On the highway, some developers lose control

Patel Engineering recently emerged preferred bidder for developing a 111-km stretch of national highway between Kharagpur and Dhankuni in West Bengal.

The Jogeshwari, Mumbai-based company quoted a negative grant of Rs191 crore.

IL&FS Transportation Networks (ITNL), the biggest highway developer in the country in terms of lane km, was the next highest bidder offering a third less — a negative grant of Rs120 crore.

Negative grant is the money a bidder offers to pay the National Highways Authority of India (NHAI) to bag a contract it finds lucrative.

Most projects come with up to 40% of viability gap funding (VGF) to make them feasible. Under VGF, the government meets some portion of a project’s cost so that it can draw investors.

Patel subsequently withdrew the bid and forfeited its security deposit of `13 crore. Rupen Patel, managing director, Patel Engineering, couldn’t be reached for comment.

He had earlier denied media reports that NHAI was considering a ban on the compay after its withdrawal.

The project was retendered and Ashoka Buildcon won it.

Commenting on the saga, an NHAI official said the bidders drew very optimistic projections.

“But differences in quote of two bidders vying for a project are quite natural, as certain costs like utility shifting, vary from developer to developer,” he added.
Utility shifting refers to moving electricity, water and telephone lines from the area under construction.

Though most agree the Kharagpur-Dhankuni bids were an aberration, they also believe the gap between the top two bidder has grown over the last year or so.

“Earlier, the difference was 2-3% or maybe 5% but now it’s usually 10-15%,” said Joy Saxena, chief financial officer of New Delhi-based Era Infra Engineering, which is developing six roads.

A look at some of the recent projects bears him out (see table). In fact the gap is much higher than 10-15% and in some projects while the preferred bidder offered a premium, others sought VGF from NHAI, the Indore-Gujarat/MP border project being a case in point.

While the ‘L1’ bidder (or the preferred bidder, who generally makes the highest offer) offered a premium of Rs23 crore, the L2 bidder sought a VGF of `387 crore.

“In every project, there are a few who are totally outside the realm of rationality,” said K K Mohanty, managing director of Gammon Infrastructure Projects.

Sanjay Ubale, managing director, Tata Realty & Infrastructure, concurs.

“Bids are being put with irrational thought and even if if they pass the muster, getting financial closure for such bids will become extremely difficult. The only proactive way to avoid such situation for the government is that they should come up with more and more projects on the bidding block.”

In case of a paucity of projects, do developers have to look at other sectors to make up for the few available roads. “No, we are comfortable for the next year and a half,” said K Ramchand, managing director, ITNL.

The company has a portfolio of 22 roads. But those lacking as big a backlog are sure turning their attention to other areas. “We are looking at T&D (transmission & distribution), hydro and metro projects and even planning to bid  projects overseas,” noted Saxena.

Mohanty, who was a wholetime director with Srei Infrastructure Finance till recently,  attributes the trend to more players joining the fray.

“Cash contracts have reduced so even contractors want to upgrade themselves into developers,” he said.

Under a cash contract a company just builds a road or part of it for the government or another company that owns the road for a specified period and operates it under the build-operate-transfer (BOT) model.

While many companies and experts believe there could be about 40 companies vying for national highway projects, M Murali, general secretary, National Highway Builders’ Association says it’s more like 60. This includes several small, state-level players who are looking to bag their first project.

“There are also about 10-15 foreign companies which bid every now and then,” he said.

However, the number of National Highways Authority of India (NHAI) projects up for grabs has been constant and low. Last fiscal, for example, only 44 projects were awarded.

In this fiscal, NHAI aims to up the number to 100.

But going by its track record, that looks a tall order.