New exit norms good for viable projects: Gammon Infra

The Cabinet Committee on Economic Affair's (CCEA's) recent approval of allowing concessionaire to exit in ongoing and completed projects without punitive measures will certainly expedite road projects, say experts. Previously, concessionaires had lock-in of three years in a project.

A concessionaire is a person or firm that operates a business within the premises belonging to another (the grantor) under a concession. An and this case, it could be infra companies which have taken up government's highway projects.

While welcoming the CCEA's directive on new exit norms, Parag Parikh, ED and CFO, Gammon Infra told CNBC-TV18 that the concessionaire can divest equity in totality and walk out of the ongoing or completed projects which are viable. But, these norms may not be applicable in projects which are fundamentally not viable.

Also read: CCEA nod on roads sets off debate on PPP model

Below is the verbatim transcript of his interview to CNBC-TV18

Q: There have been two instances of GMR and GVK moving out. Under current circumstances do you think you will even find a replacement?

A: Let me take you back to where this whole thing has emerged. The original concession in a very restricted capacity was permitting exits of developers. This was in a manner where the leading developer who has bid for the project had to necessarily hold more than 51 percent in the special purpose vehicle (SPV).

This is the project company created for this concession at least upto a period of three years, post the commissioning of the project. Post that in the original concessions he had to necessarily own 26 percent during the tenure of the concession. So, in a manner the original bidder or developer could never exit out of the project.

Then the second leash of life where the concessions got slightly amended to permit the exits post three years of commissioning completely. At all points of time, there have been a lot of representations that once the project is commissioned, one need not wait at all. Therefore, the possibility of exits could be evaluated.

What the CCEA has done right now has made a good move from two perspectives. One is that it has permitted a complete exit at any stage. For example, permits exit as long as the appointed date is announced. This appointed date becomes very important because this is the date where there are certain pre-developmental activities and obligations. These are required to be completed by both the financial closure from the perspective of developer. Also in terms of the right-off way land acquisition and the necessary environment forest clearances with the National Highway Authorities of India (NHAI).

Once these activities are completed what we come to is a stage that we call it as an appointed date. The start of the construction or the concession period starts from there. The current process the way it is getting permitted is once the appointed date is announced, which means the necessary obligations of the original bidder. Developer in turn who has created the SPV as well as NHAI has completed its set of activities.

Q: Will the stuck projects have any benefits?

A: As I said there are two things to it. I am clarifying the same thing that what is getting permitted is the concessionaire. Therefore there is no change of concession permitted. I think we all will need to recognize that this is a public tendered process. Once there is a public tendered process with many parties bidding for it. A guy who substitutes the original concessionaire certainly there are challenges in permitting renegotiation of the concession just for that purpose.

However, what is getting permitted is essentially two-fold. One is that it permits in a manner a churn for developers. A developer can bid for a project, develop it, bring it to a stage of ideally commissioning. I say commissioning because that is the time when there is a higher possibility in both in terms of other investors, developers wanting to take over the project.

Secondly, as you have seen that the process the way they permitted today is more like a substitution process of the lenders. A lender would not permit an ongoing developer on one side to exit. Projects, which are not viable will be very difficult for a lender even to find the taker. So, from that perspective, this is not addressing the fact that if there is not a project which is viable, will it find any takers? Certainly not.

However, I think what it does is projects which have faced some challenges, let us call it that the project has not taken up because of the fact that the developer has not been able to perform its activities and obligations. That is one. Second is, it has performed its obligations and as an ongoing process, every developer would like to bid for new projects.

Therefore there is a need to raise money and capital. So, ideally a project, which is post commissioning and therefore all the developer implementation risks are taken out, it is a very clear possibility that the more financial sort of investor could step in and the lenders could take a view that look the project is completed. It is commissioned and it is servicing its necessary cash flows and debt obligations.

Therefore, why not permit substitution in a manner that the original concessionaire gets that capital to be raised for churning and pumping into newer projects.

So, the whole idea is not to address the projects, which are fundamentally not viable. I do not think there is any solution for that, but for projects which are doing well. In spite of that one is not able to exit either due to with the existing concession guidelines or as I said just a mode of vehicle to raise capital for future.

Q: How many such projects are there which are financially viable but are stuck for a whole host of other reasons? Can the substitution get affected in FY14 or is it such a long drawn procedure that the ultimate benefit is going to be much later two-three years down the line?

A: In terms of the process of substitution, I think it is a matter of a procedure of how quickly the lenders firstly give their consent accepting the substitution opportunities are open for all projects.

All projects mean all commissioned projects which have been completed. If that gets permitted, there are many viable opportunities, which are doing well. Therefore certainly it could find takers.

Q: Particularly for Gammon Infra are there any projects in which you are an existing developer in which you would seek to sell or and additionally are there any in which way you would look to buy out someone else’s project?

A: Certainly so. We have a few existing projects which are commissioned. To things like valuation and the capital that is raised clearly some of these projects are attractive. It will have investors wanting to look at projects and finally we will take a view based on valuations.