India is awarding highway- construction contracts at a record pace, and saving taxpayers money, as builders stop asking for subsidies and instead offer fees to lay and operate new toll roads.
Competition among builders such as GMR Infrastructure Ltd. (GMRI), Larsen & Toubro Ltd. and IRB Infrastructure Developers Ltd. (IRB) has helped the National Highways Authority of India win payments, or premiums, for at least 23 of the 35 projects it has offered since April 1, said G. Suresh, its chief general manager for finance. He didn’t elaborate. The body will award tenders for 7,300 kilometer-lanes of highways this fiscal year, worth about 570 billion rupees ($12 billion), and 9,000 kilometers next year.
“Many of the projects where we thought we’ll have to pay subsidies, we actually got premiums,” said B.K. Chaturvedi, who headed a government committee on highway development and a member of the state Planning Commission. “It’s a good thing there’s competition.”
Construction companies have stepped up bids for highways as growing vehicle ownership is spurring traffic and because of a slowdown in other sectors such as building power plants. The work will improve roads (LT) ranked worse than Botswana’s by the World Economic Forum and ease congestion that contributes to about 440 billion rupees of harvested foods going to waste each year, according to government estimates.
“India’s road network is barely adequate to maintain its current growth trajectory,” said Shailesh Kanani, an analyst with Angel Broking Ltd. in Mumbai. “Positively, the political will to acknowledge and address this issue is now visible.”
$1 Trillion Spending
India’s investments in roads could rise to $145 billion in the five years to 2017 from about $69.8 billion in the previous five years, according to a PricewaterhouseCoopers LLP. study. The country plans to spend a total of $1 trillion on roads, railways, airports and other infrastructure in the period.
The national highway system, a predominately two-lane network linking major cities, carries 65 percent of India’s freight and 80 percent of passenger traffic. In about six years through October 2011, the highway agency oversaw 5,182 kilometers of construction, including new highways and improvements.
Prime Minister Manmohan Singh in August 2009 set a goal of building 20 kilometers of highways a day. The nation has added 823 kilometers, or about 2 kilometers a day, since then as construction slowed, Tushar A. Chaudhary, junior road transport and highways minister, told lawmakers in parliament Dec. 12.
Construction is now speeding up, partly because the agency has made it easier for builders to compete for projects by accepting tenders online and by creating a list of prequalified bidders. Winning bidders get to collect tolls for as long as 30 years before transferring the highways to the state, Suresh said. Toll fees are decided by the National Highways Authority.
The highways have become more lucrative for builders and the government as the rising number of cars and trucks boosts traffic and tolls. India’s car sales in the year ended in March jumped 30 percent, the biggest gain in at least nine years, according to Society of Indian Automobile Manufacturers. Sales may triple to more than six million by 2018, Rothschild forecast in a December report.
“Traffic risk is something to be taken on by the developer,” said Virendra Mhaiskar, chairman of IRB Infrastructure, which has constructed roads including the Mumbai-Pune highway. If the builder is confident of generating enough tolls to cover costs and make a profit, it can offer the extra anticipated funds to the government as premiums to secure the contract, he said.
Builders run the risk of overestimating future traffic and tolls, which could cause them to pledge unprofitable levels of fees, said Parvesh Minocha, managing director, transport division at Feedback Infrastructure Services Pvt., which advises clients on construction projects.
“The premium bids are increasingly becoming a cause for worry,” he said. “The worry will start manifesting a couple of years down the line when you have to give the NHAI what you promised and also put in money to build the roads.”
L&T, the nation’s biggest engineering company, decides to make premium bids for projects based on factors including traffic expectations, competition from other roads, the type of traffic the highway will attract and the ease of construction, said S.N. Subrahmanyan, director and senior executive vice president of its construction division. He didn’t say how much premiums the company has so far paid.
The builder fell 3.5 percent to 1,301.9 rupees at close of Mumbai trading. It’s fallen 14 percent in the past year. IRB Infrastructure declined 2.9 percent and GMR Infrastructure dropped 5.3 percent today.
Builders may also be chasing road projects to help replenish orderbooks amid a slowdown in power-plant orders, said Manish Agarwal, an executive director at the Indian unit of PwC. Reliance Power Ltd. (RPWR), Adani Power Ltd. and other electricity generators have delayed building $36 billion of power stations because of concerns about coal supply.
L&T, based in Mumbai, has orders to build 100 billion rupees of roads, Subrahmanyan said. The builder boosted the number of road projects to 7,171 lane-kilometers in the first nine months of this fiscal year from 5,701 lane-kilometers a year ago, according to company presentations on its website. The number of power projects remained unchanged at 5 during this period.
That means power plants now account for 29 percent of L&T’s orderbook, compared with 37 percent a year ago. Roads and other building projects’ share has jumped to 40 percent from 32 percent.
“For investors, a company’s valuation seems to be driven by its orderbook,” said Agarwal. “If a company wins a bid, they see it as fantastic.”
Welspun Infratech Ltd., a unit of JPMorgan Chase & Co.- backed Welspun Corp. (WLCO), has won road projects worth 10 billion rupees since 1999, including a 185-kilometer stretch in the central Indian state of Madhya Pradesh, without offering premiums, said Assistant Vice President Rajeev Kumar. Still, the company is willing to offer fees.
“We aren’t averse to offering a premium to win a deal,” he said. “If the deal is good, why not?”
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