Total FY16 spend on roads will be Rs 1 lk cr: Road secy

NHAI also intends to spend Rs 72,000 crore this fiscal versus Rs 23,000 crore in FY15. It has already spent Rs 17,000 crore till now in this fiscal year.

There are three models of awarding road projects in India: Build Operate and Transfer (BOT) – Toll, BOT – Annuity, and Engineering Procurement and Construction (EPC).

As far as the BOT - Toll projects are concerned, VD Mhaiskar, CMD, IRB Infra, sees good growth in terms of volume. He says revenues are now coming from increase in volumes and not tariffs due to low inflation. He expects tariffs to remain muted during this phase of deflation and low crude oil prices.

Below is the transcript of Vijay Chibber, Satish Chandra and VD Mhaiskar's interview with CNBC-TV18's Latha Venkatesh, Sonia Shenoy and Guest Editor Aditya Narain

Aditya: We have seen a lot of emphasis from the government in terms of the road segment. Targets have been high, expectations have been high but in terms of numbers there is still a certain amount of wait and watch in terms of roads that have got constructed, roads that have effectively been tendered out. So, it would be great if you could give us some sense of some of the activity that is going on in the ministry and how you see this entire road push actually playing out over the medium to long term?

Chibber: The numbers speak for themselves. Last year we had awarded about 8,000 kilometres of roads and that itself was a fairly substantive number. This year we have set out to award about 10,000 kilometres of road and up to July we have already awarded a little over 3,100 kilometres. So, the numbers really speak for themselves.

The grand strategy really is that we award at least 10,000 to 12,000 kilometres every year going forward and therefore the outputs in terms of completed roads would be 10,000 to 12,000 kilometres of completed roads with a lag of two and half to three years because that is typically what it takes to build a road stretch.

The second part would be the total infusion of money into the economy through the road sector. Last year this was around Rs 55,000 crore and this year we anticipate that the total spend both public and private would be little in excess of Rs 1 lakh crore and this momentum would get even further developed as we go into the next fiscal.

So, broadly road sector is back on a roll and it is going to play a meaningful role in getting the economy back on its feet.

Latha: I was asking whether you all are giving more concessions to existing players who have won road contracts. You allowed them to bring their premiums a little later, you deferred it. What concessions are you planning for prospective bidders?

Chibber: Actually quite a few policy initiatives have been introduced already and some more are on the anvil. What you are referring to was rescheduling of the premium that is payable to government, that has been not only approved but now it has been put into play and quite a few projects have benefitted on that account. In this architecture what is payable to the government is deferred and to that extent really it adds a little comfort to the lenders so that they can pull out their money at an earlier stage. So, this policy is through.

The second policy initiative was equity exit, this relates to the projects awarded before 2009. In the MCAs before 2009 a part of the equity was locked in for the life of the project. We have now brought these projects at par with the post 2009 MCA which allows equity exit after two years from completion. So, to that extent there could be a bigger churn in the equity that is already into the existing roads.

We are also looking at further tweaking in terms of infusion of one time infusion of money by National Highways Authority of India (NHAI) has been permitted for the Build-Operate-Transfer (BOT) projects. This of course would be subject to the existing lenders having comfort with this arrangements. We are also seeking currently a mandate from CCA that this one time infusion could also be permitted for annuity projects because annuity would become payable to these projects once they are completed and there is relative comfort that we can recover our money which is pumped into these semi constructed projects.

In addition we are also looking at few further policy initiatives whereby we compensate the builders for any delays that have occurred on account of the authorities namely if there is a delay in land acquisition and that has resulted in delay in the project we should find a way to compensate the builders.

So, these policy initiatives are finding traction and we are hopeful that the languishing projects, about 73 languishing projects we would be able to get them around either by rebidding them or by getting them back on to their feet.

Sonia: For this magnitude of ordering that you mentioned about 10,000 kilometres in FY16, a large chunk of land needs to be acquired and you just spoke about the land acquisitions issues that National Authority of India (NHAI) has been suffering with for a long time, have any of these land acquisition hurdles been cleared? And if you can give us any indication of how much land has been acquired so far?

Chibber: The land acquisition bill that is the 2013 bill, the act, that act itself has actually provided the stimulus for increased land acquisition by making the compensations far more lucrative than they were in the past. So, we believe that notwithstanding the difficulties that exist because of the consultation process and the rehabilitation aspects of the act, the fact that a substantial step-up in the compensation, in the monetary compensation is provided for under the new act. This itself should help us get the land acquisition process fast-tracked.

Aditya: If I might add one more which is in terms of the push to engineering, procurement and construction (EPC) contracts vis-a-vis the public-private partnership (PPP) model that had been followed previously, and I believe that a lot of the newer contracts have been on an EPC kind of format. How do you look at it from an economics perspective to start with and from a longer term perspective? Do you see a transition back to the PPP model given that at the end of the day to the exchequer that is what probably works best if it functions well?

Chibber: There are two ways of looking at this. Firstly, the roads have to be built. So, really it does not matter what mode of delivery you adopt. But, where we went wrong in the past was to insist that the Build, Operate, Transfer (BOT) toll would be the default mode. And only when that default mode does not perform would we shift then to the annuity and then on to the EPC in a waterfall mechanism.

I think this was a philosophically wrong approach. What we are now adopting is a more practical approach where we actually analyse each project as a standalone activity and then see whether it would be best to build this through a BOT toll or an annuity or a EPC mode. So, there is not sort of straitjacketed kind of structure. It is a case-to-case kind of analysis. Last year, yes it is a fact that we had gone heavily on EPC. Out of the 8,000 odd kilometres awarded, hardly 650 kilometres were awarded on BOT toll. But this year I can see the beginnings of a turnaround. In fact in the first three months, we awarded about 800 kilometres, little in excess of 800 kilometres in BOT toll.

So, really the sense I am getting is that BOT toll is going to continue to play an important, is going to continue to be part of the portfolio. I think the markets will respond better if we bring the projects after due preparation and after getting all regulatory clearances. And that is really the key going forward. And that is also probably the reason or the main reason why some of the projects were in distress over the last two or three years.

Latha: Can you tell us what are the main contours of the new model concession agreement?

Chandra: Like hybrid annuity?

Latha: Yes. Any other?

Chandra: Hybrid annuity, we proposed to award about 700 kilometres by November-December in the current year. And as per this model, basically 40 percent of the cost will be contributed by NHAI during the construction period and remaining 60 percent would be paid to the party during the remaining 10 years through annuities. And tolling would be done by NHAI. So, the concession is totally risk free. The entire risk is taken by the authority.

Sonia: Mr Chibber just spoke about the BOT toll revenues. For you as well, in the quarter gone by, most of your large projects have seen double digit growth and you have seen very strong BOT toll revenues. What is the future for IRB Infra in terms of growth? Do you think this growth that you have reported in the quarters gone by can sustain?

Mhaiskar: For the growth prospects we see very good growth in the volume to continue. What has happened is really the sector and the particular tariff model has a hedge in itself and when you have a very high inflation, your growth usually falters and vice-versa. So, we today are seeing a negative wholesale price index (WPI) and a double digit volume growth. So, typically, what it ends happening is the revenues that one would have projected in the range of 10-12 percent revenue growth, the mix of that is now changed. It is more coming from the volume rather than increase in the tariff because the tariff today is not going to go up because of a kind of a deflation that we have seen. So, the project being in highly economic zones certainly has helped to keep the volume growth going.

And after the last one year’s euphoria in terms of the turnaround and the volume story picking up we will be now on a very high volume base and sustaining that will really be the challenge going forward. And for that the project geographies will play a very big role because tariff is not going to help much this year. Although if crude comes back and if inflation picks up next year, we do not know how it will look, but at least for a reasonable time to come, we see the tariff to remain muted and the growth to contribute to the revenues.

Aditya: One of the questions I had was as Mr Chibber mentioned the fact that there is much more ordering and tendering that has effectively happened. From your perspective as a participant what is your sense in terms of the ground reality. Are you seeing business effectively come through, are you seeing projects which are much more comprehensive in the way they are put out and are you seeing amongst your peer set and your competitors an element of competitive bidding or at least enthusiasm that had drifted away in the recent years?

Mhaiskar: I would like to totally compliment road secretary and NHAI for a host of reforms that they have really taken and worked hard on in the last one year which has really helped the sector to come back and as he rightly said we are again back driving at a better pace than what we were a couple of years back and these whole hosts of reforms that they have done whether it was deferment of premium, whether there was bringing back the mix of BOT and EPC both kind of projects enabling developers to pick up BOT while the EPC contractors could go back to EPC or it was on the land front phenomenal work has been done by the government and I am quite sure that over the period of next two years we are going to see phenomenal growth in the road sector. A whole host of things are happening on the ground and we are very clearly seeing the fruits of that.

Latha: You have done only 3,000 out of the proposed 10,000 kilometres and we are already almost five months into the financial year. What is the break up, how much in the next quarter for instance this September quarter itself will you put out some bids, December quarter or March quarter, what is the break up?

Chibber: No, it is not that if the target is 10,000 for the year that every month you shall get an X. Projects are planned and then we make the grand plan of 10,000 kilometres depending upon the planning that has gone on in the previous two years. So, firstly this figure of 3,100 kilometres is for the first four months, it is not for the first five months. If you want the figures as on date it will be about 4,000 kilometres that have been awarded.

So we are bang on target, we are quite confident that we shall achieve the award target. A lot of hard work and preparatory work has gone into this. The road construction activity actually typically picks up more in the second half of the year. So, you would get a sense of where we are actually sometime around December or January.

Latha: Actually as Aditya was also saying it all depends on how much the government spends and very often there are unspent amounts at the end of the financial year. What is your sense, how much will NHAI spend this year and how will you compare it to last year?

Chandra: Last year we spent about Rs 23,000 crore and this year our budget is for Rs 72,000 crore.

Latha: How much have you already spent?

Chandra: So far we have spent about Rs 17,000 crore.