If it wasnt bad enough that the NDAs hugely successful roads programme had crawled to a halt under the UPA, the GMR Group walking out of the most successful roads bid in recent years has been a huge blowindeed, the story of last year was one where the National Highways Authority of India (NHAI) had managed to pull off a coup with some outlandish bids. For 33 road projects, where NHAI staffers had estimated they would have to pay out R3,400 crore to bridge the gap between revenues and costs, the government managed to get bidders to agree to pay NHAI a total of R19,000 crore (on an NPV basis, using a 12% discount rate). Around half of this was from one project, a 4-lane national highway that was to be converted into a 6-lane one, from Kishangarh in Rajasthan via Udaipur to Ahmedabad in Gujarat. This is the project that, last Friday, GMR gave a notice to NHAI, saying it wished to terminate the project.
Interestingly, the government cleared the setting up of the Cabinet Committee on Investment (CCI) for precisely the reasons stated by GMR for walking out of the project. GMRs big complaint is that NHAI was not able to get it the environment clearance for one of the tunnels that needed to be built along the highway. Apart from the fact that 6-laning an existing highway should be one of the easiest projects to clear, this is a project in which the PMO had also stepped into no avail, it would appear. Even more galling is the sheer inefficiency of NHAI. As part of the process of making financing of highways easier, the government had okayed a proposal to allow developers to collect higher tolls on a highway even though the process was not completeso, GMR could collect tolls based on a 6-lane highway even if the actual highway was only a 4-lane one. Unfortunately, NHAI failed to notify this, ensuring GMR didnt get to collect the higher toll it had factored in while doing its math.
GMR has clearly dealt a body blow to NHAIs financing plans. While NHAI tends to give VGFs of around 30% for each project it hands out, its ability to hand out more roads depends on the money at its disposal. Which is why the GMR-type bids were a great source of comfort, apart from the fact that such bids did wonders for the attractiveness of the highways sector. While this means NHAIs highways programme is once again back to being sub-prime, to use Gajendra Haldeas phrase to describe NHAIs financial condition, GMRs investors are a relieved lot. Even at the time of the bidding, most rivals felt the amounts promised were way too excessive. For a debt-strapped group, cutting exposure can only be a good thing.