BW Communities

Luring Private Funding Into Indian Infra

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[When DP World was vying to build a fourth container terminal at Mumbai's main port this year, the Dubai-owned giant made what it thought was a solid bid, proposing to share one-fifth of the terminal's income with the government. Then a rival came along with a bid that beat all-comers, offering to hand over 51 per cent of the port's takings to New Delhi to secure the project estimated to cost 67 billion rupees ($1.4 billion). Such generous terms are part of an emerging pattern of companies making ambitious - some say unrealistic - bids in a race to cash in on a massive push by Prime Minister Manmohan Singh's government to lure private funding into infrastructure. "The bid competitiveness is increasing to the extent that the projects will become unviable," said Devang Mankodi, finance director for South Asia at DP World . "There is a lot of hype about India's growth story and probably that is pushing some of the entrepreneurs to bid aggressively," he said. "No one wants to miss the bus." PSA International, the Singapore state company that is the preferred bidder for the Mumbai port deal, declined comment. While India hopes that half its targeted $1 trillion in infrastructure spending over five years is privately built, attractive projects are scarce, making for fierce bidding. That means the government may get an attractive deal in the near-term, but it puts heavy pressure on companies and poses a longer term risk if such projects are delayed or derailed due to over-optimistic assumptions on costs or revenue. Winning bids can sometimes be ten times the second place offer, said S. Nandakumar, a sector specialist at Fitch Ratings. Some projects attract dozens of bids. Such aggression has prompted major Indian firms such as Reliance Infrastructure, owned by tycoon Anil Ambani, to focus on bigger projects such as expressways. "In small projects the competition intensity is completely crazy," said Lalit Jalan, chief executive of Reliance. "So we will focus on the large projects where we will have fewer and more rational competitors," said Jalan, whose company built a slick high-speed rail link to Delhi airport, the first of its kind in India. Irrational Competitors Strapped for cash, New Delhi is pushing a model known as build-operate-transfer (BOT). Firms bid to build a road or a metro and operate it for a fixed period, collecting toll or ticket fares before handing it over to the government. To win, bidders compete to maximise the government's share of revenue or minimise the contribution New Delhi must cough up to ensure projects are viable. "Today you have four or five players who are aggressively fighting for a project. So basically they have no choice but to try and increase the financial revenue share ... as high as they can to win the project," DP's Mankodi said. "The risk associated with that is that once the long term sustainability of the project is being tested, you will have issues," he said. The risk of that happening hasn't deterred a slew of companies pitching for infrastructure projects, however. GMR Infrastructure Ltd, which built Delhi's swanky airport and will soon build India's biggest highway, for example, bid on 25 projects last year and won exactly one, according to a spokesman. "Earlier we were looking at around 6-10 people getting qualified for a bid. Now around 40 normally get qualified," the spokesman said. Newcomers to the BOT model are creating problems, said Shashank Shekhar, vice president for business development at KMC Constructions. "Novice players means very new guys who don't have experience of BOT, they are getting into the BOT, which is actually spoiling the market today," he said. Optimism And Scarcity Builders of roads, power plants and other big projects are bidding in part because of optimism over the sheer demand in an economy growing at roughly 8 per cent a year with a severe infrastructure deficit. New Delhi expects an annual average of $100 billion of private investment in infrastructure between 2012 and 2017, although the government has consistently missed its targets for both funding and construction. A slump in India's real estate sector and a drying up of work in parts of the Middle East amid unrest in several countries, means Indian builders are turning to domestic infrastructure. A dearth of attractive projects is another factor. The fallout from a spate of corruption scandals, red tape and land acquisition hassles have slowed the award of bids and subsequent construction work. In roads, for example, India managed to build about 5 kms (3 miles) a day in the last fiscal year, far short of New Delhi's target of 20 kms a day. The Indian government, which unlike China is not flush with government funds to spend on big projects, welcomes the competition. For its part, China has much larger state resources and a much better record of execution on infrastructure projects, although now Beijing appears to face a different sort of headache. The state has accumulated a mountain of bad loans for infrastructure projects - part of a stimulus package during the economic slowdown - leaving a clutch of redundant works. "We want an aggressive bidding climate," Montek Singh Ahluwalia, a top adviser to the government, told Reuters. "It's the job of the private sector to make intelligent bids." Some builders have called on the government to shut out bids that look outlandish and end a mentality in New Delhi that they say is more keen on getting things done cheaply than done well. "We need to move out of the syndrome that the cheapest is the best. It's rarely the best," Shahzad Nasim, Singapore-based global CEO of the engineering firm Meinhardt, told Reuters. (Reuters)