Those lured into an industry at its peak often have to face the ignominy of having to back down. This is amply demonstrated in the grand plans of Indian companies to join the shipping industry, when it was enjoying its biggest boom in a quarter of a century. Around the year 2006-07, India was touted as the next global destination for building of ships. It was supposed to be a natural progression of the shipbuilding industry's migration from Europe to Asia, on a constant hunt for cheaper manufacturing destinations.Everything seemed just right. An economic boom coupled with IMO (International Maritime Organization) rules that stipulate phasing out of ships older than 25 years as well as single-hull oil tankers by 2010 (see ‘Battling The Spill Effect', BW, 18 May 2009) engendered a huge rush for new ships. Big global shipyards were saturated with orders — a 2008 KPMG report estimated that in the previous five years, average delivery was around 60 million DWT (deadweight tonnage, the amount of load a ship can safely carry), whereas orders placed for new ships were for 100 million DWT. This resulted in orders for smaller vessels, such as offshore supply vessels (OSVs) and bulk carriers moving to countries such as India and Vietnam.Indian shipping's cause was also helped by the government, which had introduced in 2002 a subsidy of 30 per cent on the sale price of ships. The move was designed to help them compete in the global marketplace. As a result, Indian shipping industry's order book grew multi-fold, from 0.3 million DWT in the 9th Plan (1997-2002) to 1.3 million DWT in the 10th Plan (2002-07). That helped take India's market share to 1.3 per cent of the global order book from a mere 0.1 per cent earlier. According to Planning Commission estimates, the industry can achieve a world order book share of 2.2 per cent worth Rs 37,000 crore by 2011-12.Enticed by the bulging order books of existing players and great returns, several Indian companies announced big investment plans for shipbuilding. Existing players, too, joined the fray, announcing ambitious expansion plans (see ‘Caught In No Man's Land'). In all, 14 companies announced newer or expansion projects worth $5 billion. Once implemented, these investments were to take India's shipbuilding capacity up to 5 million DWT by 2012, helping it gain a global market share of 2.2 per cent. Given that these were infrastructure investments, the government allotted them land in coastal areas for free, or at very cheap prices.But before they put money on the ground, things changed. The global economy went into recession, and with it the shipping trade. The Baltic Dry Index, which tracks the freight rates for transporting dry bulk cargo through sea, plunged 80 per cent from 8,291 in April 2008 to 1,659 in April 2009. As trade declined, so did freight volumes and demand for new ships. World over, orders began to be postponed or cancelled, as many buyers could not pay for the ships they ordered. In India, fresh orders started declining from October 2008 onwards, and have come to naught by April 2009. The government, too, did not extend the subsidy, which expired in August 2007, and financing — a key element in an industry that manufactures only on order — became impossible to find.Not surprisingly, the companies developed cold feet. Most of the big plans have been put on hold. Many companies have not even raised money for their projects, and initial public offerings (IPOs) of two companies — Cochin Shipyards and Goodearth Maritime — have been shelved. Everyone is waiting for the government to bring back the subsidy and rationalise a lopsided tax structure, and, most importantly, waiting for the economy to turn.Dropping AnchorCompanies have a variety of reasons to show for delaying their projects. RIL Chairman Mukesh Ambani's Rs 8,000-crore plan to build a shipyard and a large-scale dredging company as part of the Maha special economic zone (SEZ) at Rewas, Maharashtra, stalled after the SEZ ran into land acquisition trouble. Engineering giant L&T, which operates a yard at Hazira in Gujarat, had announced plans to invest Rs 3,000 crore in a mega shipyard at Kattupalli in Tamil Nadu. A spokesman for the company says that the project is in a preliminary stage with land still to be acquired, and Rs 1,500 crore will be invested now. The balance will be put in when the global situation improves. According to brokerage firm IDFC-SSKI Securities, L&T will focus only on ship repair and defence demand. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } Bharati Shipyards (BSL) Managing Director P.C. Kapoor says the company's greenfield yards at Dabhol and Mangalore are on schedule. "Both these yards would enhance our shipbuilding capabilities," he says. But analyst Pritesh Chheda of Emkay Global counters that Bharati did revise capex plans for both yards. "These are now spread over 2010-11," says Chheda. "It has also kept the Rs 2,000-crore greenfield yard in West Bengal (with the Apeejay Group) on hold till demand revives."Shipping Corporation of India (SCI) is waiting for the right partner before executing its project. "We have been talking to interested parties, but have set no timeline for execution," says Sabyasachi Hajara, chairman and managing director of SCI. He adds that creating huge capacities amid a crisis does not make sense.Mercator Lines Chairman H.K. Mittal's "personal" venture to build two shipyards for cargo-carrying ships in Gujarat and Maharashtra for Rs 2,300 crore is yet to cross the preliminary stage. Mittal blames the delay on the crisis engulfing the shipbuilding industry: "Ships meant for exports are getting cancelled or delayed as buyers are not able to manage finance."The fate of the proposed Rs 3,200-crore shipyard in Cuddalore in Tamil Nadu by Chennai-based Goodearth Maritime is unknown. The company managed to raise Rs 260 crore from IDFC Private Equity in 2007-08, but its IPO, which was to bring in a bulk of the money, did not take off. Managing Director S. Madhan could not be reached for comment.Mumbai-based Dolphin Offshore's Rs 400-crore plan for a yard to make smaller vessels has also been held up. "We are awaiting clearances from the Gujarat government on our shipbuilding proposal," says Satpal Singh, managing director of Dolphin Offshore, which is one of the few companies to have acquired land for its project. Tuticorin Port Trust's Rs 1,400-crore yard proposal is also awaiting clearance from the Ministry of Shipping. "The management is in talks with the government over certain policy issues," say sources in the Port Trust. The project is behind schedule by at least two years.Chennai-based Tebma Shipyards has put off its plans to build two yards for Rs 1,000 crore. "We are in the process of acquiring land, as there is no hurry in terms of demand," says P.K. Balan, chairman of Tebma Shipyards. "We hope demand will recover by 2011, by which time we will expedite the process." The company has an order book for 16 vessels, which it hopes will take it through the current fiscal.Among the very few projects that are actually underway is Mumbai-based Pipavav Shipyard's (PSL) Rs 2,900-crore project to create an offshore fabrication yard by end-2009. PSL is, at present, constructing a number of Panamax bulk carriers (large ships of at least 60,000 DWT in size that can pass through Panama Canal) of 74,500 DWT each, among the largest ships being built in India today. PSL has also received ONGC's contract for the construction of 12 OSVs. "PSL's current order-book extends up to 2012," says a company spokesman. "By that time, economic conditions would have improved following the recovery measures being taken by governments worldwide."Also on schedule is ABG's Rs 1,650-crore project in Dahej. "We have now started building rigs for the oil and gas industry," says Dhanajay Datar, CFO of ABG. "ABG has completed 40 per cent of the work on the two rig orders it has received from Essar." However, it has not received any money from Essar for the orders, which is stretching its working capital limits, according to analyst Kejal Mehta of Prabhudas Liladhar.Looking AheadAnalysts say the crisis is the result of investment decisions taken by only looking at the order books of existing players, and neglecting future viabilities. In fact, many companies are unsure of the long-term strategy for the sector in the larger scheme of their core businesses. Further, clarity on government support is getting vague. Last December, former Shipping Minister T.R. Baalu had told Parliament that the reinstitution of the subsidy was under consideration. But it is yet to take place. SCI's Hajara, though, says he is confident that the subsidy will return. Analysts say it may be limited to 20 per cent at the insistence of the finance ministry. What might be needed to put the ambitious investments back on track? A lot, actually; including the return of the subsidy, easier finance, a more rational tax structure (the industry is subject to 12 different direct and indirect taxes), faster replacement of old and single-hull ships. It will also require "favourable investment policies that would encourage shipbuilding", says M. Jitendran, managing director of India's biggest shipbuilder, the state-owned Cochin Shipyards. He adds that one way to beat the downturn is to invest and build capacities that would fetch better business when the tide turns.That is something companies, who had announced big shipbuilding plans, are not doing. They are just waiting for the economic tide to turn. As Jitendran says, "A pick-up in trade volumes is necessary to inspire freight rates, which will put confidence back in investors." Yes, but given that many of them were given government land for free, can they afford to wait?Meanwhile, with only three of the 15 ambitious projects announced having got underway, India's quest to be the next big shipbuilding destination will also have to wait.sreevalsan dot menon at abp dot in var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') }
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As part of the strategy to fast-track the National Highway Development Programme (NHDP), undertaken by the National Highways Authority of India (NHAI), the Centre plans to link the release of Central Road Funds (CRF) to states to the cooperation extended towards the highway development programme. Active participation of state governments in getting all clearances in place is crucial for getting road construction works to be executed on time. Here factors such as land acquisition are important hurdles where state governments have a crucial role to play.Road transport and highways minister Kamal Nath says that the Centre plans to release funds from the CRF on the basis of the proactive role states play in expediting state-level clearances as well as getting bottlenecks removed on time.CRF is a dedicated fund created from the cess on petrol and diesel. These funds are to be used for the development and maintenance of national highways, state and rural roads as well as for building road overbridges and underbridges. Fifty per cent of funds collected through cess on diesel go towards rural roads. The rest and the entire cess on petrol is distributed among national highways, state roads and towards the requirement of railways. While the new CRF norm is not aimed at any particular "non-cooperative" state, in the past Uttar Pradesh had stalled the NHDP for four years insisting that NHAI should provide a 10-metre strip of land along the national highway to plant trees. This was to compensate for the trees that needed to be cut to build the road. But NHAI was unable to meet this demand as it was not always possible to get land along the proposed national highway. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } (This story was published in Businessworld Issue Dated 17-08-2009)
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The ongoing feud between the Ambani brothers will impact the New Exploration Licensing Policy (Nelp), say sources in the directorate-general of hydrocarbons (DGH). The next round of Nelp — Nelp VIII — offers 70 oil and gas blocks for auction. The government has extended the last date for bidding to 12 October, and, if sources in the petroleum ministry are to be believed, it is likely to be extended further "as the current controversy is not a good sign to attract foreign investors". While the battle between Reliance Industries and Anil Dhirubhai Ambani Group on gas pricing has put off foreign investors, the government's assertion that no company can claim ownership of ‘a national resource' has also created discomfort amongst the private oil and gas companies, says a senior executive of a foreign oil and gas company, which had bid in Nelp VII.The petroleum ministry has planned road shows in India and abroad to attract investors. According to DGH sources, the response to the roadshows will determine whether the October deadline will be adhered to. The government has clarified that gas producers will get tax holiday for seven years, but there is no clarity on whether they will be exempt from service tax. However, some analysts are optimistic. "Most of the issues have been cleared, but a few remain that are minor, and this round should see good bids from foreign players," says Ajay Arora, partner for transaction advisory services at Ernst & Young. A "good bid", however, is dependent on market sentiments. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } (This story was published in Businessworld Issue Dated 17-08-2009)
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A slew of launches at discounted prices have made summer a busy season for builders. Or so they say. Delhi-based Unitech has been among the more active ones, with nearly a dozen new projects going on sale. In Gurgaon's Sohna Road, there is Uniworld Garden II and Uniworld Resorts. In Noida, it has launched Uni-Homes in Sector 117. The typical ‘affordable category' one-bedroom home costing Rs 2,500- 3,000 a sq. ft, is in the range of Rs 21-23 lakh — nearly 20-30 per cent below the July 2008 peak. Unitech MD Ramesh Chandra, claiming success with the new round of affordable housing projects, said the company had sold 4,000 units over the past two months, and is certain it would net another 20 million sq. ft over the next year.To beat the slowdown, builders have been offering new financial packages that they say are luring buyers. Emaar MGF's luxury segment offerings, costing above Rs 2 crore, have an arrangement for the builder to pay the EMIs till the owner occupies the apartment, says Shruti Gupta, country head of Hamptons International, a property broking house.Confidence seems to have returned and some developers have already announced price hikes of 5-10 per cent. Unitech, for instance, says it has upped prices by Rs 50 per sq. ft for its Uniworld Garden II and The Residency in Gurgaon. But are prices really going up or are these claims of price hikes aimed at drumming up a lacklustre market?Playing With PricesThose watching the property market are suspicious of builders' claims. Property brokers Knight Frank India's chairman Pranay Vakil says prices are still plummeting, and the hikes were only in projects that are nearing completion. "The Bombay Silk Mills residential project in central Mumbai, which will be completed in two months, is selling at Rs 13,000 a sq. ft compared to the booking rate of Rs 12,000 a sq. ft," he says.Pankaj Kapoor, MD of Liases Foras, a property research firm, pooh-poohs claims of prices moving up. "Builders are playing a pre-scripted game. Most of these new projects are in remote locations and booking amounts of just Rs 50,000 or a lakh do not reflect actual sales when there are dozens of cancellations," he says. "Investors have taken positions in these projects, and the so-called price hikes are to facilitate their exit in favour of a new set of investors."Liases Foras as well as Crisil Research, which has just released a property market survey, agree that average residential property prices have fallen around 30 per cent since the peak time of June 2008, and can further soften by 10 per cent by the end of the year. The Crisil survey, in fact, says prices in satellite towns — Faridabad in the NCR, HiTech City in Hyderabad and Rajiv Gandhi Salai in Chennai — flooded with over-supply might see a sharper fall.However, while the residential market is expected to stabilise in the first half of 2010, commercial and retail property faced with huge supply in the pipeline, is expected to see a falling market — both in capital values and lease rentals — over the next two years.Problem Of PlentyIt seems there is a pick-up in consumer activity in the property market, but buying is concentrated in the residential sector alone, and that too only in metros such as Mumbai. The paralysis in the office and retail segments continues. Simultaneously, projects launched 2-3 years ago are now ready for sale. This has created a general glut of stock that is reducing prices. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } Despite claims of successful launches, the inventory of all big developers show large unsold stocks. For instance, a Merrill Lynch report on DLF reveals that in Gurgaon it had an unsold stock of 2.5 million sq. ft. "In Chennai, over 70 per cent of the new projects including DLf's land banks are located in Old Mahabalipuram Road and Sriperumbudur. DLF cut prices but still has 50 per cent of the inventory," says Vandana Luthra, analyst at Merrill Lynch .The commercial property glut is even worse. DLF in Mumbai had bought the Mumbai Textile Mills investing Rs 700 crore for 17 acres of prime land. This ensures a potential supply of 3.6 million sq. ft of retail/mall and commercial space. The only problem is, other textile mills in the vicinity were also sold to developers, and are expected to bring in 10 million sq. ft of space over the next few months.Vakil says the most blighted segment of the property market will be the commercial sector, which will see a supply of 163 million sq. ft. in FY 2010, against a projected demand of 132 million sq. ft.Queing Up For QIPs Builders have tried to solve the problem of mounting debt and poor cash flows by launching projects, and then using the initial instalments to complete projects and meet short-term debts.But sales have not been too good. This has generated a queue of builders before the qualified institutional placement (QIP) window. It all started with Unitech raising Rs 1,620 crore in April, albeit at a discounted valuation, with the promoters selling around 13 per cent of their stake. "But it also showed the way that realty was still in demand," says Abhisheck Lodha, director of the Lodha Group. Buoyed by a successful first round, Unitech has closed a second QIP round raising Rs 2,800 crore. The proceeds will bring down its debt to around Rs 5,000 crore.QIPs, a quicker way of selling equity to investors, suddenly became the summer fashion. Indiabulls Real Estate in mid-May raised Rs 2,585 crore through a QIP by selling discounted shares to overseas investors including TPG Capital and Fidelity. Since then, about 40 companies, most of them real estate or construction giants, have secured clearances from their AGMs to raise over Rs 60,000 crore through QIPs. These include Parsvnath Developers intending to raise Rs 2,500 crore, Sobha Developers Rs 1,500 crore, HDIL Rs 2,500 crore, Akruti City Rs 2,500 crore and construction group HCC Rs 1,500 crore (See ‘Qualified List').But the irony is that the bull run that prompted these companies to go to the market turned against them. By the time these companies started their road shows and fund-scouting, their stocks had risen three-fold from December last year, and investors found them too expensive. It is also a case of too many suitors chasing too few investors.The road show became a flop show. HDIL met lukewarm response during its Singapore sorties, and its Executive Director Sarang Wadhavan said the QIP was on hold till the market improved. GMR Infrastructure has formally pulled out, while Parsvnath and Sobha are believed to be facing heavy weather.This has left builders in a bit of a jam. With monsoons settling over the country, sales will peter out as consumers take a break from home-buying. On the other hand, builders seem to have exhausted all the traditional routes to raising bridge funds — debt, private placement and QIPs. The only hope they now have is that when sales resume in the post-Dussehra festival season, the market would have turned for the better.gurbir dot singh at abp dot in var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') }
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Reliance Industries (RIL), owned by Mukesh Ambani, and Reliance Natural Resources (RNRL), owned by his younger brother Anil Ambani, are set for a final showdown as the two companies moved the Supreme Court on Tuesday to help resolve their five-year-old feud on supplying gas at the price agreed upon in the family agreement.This tussle between the two brothers has consumed a lot of media space and even Parliament's precious time. Many members of Parliament have sought answers to a host of questions that are directly related to the two warring brothers' business.BW brings you some of the questions asked on the floor of the House in the past three years, along with the government's responses. For Anil Ambani?Question by Swadesh Chakrabortty (CPI-M)Whether the government is considering revision of gas price of Reliance Industries (RIL) as and when the gas is available from KG Basin. Whether RIL has requested the government to raise the gas price at $4.20 per unit; whether Oil and Natural Gas Corporation (ONGC) is supplying gas at a price of $2.2 / unit.Answer by Dinsha Patel, minister of state in the ministry of petroleum & natural gasNo, sir. No request has been made to the government by RIL to raise the gas price. Under administered price mechanism (APM), gas is being supplied by ONGC to power and fertiliser sectors at Rs 3,200 / thousand standard cubic metres (tscm) and to transport sector and Court mandated small consumers at Rs 3,840 / mscm. In the North East, the supply to the mentioned categories of consumers is at Rs 1,920/mscm and Rs 2,304/mscm respectively. At US$ 1= Rs 45, these prices translate to US$ 1.792/mmbtu, US$ 2.15 / mmbtu, US$1.076/mmbtu and US$ 1.20 / mmbtu, respectively. APM price is not comparable with market determined prices under production sharing contract (PSC).Question by Basudeb Acharia (CPI-M)Whether higher prices are being charged by RIL from National Thermal Power Corporation (NTPC) for the gas explored from the blocks awarded to RIL by the Union Government...Answer by Dinsha PatelAt present, no gas is being sold to National Thermal Power Corporation (NTPC) by RIL. (The) government has formulated New Exploration Licensing Policy (NELP), which promotes investment in exploration, so that adequate oil and gas are available at market determined prices. The natural gas being produced by ONGC and Oil India (OIL) from nomination blocks is sold to power and Fertiliser sector at APM prices... The price of crude oil is to be determined on the basis of the international prices of reference crude oils of similar characteristics and quality to the crude oil in respect of which the price is being determined. The gas price/formula submitted by contractors is required to be approved by (the) government. In case of crude oil, the calculation, basis of calculation and the price determined by the contractor is also subject to agreement by the government.Question by Amar Singh (SP)Whether it is a fact that copies of the minutes of meeting of the Empowered Group of Ministers have been sent to private companies like RIL and NIKO...Answer by Murli Deora, minister of petroleum & natural gasThe EGoM meeting of 28.05.2008 took decisions regarding the sectors to which natural gas expected to be produced from RIL-Niko's KG D6 field would be sold. M/s RIL and M/s Niko, being the parties to the production sharing contract, are required to implement the decisions taken by the EGoM. In order to operationalise the decisions taken on sale of natural gas by the contractors, the minutes of the EGoM were sent to the contractors for implementation. The decisions taken in the EGoM meeting dated 28.05.2008 were also disseminated through a press note on 24.6.08 and on the Ministry's website. Since the contents of the communication were also put in the public domain, there was no secrecy attached to the communication. No papers of secret nature have been sent to these companies.For Mukesh Ambani?Question by Chandrakant Khaire (Shiv Sena)Whether the government stands to lose heavy amount of royalty in the light of the recent decision of (the) Mumbai High Court in Reliance Industries Krishna-Godavari Basin gas issue.Answer by Jitin Prasada, minister of state in the ministry of petroleum & natural gasThe court case between Reliance Industries (RIL) and Reliance Natural Resources (RNRL) is a commercial matter between two companies. As far as (the) government take, including royalty, is concerned, it is governed by the production sharing contract (PSC) signed between the Government and the signatory to the PSC. Royalty is to be paid to the government as per PSC provisions.Question by M. Jagannath (INC)Whether the government has appointed a committee of secretaries to look into the pricing of gas from Reliance Industries Ltd. (RIL) KG-D6 Block; whether the Government of Andhra Pradesh has expressed their concerns and reservation to (the) Union Government regarding market-determined pricing of gas by RIL.Answer by Dinsha Patel(The) Government had asked (the) Cabinet Secretary to go into issues related to gas pricing. The Report has since been submitted. The Government has constituted an empowered group of ministers (EGoM) to consider issues related to gas pricing under the NELP regime.Question by Dharam Pal Sabharwal (INC)Whether Reliance Natural Resources (RNRL) is demanding gas at much lower price against the government approved price or prevalent international price of gas. If so, the reasons therefore and the details of demanding gas at abysmally low price by RNRL vis-a-vis (the) government approved or international price. Whether RNRL is also demanding reservation of gas for future plants for which no schedule is available.Answer by Dinsha PatelThe production sharing contract (PSC) for the Block KG-DWN 98/3 has been signed between Government of India, Reliance Industries (RIL) and NIKO Resources. RNRL is not a party to the PSC. There is an ongoing litigation between RIL and RNRL in the Bombay High Court on supply of gas from this KG-DWN-98/3 Block in terms of MOU/ demerger scheme approved by the court between the two companies. The matter is presently sub-judice. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } (This story was published in Businessworld Issue Dated 20-07-2009)
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The Lavasa Hill Township and its holding company HCC are caught in a legal logjam. Following the 25 November show-cause notice and stop-work order from the environment ministry (MoEF), work at the township site near Pune has come to a halt. According to the company, 10,000 workmen are sitting idle. Though the Bombay High Court on 6 December stayed the MoEF notice till the ministry passes a final order, Lavasa committed not to go on with the work till the next 16 December hearing. On that date, the bench pleaded with MoEF to "partially allow" some work to go on. Counsel for the ministry Darius Khambatta has promised to seek advice and revert back to the court. Meanwhile, Lavasa has filed its reply against MoEF's show-cause notice and the ministry is expected to deliver its final order by 31 December. Seeing the tenor of MoEF's interim order, it is unlikely the final order will be any different. Lavasa will then have to challenge the order afresh. Meanwhile, the permission given to Lavasa by the Maharashtra government has been challenged by Medha Patkar's National Alliance of People's Movements (NAPM). Lavasa has a long and serious legal battle on hand. More serious is the financial heat. The hill township is a humungous 25,000-acre project straddling 18 hills and covering an area of 100 sq. km. Kicked off in 2001, the project cost is estimated at close to Rs 40,000 crore. By the beginning of this year, HCC had pumped in Rs 2,000 crore — Rs 800 crore as equity and Rs 1,200 crore as debt. HCC had also done a QIP last year raising Rs 1,500 crore, most of which will find its way into Lavasa.Where do the remaining funds come from? Lavasa was planning a Rs 1,500-crore IPO last year that had to be held back because of the recession. MoEF's action has again put the IPO on the backburner. Secondly, the accruals from advance sales have been crippled. Rajgopal Nogia, president of HCC Real Estate, had told BW in an earlier interview that sale of 6-8 million sq. ft of realty stock in Lavasa was expected to yield Rs 2,000-3,000 crore over two-three years after the company opened sales for its second phase. For realty projects, continuing cash flow from advance sales is crucial. So, till the legal issues with MoEF are resolved, it is unlikely that any buyer will put his money into Lavasa. With advance sales blocked, the ability for Lavasa to raise debt will also be dented.The foundation of the challenge to Lavasa is based on failure of the company to take statutory clearance from the Union environment ministry as required under the Environment Impact Assessment notification of 1994. Lavasa, on the other hand, has questioned the delayed action. The company has argued that it does not need the Union ministry's permission since it had been given environment clearance on 18 March 2004 by the Maharashtra government for 2,000 hectares.Counsel for NAPM, Y.P. Singh, told BW he plans to enlarge the scope of the challenge to include seeking criminal action against those officials and politicians who have indulged in corruption. "There is no way they can avoid clearance from MoEF, and that means there will have to be a public hearing. They (Lavasa Corp.) will see the resistance at that stage," he says. This is going to be a battle to watch. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } (This story was published in Businessworld Issue Dated 27-12-2010)
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Nagpur (Maharashtra) and Betul are roughly 174 km apart. Betul is in Chhindwara, Madhya Pradesh, and is also the constituency of Kamal Nath, minister for road transport and highways. The highway contract for this stretch has become the most cited case of rigging in NHAI contracts. The highway shot into prominence in April-May this year. First, Larsen & Toubro challenged the NHAI in court for disqualifying them from the bid, in May. Then, on 26 May, the CBI raided NHAI and Oriental Structural Engineers (OSEPL), the company that won the contract for the highway, and made four arrests. L&T later withdrew its case and the CBI failed to file a chargesheet. All arrested were released. But the controversy over the highway remains.We go back to December 2009, when the contract was conceptualised. Sometime in early December, it was decided to offer the project for bidding. As per norms, all highway projects must initially be offered as build-operate-transfer (BOT)-Toll model. So was this stretch. But within 14 days, NHAI changed the model to BOT-annuity on the plea that the traffic was too low to attract any bidders under BOT-Toll. (In toll projects, the company gets its money by collecting toll from users while in annuity projects, the government gives the money twice a year to the bidder, thus cutting out his risk altogether.)The traffic was low — on different stretches, it ranges from 6,423-16,157 passenger car units (PCUs) per year. Things get murky here. According to Indian Roads Congress (IRC) norms, Nagpur-Betul should have been a two-lane highway (which is enough for anything below 17,000 PCUs). Strangely, the roads ministry officials managed to push through a four-lane proposal in the inter-ministerial group meeting on 30 December 2009. A Planning Commission official present at the meeting says: "What was strange was that traffic was too low (for the road) to be given out as a toll project but high enough for it to be four laned. It defied logic."Within two months, the project cost also escalated. At the December meeting, the project was presented at Rs 2,248.31 crore. By the time the proposal was considered by the PPP appraisal committee in February, it had gone up to Rs 2,519.62 crore (despite no increases in the costs of inputs). The cost per km worked out to Rs 14.60 crore — way above the guidelines of Rs 9.5 crore per km. Why was the cost so high? The highway plan had five bypasses, 12 grade separators and flyovers, 68 major and minor bridges, and 32 underpasses — too many for a road with thin traffic. After much prodding from the PPP committee, the roads ministry cut the project cost to Rs 2,498.76 crore. "It was a joke!" says one government official who objected. The PPP appraisal committee meeting held on 15 March gave its final clearance though it wanted further reductions. But the NHAI chairman said the cuts would not be possible.More surprising than the speed of project clearance (see ‘Lightning Speed') is what happened afterwards. Sixteen bidders put in their pre-qualification documents. But some bidders claimed to the CBI (and some confirmed this to Businessworld) that they received calls from senior NHAI officials — including member S.I. Patel, who has since been transferred out of NHAI — asking them to withdraw. Some did so (NHAI records show that GVK, Gammon and DSC withdrew their documents after submitting them) while some did not submit the documents at all. Only five bidders were qualified. But some bidders, including L&T, who had submitted pre-qualification documents, were disqualified. "At the nth hour on 2 April, a technical circular was brought in, which said documents had to be submitted in original. This was used as the pretext to disqualify bidders for non-compliance," says one bidder. This is also evident from the fact that the same circular was withdrawn just 21 days later (on 26 April) after disqualifying the bidders. L&T went to court. NHAI had told the company that its bid was "non-responsive" as some of the documents had been submitted loose. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } This, however, was just a cover. An NHAI internal document shows that meetings were held on 30 March, 5 April and 6 April, and bidders were disqualified for not having technical and financial capability to complete the project. Two among the rejected companies were L&T and Reliance Infrastructure. The net worth for both was shown as "nil" by NHAI — something that no NHAI official can explain satisfactorily. L&T finally withdrew its case. It had come under immense pressure from the ministry and the minister, says one executive on condition of anonymity. They had been told that they could bid for other projects but not this one. Finally, just five bidders were left in the fray, and OSEPL won the bid. OSEPL CEO S.K. Dixit says that it was impossible to rig the bid, and if any bidder was disqualified by NHAI, the authority has to explain, not the company. Too Close For Comfort The Nagpur-Betul case is not alone. Bidders allege that there are at least three more cases of blatant rigging: four-laning of Bijapur-Hungund stretch in Karnataka; four-laning of Hungund-Hospet stretch, also in Karnataka; and the elevated corridor on the Hyderabad-Bangalore highway (see ‘Photo Finish'). The CBI is investigating all three cases. Bidders say some NHAI officials asked them to stay away from these three projects. In the end, in all the three projects, just three bidders remained. And, not only were all the bids inexplicably close, all three won one project each. "It is virtually the same three bidders, and their bids are almost within Rs 10-20 crore of each other," says one bidder, who also argues that in many cases in recent months, NHAI has been deciding who will get which project without even considering the bids. In fact, in the case of Hungund-Hospet, GMR had come in alone in the pre-qualification stage. But just one day prior to the final bid, it brought OSEPL in as a partner and the project was awarded to the combine. The modus operandi is that one bidder is "given" a particular project and, in turn, he gives a supporting bid for another project. However, Brijeshwar Singh, NHAI's chairman, says these allegations are being made by sore losers. In all three cases, NHAI argued that because of low traffic the projects need to be given out on grant. But many bidders disagree. "It has been argued that since the traffic on a parallel stretch is very low, it will be very low on these stretches too. You can see the fallacy of the argument," says one bidder, who insists that they would have bid for all three on a premium. Calculations by a leading company show that the total loss to the exchequer (loss of premium plus grant given) on account of just these three projects is over Rs 4,200 crore. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') }
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In the last week of May this year, the Central Bureau of Investigation (CBI) raided the offices of the National Highway Authority of India (NHAI) and arrested two senior officials. They were suspected to have taken money to help certain bidders win lucrative projects given out by the highway authority. The investigative agency also raided the offices of Oriental Structural Engineers (OSEPL) and arrested its managing director and another senior executive. OSEPL, a mid-sized construction firm that is active in the road building sector, had just won the tender for the Nagpur- Betul stretch — a contract that several other bidders claimed was rigged from the start. That there is a certain amount of corruption and rigging in road contract projects is something that most bidding firms take for granted. But the CBI action in May was followed next month by an internal report titled "Sub Prime Highways" by the Planning Commission on the NHAI's style of functioning, which caused a fair amount of worry in the finance ministry, the Prime Minister's Office (PMO) as well as in several other ministries. The reason: the NHAI had moved into high gear and started giving out contracts at a rapid pace after Kamal Nath took charge of the ministry of road transport and highways. And even as Rs 64,000 crore worth of road contracts were given out in 19 months, allegations of corruption and bid rigging reaching new highs had also started doing the rounds. The Planning Commission paper, in fact, opened a Pandora's box of allegations. It claimed that competition in the sector was plummeting and hinted that the award of contracts was based on factors that had little to do with merit. It said that the NHAI was hurtling towards bankruptcy because of the way it was functioning. It also painted a bleak picture of projects costing far more than justified, procedures being routinely ignored, and collusion and rigging in the awarding of contracts. The paper claimed that the whole programme would eventually cost the public exchequer far more than it had bargained for. Though some critics feel that the paper's author — Planning Commission member Gajendra Haldea — has taken a particularly jaundiced view, they admit that highway projects need closer scrutiny because of the way at least some projects, especially in 2010, have been awarded. "In all government projects, some money changes hands. But in some of the cases of projects awarded recently by the NHAI, there seems to be fairly blatant rigging and collusion," says the head of a road project of a Mumbai-based construction firm on the condition of anonymity. Planning Commission officials say that the projects are being increasingly structured to make them lucrative for the winning bidder — and then they are being rigged to make sure that a handful of specific bidders bag them. CBI sources say that both the ministry and the highway authority have been uncooperative, and have stonewalled their enquiries. The roads minister declined to be interviewed on the issue, and passed the queries on to the NHAI chairman, Brijeshwar Singh. The latter says that the Planning Commission does not have a clear picture of the ground realities and its approach to the subject of road building is academic. S.K. Dixit, CEO of OSEPL, says that the complaints about rigging come from bidders who lose out and is a case of sour grapes. But privately, many officials within NHAI itself say that rigging has grown — both in size and sophistication — in the recent past. Interviews with bidders, Planning Commission officials, and current as well as past NHAI officers, most of whom spoke only on the condition of anonymity, paint an alarming picture. Companies, too, are ringing the alarm bells because there is a large number of projects yet to be awarded and because many large institutionalised bidders appear to be losing out to smaller, lesser known and, in some cases, dubious rivals. The Potholes Essentially, there are four separate areas in which manipulation is taking place resulting in hundreds of crores of losses to NHAI and the government (and by extension to taxpayers), while fattening the bank balances of certain bidders and corrupt officials. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } To start with, many projects are being converted from the build-operate-transfer (BOT)-toll schemes to the BOT-annuity schemes (see ‘Road Blocks', page 32). In toll projects, the builder makes his money from toll collected over the 10-15-year period of his concession. In annuity projects, the government simply gives half-yearly fixed payments to the builder for the period of his concession — which could stretch to 15 or even more years. Annuity projects, therefore, carry no risk for the builder and are particularly attractive for all bidders. Conversely, they commit the NHAI (and therefore, the government) to pay out money regularly for the entire period of the concession and can add up to a significant financial burden if too many such contracts are given out. More worrying is the fact, some bidders claim, that most annuity projects are being padded up to give a more than reasonable rate of return. An annuity project where the NHAI should be giving out Rs 100 crore annually, say, is now being given out for Rs 150 or 200 crore; which means a bonanza for the bidder who wins the contract. Then the NHAI is giving a lot of money to the builders of winning projects to help them complete the roads. According to the Planning Commission paper, the Viability Gap Funding (VGF) — or the amount that the NHAI gives to the concessionaire as its contribution for building the road — is also ballooning beyond all rationale. While this is derisking the project for the winning bidder, it has serious implications for NHAI's finances, which are getting stretched. The paper paints a bleak picture of the NHAI going bankrupt very soon — something that NHAI chairman Singh says is a coloured view of the actual picture. Projects are being over-engineered to increase the total project cost resulting in a colossal waste of funds and great gains for winning bidders. In many cases, where traffic projections justify a two-lane road, they are being converted to four- or six-lane roads to make them more lucrative to contractors. "What this amounts to is that roads are being built today, which the next several generations will be paying for," explains one government official. The standards laid down by the Indian Roads Congress have been adopted by the NHAI, but are being "routinely exceeded and excessive costs continue to be incurred by adding elements that lack justification", says the report. Over-engineering is also taking place in another way — far more flyovers, underpasses and side lanes are being built into the projects than may be justified. All these inflate the cost of the project and, therefore, make it more attractive to bidders. The problem, says the Planning Commission paper, is that much of this is unnecessary. Many infrastructure experts, however, don't buy this. Says Jayesh Desai, CEO, Unitech Infra: "There is no such thing as too much infrastructure in India. We can do with all we can get." Perhaps the most worrying of all allegations is that a cartel of sorts is operating. Who will win certain contracts is decided in advance. Many other bidders are actively discouraged from bidding for those contracts. In some cases, senior NHAI officials call these bidders to tell them to withdraw from the fray. (A number of bidders as well as the CBI have alleged that S.I. Patel, who was member (projects) till recently at NHAI, had a hand in this. Patel has recently been sent back to his parent cadre, probably as a result of the CBI asking the Cabinet Secretary's permission to investigate him.) The net result is that in many projects, there are many pre-qualified bidders, but only one or two final bids are received. In some of these cases, the bids received appear rather close to each other and reek of collusion. Speeding Ticket All this should be worrying Kamal Nath, whose stated aim was to push highway construction into high gear once again, given the slow pace of projects awarded in his predecessor's regime. The highway construction programme was moving quite fast under the NDA regime before it came to a grinding halt under the first UPA government, and the then minister of roads and highway development, T.R. Baalu. Between 2007 and 2009, in Baalu's time, the NHAI awarded a miserly 17 projects covering 1,786 km at a total project cost of Rs 17,000 crore. When Nath took charge of the ministry in the second UPA government, he promised to get things moving again. And he certainly moved to keep his promise. The NHAI has already awarded 76 projects covering a length of 6,871 km for a total cost of Rs 64,000 crore in the 19-odd months that he has been in charge. By March next year, the total kilometres awarded are expected to touch 9,000. In other words, in the coming months, another 40-odd projects will be awarded worth another Rs 30,000 crore. The pace has been frenetic and activity levels at NHAI unparalleled. As the NHAI chairman Brijeshwar Singh puts it: "The last few months have seen activity equivalent to the previous four years (2005-09) put together". But the whole programme could come to an abrupt halt once again if large-scale rigging is proven in the contract tendering process. With the 2G brouhaha still going on, the government can ill-afford another big scandal — especially in the arena of an infrastructure sector that it considers extremely important. The CBI raids in May had resulted in a paralysis in the NHAI for almost two months, before things started moving again. The big question is: can the minister clean up the highway programme problems before it blows up in everyone's face, the way the telecom scandal did? anjulibhargava(at)gmail(dot)com var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') }
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