‘Longer concessions will lower VGF’

IL&FS Transportation Networks (ITNL) is the country’s largest highway developer, with a portfolio of 21 projects totalling 2,881 km. It also has a presence in metro and airports. The company went public earlier this year to raise Rs700 crore. Since its listing on March 30, the stock has outperformed the Sensex, appreciating 17% compared to the latter’s rise of 3.7%. In an interview to DNA, managing director K Ramchand talks about the unviability of bond issues, financial closure of ITNL’s projects and why it made sense for the company to not build its roads. Excerpts:

How much of your IPO proceeds have been spent?
All of it. We repaid the debt on our books with it.

Why do you not construct your own projects?
It depends on what you call construction. According to us, we do construction, but don’t own equipment, nor any plant. But we don’t also work with the top-tier contractors, we work with the second-tier ones.

Why not?
Because the skills we have are equal to, or better than, those of big contractors. We have built-up our design strength, which is what big contractors have. In our case, we do the design and construction drawings. We prepare the cost estimates, traffic studies and do revenue forecasting. We have moved from being a pure developer to being a project manager and developer. After design, we do the scheduling ourselves. We tell a second-tier contractor, this is the schedule we want you to follow. The third thing is, on many occasions, we take the risks of both quantity and price (of raw materials). We don’t give out fixed-price contracts.

What’s the reason?
The moment you transfer the risks, you transfer the attendant cost too. If a project costs `100, the contractor will have to charge you `120 or `130 to take care of the risks likely to come up over a three-year period. When you start doing this, the mark-up you have for yourself starts getting squeezed. We initially worked on fixed-price contracts and then found that the `30 is what we want to take on to ourselves. If you take that away, you don’t need a large contractor. Small ones are equally efficient if you ensure land and cash are available. We have cultivated a whole host of small contractors.

Through project design and scheduling, you earn revenues pre- and during construction. How much do you typically make?
About 12—15% of the project cost, which would be the mark-up a (big) contractor would anyway have.

What’s your mix of state and national highways?
About 60:40.

When do you hope to tie-up funds for your five recent highways worth Rs7,670 crore?
We should achieve closure for the two NHAI projects this month and the three state highways next month.

Given state highways preceded their national counterparts, are their model concession agreements better than NHAI’s?
If you look at the concession for Delhi-Noida, it was done in 1998. There was no format available to develop a concession for a Rs500 crore project. Traffic forecasting was an art and continues to be so. In those days, it was a much bigger art form. The risks on the revenue stream were seen to be extremely high. So the only way we could get projects financed was to come up a structure where our returns are assured, where our lenders were also going to get paid back. That’s why the concessions were based on fixed return and variable period, whereas now it’s fixed period and variable return.

Of late, you’ve ventured into sectors like metro and airports. Is this to de-risk your business?
De-risking is one aspect of it. We have the mandate to cover all these projects. We are totally dependent on how the government brings out its projects. We want to be in all the sectors which we are mandated to do. As we talk today, we have achieved a breakthrough in the metro project in Gurgaon and the bus project in Nagpur, where we are able to meet our viability thresholds though they were seen to be unviable. Take the case of the metro project. We have a concession of 99 years. In 99 years, you can always catch up. The moment you extend the concession, you have a better chance of making payments to your lenders if not make returns.

So you think longer concessions in roads will help us do without viability gap funding (VGF)?
No, we can’t do away with VGF but we will be able to bring it down.
Coming to financing, why is the bond market not taking off?
See, there is this new thing where infrastructure SPVs can issue bonds. I don’t have the capacity to do it. Let’s say you can invest Rs20,000. How many investors do I need to finance a Rs1,000 crore project? I will be servicing more bondholders than traffic users on my road. I think the government needs to have an intermediary or a mutual fund that has the capacity to service retail bondholders. Assign a responsibility to them and tell them the money has to go back to infrastructure projects.

Are you looking at acquiring any projects?
We are very keen. We don’t see an acquisition opportunity in the projects awarded between 2005 and 2009. I believe a lot of projects between 2009 and 2011 were bid out aggressively. They will be commissioned now. Only then will we know if the bids were aggressive or not. We see opportunities there after six months.