The road not taken

In May 2001, well before the highway development programme in India gathered steam, Mumbai-based Essar group decided to enter the roads business. The company bagged some stretches on the Golden Quadrilateral highway network connecting Delhi, Mumbai, Kolkata and Chennai. Essar’s area included the Harihar-Haveri stretch of 56 km and Chitradurga-Harihar stretch of 77 km — both spread through the state of Karnataka.
But neither of the projects had a smooth ride. In 2007, the National Highways Authority of India (NHAI), the apex body that manages India’s national highways, terminated Essar’s contracts. After Essar spent six frustrating years trying to complete what it had started, NHAI said it failed to deliver as promised.
And so started the blame game between Essar and NHAI. The company said the government body did not deliver, and vice versa. Essar alleged that NHAI provided the land late and in “bits and pieces”. The cost estimates for the projects were way off the mark and the project’s specifications and drawings were flawed, according to Essar. On top of that, NHAI sat on the company’s head to deliver, without keeping their end of the bargain.
The jury is out on the roads whether NHAI or Essar is actually to be blamed for the unfinished projects. However, the experience was enough for Essar to stay off the path of highway development in the country.
Rough Ride
Like Essar, Hyderabad-based GVK was also an early entrant to the roads sector. The company started on a pretty successful note, completing the Jaipur-Kishangarh stretch in 24 months in 2005 for Rs 706 crore.
But the experience was not without glitches. According to senior executives at GVK, NHAI tends to promise more than it can deliver — land acquired often falls short of what is proposed at the time of handing over of the project. GVK argues that NHAI’s consultants also go awry with their cost estimates — their costs are always lower than what companies estimate. This mismatch can lead to endless disputes on how much debt and equity would be recovered by the company if the contract gets terminated.
Though it completed the project on time, GVK failed to win any further bids from NHAI. The company says this was more on account of what they perceive to be over-aggressive bidding by competitors. Says Vijay Agarwal, head of transportation business in the GVK group: “The capital markets were very buoyant at that time. So, bids were equally aggressive. We did not feel that it made sense to match them”.
Another large company in the fray, Bangalore-based GMR Group, which has six highway roads on hand is facing its own set of problems. While construction and transfer of projects have been relatively smooth, operational problems are beginning to tell. Collection and leakages of tolls are causing problems for the GMR-developed Chandigarh-Ambala highway that got operational barely a year ago.
No Smaller Woes
Like the big players, lesser-known companies have their own tales of woe. KMC Construction, a company with presence in both road construction and building and operating toll roads, says it has not been smooth sailing all the way. Although the company has won many projects, Shashank Shekhar, vice-president of the company, says KMC has faced niggling problems all the time, but has learnt to live with them. The company bagged the contract for the Ichhapuram-Ganjam leg of the Golden Quadrilateral. But the project was hampered by the state government’s ban on quarrying in the region. Stones for the road project were available just 25 km away, but had to be brought from as far as 150 km due to the ban, says Shekhar.
Another KMC project — six-laning of the Gurgaon-Jaipur highway — was stuck for weeks owing to failure in availing ‘forest clearance’, something that should have been received well in advance. Moreover, collecting tolls has become a Herculean task. After KMC took over the task of collecting tolls from NHAI, the company found that the highway authority had in the past been quite lax in collecting toll. As a result, getting users to pay up became quite a challenge.
Soma Construction forayed into highway construction in 2001. The company has bagged many projects — as many as five build-operate-transfer (BoT) projects worth Rs 10,000 crore. D.V. Raju, senior vice-president and head of business development at Soma Construction, says that though the company put in every effort to finish projects on time, “the delays caused by the state government and NHAI tend to hold up projects”.
Then at times, collection of tolls — the very basis for the viability of the project — can be unusually delayed. Raju cites the example of the Bangalore Elevated Tollway. He says while the project is almost completed, the state government is yet to issue the toll notification. Without this gesture, it cannot collect tolls.
Clearing Potholes
The examples above partly illustrate why India’s ambitious National Highways Development Project (NHDP) has progressed way slower than it could have. The numbers tell the story. Despite policy being oriented towards tolls, during 2005-09 (till September), 78 BoT projects totalling a length of a little over 5,700 km have been awarded, but only 23 — with a length of 1,063 km — have been completed so far. Frequent changes at the helm of NHAI (see ‘Musical Chairs’) have made matters worse. But even more troublesome than these changes are the constantly changing government policies that have kept companies spinning.
Almost the entire Golden Quadrilateral — and the initial phase of the NHDP — was based on cash contracts (or EPC contracts), where NHAI paid money to companies to build roads. As it felt the need for more social sector funding, the government in 2005 decided to adopt the public-private partnership (PPP) route to build roads. In PPP projects, government support is limited — in the form of a grant of up to 40 per cent of the project cost — and the private sector has the right to collect tolls in order to recoup the investment for the road project.

There are more troubles. Convincing the big boys to fall in line is easier said than done. Trucks and commercial vehicles are just bypassing the toll plaza at the Dhule-Pimpalgaon highway by using the village roads. Raju says toll collections have already seen a dip by 10-15 per cent, and the company is yet to find a way to stop this.
MUSICAL CHAIRS
Too many cooks spoil the broth. Highway development in India has suffered from lack of consistency in decision making, besides constantly changing policies. Crucial decisions have been affected by constant changes at the helm of NHAI — five chairmen in as many years. Even smaller matters such as clearance of cheques have suffered. During the tenure of previous road transport minister T.R. Baalu, there were four changes in just 13 months.
The longest stint was probably that of N. Gokulram, who steered the wagon for just about a year under Baalu. This, despite the fact that NHAI chairman’s job has a fixed tenure of three years, extendable to five years. But Baalu blames everyone but himself for the changes. He says many of the chairmen under him failed to perform. “Those who were not performing had to be changed,” he says, adding there was one instance where a chairman reached “35 minutes late” for a parliamentary committee meeting. He says the appointments and removals in NHAI were made in consultation with the prime minister and the home minister. Baalu washes his hands off the project delays as well. While the minister is fine with changes at one level, he questions another. He blames the changes in the model concession agreement (MCA) for delays. “What was the need for a new MCA?” he asks. Baalu says no developer had problems with the old MCA (developed by NHAI), and nobody challenged it in court, so there was no need to change it. Initially, the government had decided to offer highways on toll (BoT) basis. If this mode failed to attract investors, then the government would offer the same road on annuity basis — where NHAI gives a yearly payment to the developer of a particular road; and if this too failed to attract investors, the last option was to go back to the cash-contract mode. According to a senior government official, a minimum of six months was lost negotiating this process in spite of the fact that it was known to all that some roads just did not have enough traffic to merit tolling.
Click here to read full interviewMoreover, the entire process of awarding and executing toll-based highways took close to three years to finalise. But even after these were finalised, the developers challenged some of the very restrictive clauses of the agreement. In 2007-08, NHAI had 60 highway projects to offer. But there were absolutely no takers. Amrit Pandurangi, who heads the transport and infrastructure practice for audit and consulting firm PricewaterhouseCoopers, says that there were “deal breakers” in the original policy documents. That is why there were very few bids.
David Birch, regional managing director of engineering consultancy Halcrow Group, says: “In order to attract investments in infrastructure, terms of contract must be fair towards investors.” Birch says land acquisition and identifying the real cost of infrastructure projects remain major areas of concern for investors.
The Journey Ahead
In its second avatar, the UPA government is trying to correct many of the mistakes it made in its first term. A committee has been formed under B.K. Chaturvedi, member of the Planning Commission, to resolve the problems dogging India’s highway development.
In effect, the new policy measures are a shift of tracks. Earlier, all roads were to be offered on a toll basis. Now, the government’s latest work plan for 2009-10 lists out the roads that can be tolled, which can be offered on annuity, and which can be given out on a cash contract basis. The latter two add up to about 30 per cent of the total 12,652 km planned for this year.

Moreover, under NHDP Phase IV (20,000 km), a major portion will be offered on contract or EPC basis — just like it was done in the Golden Quadrilateral. The new government policy says if traffic is less than 5,000 passenger car units, the road project under NHDP Phase IV should automatically be given on the basis of EPC.
In another major shift in government policy, a road developer no longer needs to hold a minimum amount of equity during the entire tenure of the project. The government has now allowed companies to exit a project and hand it over to companies that specialise in road operations. In short, a construction company can focus only on construction of roads and not bother with operating the toll booths.
These changes show that the government policy is running round in circles, and has virtually come back to the earlier policy of getting the road built through its own funds. Asks an official from one of the companies on condition of anonymity: “If this is not an admission of a failure in government policy, then what is?”
Even more critical is Partho Mukhopadhyay of Centre for Policy Research. He says the government appears to be doing just a “spell check” of the earlier policy rather than starting with a clean slate. Problems in toll collections have already begun to surface in the form of toll leakages. In states such as Orissa, truck operators have gone against the toll policy (see ‘State-level Roadblocks’ on page 55). Recently, the Kerala High Court upheld a public interest litigation against tolls. Developers say that if government policy does not ensure that there is no competing road (or alternative routes), which have the potential to take business away, then tolling would always be a risky business.
Based on feedback from developers, there is a fresh thinking in the government to allow road developers alternative sources of revenue. This can be in the form of wayside development — where real estate development along the highway can be offered to the road developer.
STATE-LEVEL ROADBLOCKS
It is just not land acquisition that poses a problem for developers and NHAI in getting the roads built. Government documents show that each state throws up unique, and bizarre, problems. In 2005, Uttar Pradesh imposed a unilateral condition asking NHAI to provide a 10-meter wide strip along their highway to plant trees. This was to compensate for the trees that NHAI had to cut to build the roads. This brought the highway programmes in the state to a grinding halt.
In Karnataka, NHAI expelled a contractor in January 2007 for poor performance and handed over the project to Gammon India. But the expelled contractor approached police and local courts, and filed “false” criminal cases against NHAI officials. The project is delayed by two years. Similarly, a year back on NH-60 at Santoshpur in Balasore district, local people demanded a cut in user fee. Local authorities even deployed security personnel to ensure the demand is met. The daily loss of revenue was Rs 54,000. In Panikhoile on the same highway, private bus operators using the road have not been paying user fee. The loss: Rs 4.66 lakh a day.
In Rajasthan, NHAI says there have been instances where the state government demanded compensation for acquiring government land. A few years back, district collector of Bhilwara ordered sealing of NHAI bank accounts saying the body had not paid compensation. NHAI, however, says intra-departmental transfer of government land is free of cost.
Both Raju and Agarwal agree that there is a dire need to allow developers to create different sources of revenue. This will certainly help, says Agarwal of GVK. “If real estate developers can benefit from a new highway made by us, then we (road developers) should also get a share of this benefit.” Some states such as Uttar Pradesh are already doing this for their state roads, according to Chaturvedi. He says the government may implement such a policy for the national highway projects as well.
Such a change would not only make developers happy, but would also give additional security to banks that fund road projects. According to NHAI, close to $41 billion of the $69 billion is expected from private investments (see ‘Fund Demand’). And these investments are largely dependent on debt financing.
Clear Fund Channels
Developers have already expressed concerns that getting bank finances in the future may pose a problem. This is because loans to road projects are treated as unsecured loans —similar to credit card loans. Banks do not have the backing of any physical assets — which act as a security for the loans given to a road project. Ajit Gulabchand, chief executive of Hindustan Construction, says while the recent steps undertaken are in the right direction, issues such as project financing remain challenges for greater investment in infrastructure.
The Reserve Bank of India may have the last word on the issue of financing. Till then, the government will just have to keep thinking of ways of making investments in this critical sector more attractive. And that will be a million- dollar question.

Unbelievable functioning of Indian Parliament

Could'nt resist putting this one up on the blog !! This is Nandan Nilekani's brief of his first day in parliament. Do go through. Cheers!

Continuing my tryst with capturing the life and times of Nandan Nilekani in his new avatar as a Cabinet Minister, here is what he had penned after his first day in the Parliament. The last entry stopped when the House was just about to begin. Let’s see what happened thereafter….

The House was in pin drop silence. I was brimming with anticipation and excitement!! !! Manmohan had informed me that my introduction was one of the important points of the agenda. I hoped that I will be able to make my speech properly. After so many interviews and conferences, I was nervous today!!!! After the Speaker indicated that the proceedings of the House could begin, Manmohan formally introduced me to the entire House. He mentioned that as the head of the Unique Identification Authority of India, I was responsible to ensure that each and every Indian had a digital smart card as a proof of his existence.

Manmohan spoke about why I was selected and also some references to the various projects executed by me in Infosys were mentioned. The House listened with rapt attention. I was asked to say a few words and I did exactly the same!!! I thanked the Government of India for having given me this opportunity and I assured the House that I would strive to successfully deliver this project. The Speaker then formally inducted me into the House and before the proceedings could move any forward, there was a small commotion on the other side of the hall.

It was Minister of Textiles who had a comment to make before the next point on the agenda. He made a request that I should be attired in a more austere way instead of a flashy suit. It did not go well with the image of a minister who should live to serve the common man and should be less ostentatious in his habits. I stood up to reply. I offered my apologies to the Honourable Minister and assured that I shall be in a more acceptable dress next time. I felt that he was right. We also used to have corporate dress code in Infosys. So it's here as well!!!!

I sat down and felt somebody nudging me. I turned around and to my surprise; it was the former Indian skipper and one of my favourite batsman Mohd. Azharuddin. I remembered that he had recently won the elections. I smiled at him and mentioned to him that I used to like his game very much, shaking his hand. No Rolex, I noticed. Azhar told me that he would “fix” me an appointment with an Italian designer who had designed his dapper Kurta suit. An Italian designer in Milan doing Kurtas!!!!! I made a note of this and reminded myself to give this example to Friedman for his next book,” The World Markets are flattened”.

Since there was no doubt about the “Fixational” capacities of Azhar, I told him to give me the details and I would consider. The proceedings of the House went on with numerous bills being debated and passed as I sat as a passive audience waiting for my project’s turn to come up. After the lunch break, it was the moment for me!!!!

MY PROJECT’S FIRST REVIEW CAME UP FOR PRESENTATION.

I was at sea. My laptop did not have any reserve power. I went to Manmohan and apprised him of the situation. I was sweating. He calmly replied that this would not be a cause of concern. I was flummoxed!!! ! The Speaker asked me to explain to the House on what were my plans for the Unique Identity Project. I replied that I have a plan prepared for 30-60-90-120 days’ milestones and I have presentation to make for which I need a power socket, a projector and a screen. I had no idea what was going to happen after this.

The next couple of minutes were a complete jolt for me. I was completely in a tizzy. Let me just summarize what happened. A Joint Cabinet Secretary Committee was set up to judge the feasibility of my request. The Under Secretaries for the Ministries of Power, IT and Broadcasting will prepare a Viability Report after scrutinizing National Security threats to my request. This was because the power socket comes under Power, laptop comes under IT and projector comes under Broadcasting. I have also been told to reconsider my timelines of 30-60-90 days and start thinking in terms of years. Probably, they are right. I did not have the foresight in this matter.

The summary of the issue is that I need to come up with a more inclusive, democratic, comprehensive long term plan for this project to be executed over the next five years. I have also been given a presentation slot 3 months from now (by which the issues related to the power cord etc will also be resolved). I am filled with mixed reactions. I was planning for a quick resolution; the management wants a strategic solution. I come out of the House and text Murthy.

“You won’t believe it but these guys work just like us. I am on a NATIONAL BENCH for the next three months!!!!!! !!”

GOVT Considers FDI in Real Estate

All said and done, the government is already on the right track by considering the hiking of income tax exemption available for interest payment on home loans to Rs 2.5 lakh a year. However, there are still a number of blanks to be filled. The Budget should make high-priority provisions for the laying down of necessary infrastructure so that new areas can be opened up. The concept would be to create and link-up satellite settlements to main cities that will help tackle the demand-supply mismatch.

The Budget should provide clarity on the STPI guidelines whether they will remain or not, or whether they have changed. The Budget should offer clarity on the introduction of a real estate regulator, since the fact that India is now a member of the global village makes higher levels for transparency imperative. This regulator may not necessarily decide on rates, but should put down firm principles in terms of property dealings and also quality parameters in terms of rating of constructions.

The Budget should provide forward momentum for real estate mutual funds so that real estate becomes accessible to retail investors, as well. The Budget should free the rental income yielded by commercial premises from service tax. The Budget should extend the tax holiday under Section 80-IA (4) (iii) for developers who build, operate and maintain industrial parks so that the compromised IT industry gets a shot in the arm. The Budget should finally and decisively enable the entry of foreign direct investment into the real estate sector. The Budget should reintroduce tax exemption for developers who construct flats of smaller size with tax benefits, offer incentives to developers to concentrate more on affordable housing and rationalise stamp duty registration charges for land so that obtaining land for affordable housing becomes more feasible for developers.

Tax exemption to be raised to Rs 2.5 lakhs from Rs 1.5 lakhs

The government is taking some bold positive steps to boost the real estate sector. The tax exemption limit for the interest on a home loan may be raised to Rs 2.5 lakhs from the current Rs 1.5 lakhs in the upcoming budget. Besides this, the repayment of principal amount is part of investments eligible for benefit under Section 80(C) of the Income-Tax Act, which has a ceiling of Rs 1 lakh.

The existing tax exemption limit is considered inadequate at a time when a two-bedroom house in big cities costs at least Rs 25 lakh. Considering a person takes a loan of Rs 20 lakh at an interest rate of 9.5%, he would pay Rs 1,88,493 towards interest alone in the first year. His annual interest payment in the first five years would be more than Rs 1.5 lakh. Hence a raise to Rs 2.5 lakhs would benefit the home buyers and be an impetus for growth of the housing sector.

If the exemption limit is hiked to Rs 2.5 lakh, then a person paying that much home loan interest in a year will save an additional Rs 31,000 in tax every year (WOW!!) . This saving of over Rs 2,500 a month would be significant for most borrowers, making home purchases more affordable. However, as per existing norms, the tax benefits start flowing in only after the construction of the house is completed, which usually takes 2-3 years in case of builder flats. The housing industry has urged the government to allow for the deduction as soon as loan repayment starts, as it would give substantial relief to home buyers and boost demand

TATAs ambitious housing projects

After successful completion of cheapest car project, Tata group is now working on cheapest hosing solution through its two realty subsidiaries, Tata housing and Tata Realty. Tata group has discussed about the land requirement for the project and they have decided to develop land in 3 major ways. First one is Tata housing working with the company that owns the land. Second one is, Tata housing can also take the SPV route and then decide on the profit sharing ratio and the third one is the option of purchasing the land. After completion of project, the property could either be sold or leased. Managing committee refused to share any kind of details by saying that it would be premature to comment.

Real Estate Update

Indian realty majors have been reeling under a severe cash crunch for a long time now. Will the crisis subsiding (atleast seeming to subside), real estate players have started taking prudent measures to improve their financial condition. Capital Intensive projects have been scrapped/ deferred and affordable housing has become the buzz word.

Players are looking at deleveraging their business with asset monetisation and equity stake sales. Sobha is looking at raising PE funds (in talks with Actis, JPMorgan, and IL&FS Private Equity), DLF is planning to sell its non core assets, Unitech has done a QIP, Parsvnath is planning a 2500 crore QIP and others have been also been following the same path.

With prices down ~30% from the peak, genuine buyers are returning to the market, albeit only in the housing segment. In the last three months, Unitech and DLF have sold 3.2msf and 2.5msf of launched properties. Demand is bound to accelerate over the next 12 months as the economy revives and interest rates stay soft, though commercial demand would come only after the

oversupply is absorbed.

Rentals at Saket for commercial/ retail property have fallen to Rs 120 (who would have imagined that last year). In Gurgaon, rates for new apartments have been cut by over 30% by builders. A lot of construction activity seems to have restarted with the realty players having consolidated their finances.

However, there is a lot of dirt and debt in the balance sheet of most of the realty players which will need prudent financial decisions to clear. Real estate is still away from recovering. Real estate stocks though have shown a decent bounceback in the recent rally of the Sensex. Most of the stocks are up over 50% from its March lows.

The IPO market has seen some activity with Mahindra Holidays coming out with a public offering at a conservative price. The issue has been subscribed 20% on the first day itself, though the pre IPO placement to SBI and Jacob Ballas have taken a 32% haircut on their price!

Education sector the next target for Real Estate players!

At a time when the biggies of real estate are divesting non core businesses, a clutch of mid-level developers are chalking up plans to invest in the ‘recession proof’ education sector. In the last one month, four real estate developers have announced plans of setting up business schools across the country with the combined investment exceeding Rs 500 crore. The Chennai based R. R Industries, Ahmedabad based Omega Realty, Delhi based Ansal Plaza and Kolhapur based Sanjay Ghodawat group are betting heavily on the `business of education’ to diversify their businesses; a model that has worked successfully in some countries like US and Canada.

With diminished demand for housing and a cash constraint, it’s a natural progression for many developers with available land banks. The reason for the rush into education is the burgeoning demand supply gap and also a logical extension into an adjacent category for builders who have the necessary wherewithal.

Ansal has tied up with Educomp and has leased out its three operational schools in Gurgaon to Educomp. The realty major also plans to build school in townships being developed by them. Similarly, the Ahmedabad based Omega Realty plans to get into business schools - to be named as United World School of Business - with a proposed investment of Rs 105 crores. The three proposed schools in Mumbai, Delhi and Ahmedabad will commence operations in academic session 2009-10.

Sanjay Godhwat Group plans to offer courses in engineering, management and also in the pipeline is an international school. The development of the 150 acre Sanjay Godhwat Institute will happen in three phases with an investment of over Rs 250 crore. The trend is being seen amongst the builders in south too. Chennai based real estate firm R. R Industries has tied up with National Management School (NMS) which is being set-up by US academics to start 25 business schools across the country with an estimated cost of Rs 9 crore.

It is only time before which the biggies, i.e, DLF, Unitech, Sobha get into education.