NEW DELHI: A week after the government approved a bailout of the highways sector and set up a committee that will draft its details, developers told Prime Minister Manmohan Singh that the rescue plan shouldn’t end up being similar to what they described as the “flawed exit policy” that has failed to attract takers.

Last week’s decision by the government to reschedule the premium payable by developers to the National Highways Authority of India (NHAI) is aimed at giving jammed road projects a new lease of life. The decision to reschedule the premium arose out of the fact that many developers quoted a hefty premium to win orders, as competition increased between fiscal years 2012 and 2013, which led to some projects turning financially unviable.

No doubt, the decision to reschedule will not change the profile of projects overnight. Analysts’ data indicates that more than 80% of the build-operate-transfer (BOT) projects awarded in fiscals 2012 and 2013 have not started construction yet. It is now widely known that land acquisition and environmental clearances, highly leveraged balance sheets, poor cash flows on existing projects and high interest rates are key reasons for a slowdown in the roads sector.

Around 23 projects caught in a quagmire will be examined on a case-to-case basis. However, a note by Citi Research says that one of the conditions to ensure smooth payments by developers after rescheduling is that the firms should furnish bank guarantees. “Given the tightening lending standards to road projects and leveraged balance sheet of developers, it may be difficult to furnish the bank guarantee,” it says.

As has been the case during the past several quarters, the September quarter too will see earnings of most infrastructure firms including roads being weighed down by high interest and depreciation costs. A report by IDBI Capital Market Services Ltd expects companies such as Hindustan Construction Co. Ltdand IVRCL Ltd to be in the red during the September quarter. And, others such as Simplex Infrastructures Ltd, Nagarjuna Construction Co. Ltd and IRB Infrastructures Developers Ltd are likely to see a decline in earnings compared to the year-ago period. Revenue expansion is likely in some cases where execution is on track.

But analysts’ data reveals that against a normal road completion time of 48 months, most projects awarded in fiscal 2009-10 are complete to the extent of only 50-60%.

Complicating the imbroglio is the fall in order inflows, which could get worse in the near term, given that elections typically see major decisions being postponed. This would stymie revenue expansion too. This fiscal year till date, NHAI has awarded only 479km of road projects costing Rs.2,700 crore, compared to the road ministry’s target of 5,000km of both EPC and BOT projects. EPC stands for engineering, procurement and construction.

Now, the orders that have already been given can mean healthy order book for some firms, giving decent revenue visibility for the next one or two years. Among the mid-sized firms, Sadbhav Engineering Ltd and Ashok Buildcon Ltd are better off than some of their peers.

The government’s desire to give a push to infrastructure projects may result in some relief from the problems of poor order inflows and low financial viability of existing projects. But the pace leaves a lot to be desired and it may be many more quarters before actual and substantial movement is visible. For now, nothing seems to have changed for the roads sector.

“Three parties have been showing interest in the desalination plant, but numbers are yet to come from them. No agreement has been signed yet, but the process has begun,” Reddy said, answering a shareholder’s query at the company’s annual general meeting yesterday.

The Chennai desalination plant, with a capacity to purify 100 million litres of sea water everyday, was set up at an investment of Rs 600 crore in 2010.

Recently, IVRCL sold three highway projects it developed on NH-47 in Tamil Nadu to Tata Group company TRIL Roads Pvt Ltd (TRPL) in a bid to reduce debt in its books which were denting profits.

Reddy said the company’s debt would be reduced by Rs 1,100 crore, besides getting back around Rs 450 crore of its equity invested in road projects.

IVRCL has a consolidated debt of around Rs 6,100 crore as on March 31, a senior company official said.

The company suffered a Rs 102-crore loss during FY 2013 on gross turnover of Rs 3,579 crore due to high interest and finance costs pegged at Rs 348 crore during the fiscal.

“In nine months, we are hopeful of selling assets. We will not bid for any BOT projects till the interest regime is stable,” he said, about the time frame for the second round of sales.

Three road projects already sold by IVRCL include Salem toll way, Kumarapalayam toll way and IVRCL Chengapally toll way, which is being built on a build-operate-transfer (BOT) basis at a cost of Rs 2,200 crore, IVRCL said earlier.

IVRCL is also working on some more BOT road projects which will reach their final stages in six months, Reddy said.

The 155-km Indore-Jhabua road project will be ready in next six months and become operational, he said.

The company also plans to commence commercial operations of its Baramati-Phaltan road project in Maharashtra, Reddy said.

“The policy has not found many takers and we are currently revisiting the framework to resolve issues over taxation in the Special Purpose Vehicles ( SPV) executing the projects,” said Rohit Kumar Singh, joint secretary with the ministry of road transport and highways. There is confusion over whether tax holidays and other aspects of the policy would apply when the new developer comes in, he said.

Highway developers had written to the government after the policy was formalised, saying it was unclear whether tax benefits could migrate to the new entity and that capital gains tax implications could also be substantial. They had also stated that clarity was needed on whether legal consents and permits could migrate to the new entity.

The ministry also wants more flexibility in the model concession agreement (MCA) to allow the National Highways Authority of India (NHAI) board to make changes, if required.

“Currently, the MCA is a very rigid framework. Even for small changes we need to go the Cabinet which takes time and it needs to be justified on several levels. The MCA should be left to the NHAI board to decide and this includes the framework of how Public Private Partnerships (PPP) will be required to be addressed in the road sector,” Singh said while addressing a PHD chamber conference on infrastructure.

“Under the framework designed by the committee headed by Planning Commission member BK Chaturvedi, any road project will have to be tried first on the Build-Operate-Transfer (BOT) – toll model. If it does not succeed, go BOT (annuity), and if still does not succeed go to the Engineering Procurement and Construction ( EPC) model. This leaves no flexibility for new, innovative models which might be appropriate considering the field conditions,” Singh added.

Hyderabad-based infrastructure company IVRCL Limited has decided to exit from all its build, operate and transfer (BOT) projects and focus on engineering, procurement and construction (EPC) activities.

At present, the company has 11 BOT projects of which, one is water and 10 are road projects. Of the 10 road projects, three projects are under operation and three more are expected to come under operation in the next five months, while the remaining four are still in a virgin stage.

“We have invested over Rs 2,000 crore in the six road assets and this amount will come into our kitty if I exit from them. Consequently, my profitability will go up,” IVRCL chairman and managing director, E Sudhir Reddy, said.

He said the amount realised from the sale of the six assets could be utilised for the companies EPC segment which has an order book of Rs 26,000 crore at present.

The road projects of the company, which are currently under operation, are Salem Tollways (53.53 km), Kumarapalayam Tollways (48.51 km) and Jalandar Amritsar Tollways (49 km).

“We will sell these three toll projects first while the other three projects which are under construction will be offered for sale after they are completed,” Reddy said.

Though the three toll projects have been put on the block for nearly a year, he said no deal had been finalised so far. Three firms, including Tata Realty and Infrastructure, have evinced interest in the projects but “nothing had been finalised till now.”

According to Reddy, infrastructure companies that have taken up road projects on a BOT basis have failed in their traffic assumptions and anticipation of interest rate hikes and dollar fluctuations. The execution of many projects has been delayed on account of various aspects including lack of environmental and forest clearances. Consequently, “95 per cent of the contractors who had jumped into these projects have lost money.”

“If the BOT projects have to be viable, the government should increase the concession period by at least 3-10 years,” he said. At present, the concession period, depending upon the project location, ranged from 20 to 30 years.

Reddy denied reports that there was a delay in the execution of works pertaining to four/six laning of NH- 47 from Chengapalli, near Coimbatore, to Walayar on the Tamil Nadu-Kerala border due to funds shortage. “Work was slowed down because we are awaiting the state support agreement, which is part of the conditions of the contract. In the absence of such an agreement, bankers are not releasing any loans,” he said.

Source-http://www.business-standard.com