GMR bid for India’s biggest road project was too good to be true
Jan 08 2013, 2018
GMR Infrastructure’s decision to terminate the concession agreement with National Highways Authority of India (NHAI) for six laning of the 555 km Kishangarh-Udaipur-Ahmedabad highway is yet another example of the unravelling of India’s stuttering infrastructure promise. Billed as the largest deal signed by NHAI in terms of money offered to be paid by the developer, the toll road project is a prime example of all that is going wrong with India’s embattled infrastructure sector. Like the Mundra ultra mega power project, the Kishangarh-Ahmedabad toll road project was a product of the boom times when bullish sentiment overpowered common sense of project bidders. These more than optimistic estimates of reality are now beginning to show up. Both competitors as well as analysts who badgered the company for its excessive exuberance considered the toll road project bid way too high. Arranging the financial closure for the project too was a Herculean effort involving nearly two dozen banks, none of which were keen to have an outsize exposure to such a big, aggressively bid project. As the stock market tanked and infrastructure became a bad word on the bourses, GMR, which has had a spell of debt-funded acquisitions and growth, began to feel the pain of debt, which has impaired its ability to post profits for the past 18 months. In such a scenario, it becomes even more important for a project developer to ensure all projects are self sustaining and profitable. Sadly many projects have been found wanting, with developers not having done stress tests and sensitivity analysis to ensure the assumptions are sufficiently robust, to take shocks in real life. Like the GMR Kishangarh toll road project, the imported coal-based UMPP being built by a subsidiary of Tata Power too was a product of the go-go boom times. Developers took risks that they frankly had no way of hedging and then realising the risks tried to create partial hedges by buying coal mines in Indonesia. But a change in laws in the island nation has reduced the chance of a sweetheart deal to source coal. As a result, the project is now estimated to lose as much as Rs 400 crore a year. GMR is luckier in that it doesn’t face the Hobson’s choice of abandoning a half-finished project and writing off its investments or being stuck with a project that seems set to make losses over its life. It seems like it may get away relatively lightly by taking umbrage under certain provisions of the contract not being fulfilled by NHAI. It may yet end up paying a small penalty, but in the main, it seems to have escaped. The casualty of both these cases, however, has been the infrastructure build out in a country that’s starved of it. With government resources for plan expenditure limited, reliance on the private sector to fund PPP projects is proving to be misplaced. NHAI has realised that private firms are more interested in being EPC contractors than being project developers. As a result, it’s looking at bidding out more projects as EPC contracts. But this relies essentially on the ability of the corporation to raise finances and assume developer risks. It’s doubtful the country’s connectivity targets can be met on the back of NHAI’s balance sheet. If, instead, the authority was more focused on mitigating irritants such as unavailability of land on time or ensuring that all in-principle approvals for projects were sought before a project was bid, it would be leveraging private balance sheets to build out the country’s infrastructure. The lesson in all this for the government is that when it gets a bid that sounds too good to be true, somewhere down the line it certainly turns out to be so.