Satish Mandhana, Managing Partner, IDFC Private Equity, reminds us of some basics of how finance companies evaluate NVGF projects, and denies that they are looked at any differently from VGF projects.
Are developers being realistic in their estimates while bidding for the NVGF projects (for example, and especially, Kishengarh-Ahmedabad stretch, where GMR has bid an astronomical sum)?
Overall, roads sector is one of the most vibrant sectors in the economy in terms of action. And hence naturally, it is attracting participation from several players. At times, one gets a feeling that some players may be bidding aggressively. But one cannot make a general comment about any project bid without knowing the exact underlying assumptions.
Roads Minister CP Joshi remarked on the success of the Kishengarh-Ahmedabad stretch bid: “This reaffirms the confidence of the developers in the efforts taken by the government in the highways sector. With policy laggards now smoothened and future bidding plans duly prepared, the investors naturally see prospects in the road sector.” Do you agree?
Roads sector is definitely attracting attention from a wide spectrum of players (EPC, developers, PE investors, public markets, etc). The government has a well structured programme for national highways. Likewise, several state governments are also coming up with their own state highÂway projects. Therefore, we continue to be bullish about the sector. We have always been micro in our approach-trying to pick the 0right players with good capability and track record. In our last eight years of operation, we must have met most of the players who operate today, but we have made only three investments in this sector: L&T Infra, Ashoka Buildcon and very recently, GVR Infra.
Please comment on the bankability of Negative Viability Gap Funding (NVGF) projects and compare them with that of VGF projects in BOT road projects.
Promoters/investors and bankers evaluate bankability of a project based on the internal rate of return (IRR) of the net cash flows (including all inflows such as equity, toll income, positive VGF, etc, minus all outflows like capex, opex, negÂative VGF, etc) from the project. As long as the IRR is above a certain minimum threshold, it would be an acceptable proposition. Hence, regardless of whether the VGF of positive or negative, projects need to be evaluated based on the IRR on a case to case basis.
Every bank evaluates the cash flows of a project and then decide about the financial closure. Projects that are bid at a reasonable level would get funding done without much difficulty whilst if the bid is aggressive (irrespective of posÂitive or negative VGF), the financial closure process may be tougher or it would require sponsors to bring in higher level of equity.
Does (and should) the Feasibility Report for an NVGF project include special exercises and indicators?
No one has the knowledge with certainty before a bid whether it would be a positive or negative VGF. Hence, the Feasibility Report cannot be any different.
NVGF though a significant booster for road development in India, it requires more clarity and transparency. Your comments.
NHAI will be better off to have added mechanism of creÂating a deterrent to avoid non-serious/aggressive bidders who can potentially default after bidding aggressively for VGF projects and putting NHAI's finances at risk, especially in NVGF projects.
In NVGF, is there a possibility of the developer comproÂmising on the quality of work?
If the company has bid at a wrong level (again, irresÂpective of positive or negative VGF) and the project is not generating enough cash flows, there could be various diffiÂculties (for example, timely debt service, proper maintenance of road etc).