GMR-NHAI row: It's not about clearances but greed

As if losing a lucrative airport project in Maldives was not bad enough, India’s infra major GMR seems to have brought bad luck to India’s roads and highways industry too.

Last week, GMR walked away from the Rs 7,700 crore Kishangarh-Udaipur-Ahmedabad highway, citing delays in environmental clearances. While the cancellation of India’s first mega project led to a blamegame between the National Highways Authority of India (NHAI), the nodal agency for highway development in India, and the Ministry of Environment and Forests (MOEF), without whose assent no project can go ahead, the critical issue of overbidding for PPP (public private participation) projects where the contractor overcommits annuity payments to the government may be the real reason for the pullout.

Bidding aggressively by self-funding for road development projects has now become a growing trend in India since it offers higher returns as compared to the assurance of public funding.

In the case of projects going for a premium, the private developer raises the entire funds without any government assistance and on top of that it gives a fixed annual amount to the NHAI.

Developers hope to snap up these projects in the hope of selling a stake or exiting later. Here concessionaires assume all sorts of market risks and also provide handsome premiums, but the motive is not driven by fundamentals but greed. The bids not only build strong order books but also boost share prices. And if the PPP project fails the idea is to shift the risk to either the lender or the government. In late 2011, two projects worth about Rs 2,450 crore awarded to DSC and Gannon-Dunkerly were terminated after failure to achieve financial closure.

An article in the Business Standard today rightly blames GMR’s ambitious bid as the reason for its exit too.

“The bid, in which GMR beat Larsen & Toubro, Reliance Infrastructure, GVK and Nagarjuna Constructions, was considered too aggressive. RP Singh, chairman, National Highways Authority of India, says the project was among those bid out on high premium, which the company was finding difficult to implement,” the report said.

In 2011-12, NHAI awarded 49 bids of which 32 fetched premium (a committed annual payment to the government over the term of the project) in the PPP model where upfront revenue was offered to NHAI that increases by 5 percent annually. Currently, 35 projects are awaiting financial closure because overbidding implies massive funding. The key road projects awaiting financial closure for months include those by infrastructure firms like GVK, GMR, L&T, IL&FS, Gammon, IVRCL, Essel Infra, Gayatri, Ramky, Madhucon, KNR, Soma, Sadbhav, Transstroy among others.

However, with banks crossing their sector exposure limits or companies not being able to tap into private equity (PE) funds, lending to the sector has dried up. Corporates are unable to achieve financial closures which are actually based on over-optimistic revenue models when the going is good in the debt market.

“PPP is a child of the bull market when debt is easy. Now, lenders have burnt their fingers and will not be so forthcoming,” Shailesh Pathak, president of Srei Infrastructure Finance, is quoted as saying by The Times of India .

Unless developers exit older projects they cannot bid for newer ones. But in amarket with few buyers and many sellers, a course correction is bound to happen. Financial unviability could very much be the reason for such exits since lenders are chasing infra firms to sell assets any which way they can as the banks have stopped lending to the road sector.

After the Male project, which is sure to affect the company’s bottomline, GMR may just be using the clearance hurdle as an excuse to exit the project which it had bagged by paying the highest ever annual premium of Rs 636 crore.

Last week, NHAI chief RP Singh even noted that the exit of not just GMR but even GVK from the pact for the Shivpuri-Dewas Expressway in Madhya Pradesh was not due to regulatory hurdles but the inability to fund such projects.

“Arranging huge private equity is a major problem (for them) as these are much bigger projects than what we earlier awarded on BOT (build, operate, transfer),” he has said, adding: “In the present scenario, I think, they are overleveraged financially. For them to raise this kind of equity is not possible. (Read more here) .

But allowing such contracts to be terminated for non-regulatory reasons and allowing the company to walk away free vitiates the bidding environment for upcoming tenders too and encourage similar aggressive bidding in the forthcoming bids.

A senior NHAI official told the Times of India that those developers who bid aggressively seem to be waiting for the outcome of GMR and GVK pulling out of the deals, which are now before the Delhi High Court. “If nothing happens to them and they take out their security amount, more will slap such termination notices on NHAI on some ground or the other.”