Click here for the hard truth about the current job marketAugust 31, 2015 8:50
Firms compete for a spot in India’s economic battleground
The UAE isn't the only interested investor in India. Fierce competition for infrastructure projects in India is even ramping up government expectations in infrastructure spending to $1trillion over 5years.
September 20, 2011 11:13 by Reuters
When DP World was vying to build a fourth container terminal at Mumbai’s main port this year, the Dubai-owned giant made what it thought was a solid bid, proposing to share one-fifth of the terminal’s income with the government.
Then a rival came along with a bid that beat all-comers, offering to hand over 51 percent of the port’s takings to New Delhi to secure the project estimated to cost 67 billion rupees ($1.4 billion).
Such generous terms are part of an emerging pattern of companies making ambitious — some say unrealistic — bids in a race to cash in on a massive push by Prime Minister Manmohan Singh’s government to lure private funding into infrastructure.
“The bid competitiveness is increasing to the extent that the projects will become unviable,” said Devang Mankodi, finance director for South Asia at DP World.
“There is a lot of hype about India’s growth story and probably that is pushing some of the entrepreneurs to bid aggressively,” he said. “No one wants to miss the bus.”
PSA International, the Singapore state company that is the preferred bidder for the Mumbai port deal, declined comment.
While India hopes that half its targeted $1 trillion in infrastructure spending over five years is privately built, attractive projects are scarce, making for fierce bidding.
That means the government may get an attractive deal in the near-term, but it puts heavy pressure on companies and poses a longer term risk if such projects are delayed or derailed due to over-optimistic assumptions on costs or revenue.
Winning bids can sometimes be ten times the second place offer, said S. Nandakumar, a sector specialist at Fitch Ratings. Some projects attract dozens of bids.
Such aggression has prompted major Indian firms such as Reliance Infrastructure, owned by tycoon Anil Ambani, to focus on bigger projects such as expressways.
“In small projects the competition intensity is completely crazy,” said Lalit Jalan, chief executive of Reliance.
“So we will focus on the large projects where we will have fewer and more rational competitors,” said Jalan, whose company built a slick high-speed rail link to Delhi airport, the first of its kind in India.
Strapped for cash, New Delhi is pushing a model known as build-operate-transfer (BOT). Firms bid to build a road or a metro and operate it for a fixed period, collecting toll or ticket fares before handing it over to the government.
To win, bidders compete to maximise the government’s share of revenue or minimise the contribution New Delhi must cough up to ensure projects are viable.
“Today you have four or five players who are aggressively fighting for a project. So basically they have no choice but to try and increase the financial revenue share … as high as they can to win the project,” DP’s Mankodi said.
“The risk associated with that is that once the long term sustainability of the project is being tested, you will have issues,” he said.
The risk of that happening hasn’t deterred a slew of companies pitching for infrastructure projects, however.
GMR Infrastructure Ltd, which built Delhi’s swanky airport and will soon build India’s biggest highway, for example, bid on 25 projects last year and won exactly one, according to a spokesman.
“Earlier we were looking at around 6-10 people getting qualified for a bid. Now around 40 normally get qualified,” the spokesman said.
Newcomers to the BOT model are creating problems, said Shashank Shekhar, vice president for business development at KMC Constructions.
“Novice players means very new guys who don’t have experience of BOT, they are getting into the BOT, which is actually spoiling the market today,” he said.
OPTIMISM AND SCARCITY
Builders of roads, power plants and other big projects are bidding in part because of optimism over the sheer demand in an economy growing at roughly 8 percent a year with a severe infrastructure deficit.
New Delhi expects an annual average of $100 billion of private investment in infrastructure between 2012 and 2017, although the government has consistently missed…
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