after repaying the whole loan.

If we can backend the premium in such a way that we take reduced amount in the initial few years and subsequently increase the amount. For example, we have worked out instead of Rs 32,000 crore premium over a period of 26 years, if they pay a premium of around Rs 60,000 crore, but back-ended to a great extent, without disturbing the NPV, it is possible to justify this as a public policy. If he can agree for this kind of a thing, most of these projects can be revived.

We can request the other project, the GVK Power & Infrastructure also if they can come back on the table and we make this kind of offer. I am hopeful that all the premium projects, there are 27-28 premium projects, which have been awarded in the last two years and they may see the light of the day.

Q: Are you about to make such an offer?

A: We have discussed with them, made a proposal, gone to our board in the case of GMR Infrastructure, taken a resolution on the board. We have already sent a proposal to the government, it is about a week and we are hoping for some positive decision from the government.

Q: By when are you hoping for some positive decision by the government?

A: As soon as possible. If you want decision, you must take one quickly, because if there is too much delay, it will become more difficult to revive these projects. The viability depends if you take the decisions fast and quick enough.