Kamal Nath Takes the Unlimited Road

Fixing the Legacy
Kamal Nath has not just built a plank to secure his own and his masters’ political future, but has shown enough action in the last seven months for the people to take his plan seriously. It is the same department that was lulled into inaction for five years under his predecessor, T.R. Baalu from Tamil Nadu.

But now, the same Commission is equally swift in working with the government and approving projects that got stalled earlier. The irony is not lost on anybody. The Congress is determined to be able to showcase the new road network to voters when it pitches for a new mandate in 2014.

Nath has worked hard since he took over in June 2009. In eight months, the National Highway Authority of India (NHAI) awarded projects worth Rs. 40,000 crore. By the end of March, the figure could touch Rs. 55,000 crore. While it might fall short of the target of Rs.100,000 crore set for this year, it is by no means a mean achievement for a first year in office. The industry is confident the pace will only pick up now. “More importantly, a platform is now in place for the rollout of more packages next year,’’ says billionaire Virendra Mhaiskar, chairman and managing director of IRB Infrastructure, a Mumbai-based road construction and tolling company that is limbering up for action.

Nath is moving in like a man possessed. He reels off statistics like an evangelist quoting from the Bible as he drums up support for various road projects. Developers and financiers, part of his team that travels around the world to find the money, say a razor sharp mind lies behind his often deadpan expression. For decades, the government did it all by itself but even after allowing in private developers, it just didn’t have the simple laws to facilitate construction.

For instance, until just before Nath took over, road developers could not sell their equity stake in a project after executing it and move on to a new project. They had to stay with it and keep collecting tolls. Nath realised that companies specialising in building projects should be able to get out of completed projects quickly. He amended the rules to allow that.

Similarly, a conflict-of-interest clause said that there should be no more than 5 percent of cross-holding between rival bidders. This was a technical requirement too difficult to follow and which led to disqualification of otherwise sound bidders. Nath realised the folly and raised the ceiling to 25 percent.
Again, it took Nath’s arrival in the roads ministry to combat “project squatting” by some road developers. Companies that have won several projects get a better valuation in the stock market. So, developers would typically bid aggressively and win projects at any cost. Some would agree for very short lease periods while others part with a chunk of their potential toll earnings. The government would be forced to award the projects to them only to see construction languish. Banks won’t lend to such obviously unviable proposals. Kamal Nath put an end to this practice and imposed a limit of three projects pending for financial close for each developer.

The Exuberance
Actions like these have removed most of the hindrances that private capital faced in the bidding stage of road projects. As a result, big and small road developers are cranking up for big action like never before. The industry has about a dozen large firms like Larsen & Toubro, Reliance Infrastructure, Sadbhav Engineering, Nagarjuna, IVRCL and IRB Infra that have the capacity to build, operate and maintain roads and also collect tolls on them. New players like Tatas, Birlas and real estate developers like Hiranandani are joining up. Most of these big companies have three projects each in the pipeline and hope to reach financial closure and go for new bids soon. There are also dozens of smaller companies that may not be able to make the huge investments required but can take up work from the larger companies.

With such a big opportunity coming their way, some Indian companies have gone looking for foreign partners, to gain both capital and project expertise. GVK Power and Infrastructure is one such. The Hyderabad-based company won the bid for the Jaipur-Kishangarh highway. But after that it seemed to have gone into hibernation, not adding any projects in the last nine years. It is now waking up again. “Cash flows are improving and the huge opportunity in roads are now attractive enough for the next big leap,’’ says Vijay Agarwal, the firm’s president for transportation. Agarwal has stepped up bidding and hiring.

The Flip Side
And yet, Kamal Nath may not be getting everything right in his first attempt. His penchant for thinking big is making him combine smaller projects into one large project and offer it up for bidding. He has already done that in the Kishangarh-Ahmedabad sector and NHAI is to follow the strategy for 10 other projects. The danger here is that this will close the door for smaller companies because they will never make the technical score to qualify. The sector may then be cornered by large global players.

Even then, there is little proof that foreign investment has begun to flow. Very large projects, worth over $1 billion, are yet to be tendered out. Global construction companies like Abertis, Isolux, Italy’s Atlantia and Vinci of France have shown interest in the current rounds of bidding, but much of the activity is outside the bidding floor. Alliances are being formed between Indian developers, foreign construction companies, funds and banks.

Another bottleneck is with the India Infrastructure Finance Company, a sovereign supported entity aiming to meet the exclusive needs of infrastructure financing. The company had raised Rs. 30,000 crore through the government’s economic stimulus package, but the money is yet to make its way to banks.

Scaling the Cliff
The Indian industry is not quite used to the scale Nath is talking of. Developers need to raise dollops of both equity and debt. Equity will help them bring down the cost of capital from the current levels of about 11 percent. Debt will enable them meet the humongous need for funds.

“The big challenge is getting equity,’’ says Suneet Maheshwari, CEO of Larsen & Toubro Infrastructure Finance. “Gathering resources in terms of financing as well as project execution will be a big stretch for Indian industry,’’ he says.