C Venkataramana, Director, Sunil Hitech Engineers Ltd, expects tremendous growth in the next three-four years, but warns that the industry must learn from their past mistakes.
What is your initial take on the hybrid annuity model (HAM)?
The government is taking only the EPC cost as the DPR cost. They are not adding other things like interest on annuity or the interest difference when we do the financing of the project. In this model, we are up by around 40-45 percent more than the DPR cost. And the government also has certain restrictions like, beyond 20 or 25 per cent, they cannot give. Those restrictions can be avoided if they add finance and other cost in the DPR, apart from EPC cost. Then, interest during construction is something which needs to be captured. The interest cost has got to be there; interest during construction will be a higher amount and if they are paying out in 20 or 30 annuities depending on the project, they are paying the interest on the decreasing balance as annuity. For some projects, they are talking about giving only the RBI rate, which is 8.5 or 8.75 per cent whereas the funding we get is close to 12 to 12.5 per cent. The difference has also got to be loaded into the project cost and that´s how the bidders are going to bid. Overall, there are a number of issues around how these payments are structured.
You don´t expect much interest?
The only thing is earlier we were doing somewhere around close to 100 per cent for the financial closure of the project with 30 per cent equity and 70 per cent debt, or 25 per cent equity and 75 per cent debt. Today, the situation is that even though government is giving 40 per cent and balance 60 per cent needs to be organised by the developer, none of the infra players are keen in such a position. Also, we are not sure how the banks are going to react to this model for financial closure, as already, most of the infra players´ balance sheets are overstretched.
For banks, the main concern would be to get their money.
Naturally. The government´s thinking is they are mitigating that risk. It is not toll dependent but annuity dependent and money from the government has got to come. This comfort is available now for the banks. However, after their experience in the last three-four years of NPAs in many of the toll projects, we need to wait and see their interest. Moreover, the land issue has not been sorted out. We are talking of giving projects now only after 80 per cent of land has been acquired. However, the powers that be, they force the concessionaires to sign even if it is only 60 per cent. We do work under such restrictions. For instance we are doing a road project, where after six months, for some length of bypass and forest area, we are not able to conduct our survey as the locals are protesting and forest clearances are yet to be in place. The document says if it is delayed beyond a certain time, we can forego this portion. However, this will put us in a catch 22 situation because if we do that, the cost will go down due to negative scope being applied. If we wait for the land, obviously, the project will get delayed and there will be escalations. Either way, the developer is at loss and the situation will need to be resolved through arbitration. This is the main reason both bidders and bankers are averse to projects.
This regime has taken some positive steps like being able to exit projects. What is your take on this?
This is a fantastic thing which the government has brought in. The earlier government was also toying with this idea which has been implemented now; allowing the developers to get out of the project after completion. Earlier, the lead developer had to hold 51 per cent which has now been freed up. That´s good because the moment the road is going to be viable, definitely, we can have investors coming in.
Are dispute resolution mechanisms improving?
That is right. Basically, they are a little proactive nowadays and sensitive to the needs of the developers unlike the earlier years although much still needs to be done. This is also the message from the National Highways Builders Federation (NHBF). We find that resolutions are being done well by NHAI in the sense they are at least much more receptive today to problems unlike earlier.
This is a good sign because once disputes are resolved, thousands of crores of developers´ money that are locked in will get eased. That may help boost interest for this new hybrid model. When people have equity to fund them, only then can they show interest. Today, the situation is that the equity route for developers has almost dried up.
Recently, the government also allowed an extension of concession period. Comment.
This is also a good sign, but not only this, they are also coming into back-ending of the premium for projects done on a premium basis. Why people went in for premium at that point of time is we anticipated a normal growth of 7 to 8 per cent which was upbeat in the earlier part of the period. Between 2007 to 2010-11, the normal CAGR was coming to somewhere around 7 to 8 per cent plus the additional growth that we anticipated of at least 10 p Recently, the government also allowed an extension of concession period. Comment.er cent in the toll collections year on year. That hasn´t happened. There are a multitude of reasons for this ranging from broad economic reasons to some specific ones. What I´d like to highlight is the issue with trucks. With multi axle trucks, drivers can carry loads of close to 60 tonne. The rates are the same whether you carry 20 tonne or 60 tonne; the government of the day is not willing to look into it.
This is double trouble as our road maintenance also has got to be geared for this heavier load. What has been done for a particular weight situation three or four years back is not good enough now. The number of trucks have reduced but there are more multi axle trucks and the weight has increased.
How do you see the growth in the coming years?
The government is definitely keen on improving the roads. In this regime, roads have taken a quantum leap. In the last one and a half years, whatever bids have come in for infrastructure, roads ranked on top of them all. That has been number one in this country. The ministry is embarking on 30 km per day roughly. Now, MoRTH is very active and NHAI is as well. Not only this, hitherto, roads were being funded only by World Bank and ADB. We now hear Japanese funding is also coming in and they are going to do many roads. I expect that in the next three-four years we should see tremendous growth. My simple advice is only that road bidders should not go crazy like what we did earlier. I was also among the crazy lot in a couple of road projects in my earlier assignment. It is time we had better learn from our mistakes. Every time, though, what happens is that some new player comes in and jumps the gun. They bid crazily and the situation really doesn´t get better.
The Minister is also talking about monitoring the pace of construction with drones and satellites.
That´s very good. People at the helm have to change. Nowadays, every week, someone or the other wants to take a meeting with the senior management in Delhi or other respective locations. If a developer is doing four or five projects and every week he has to travel about three times for attending review meetings, look at the cost and look at the time. Therefore, real-time monitoring is going to help instead of traveling for reviews. We were told that some international company is probably getting a mandate for monitoring the road projects under the Minister´s push. This is not rocket science. Today, the technology is good enough for micro managing the projects, sitting in multiple locations.