For the National Highways Authority of India (NHAI), there couldn’t be a bigger contradiction in two ongoing legal issues.
In the first one, it has petitioned to move the Supreme Court to expedite environmental clearances in highway projects, by de-linking them from forest clearances. Right now, without the latter, developers cannot take up work, even if it is on stretches having no trees or plantation cover.
But, it is simultaneously also, in the Delhi High Court, taking on GMR Infrastructure for terminating a concession agreement for six-laning of the 555 km-long Kishangarh-Udaipur-Ahmedabad highway.
In this case, GMR has cited delays in obtaining environment and forest clearance as the reason for terminating its contract, while wanting NHAI not to encash a Rs 269-crore bank guarantee against non-performance that the former had furnished after winning the bid.
So, we have the NHAI, on the one hand, fighting to hasten the process of environmental clearance, while, at the same time, trying to prevent GMR from using this as reason for withdrawing from executing the country’s largest highway project worth Rs 7,500 crore!
As the highway development sector looks increasingly messy, a blame game is now on as to who is responsible for this conundrum.
TIME IS MONEY
Roads have an intrinsic appeal both economically and politically, as they reflect visible development on the ground — literally. This logic naturally led the ruling Congress-led United Progressive Alliance to target building 20 km of roads a day three years ago. To accomplish this goal, the Government focused on awarding about 7,000-8,000 km of highways every year through public-private-partnerships (PPP).
But here, it should have known from the outset that the private sector, unlike state agencies, is much more sensitive to time and cost overruns. Any delay in commissioning projects that can start generating toll revenues translates into greater difficulties in paying off lenders.
This reality does not seem to have dawned on the Government, even as developers began complaining that the multiple regulatory clearances necessary for undertaking work were far too slow in coming.
This was so even for projects where bidding had already taken place and contracts were awarded, assuming that the approvals would necessarily follow in due course.
All this was not given due importance when the NHAI moved to a PPP-only award format. Many developers, who were traditionally only EPC (engineering, procurement and construction) players executing projects funded and operated by NHAI, entered the PPP highway concession segment, wherein they took on the entire finance and traffic revenue risks themselves.
COMPETITIVE MARKET
In 2010-11 and 2011-12, there was massive competition, as firms bid aggressively to win PPP concession contracts. In many cases, they offered to pay huge premiums to NHAI. The accompanying table shows how much each developer offered to get the concession for the six-laning project that GMR eventually bagged.
Why did firms offer such large payouts? The underlying logic seems to have been that construction costs varied only marginally, irrespective of who undertook the project. The bid differentials primarily came from the revenues anticipated, with each developer making his own calculations.
Some contractors bid believing they would make good margins building the roads and later exiting in favour of those willing to operate projects over the concession period. Most bet mainly, though, on a never-ending India Growth Story.
GDP growth was, indeed, hovering well over 8 per cent till the first quarter of 2011-12, which was also around the time when GMR submitted its bid. Commercial vehicle sale volumes were growing at an even higher 20 per cent-plus level between October 2009 and March, 2012. All this inevitably pointed to ever-rising traffic, justifying the bullish toll revenue projections.
But as GDP growth started slowing down, the developers — and, more importantly, the bankers funding their projects — from mid-2012 onwards started seeing that the actual toll revenues from many completed projects were turning out lower than the original projections.
GOVT RESPONSE
The Government, on its part, was aware of the aggressive bidding going on. In 2010, the NHAI Board reacted by making the technical and financial criteria for bidding in projects more stringent, to attract only large serious players.
But as events later proved, the ones calling it quits — GMR, GVK or Reliance Infra, which also exited from a similar showcase Delhi Airport Metro Express link project — were precisely those in the country’s top infrastructure players’ league.
But the Government should equally have been alert to resolving regulatory clearance issues through greater inter-ministerial coordination. That would, at the least, have ensured that those wanting to wriggle out of projects had no alibi to fall back on — as is the case today.
Instead, the Government made it even more difficult for developers. It did nothing about bans on sourcing aggregates by some States or tightening soil extraction permissions. Simultaneously, forest and tree-felling clearance, which can take up to a year or even more, got clubbed along with environmental clearance in mid 2011.
Since developers could not have started collecting revenues without environment nod, it further dented the financial viability of projects.
GMR, for instance, had initially projected toll revenue collections from May 1, 2012. Not getting the required approvals cost it about Rs 1.7 crore daily, in terms of revenue foregone.
FINANCIAL RISKS TO FORE
All this made bankers, too, wary, as they started paying more attention to traffic risks and environment clearances, while increasing lending costs. Besides, they made fund disbursals conditional upon 100 per cent land acquisition. This was as against the original concession agreement norm that allowed for financial closure even with 80 per cent land availability.
As the outlook on road projects turned pale, investors and lenders started finding the sector not as attractive, further constricting fund flow for developers. Many, including L&T and GMR Infra, began to look at part equity sales in various infrastructure projects as a means to raise funds. And that hasn’t been easy in the current market.
THE COST OF INDECISION
But none of these represented any bolt from the blue for the Government. Cases of firms withdrawing due to land acquisition issues were there even earlier. IRB had done so from a project in Goa in 2011 for this reason. The same issue had also prevented some firms from starting toll collections. These, the Government then brushed under the carpet as exceptional cases.
The problem today is that exception is becoming the rule. This is a realisation dawning on the Government itself, as it has seen GMR pulling the plug citing environmental nod delays and GVK doing the same in the case of a highway project in Madhya Pradesh. There are whispers of many more looking to use the same ‘environment and forest’ route.
No wonder, suddenly things are moving at a frenetic pace, with NHAI moving the Supreme Court seeking faster environmental approval norms and the Environment Ministry claiming it has already permitted de-linking of forest clearance nod. The Finance Ministry, too, is reportedly re-looking at its 100 per cent land acquisition precondition for bank lending to highway projects.
Meanwhile, one cannot help but wonder: Had GDP growth not slowed down and toll revenues not deviated wildly from projections, would GMR have withdrawn from a prestigious project even with delayed environment clearances?