‘Tariff policy is a big risk’

The Union Cabinet minister for roads and highways, Mr Kamal Nath, wants to build 20 kilometres of roads a day — up from the two km/day that was happening last year. For that, he needs the help of Mr Virendra D. Mhaiskar, and others like him. Mr Mhaiskar is the chairman and managing director of IRB Infrastructure Developers, with over seventeen 17 years experience in the construction sector. IRB Infrastructure is one of the leading road developers in India, with over a dozen projects in bag.

The company is best known as the operator of the Mumbai-Pune expressway. Mr Mhaiskar has seen the road construction space evolve over the past decade and half — from being completely a government driven sector to one where private sector has a much bigger role. Amit Bhandari caught up with him to decode the changes that are going on in the sector.

NHAI has awarded several big ticket projects in the past six months. Do you see any difference compared to the past?
The standard project size is now Rs 1,000 crore — much larger than the projects awarded by National Highway Authority of India three to four years back. There are 10-15 players who can handle contracts of this size.

The minister wants project size to increase to Rs 5,000 crore. There are 70-75 projects that have been identified, which should be awarded in the next few months. This project pipe-line is worth close to Rs 1 lakh crore.

The new government is talking of speeding up the pace of road construction. Could you list out any concrete steps they have taken for that?
Faster resolution of disputes is one. A single committee has been formed to look at bunched up concerns of developers, lenders and other parties.
Land acquisition is another area where we can see progress. A body has been created to help with land acquisition at the state level. Changes have also been made to the concession agreements that were there earlier.

Road development by the private sector is an accepted practice now. As an insider, how do you see the change over the past decade?
In a sense, we have seen the cycle getting over now. Three of our BOT (build, operate, transfer) projects are now complete – we bid them, operated them and are now handing back to the government. We have also seen traffic and interest cycles. Interest rates have been at a low of eight per cent and a high of 16-18 per cent in the past decade.

IRB has a big portfolio of roads as a developer — how did you get into that role?
We went for the first project as a developer in 1995. Prior to that, we were into construction, maintenance and tolling in different projects — we were handling each of the verticals in a road project.
Tolling was also a contact point with users — where we often heard complaints about the quality of the asset. So we felt we should have control.

How has your business been impacted by the economic slowdown?
We had seen a drop in traffic on some of our projects – especially where traffic was led by export markets. The past six months have seen robust growth though.

Is it easier to arrange funding for road projects now compared to the past?
The equity requirement is still around 30 per cent. In larger projects, the project life can be 24-25 years while long term finance is not available beyond 15-16 years. That puts a restriction on how much we can borrow.
It is also not possible to tap the bond market, because the bond market requires a tangible asset. One possibility is to have a structure like REIT (Real estate investment trust), where you bunch up several projects under one firm and raise capital on them by listing, and free up the equity tied up in those.
After all, you can’t keep diluting equity in the main company endlessly.
What is the big risk that you see in the business at this point?
One risk from the planning side is the tariff policy. Typically, the toll of a road should be 50 per cent of the cost saved by the vehicle operator. Tolling cannot be indiscriminate — for instance, on two lane roads. Some basic level of service needs to be provided free of cost.

Infrastructure companies complain about not getting young engineers because they prefer computers to civil engineering. Has that changed?
Last year, we had an easier time hiring from campuses as IT companies had gone slow on hiring. We have close to 1,800 technical staff.