Cuckoo Paul/Forbes India
Slothful bureaucracy, ever-changing rules, irrational competitors and fickle investors — the business of infrastructure can be quite tricky in India. Ask G.M. Rao
Safdarjung, India’s iconic British-era airfield that is now sadly defunct was the venue of a remarkable meeting one hot day in May. The crème de la crème of India’s passenger aviation business had assembled there to tell the sector’s new regulator how much they think travelers flying in and out of the city should be charged.
The Airport Economic Regulatory Authority, or Aera, had a tough question to settle: Who should be made to bear the brunt of a 41% cost escalation in the construction of the Capital’s gleaming new international airport — the passengers, the government or the guy who built the airport?
The guy who built the airport — Grandhi Mallikarjun Rao, or GMR — was chewing his nails off at his office in Bangalore 2,000 kilometres away. The veteran infrastructure entrepreneur was seeing his best-laid plans being blown to smithereens at a pace even he could not keep up with. In a matter of a few months, his world had turned topsy-turvy.
Rao was staring at a hole of Rs. 1,800 crore (USD 400 million) in his balance sheet for no fault of his. He had built a world-class airport terminal with a capacity of 34 million passengers in a record time of 37 months. Given that planning always lags behind demand growth for infrastructure in India, he had to widen the scope of the project along the way.
An exclusive terminal for low-cost carriers, an underpass for easier access from the highway and a few other bells and whistles had made the airport future-proof. Yet, in place of the accolades he had expected, Rao was facing regulatory hurdles and policy flip-flops that could make his business unviable.
At the core of his problems is the shift in the power equation from the civil aviation ministry to the new regulator. Aera is pushing for a tight control on the returns of private airport operators (and consequently on airfare) through a new system of calculating revenues. This passenger-friendly move, however, could temper the rate of return and delay the breakeven at Delhi International Airport Ltd. (DIAL), a subsidiary of the listed GMR Infrastructure.
Even if Rao were to accept a slower journey to breakeven, he has a more urgent problem to solve. As per his calculations, the project cost had risen to Rs. 12,857 crore (USD 2.86 billion) of which all the equity, debt and government funding could not meet a gap of about 15%.
He needs to recover that in some form and had proposed he be allowed to charge passengers a development fee for another three-and-a half-years. It is this question that the Safdarjung meeting debated. But no decision came through that day and it is still not clear whether the regulator will allow this unpopular move.
There is more bad news. Aviation is not the only business that is in jeopardy in GMR’s empire. Each of his other ventures — power, roads, special economic zones and even his recent international foray — has gotten into trouble. In most of these cases, the problems have largely to do with the changes in the environment, like regulatory U-turns, irrational competition and that fickle thing called stock market perception.
In the power sector, he is hemmed in by a shortage of gas and uncertainty over fuel linkages. Earlier, Rao lost out on the bids for ultra mega power projects that seriously undermined its plans to be a major player in power. As a way out, he paid a billion dollars for Dutch company Intergen with a capacity of 8,000 MW in five countries. But falling margins quickly turned that acquisition sour.
The roads business, while ostensibly more profitable than airports, has become a cutthroat pursuit. Taken in by the hype surrounding the infrastructure business, rookie entrepreneurs and road contractors are bidding aggressively. They are taking away the projects from more experienced hands. Last year, GMR bid for 24 projects and won only one.
While GMR demonstrated more hunger for new projects than their rivals like GVK, the pressure from investors grew by the day. “It is simply impossible to keep sustaining the hype,” says Vinayak Chatterjee, chairman of Feedback Infra. When short-term excitement ran out in this long-term business, shareholders became upset.
All this has led to a simple equation: Revenues are slow to come, profits uncertain, debt mounting and new investors hard to come by. This is not just the story of GMR but of much of the entire infrastructure sector in India, which after two decades of economic reforms, is still choked by bureaucratic and regulatory bottlenecks.
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