Prime Minister Narendra Modi has finalised infrastructure targets for road and rail sector for FY17. The government has sought to encourage private participation by August 2016 and also wants the Road Ministry to develop a contractor-rating system to incentivise early completion of projects. Bloomberg TV India discusses its impact with KK Mohanty, MD, Gammon Infrastructure.
We heard about 30 per cent contracts are being awarded through NHAI under the hybrid annuity model. How do the prospects of the hybrid annuity model compare with the erstwhile model?
The whole business position in this PPP sector runs with the basic philosophy: higher the risk, higher the returns. The hybrid annuity model has drastically reduced the risk by primarily giving 40 per cent at the initial construction stage and taking away the toll collection risk.
That takes away the offside on the investment too. So you are likely to get only a marginal return on your investment when you borrow from a bank and complete the annuity project. So from a business proposition or investment angle, it reduces the risk and it also takes away the offside of the investment.
But I would like to make another point. Even if out of ?3 lakh crore, 30 per cent as stated by the government has to be through the PPP model; at least a ?50,000-crore credit facility from public sector banks will be necessary to take forward the project. The present situation is that the doors of the banks are almost closed against PPP or road projects. So we need to address that issue. How do you address the concern of the banks and bring back their confidence?
In the initial half, for a dozen projects that have been bid, frontline players have stayed away and and new-generation players have come forward to take annuity projects. These may not have a very large balance-sheet. So that brings in another area of risk. Because in a country like ours, you cannot be always in a learning curve and the new player comes in and just keeps on learning, and new challenges come along the way. There are certain major roadblocks which need to be addressed.
What about project divestments for completed projects? You have also undertaken a few of those and been a beneficiary of the same.
How much of an enabler do you think it has been for the industry?
We have monetised six of our operational projects in a very difficult time. That is a one-of-a-kind deal in the infrastructure segment in the country.
We got some valuable additional cash flows and resources that have improved our balance sheet, and we are slightly a cash-surplus company today. It might be easier for us to rebuild the business again from this level, because our balance-sheets are not stretched today.
Going ahead, we need to see that all asset monetisation cannot happen in such a depressed market or when we are practically operating in a buyer’s market than a seller’s market. The market has to be more balanced where both the buyer and the seller have a choice. It is just not getting into a seller’s market where there is only one or two buyers and you have to sell the projects at an unattractive evaluation. That puts the investors at a disadvantage and sometimes shatters the confidence of new investors. George Fant JerseyShare This