M S V Ramu
Profession – Contract Manager
Date: May 4, 2010
E-mail: msvramu@yahoo.com

Introduction: with a need a build good infrastructure and lack funds available to finance these Highway project government has undertaken to built highway on Public Private Partnership either toll based or annuity based.
The private developers who bids and undertake constructions of Highway on toll basis needs to implement a through pertinent “risk” management system with the help of the government to mitigate all the risks that come with development.

To understand the various consequence of “tolled” roads there needs to through study to undertaken which is not my purview at the moment. Hence I dwell over some of these consequences based my exposer these projects.

Toll based Highways:
The idea of “Toll based” highways was imported into India from experiences of others countries like Europe, Malaysia or North America. The model “Concession Agreement” was drafted by the Government to suit India needs.

The toll categories of roads are those wherein there are sufficient traffic which can be tolled by the Concessionaire and recoup the investment made him and also make profit. In the event there are not enough tollable traffic to recoup the investment made, it will be offered on annuity basis or with VGP (Viability gap funding) by the government.

The tolled based roads wherein the Government grants private developer specific rights to design, finance, construct operate and maintain the roads. The developer called “Concessionaire” develops covers the investment costs and carry commercial risks since he relays on operation revenue from the tolls remunerated. At the end of the concessional period the road reverted back to government at no extra charges. However if the estimated revenue does not materialize during Concession period the Concessionaire may have to negotiate the concession period (as in other countries) which is yet to happen in India as we are just starting!

In south America there is method of bidding known as “Least Present Value” wherein the winning bidder is the one who asks for “smallest Net Present Value” and period of the concession period ends when the present value of revenue equal to winning bid. This model has not been tried in India.

Risk management in “Toll based” Concession

In the present circumstances the Concessionaire undertakes risks to constructs road which is generally divides normally into three parts:

1. Certainty – decision maker know exactly the outcome
2. Uncertainty – here the decision maker does not know the risks due to non availability of any data
3. Risks – are those which can be determined by statistical terms and can be analyzed but it differs from uncertainty

In risk management all the risks are quantified and analyzed and decision taken by the Concessionaire to mitigate the same by way of disciplined approach to critical situation

Developmental risk involves “Land Acquisitions” needed for the project. This is one of the biggest risk faced by the Indian developers as most of the times project gets delayed due non-availability of Land. NHAI does not meet the contractual requirements specified in the Concession agreement thereby causing unnecessary hardship to concessionaire. This risk falls under “uncertainty” which can not be quantified

Financial Risk: Soon after award of Project, the Concessionaire needs to raise the necessary capital required for execution project

There are two major risks involved:

1. Ability to raise the finance and make financial close as required by the Concession agreement.
2. High interest rate during the currency of concession period (due to floating interest charged by lenders) – mitigation of this risk in extremely important).

Construction risks

Whether the construction undertaken by the Concessionaire himself or by other contractor there are many risk involved

1. Poor performance of the contractor
2. Different site condition which normally experience contractor many not have thought off which is problematic and end up in high cost due additional items of work to be executed.
3. High price escalation of all the inputs of construction – Example: steel pricing going through roof last year.

All above risk has to be born by the Concessionaire which needs proper approach in the initial stages itself

Operational risks

Operation risk involves mainly the following

State support agreement – needs to signed by the concerned state and they shall support the collection of tolls which important to the concessionaire. NHAI who are promoters of the project should take full responsibility in getting the agreement signed with Concessionaire as Concessionaire can not exert any pressure on the states

Toll Level: the estimated toll level uncertainty during pre-bidding stages can lead to inaccuracies in revenue estimation which the Concessionaire has based his bid. Hence this risk needs to shared by the NHAI

The traffic volume projected in financial model may not materialize as it completely depends on economic growth projected during pre-bidding stage

Any fall in traffic volume will automatically bring down the IRR value projected. Expert estimate that 10% drop in volume of traffic will result in reduction of 1-7% – 1.9% percent reduction in IRR.

Toll collection
The Concession agreement does give any standard specification for the installation of tolling equipment. This has resulted in haphazard manner the tolling equipment being installed by the different Concessionaire. This needs to change. For example a RFID card issued at New Delhi should also hold good down south. By such an arrangement the road user can travel effortlessly any ware in India.

The technology used by the Concessionaire needs to be streamlined on all India basis for all Concessionaire.

Toll fee: The price escalation of “toll/Fee” charged by the Concessionaire is based on all India WPI index. This is incorrect as in some states it may be very high. In my opinion there should be “Toll Regulator” on all India basis to regulate toll based on each state WPI or any other base model

HTMS: Here there is no comprehensive approach. For example the “variable message system” is limited to one project length only! This also needs an all India approach.

Suggestion: at the moment there are so many “Toll” based road are in operation and also on the horizon. All the toll based roads owners are “Special purposed vehicle” promoted by the concessionaire.

So why not a “over the counter” stock listing be arranged of these SPV and listed in Stock exchanges which can also traded in F&O section. I am sure this arrangement will automatically will mitigate many risks and also give scope for improvement in roads as the Concessionaire would like increase the traffic by enhancing the many amenities for road users.

Thanks for taking time for reading this articles.

Also, a large number of these projects are on Build Operate and Transfer (BOT) and annuity basis, which means the companies will have a steady flow of cash through annuity or toll. This development spells good news for investors who can make full use of this golden chance and earn high returns in the long run.

WHY NOW?

The question that may cross your mind is why now? Ever since Kamal Nath took over as the Union minister for roads and transport, the Indian road segment has taken a new turn. He created various milestones since he was given this portfolio.

The most important announcement he made was the construction of the national highway at the rate of 20 km per day to expedite the achievement of National Highway Development Programme (NHDP) targets. This is significantly higher than the current execution rate of about 6 km per day. The ministry has also been working towards faster clearances related to procedures, land acquisitions and other formalities.

CREATION OF FUNDING

Kamal Nath is aware of the fact that improved road network in the country would not just lead to better connectivity but would also lead to increased energy efficiency in transport operations. He also travelled across different countries on road shows to international investors to highlight opportunities and potential in the Indian road sector.

Through these measures, the government has and will be able to rope in huge investments needed for the sector from international and national long-term investors.

Earlier it was difficult to raise money for more than five years or so as money was available only for a short period. However, now that the corporate debt market is developing, long-term investors like pension funds, mutual fund houses, insurance companies and even banks are coming forward to provide long-term capital. Most road projects, particularly the BOT ones need huge long-term investments in the form of debt and equity to fund them.

INCREASING VIABILITY

In terms of the less viable projects, the government increased the viability gap funding (VGF) or grant to 40% from 25%. Formerly, the grant used to be given after the completion of the project. But now it is handed over at the beginning of the project. In this manner the construction of the project does not get delayed for want of funds.

The government is also working on creating innovative ways of structuring non-viable projects like allotment of land, which can be monetized by developers so that the returns on investments are reasonable.

Other aspects like increasing the role of private players through public private partnership (PPP) and awarding of projects on BOT basis would mean that private players now have a bigger role to play in the construction of viable road projects.

A LONG WAY TO GO

India currently has about 33 lakh km of road network spread across the country. This is the third largest network in the world. But, in terms of density and quality of roads, India still lags behind many developed and developing countries of the world.

In relation to our population, the country’s roads are about 3 km per 1,000 persons, which is significantly lower than the world average of about 7 km per person. In terms of quality, about 80% of our roads are in a poor condition and require huge investments for repair, renovation and increase in the number of lines.

Majority of India’s roads are single line in spite of increasing traffic and congestion. Even the conditions of our existing roads are so bad that India’s logistical cost as a percentage of total production cost is considered to be about twice the world average of 7%.

No wonder due to the poor road infrastructure, India is ranked 87th in the world on the basis of quality of roads, which is very low and considered to be the biggest hindrance for economic growth as envisaged by the government for the coming years.

Surprisingly, within this vast network of roads, only about 2% is accounted for by national highways and a very minuscule part is accounted for by express highways, which is very critical considering that about 40% of the total road traffic is handled by national highways.

The slow transportation of goods has also affected the movement of goods among states, delaying exports and imports of the country. Especially, in the case of transportation of perishable goods like milk, vegetables and flowers among other things, which are procured from the hinterland takes so much time that they become stale or get destroyed before they can actually reach the end consumer and the export market.

This leads to wastage of goods due to the delay in reaching the markets. Express road connectivity to the main ports of the country and to major cities is very important to improve trade volumes and discover better prices for farm goods.

WHAT IS CHANGING?

The government has realized the importance of better roads in the country so that it can support the growth of the economy in the coming years. Roads are critical for any economy, especially a growing economy like India with a large population and different topographies.

The role of roads is of paramount importance for commercial and economic activities in the country. In India, passenger traffic is growing at about 12% per annum, while cargo traffic is growing over 15%, which will continue to rise as economic activities improve along with the increase in foreign trade.

India’s foreign trade is growing at 10-12 % and there is an immediate need to connect all the major ports of the country. The government has taken the first step in this direction. Under the NHDP (phase II), the government will connect major ports and build freight corridors, which will connect many states from the eastern part of India to western India.

In phase III of the NHDP, all major capitals will be connected with highways. Also major cities and points that could not be connected in phase II will be connected with better road infrastructure. Besides, plans are afoot to improve and connect rural India to major cities of the country soon.

EASING HURDLES

Most of these plans are not just on paper. In fact the government has already awarded projects to achieve this goal. The government formed the BK Chaturvedi Committee, which presented its findings and suggestions to make progress in the sector.

Based on the findings of the committee report, several changes have been incorporated and more importantly, the government is seriously working on the recommendations, which are quite innovative and provide solutions to various problems that the companies have been facing.

Changes have been incorporated with regard to land acquisition, which is the biggest problem for construction of roads in the country.

Now, NHAI will work along with the state governments for facilitating land acquisition and all state governments have been directed to coordinate for the same. NHAI now awards road projects only after 80% of the land has been acquired.

FEW SPEED BREAKERS

Tackling delays in approvals, decision-making, faster resolution of disputes and coordination among different departments are few other highlights of the recommendations of the committee report.

Essentially, most of the changes are already in effect and new orders are awarded to interested parties. The flow of new road orders in the last few months was the highest in the last several years. This itself speaks volumes about the commitment of the government and its intention to put things on ground.

Also, the projects which were not viable and did not attract private participation were given extra focus and restructured within time frame along with consultations of private players while changing the terms and conditions of the project. There are other measures also which have attracted private participation in road projects.

Large projects will be built on a BOT basis, which are expected to have a higher return of about 18% to 20% on investments as compared to 14% to 16% earlier. Additionally, the new guidelines that have been framed are such that once a project is awarded for a particular road, the private player is given an assurance that there will not be any competition or construction of road, which will make sure that the cash flow in terms of the collection of the toll is protected.

What is more remarkable is that the government now has experts as representatives from development agencies like the World Bank, the Asian Development Bank, who make sure that the projects are not delayed and hurdles are resolved.

These representatives keep track of projects and act as a liaison between government agencies and private parties. They also bring their experience to structure the project in such a manner that it gets executed.

QUANTUM OF OPPORTUNITY

There are different estimates about the size of the opportunity. But there is little or no doubt that the opportunity is far bigger than what it used to be a few years ago.

When we talk about 20 km per day of the construction of roads, this in itself is self-explanatory. This means that the country will have to build about 7,300 km of roads every year. This is significant as the current run rate is just about 2,500-3,000 km of roads built every year.

One could also imagine the kind of work that will now flow. For the eleventh five year plan which will end in 2012-13, about Rs 3.14 trillion will be invested as compared to Rs 1.45 trillion invested in the tenth five year plan. This is still the tip of the iceberg. India’s investment in the roads segment is expected to be in the range of Rs 10.5-11 trillion over the next decade.

In the near term, about 5,000 km of new expressways will be built and the projects will be awarded for the same. Also, NHAI has plans to award work for about 37,000 km of roads over the next three years.

Besides, under the NHDP’s different phases, the government will award work relating to the upgradation of about 55,000 km of roads over the next 8-10 years.

WHO WILL BENEFIT?

Most construction and infrastructure companies are focusing on this particular segment and their exposure has gone up in the recent past. IRB Infrastructure and IL&FS Transport Network (ITNL) are popular in the roads segment having the highest exposure to the road segment. In the case of IL&FS, the company has recently come out with an IPO and was listed recently.

ITNL is amongst the largest private sector BOT road operators in the country having integrated business model providing service for projects, from conceptualization, construction to operating and maintenance of the road projects. The company has already bagged about 19 road projects.

Apart from roads, the company is also looking for opportunities in airport segments and plans to bid for more projects in this segment. The company’s advantage is its large portfolio of BOT assets and a long experience in the sector. The company has presence across different parts of the country and has about 9,397 lane km of road projects under its belt.

IRB Infra too is a leading player in the roads segment generating almost 100% of its revenue from this segment. The well-known Mumbai-Pune highway, one of its kind in India, is operated by IRB Infra.

The company has an integrated business model having large experience in toll roads and highways sector. The company has about 1,100 km of road projects in its kitty, which is the second largest among private players in the whole of India.

As opportunities are growing, the company should be able to procure more projects and increase its current portfolio. The company will not only benefit on account of the construction of these projects but also due to the collection of toll and annuity from these projects, providing stable future cash flow.

Also most of its projects are strategically located in major traffic areas like Mumbai-Pune, Mumbai-Surat, etc. The company also won projects in other states like Rajasthan and Punjab and is gradually focusing on becoming a pan-India player in the road segment.

Source: stockmarketsreview.com

SNBTPL enjoys an 18-year concession from National Highways Authority of India [NHAI.UL] (NHAI, ‘AAA(ind)’/Stable) to design, engineer, build, finance, construct, operate and maintain on a Build, Operate and Transfer (BOT) basis an 82.8km road stretch on the National Highway 3 (NH-3) in the state of Madhya Pradesh. The estimated cost of the project is INR7.9bn, with the scheduled commercial operations date (COD) in May 2011.

The affirmations follow SNBTPL’s reasonable progress over the last year in achieving different project milestones during the critical construction phase. Fitch does note however that the company is slightly behind plans. The entire right of way (ROW) required for the project is reportedly in the company’s possession, with the exception of a three-km stretch of forest land; however, first-stage approvals have been received from the forest department.

As of March 2010, the project has received equity infusions (61.3%), and has been drawing down on term loans – 58% of senior debt and 57% of sub-debt – as per schedule.

The ratings are constrained by the residual completion risk, although a fixed-price construction contract with SEW, whose terms mirror those in the concession, offer protection. Base-case debt service coverage metrics are extremely modest and vulnerable to various deep stress tests Fitch performed. A three-year tail in the concession allows the banks to restructure the loans, if necessary. Some liquidity support is available in the form of a fully-funded debt service reserve account (DSRA), equivalent to three months’ principal and interest payment.

Fitch has factored into its rating the operational track record and financial strengths of the sponsors. This includes the credit enhancement value of their undertaking to finance the cost and time overruns, to replenish the senior and subordinated DSRA and to provide unconditional and irrevocable bank guarantees if event project cash flows are inadequate to create the DSRA. Additionally, SEW has executed a letter of undertaking to the senior to infuse INR100m, after the COD, to augment debt payment capacity and to inject additional funds in case operations and maintenance expenses exceed the base case projections submitted to the banks.

The agency believes that the road has long-term economic potential, and that its locational advantage should have a beneficial impact on tollable traffic. Also, it is situated on the highway that represents the shortest distance between Mumbai and Agra.

SNBTPL is a 74:26 JV between SEW infrastructure Ltd (SEW, ‘AA-(ind)’ / Stable) and Navayuga Engineering Constructions Ltd (NECL). Following inter-se adjustments among the sponsors, SEW has increased its equity stake in the project to 74% from the 51%, resulting in a reduction in NECL’s holding to 26%.

Applicable Criteria available on Fitch’s website at www.fitchratings.com: “Rating Criteria for Infrastructure and Project Finance”, dated September 29, 2009.

Source: in.reuters.com

After taking charge of the ministry, Nath said his focus would be on implementation of projects on the ground rather than making big plans — a clear indication that the sector will get a major boost.

“Sadkon ko napi jaati hai, plans ko nahin (roads are measured and not the plans). Lot of thought has been given to planning in the past two years. Now we have to deliver. Performance is evaluated on the basis of kilometres of roads that are built. Now our agenda is of change. The system has to be overhauled so that work on the ground happens. Planning has to be delivered on roads,” he told reporters.

Nath, who was shifted from commerce and industry to road transport and highways, said he was “excited” about his new portfolio. He said he was looking forward to a challenge and he had got one.

On highway projects under public private partnership (PPP) model finding lukewarm response from private developers, the minister said, “Models which are not working have to be done away with and we need to adopt models which can attract investors. Moreover, just awarding the work is not just enough. We have to ensure progress is made on the ground.”

Spelling out his approach to bring the key infrastructure sector back on track, the minister said he was looking at structural changes in the system and procedures to make it result oriented. “Some of the old regulatory frameworks relating to transportation like multiple permit and Motor Vehicles Act have to be looked at from new perspectives. Old laws have to be amended,” he said.

Ministers of state Mahadev Khandela and R P N Singh also assumed charge on Friday.

Source: timesofindia.indiatimes.com

We will meet all the states in a month’s time to remove the bottlenecks . Some old regulatory frameworks on transportation such as multiple permit and others have to be reviewed . We are looking at new models . We will look at new ways of capital inflow.

Source: economictimes.com

India’s economy slowed to a six-year low of 6.7 percent in the year to March 2009, and many expect it to slow further to 6 percent in the current fiscal year, compared with 9 percent or more in the recent past.

Source: in.reuters.com

“Some of the very old regulatory frameworks we have relating to transportation like multiple permit and others have to be looked at (anew)… We are looking at new models,” Nath told reporters here while taking charge of the Ministry.

He also said that the outlay for constructing roads and highways has to be utilised and the programmes and mechanisms for road development have to be made workable and practical.

Nath, who was Minister for Commerce and Industry in the previous Government, said he will work towards meeting the challenge of providing stimulus to the economy through developing roads and highways.

“With the current global recession and the (slowdown) in the country, it is important that this (development of roads and highways) provides economic stimulus, this provides jobs and this is going to the biggest challenge,” he said.

His ministry will also look at the impediments in implementing plans for infrastructure development in the country, Nath said.

Source: business-standard.com

NHAI, which functions under the Union ministry of road transport and highways, has invited a global expression of interest (called request for qualification in technical parlance) from construction majors. The last date to respond is August 29.

“It would be a 75km stretch of NH-33 costing around Rs 600 crore. The tenders would be on build, operate, transfer (BOT) annuity basis,” said H.C. Arora, the chief general manager of NHAI, who looks after projects in Uttar Pradesh, Uttarakhand, Bengal, Bihar, Jharkhand and Delhi.

This would be the third time that NHAI has invited tenders for the same stretch.

Earlier, two efforts to finalise the project through BOT-toll basis proved futile with no parties responding to pre-qualification bids apparently due to Naxalism and law and order problems in the state. Under BOT-toll, the contractors awarded works are supposed to invest the entire project cost and realise the same by collecting toll taxes for the next 30 years or so.

Under the annuity basis, although the construction company would invest the entire project cost, a fixed annual sum as annuity from the government would ensure that the former gets back its invested money.

In a related development, the ministry is contemplating to turn the 150-km stretch of NH-33 between Ranchi and Jamshedpur into a single package. Earlier, the stretch was divided into two packages — one between Ranchi and Rargaon and the other between Rargaon and Mohulia.

Arora added that the NHAI would soon invite expressions of interest for the Ranchi-Jamshedpur stretch, too.

The ministry was in favour of inviting the tenders on BOT-toll basis. The overall cost of the project would be around Rs 1,300-1,400 crore.

The proposed Hazaribagh-Ranchi four-lane road would end near Vikas Vidyalaya by taking a bypass of about 20km before meeting Ranchi-Jamshedpur highway near Rampur.

The state and central authorities are discussing whether the proposed Ring Road project for Ranchi can be merged with the highways’ proposed bypass on a cost-sharing basis. Arora added that the four-laning project of both the stretches would be part of National Highway Development Programme-Phase III.

Source: telegraphindia.com

Parvez Umrigar , MD, Gammon Infrastructure Projects said that Gammon India Limited, the contracting arm of the company will book a topline turnover of Rs 3,000 crore for the current year. He added that Gammon Infrastructure, the development arm is more of a value based play and they have capital investment plans of around Rs 7,500 crore scattered over the next few years.

Excerpts from CNBC-TV18’s exclusive interview with Parvez Umrigar:

Q: Numbers look good, Operating profits margins stood at about 71%, the key concern right now is whether are not incremental orders are expected to slow down and more importantly for the current order book that you enjoy at Rs 9,500 crore is there an issue on execution?

A: The privatization space across the sectors continues to keep pace and infact the government has given us a choice that would like to promote more on a privatization model.

We have had some slow down in the road sector because the implementation under NHI new model agreement have had some issues raised by some developers and that once in a while you do change a model agreement so those things arise but otherwise if you see the action in BOT (Build, Operate, Transfer) space for example the government just announced the qualifications of Ennore.

Q: So out of the Rs 9,500 crore of order book, how much execution will be possible in this year and the incremental orders that are coming in, what is the average size that you are looking to bid right now?

A: Gammon India Limited, the contracting arm will book a topline turnover of Rs 3,000 crore for the current year. Gammon Infrastructure, the development arm is more of a value based play and they have capital investment plans of around Rs 7,500 crore scattered over the next few years.

Q: We understand you have 14 projects underway, what is the kind of outlay for these projects?

A: The 14 Special Purpose Vehicles (SPV) companies that we have has an overall capital outlay of Rs 7,000 crore which would involve an equity investment of Gammon itself of around Rs 500 crore.

Q: What is the overall target for FY09 for Gammon Infrastructure at this point in time and what are the kinds of projects you are bidding for right now?

A: Gammon Infrastructure for the current year we expect to grow our current 14 SPVs by at least four more, there two SPVs where we are lowest in the bid and we await the letter of intent (LOI) ending which we can make the official announcement. The topline for the current year on a turnover basis will be around Rs 250 crore.

Source: moneycontrol.com

HCC will have a share of Rs326.03 crore in the work being undertaken for the Pranahitha-Chevella Package-3 being undertaken by the Irrigation & Command Area Development (ICAD) department of the government of Andhra Pradesh.

The contract covers detailed investigation, preparation of designs, drawings and construction of a barrage including fixing of gates, head regulator and 500 meter long gravity canals. The project will be completed in 48 months.

The project is a part of the government’s ‘Jalayagnam’ programme, an initiative to provide immediate irrigation benefits to all underdeveloped regions of Andhra Pradesh.

Pranahitha-Chevella lift irrigation scheme will irrigate an ayacut of 12.20 lakh acres and provide drinking water to about 1,000 villages in Adilabad, Karimnagar, Nizamabad, Medak, Nalgonda and Rangareddy districts in Telangana region.

HCC is currently involved in construction of Godavari lift irrigation phase I and Phase II in Andhra Pradesh where Phase I has already been commissioned and phase II is in advanced stages of completion. In addition, HCC is currently executing four major projects in Andhra Pradesh, including the country’s first cavern for strategic storage of crude oil at Visakhapatnam, the Veligonda lift irrigation project, the Rajiv Sagar lift irrigation project and a 30 km highway of NHAI on NH-7 under north-south corridor on BOT basis.

HCC constructed the first bridge over the river Godavari at Shahgar, in Andhra Pradesh way back in the 1930s. Since then it has built several infrastructure projects, including the Godavari Barrage at Rajahmundry, the Papavinasam Dam, the Vizag Monolith & West Wall Protection and the Railway Bridge over Godavari which is the first and only bow-string bridge in India, the company said in a release.

HCC has so far constructed over 45 dams, barrages and 15 powerhouses in the sub continent, contributing to over 30 per cent of the country’s installed hydropower capacity.

Source: domain-b.com