Back to the wall, infra cos leave projects high and dry

Written by Noor Mohammad | Noor Mohammad | Arup Roychoudhury | Timsy Jaipuria | New Delhi | Updated: Aug 2 2013, 17:32pm hrs
Highly leveraged infrastructure companies are seeking to unburden themselves from committed, or even partially completed, projects even as they realise that disposing of assets at this time would amount to distress sale. The phenomenon is most visible in the highways sector, but there are several instances of developers wanting to exit power and port projects and one where a leading company has dumped a seemingly lucrative metro rail network. The economic slowdown, which upset the revenue calculations of these firms, coupled with the high cost of credit, are at the core of the issue, but there have also been a host of other factors that have dampened investor sentiment and forced firms to cut down on their plans.

Less-than-anticipated returns, fuel scarcity (as in the power sector), inability of the government to make available land and fashion suitable model concession agreement in time (witness the projects awarded by port trusts) and the delays in clearances leading to huge cost overruns, too, have made projects unattractive to investors of all hues.

In the highways sector, GMR, GVK and Ashoka Buildcon have terminated their agreement with NHAI and moved out of highway projects -- supposedly premium ones originally. Many more companies are also wanting to make an exit from projects, which are either midway the concession period or have just been completed (see chart). A new exit policy announced by the government to enable developers to unlock value expeditiously and invest in new projects is seen as a part-solution in the highways sector.

As for the power sector, developers are struggling to get fuel linkages and facing difficulties in mobilising resources from the capital market. Saddled with debt, many private power companies would like to sell stakes in their existing plants to raise money to finance their new projects. However, problems like fuel shortages have dented power companies' valuations, forcing developers to postpone asset sale until market improves. A case in point is Lanco Infratech's recent move to approach the RBI's CDR Cell for the restructuring of R7,500 crore of outstanding loans after failing to sell stakes in its Anpara C and Udupi power plants.

Lanco Infratech, the parent company of Lanco Power, has been desperately looking for a buyer for the plants for a while. But according to company sources, it had to shelve the plan because of low valuation. Kameswara Rao, leader, energy utilities and mining practices at PwC, said: Buyers are seeking discounted prices for power generation assets as additional fuel cost recovery provisions are still unclear, especially where state-level power purchase agreements (PPAs) have been signed."

The bidding process in port projects is skewed in favour of port trusts as developers are required to share a large part of the revenue -- as high as 60% in some cases -- with the trusts. In the case of Singapore Port (PSA), which had pulled out of JNPT's R8,000-crore container terminal project in September last year, the problem was an alleged opaqueness in the bidding process. PSA bagged the project, but refused to sign the agreement on grounds of what it said were new charges in the form of stamp duty that were not made clear during the bidding process. It had sought clarifications and was reluctant to bear the duty on its own, leading to JNPT terminating the contract.

There are instances of developers abandoning projects in other sectors also. Reliance Infra-promoted DAMEPL, is one example, which, almost a year after issuing warnings, announced on July 1 the exit from Delhi airport metro. Reliance Infra also said that DAMEPL had terminated the concession agreement the contract between DMRC and DAMEPL in October 2012. DAMEPL said that the faulty construction, which led to the closure of line last year for almost six months, was the reason why it was exiting the project. The total project cost of 22.7 km line was R5,700 crore, half of which was borne by DAMEPL. According to DMRC, DAMEPL was making a R4 crore loss on the line every month. The project has a debt of around R2,000 crore. Reliance Infra has claimed around R2,800 crore as termination payment. The matter is currently under arbitration.

It is not that it is only gloom all around. Foreign buyers seem to be attracted by the cheaper valuation of Indian power sector assets. For example, France's GDF Suez and Singapore-based Sembcorp have recently shown interest in picking up stakes in power projects in Andhra Pradesh. While the French company has signed a binding agreement with Meenakshi Energy for an equity stake in the latter's 900-MW Krishnapatnam power project, the Singapore-based investor is in talks to buy a majority stake in NCC Power Projects' 1,320-MW Nellore plant.

It may be noted that foreign investors' interest in the Indian power sector had taken a big hit in 2001 when the erstwhile Enron had to unceremoniously exit the Dabhol power project in Maharashtra. Overseas investments dried up in the sector after that fiasco.

In the port sector, the new guidelines for determination of tariff for major port projects issued earlier this week are expected to enthuse investors. The new guidelines would allow market forces to play a greater role in tariff derermination and could accord a level playing field for operators at major ports with private ports which are acquiring volumes fast. "Till now, we have not been able to invest in India's major ports because of the old tariff rules and regulations. With the new TAMP rules, I am confident we will be able to invest now," said Henrik Lundgaard Pedersen, CEO, Asia Pacific region, APM Terminals.

In the port sector, the authorities allegedly have also created difficult operating environment for developers who have won contracts. So much so that many have pulled out or have not completed projects. Add to this the red tape and bureaucratic hurdles in dealing with the government, which compound the problems faced by private players. Take this instance. In 2008, Chennai Ports issued a tender for a R4,000-crore terminal project. By December 2012, Essar and Adani groups had bid for the project designed to handle four million containers annually. While Essar had submitted proposal for revenue share of 5.25%, this was not accepted by the government, although 85% of the project costs had to be borne by private developer. Adani's bid was not opened by the port because it hadnt got security clearance from the Union home ministry. In May this year, Chennai Port Trust asked for price bids again from all the pre-qualified bidders, but failed to receive any when the extended deadline ended on 26 June, after which they scrapped the contract.

In the highway sector, the investor sentiments are low as is evident from the fact that the National Highways Authority of India (NHAI) have decided not to award any new highway projects until November. GMR infra pulled out of 555-km Kishangarh-Udaipur-Ahmedabad in January this year, citing statutory delays. Similarly, GVK and Ashoka Buildcon also exited from their Shivpuri -- Dewas and Cuttak -- Aungul projects, respectively, on the grounds of delay in government clearances.

Apart from this, other road developers also want to become asset-light and asset-right, for which they are now divesting stakes from road projects. Recently, the government allowed developers to divest 100% stake immediately after financial closure with a view to give them the financial room to bid for upcoming projects.

After this relaxation came, the industry started to witness a churn where PE funds, sovereign wealth funds and many other infra players started scouting for buying stake in road assets, but no deal has been struck so far. GMR Infra, meanwhile, is expected to garner close to R800 crore by way of sale of two road assets in Andhra Pradesh and Tamil Nadu, respectively.

However, road developers still feel that the government needs to come out with further clarification on the exit clause. "Unlocking of equity funding for new projects by letting concessionaires exit ongoing and completed highway projects will not help in bringing in any new investments or FDI into the sector since it's mired in legal, taxation and commercial mess," M Murali director general of national highway builders federation has said in a letter addressed to the Prime Minister, finance minister and the minister for road transport. Clearly, more needs to be done by the government to make investors optimistic.

(With inputs from Vaishnavi Bala in Mumbai and Rajat Arora in New Delhi)