July 2014

Interview: Dr. Harikishan Koppula Reddy, MD – V R TechNiche Consultants

By ANKUR SHARMA & ADITYA BAHETY

On the opportunities and challenges in the road sector

Dr Harikishan Koppula Reddy is the Managing Director of V R TechNiche Consultants – a leading consulting company in India in the area of travel demand estimation for road projects. It offers advisory services to various stakeholders of a BOT road project (NHAI, developers, lenders and investors) at project conceptualization and planning as well as pre-bid and post-bid stages. Its clientele includes almost all major infrastructure companies in India, along with leading financial institutions. Dr Reddy is a Ph.D. in Transportation Systems Engineering from IIT Kanpur, and has over 10 years of experience in the domain.

The advent of the new government at the centre has created an environment of optimism in the road infra­structure industry. How do you see this translating, on the ground, for the road sector? What policy initiatives would you want to see from the government, in order to energise the sector?

The new government is definitely trying to create the right environment for the putting road infrastructure industry, which has mostly stagnated for the last couple of years, on the right track. However, a number of policy initiatives and steps are required to energise as well as sustain the sector:

(i) Creating faster channels in ministries of environment and railways for timely clearance of road projects and ROBs,

(ii) Bidding only for those projects for which land is available,

(iii) Faster approval of proposals and designs by IEs/NHAI,

(iv) Faster settlement of claims and disputes,

(v) Creating technical groups for faster approval and induc­tion of new technologies, etc.

An important aspect, which never got any attention, but has got to be addressed quickly, is toll avoidance by users at toll plazas. In my opinion, the loss of revenue to developers on account of toll avoidance at toll plazas ranges anywhere between 5-10%, which developers never account for while bidding for projects. Avoiding toll at a toll plaza by a user, which is increasing by the day, should be treated at par with avoidance of any other tax, and necessary policies to punish such offenders should be formulated. Government should also analyse and assess NHAI’s institutional capacity to han­dle the amount of workload it is loaded with.

The NHAI fared quite poorly in FY13 and FY14 in terms of targeted awards to actual achievement. What were the main reasons?

A large number of projects which were awarded in FY13 never started. It was not NHAI but project developers and lenders who are largely responsible for this. Developers were too optimistic about the road sector and therefore they were very aggressive while bidding for projects. Easier and indis­criminate financing of road projects before FY13 (to a large extent) was one of the primary reasons for this optimism.

Is there a chance that the new government can change the situation and quickly revive the stalled projects? What does it need to do to achieve that?

To come out of the current situation the government should first prioritise its decisions. To start with, ongoing projects with slow or no progress should be sped-up and completed in a time-bound manner. This requires focussed efforts from the government to obtain all pending clearances and approv­als, immediately, for such projects. This will increase the cash flows of the developer and also of the road sector.

To follow up with this, government should decide the fate of stalled projects quickly, within the parameters of bid doc­uments/contracts. The path that the government takes will decide the future course of the road sector. Too much flexibil­ity from the government could set a bad example and result in an unrealistically optimistic situation again.

Over and above the stalled projects, how does the pipe­line for fresh orders look? How can it be ensured that these projects, if and when awarded, do not meet the same fate as the ones before?

With expressways and new targets fixed by new government for implementation of road projects, the future orders should be good. To avoid FY13 and FY14 situations, it is essential that the projects come with all approvals and clearances and lenders need to be rational in financing projects. While lend­ers were too lenient earlier, they are too pessimistic now.

One of landmark proposals that NHAI took to resolve the deadlock in the sector was premium rescheduling. Do you think it was required? Will it not create a moral hazard with more developers throwing up their hands in the future?

NHAI should reschedule premiums for only those projects that are actually feasible. Some of the projects, even af­ter premium rescheduling, may not be feasible. Premium rescheduling without a detailed analysis will only shift the current problems to future. Yes, indiscriminate premium rescheduling can definitely create moral hazards and set bad examples. While one-time premium rescheduling may solve the current situation, continuing with it will not sustain road sector growth.

NHAI seems to have come full circle, with bulk of the awards in FY05-08 comprising EPC project, FY09-12 comprising BOT-Toll projects, and now NHAI is looking at awarding more than 50% of projects on EPC basis. What is the major reason behind this shift? Does this mean BOT-Toll project model has been a failure in this country?

No model will be successful unless all stakeholders are ration­al and responsible. EPC projects might also fail if the NHAI or ministry does not provide all approvals and clearances in time or if bidders quote low EPC prices. While the BOT-Toll model has definitely seen many problems, it has also provid­ed many opportunities for faster growth of the road sector.

It would be important to learn from mistakes and create sustainable practices and policies.

Over the last two years, developers have found it extremely difficult to achieve financial closure for their projects. Banks now require 100% land acquisition and clearances, and have started questioning traffic growth estimates of developers in their bidding. What can NHAI do (or what is it planning to do / has already done) to ad­dress these concerns from banks – because if banks don’t lend, there is no point in NHAI awarding any projects.

In the initial years of PPP lenders were definitely lenient in fi­nancing and this resulted in too much of optimism. There was a time when financing a road project was considered a given. While many of these decisions were based on consultants’ advice, the quality of consulting available in this country has been very poor. To bring some rationale into the whole pro­cess, NHAI should review the project costs at which lenders are financing road projects and lenders should start ranking consultants based on their previous works.

How would you describe the evolution of the various players in the sector – in terms of technical capability and expertise? Are we still quite inferior to the foreign play­ers like Vinci, Balfour Beatty, and Leighton?

I do not think there are any technical capability issues on de­velopers’ side. In fact most of the first-generation projects in India under NHDP Phases 1 and 2 were executed by foreign players. The space is now mostly crowded by Indian compa­nies. It is, in fact, faster evolution and stiff competition that led to the current situation.

Why do you think there hasn’t been much interest in the road segment from foreign players?

I think red-tape and too much of competition are reasons for reduced interest from foreign players. The space is already crowded with too many Indian companies.

Who are the key players in the segment that you feel are well placed in terms of technical capability and domain expertise to capture the opportunity in the segment?

Technically, there are a large number of companies that are capable of implementing road projects efficiently. While it is quite difficult to comment, with the information that is avail­able, and the current position, I would say Oriental Structural Engineers, Sadbhav Engineering, L&T, IRB, and Ashoka Build­con are doing well (by progressing on projects in hand) and can take advantage of initiatives by the new government.