Increasing numbers of Indian authorities are committing to opening the infrastructure sector to private players, and are getting geared up with PPP units in every government board

This is good news to developers and investors all over the world, as the country's needs are enormous - but first, local companies are queuing to take their stake in a long list of much-needed infrastructure developments.

GMR Infrastructure - an Indian company with divisions in the energy, roads and airports sector - is getting stuck in a number of projects in the sub-continent. This summer it has closed two road deals which could represent a significant input to a dynamic transport market. 

Background

The National Highway Authority of India (NHAI) is in charge of the awarding of BOT projects all over the country, and is busy managing a road network that needs a great deal of upgrading and construction work. The existing network consists of:

• Expressways                 200 km
• National Highways          66,590 km
• State Highways              128,000 km
• Major District Roads        470,000 km
• Rural and Other Roads   2,650,000 km
• Total                                3,314,790 km

At the moment, NHAI has 204 projects - including those in procuremnet - to be managed with the BOT model. The earliest to be awarded on a BOT basis was in 1998 - a 1km stretch on the National Highway 8 (NH8).

The authority has been relying mainly on Indian construction firms so far, but it has awarded a great amount of technical consultancy work to foreign companies.

India's national government has offered a number of attractive incentives for private companies to develop road projects:

• The government carries out all preparatory work including land acquisition and utility removal. It also commits to provide capital grants of up to 40 per cent of the project cost to enhance viability
• Companies are entitled to 100 per cent tax exemption for five years and 30 per cent relief for the next five years. The government offers concession period up to 30 years and is keen to allow toll collection to concessionaires

In the late 1990s, India's government made clear its intention to develop a national highways development project (NHDP), a major plan consisting of two elements:

• Golden Quadrilateral - 5,846 Kms connecting Delhi-Kolkata-Chennai-Mumbai
• North-South-East-West Corridor - 7,300 Kms connecting Kashmir to Kanyakumari and Silchar to Porbandhar 

The firs phase of the NHDP - the Golden Quadrilateral (GQ) project - has been estimated to cost around US$10 billion.

On 6 October 2006 the government also approved a US$9 billion road upgrade programme for the country's highway network - to be developed in partnership with private sector players.

The cabinet committee on economic affairs (CCEA) cleared the proposals for six-laning of 6,500km of national highways (NH) comprising 5,700km of the GQ project.

The projects will be developed on a DBFO basis with a maximum of 10 per cent viability gap funding and private companies would fund US$7.8 billion of the planned investment - more than 85 per cent of the total.

The projects

GMR Infrastructure seized the opportunity to enter into the roads sector when the government invited bids to develop India's roads under the GQ scheme in early 2000.

The two road projects - both running through the Andhra Pradesh region in South India - that GMR has closed this summer are:

• Adloor-Yellareddy to Pochanpalli road
• Jadcharla-Farukhnagar road

The first project - to cost about US$150 million - involves the strengthening, widening and improvement of the existing two lane road into four lane road between Adloor Yellareddy and Gundla Pochanpalli.

The existing stretch is part of the NH-7 which connects the Andhra Pradesh region to the Tamil Nadu region. It passes through Nizamabad and Medak districts of Andhra Pradesh and covers a distance of about 100 km.

The second project involves is strengthening, widening and improvement of a stretch between Shivrampalli / Faruknagar and Jadcherla on NH7 which covers a distance of about 70 km. This BOT project involves toll collection and costs around US$90 million.

The Farukhnagar-Jadcherla road on NH-7 section has massive traffic volumes as it caters for traffic from Hyderabad - one of the fastest growing cities in the country - towards Bangalore and further south.

Four-laning of this route was proposed to ease traffic congestion and enhance trade and commerce in the entire region.

This corridor will be the main line for the people commuting between Hyderabad city and a proposed new International Airport at Shamshabad, again being developed on a greenfield basis by GMR Group. The group is also working on road connections between Hyderabad, Bangalore, Chennai.

NHAI invited bids for both road development projects last year. GMR consortium won the bid for the two 20-year concessions period of two decades after facing stiff competition from other construction giants.

The two concession agreements were signed with NHAI between February and March 2006.

Financing - Adloor-Yellareddy-Pochanpalli road

GMR signed the financial close on 22 August 2006. The total capital cost of US$150 million for the project involves a debt component of US$120 million.

ICICI Bank acted as sole MLA while the co-arrangers were:

• Andhra Bank
• Bank of India
• Bank of Baroda
• Central Bank of India
• SIDBI
• Punjab National Bank
• United Bank of India
• Vijaya Bank

The equity component is US$30m the debt-equity-ratio for the project is 4:1.

Equally to the Ambala-Chandigarh project, GMR received an excess sanction of US$170 million from the participating banks over the US$120 million total term debt requirement for the project. The loan has a15.5 year tenor.

The US$30 million excess sanction suggests that investors have seen the chance for them to benefit form the growth of GMR, and that they are confident that the firm will see an expansion in its activities.

Financing - Jadcharla-Farukhnagar road

The Jadcharla-Farukhnagar road project required a US$90 million investment. GMR closed the financing on 22 August 2006.

Again, a group of local investment and retail banks provided a debt component for the 20-year BOT concession.

The US$70 million debt was arranged by:

• ICICI Bank
• Central Bank
• Canara Bank
• Bank of Baroda
• Andhra Bank
• Vijaya Bank
• Bank of India

ICICI Bank had another lead arranger mandate for the entire debt component - the facility provided was in the form of a term loan and the repayments were structured over the entire maturity period of 14 years.

The equity component is US$20m and the consortium has the option to bring in 5 per cent of the financing cost as subordinate debt in lieu of equity.

The debt:equity ratio is 3:1 and the tenor of the loan is 12 years with a moratorium of two years.

The key risks for both projects, as told by Girish Kapoor at ICICI bank, were the following - in decreasing order of significance:

• Traffic numbers being below forecasts (hitting toll income)
• Construction Related Risks
• Overshooting the Scheduled Completion Date
• Cost overrun
• Political risk
• Changes in the infrastructure policy
• Changes in the political situation

There was no specific insurance cover for political risk in the deals. However, there are safeguards in the concession agreement signed between GMR - which is also acts as guarantor - and the NHAI.

Kapoor added: 'The major challenges to overcome in getting the project to financial close were of course the tying up of a large debt component and getting competitive interest rates. As well as that, we had to draft appropriate legal contracts.'

He also said: 'The bidding for this kind of projects is very competitive - with five or six bidders usually bidding for each project.'

Conclusion

Lawrence Graham partner Sunil Kakkad said: 'The attractiveness of the Indian market is obvious as there is a substantial need for investment and the public money is not enough. The recent US$1 billion airport development project in New Delhi is an example, as well as the other airport privatisations.'

He added: 'The pace of growth for India means that investment from foreign companies will be needed, both from the construction and the banking side. We are seeing investment and retail banks tying up financings for infrastructure projects to compensate the lack of resources.'

He says that the risk of investing in India is substantial, as for every emerging economy - but it can be calculated.

'There are a number of factors that will allow risk to be mitigated. For a start, there is an educated middle class which is developing at a fast pace. However, for any investor it will always be a matter of finding the right partner to work with.'

He thinks that the opportunity of investing in India is linked to the size of the projects itself: 'The projects that are planned in India have the capacity to set a phase of economies of scale.'

The excess debt that GMR has received for the Ambala-Chandigarh and the Adloor-Yellareddy-Pochanpalli road suggest a growth prospects not only for GMR, but for the whole road sector - which is opened with a long list of tenders - and for other transport-related project in the railways and shipping sector.

ICICI is planning more deals in the transport sector. Speaking about the health of the sector, Kapoor added: 'The Infrastructure sector as a whole is on the upswing in India. Particularly in the road sector there are a lot of development projects lined up for bidding.'

'A proactive stance by the authorities - especially NHAI - and the presence of quality infrastructure development companies makes it an interesting market for a lender to be in. A robust economy coupled with policies oriented towards sustainable growth greatly reduces the risks for such projects.'

The projects at a glance

Adloor-Yellareddy-Pochanpalli road