Road Project Execution To Pick Up Pace In 4-5 Months, Says IRB Infra Chairman

Raw material prices have softened from the peak in April-May, said Virendra Mhaiskar of IRB Infrastructure Developers.

<div class="paragraphs"><p>IRB's Gulabpura Highway Project in Rajasthan. (Source: Company)</p></div>
IRB's Gulabpura Highway Project in Rajasthan. (Source: Company)

India has embarked on a massive Rs 111-lakh-crore infra push for the next five years, and roads will play a pivotal role in terms of outlay.

While there has been a slowdown in road projects, it should gain pace in four to five months, according to Virendra Mhaiskar, chairman and managing director of IRB Infrastructure Developers Ltd.

All machineries—whether the National Highway Authority of India or state governments and private sector—will be instrumental in achieving the development targets, Mhaiskar told BQ Prime in an exclusive interview. “Private sector will act as a catalyst and enabler in making this happen,” he said. 

If one considers the next two decades to belong to India—in terms of demographic dividend, infrastructure deficit, and economic growth expected—India can achieve development targets if the government gets determined and private sector shows confidence in government policies, with agility in risk-taking, Mhaiskar said. 

Watch the full conversation here:

Edited excerpts from the interview:

In the context of development targets under various plans such as National Infrastructure Pipeline, Bharatmala Pariyojana and the PM Gati Shakti Master Plan, what kind of role and scope do you see for the National Highways Authority of India?  

Virendra D Mhaiskar: NHAI is a key facilitator in making this change happen. They have played a phenomenal role in the last 10-15 years in rolling out the project pipeline. They have tackled most of the setbacks faced by developers, such as land acquisition, which happened to be a key impediment in infra projects. The issue has been very well-addressed.

Now, NHAI acquires 100% of the land before it awards the project. This may reduce the pace of the projects but improves the viability for the developers and goes a long way in establishing the confidence of investors to bet their money on this investment. With the groundwork now, the investors will definitely up their investments. 

If that is the case why are a majority of build-own-transfer or BOT projects languishing? 

Virendra D Mhaiskar: BOT is a capital-intensive project financing structure. With weak hands, with no proper visibility on equity, there is every possibility the project execution will get into trouble. This is a high-risk structure. Unless one would have the right capital structure and financial support, getting into such kind of projects will prove to be detrimental to the private developers.

In the past, the problem was aggravated by award of half-baked projects for execution. Land acquisition delayed the majority of these projects. These projects were sensitive to delays because of equity contribution and heavy debt that were invested in the projects. There was price to any delay, it led to cost escalation and marred the project viability and returns. That is what happened to the majority of projects who could not get the promised returns. 

IRB has finished concession agreements for more than 25 years, and completed and returned more than 12 projects. As of now, we are in the midst of 24 road projects where we have invested equity and projects are at various stages of stabilisation. The capital structure created was of long-term nature, and (with) strong visibility and patience to remain through the longevity of the projects.  

However, those who plan to enter the BOT sector now, for them majority of problems have been tackled already. The projects are not offered half-baked and only after the land visibility is there.

For example, the Ganga Expressway, the greenfield expressway offered by U.P. government, they have provided us entire land for the project and the work has started in full steam. If these kinds of preparatory works are done well by the government, project execution and success become certain. It also increases the participation of the private sector. 

Earlier, all the projects were awarded under one model that is BOT, so even engineering, procurement and construction or EPC players with not-so-long-term visibility of funds would bid for these projects.

However, today government provides all verticals available that the developers can choose. Those with specific competence can choose between EPC, HAM (hybrid annuity model), BOT and TOT (toll-operate-transfer) projects. This has led to a lot of consolidation in the BOT side of the vertical, because of opportunities for EPC players to look elsewhere.

After consolidation, we are now left with 3-5 players who have the wherewithal to take BOT projects. 

<div class="paragraphs"><p>Karwar-Kundapur Highway Project between Goa and Karnataka. (Source: IRB Infra)</p></div>

Karwar-Kundapur Highway Project between Goa and Karnataka. (Source: IRB Infra)

Do you plan to take over any of the stuck projects? 

Virendra D Mhaiskar: I do not know BOT projects who have defaulted. Either they have been harmoniously substituted, some of the incomplete projects have been bought over by funds or have been re-tendered. So, I don’t see a big pipeline of stuck projects. 

What we are looking forward to is new opportunities from the government to tackle their side of debt by not leveraging themselves and making that opportunity available for private projects. 

Is that the reason why the government has reduced the total number of BOT projects, going forward? For example, if we see the Bharatmala project, only 10% of projects are on BOT?

Virendra D Mhaiskar: As stated earlier, the appetite for BOT projects are limited to 4-5 players. The government has rightly tried to structure their outlay in such a manner that projects get lifted by private players. However, if they see an overwhelming response to tenders, then I am sure the number of projects under BOT will go up. 

If we look at the absolute amount of investments proposed for roads and highways under the project pipeline, then we are talking about $240 billion.

Even if we take 10% of that, we are talking about $24 billion of investments, which is massive. The government has done a phenomenal job as far as their ability to roll out the program is concerned.

If we talk about Bharatmala Pariyojana, it is an identified opportunity, so the government has thought through what the projects are, and what are the grid expansions that they have on their mind. It gives us the visibility to evaluate the projects for any risks and prepare for financial bids. 

What could be the reason for slowdown in development of road projects, in terms of km per day basis in the last two quarters? 

Virendra D Mhaiskar: There are multiple reasons for the slowdown in progress, but majority of them are getting addressed now.

The raw material prices have softened from the peak in April-May. People have started to factor-in these prices in the bids they are putting and taking safety hedges to stay better prepared.

As far as project execution is concerned, in the last two years, project bidding has peaked between December and March.

Even now, as per NHAI website more than 60-70 projects are up for bid, and I presume they will be bid out in the next four-five months.

I think they are taking longer since they want to be prepared from land acquisition and other issues point of view before they award the projects. I think it will be a positive move if it's bid out with full preparation.   

<div class="paragraphs"><p>One of IRB Infra's Road Projects. (Source: Company)</p></div>

One of IRB Infra's Road Projects. (Source: Company)

What is IRBs total order book and asset size as of Sept. 30, 2022? 

Virendra D Mhaiskar: Our order book is in excess of Rs 20,000 crore, out of which Rs 12,000 crore is EPC, which gives us a good 2.5 years of visibility. In terms of total asset size, including the two investments across the InvITs, it has exceeded $8 billion.

What is the break-up for roads under various segments? 

Virendra D Mhaiskar: We have around 19 BOT, one toll-operate-transfer project and four hybrid annuity model (HAM) projects.

In BOT, except two projects that are under development, all projects are fully developed and running well. Out of four HAM projects, one project was completed, while the rest are under execution. For the one TOT project, we have paid the money for acquisition of the project, and it is in now in stabilisation period. 

As of Sept. 30, what was the total debt on your books? 

Virendra D Mhaiskar: The consolidated debt has dropped to Rs 13,000 crore and will continue to drop going ahead. Our newer projects will be developed under the development platform—the private infrastructure investment trust (InvIT) where IRB owns 51% and GIC Singapore owns 49%. 

IRB will generate Ebitda from execution of projects and will redeploy as equity towards participation in private InvIT.  So, it becomes a self-sustaining project execution for us where we don’t need to leverage our balance sheet but still grow the asset book. 

Can you throw some more light on your two InvITs?

Virendra D Mhaiskar: We have two InvITs—first, a private InvIT where GIC Singapore owns 49% and IRB owns 51%. Being a private InvIT, we are allowed to take construction risks. Hence, majority of the underdeveloped projects were executed through this platform.

We have 10 projects under this platform out of which nine are fully operational and one is a recent addition to it. The portfolio is generating positive cash and has stabilised. So, we are redeploying the cash in newer projects. So, it’s self sustaining, despite being a development platform. 

As far as public platforms are concerned, we have six assets, and we own 16% in the platform. We are the project managers and operators of the platform. Here also, the projects have stabilised and we are generating significant cash that we are distributing to the unit holders.  

We also have further appetite to deploy capital depending on what government brings to the table. 

Do you have plans to dilute equity any further? 

Virendra D Mhaiskar: No, given we have 20% Ebitda margin and equity contribution is only 15%—on a debt equity ratio of 70:30—with 49% stake owned by GIC. Going ahead, our projects would become more profitable and self-sustainable, so we would not need to dilute our stake any further.