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Sector Insights
We had organised a meeting on 23 December 2011 in Delhi for select fund
managers with Mr. Gajendra Haldea, Principal Adviser (Infrastructure) in the
Planning Commission with a view to facilitate in-depth discussions on the roadmap
in respect of US$1trn spending on infrastructure and with Mr. N.R. Dash Chief
General Manager (Finance) in National Highways Authority of India (NHAI) to track
the recent developments in the road and highway space, which is the only
infrastructure segment currently that drives robust growth.
Key takeaways from the meeting with Mr. Haldea:
The 11th Plan (FY07-12) infrastructure spending is estimated at US$460bn and the
12th Plan (FY12-17) infrastructure outlay would be US$1trn, on which a detailed
document will be released within a month. Taking into account sector-wise problems
like the power sector facing issues such as shortage of coal, losses suffered by state
electricity boards (SEBs), delay in getting environmental clearance and also airport
construction companies facing lack of clarity on airport guidelines, land acquisition and
funding problems, Mr. Haldea said he expects a slippage of only around US$100bn in
infrastructure spending, which still implies 100% higher infrastructure outlay
(US$900bn) under the 12th Plan.
The methodology adopted by the Planning Commission in respect of capital
expenditure in every Plan period for each infrastructure segment is based on historical
trend and assumes a holistic approach to determine the infrastructure spending. Based
on the analysis by the Planning Commission, the expenditure may show an increase or
remain stagnant, but not decline, after factoring in structural and technical problems
pertaining to the respective segment.
Despite lot of problems, Mr. Haldea expects the infrastructure sector to grow at a
moderate rate. However, he has not given a clear roadmap to justify his point of view.
The key sectors that would drive growth under the 12th Plan period are power
(generation, transmission), roads, and ports. The power sector is expected to remain
as a top investment option, but with a selective approach.
Mr. Haldea said the power distribution space needs much more than what the Shunglu
Committee and the B.K. Chaturvedi Committee have proposed. He does not expect
any state to revise the power tariff every year, as it is a politically sensitive issue. The
road ahead is a blend of the committees’ recommendations and government support
which includes partial bailout by every state, partial write-off of loans by banks and
power tariff hike by some states to offset the losses of SEBs.
Mr. Haldea believes that India is an infrastructure deficit country, which will keep
demand intact in the long term. Funding seems to be a problem area for policymakers,
as most of the banks have reached their limits in terms of lending to infrastructure
companies. However, the policymakers are currently outlining ways to meet this huge
capex which includes increasing borrowings via the ECB route, infrastructure debt
fund, insurance funds and household savings, with the private sector accounting for
50% of the share. He does not expect a dramatic structural shift in project
implementation and expects moderate growth in the long run to continue.
Key takeaways from the meeting with Mr. Dash
NHAI has set a target of awarding 7,300km of highway projects during FY12, of which 4,300km has
been already awarded during April–November 2011, 1,000km is in advanced stage of evaluation and
the rest 2,300km (14 projects) are in different stages of the bidding process. NHAI is confident of
achieving its FY12 target. Till date (i.e. April-November 2011), 33 projects were awarded, of which 22
projects were offered at a premium.
Out of the total ~50,000 km of national highways planned by the NHAI, work on 28,000 km of highway
projects has been awarded (of which 15,000 km of projects have been completed and 13,000 km are in
progress) and 22,000 km of projects are yet to be awarded. NHAI expects robust growth in the award of
projects to continue, with 22,000km of projects to be awarded in the next three years, thereby
translating into 7,300km every year.
NHAI believes the aggressive bidding scenario is cooling off, but still there is good demand for highway
projects. It says the aggressive bidding is justified keeping in mind the opportunity of higher traffic
growth, decline in interest rates and factoring in the project cash flow over the concession period.
NHAI is also carrying out a study on higher difference in project cost calculated by it and the project cost
announced by developers. Out of 33 projects awarded, the cost of 18 projects is higher by ~0-25%, six
projects’ cost is higher by 25%-50% and five projects’ cost is higher by 50%. NHAI normally takes two
years for it to award a road project from the date of preparation of feasibility report and another three
years to construct the project, for which it adjusts any escalation in input costs.
NHAI has outlined three major risks for the road sector: shortage of skilled labour, land acquisition issue
and problems in project funding.
Land acquisition has seen an improvement since the past two years after the implementation of the
state support agreement, creation of land acquisition units and an apex body for acquisition. During
CY11, NHAI acquired 12,000 hectares as against 8,000 hectares acquired in CY10. It has not faced any
major problem on the land acquisition front till date, but requires more clarity on the market price as
stated in the Land Acquisition Bill (which is an issue due to improper maintenance of records in rural
areas). Currently, NHAI is granting orders on the basis of 50% land aggregation as against the norm of
80% stated in the concession agreement, which would keep the project award momentum on track.
During the 12th Plan period, estimated requirement of funds would be ~US$70bn of which US$35bn is
likely to be invested by private players, translating into equity investment of ~US$10bn. To ease project
financing, NHAI has come out with guidelines that developers can exit from a project completely after
two years of project COD (earlier, developers had to hold 26% stake during the entire concession
period). This would increase churning by equity funds. Apart from this, NHAI is pushing for changing the
status of loans for road projects availed from banks from unsecured to secured, for which it has given
an assurance to increase the concession period by 1.5% for fall in traffic by 1%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sector Insights
We had organised a meeting on 23 December 2011 in Delhi for select fund
managers with Mr. Gajendra Haldea, Principal Adviser (Infrastructure) in the
Planning Commission with a view to facilitate in-depth discussions on the roadmap
in respect of US$1trn spending on infrastructure and with Mr. N.R. Dash Chief
General Manager (Finance) in National Highways Authority of India (NHAI) to track
the recent developments in the road and highway space, which is the only
infrastructure segment currently that drives robust growth.
Key takeaways from the meeting with Mr. Haldea:
The 11th Plan (FY07-12) infrastructure spending is estimated at US$460bn and the
12th Plan (FY12-17) infrastructure outlay would be US$1trn, on which a detailed
document will be released within a month. Taking into account sector-wise problems
like the power sector facing issues such as shortage of coal, losses suffered by state
electricity boards (SEBs), delay in getting environmental clearance and also airport
construction companies facing lack of clarity on airport guidelines, land acquisition and
funding problems, Mr. Haldea said he expects a slippage of only around US$100bn in
infrastructure spending, which still implies 100% higher infrastructure outlay
(US$900bn) under the 12th Plan.
The methodology adopted by the Planning Commission in respect of capital
expenditure in every Plan period for each infrastructure segment is based on historical
trend and assumes a holistic approach to determine the infrastructure spending. Based
on the analysis by the Planning Commission, the expenditure may show an increase or
remain stagnant, but not decline, after factoring in structural and technical problems
pertaining to the respective segment.
Despite lot of problems, Mr. Haldea expects the infrastructure sector to grow at a
moderate rate. However, he has not given a clear roadmap to justify his point of view.
The key sectors that would drive growth under the 12th Plan period are power
(generation, transmission), roads, and ports. The power sector is expected to remain
as a top investment option, but with a selective approach.
Mr. Haldea said the power distribution space needs much more than what the Shunglu
Committee and the B.K. Chaturvedi Committee have proposed. He does not expect
any state to revise the power tariff every year, as it is a politically sensitive issue. The
road ahead is a blend of the committees’ recommendations and government support
which includes partial bailout by every state, partial write-off of loans by banks and
power tariff hike by some states to offset the losses of SEBs.
Mr. Haldea believes that India is an infrastructure deficit country, which will keep
demand intact in the long term. Funding seems to be a problem area for policymakers,
as most of the banks have reached their limits in terms of lending to infrastructure
companies. However, the policymakers are currently outlining ways to meet this huge
capex which includes increasing borrowings via the ECB route, infrastructure debt
fund, insurance funds and household savings, with the private sector accounting for
50% of the share. He does not expect a dramatic structural shift in project
implementation and expects moderate growth in the long run to continue.
Key takeaways from the meeting with Mr. Dash
NHAI has set a target of awarding 7,300km of highway projects during FY12, of which 4,300km has
been already awarded during April–November 2011, 1,000km is in advanced stage of evaluation and
the rest 2,300km (14 projects) are in different stages of the bidding process. NHAI is confident of
achieving its FY12 target. Till date (i.e. April-November 2011), 33 projects were awarded, of which 22
projects were offered at a premium.
Out of the total ~50,000 km of national highways planned by the NHAI, work on 28,000 km of highway
projects has been awarded (of which 15,000 km of projects have been completed and 13,000 km are in
progress) and 22,000 km of projects are yet to be awarded. NHAI expects robust growth in the award of
projects to continue, with 22,000km of projects to be awarded in the next three years, thereby
translating into 7,300km every year.
NHAI believes the aggressive bidding scenario is cooling off, but still there is good demand for highway
projects. It says the aggressive bidding is justified keeping in mind the opportunity of higher traffic
growth, decline in interest rates and factoring in the project cash flow over the concession period.
NHAI is also carrying out a study on higher difference in project cost calculated by it and the project cost
announced by developers. Out of 33 projects awarded, the cost of 18 projects is higher by ~0-25%, six
projects’ cost is higher by 25%-50% and five projects’ cost is higher by 50%. NHAI normally takes two
years for it to award a road project from the date of preparation of feasibility report and another three
years to construct the project, for which it adjusts any escalation in input costs.
NHAI has outlined three major risks for the road sector: shortage of skilled labour, land acquisition issue
and problems in project funding.
Land acquisition has seen an improvement since the past two years after the implementation of the
state support agreement, creation of land acquisition units and an apex body for acquisition. During
CY11, NHAI acquired 12,000 hectares as against 8,000 hectares acquired in CY10. It has not faced any
major problem on the land acquisition front till date, but requires more clarity on the market price as
stated in the Land Acquisition Bill (which is an issue due to improper maintenance of records in rural
areas). Currently, NHAI is granting orders on the basis of 50% land aggregation as against the norm of
80% stated in the concession agreement, which would keep the project award momentum on track.
During the 12th Plan period, estimated requirement of funds would be ~US$70bn of which US$35bn is
likely to be invested by private players, translating into equity investment of ~US$10bn. To ease project
financing, NHAI has come out with guidelines that developers can exit from a project completely after
two years of project COD (earlier, developers had to hold 26% stake during the entire concession
period). This would increase churning by equity funds. Apart from this, NHAI is pushing for changing the
status of loans for road projects availed from banks from unsecured to secured, for which it has given
an assurance to increase the concession period by 1.5% for fall in traffic by 1%.
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