Life in the fast lane
Way back in 1996, when the state government of Maharashtra opened up the concept of build-operate-transfer (BOT) projects, a real estate developer AshokaBuildcon Ltd decided to make its entry into infrastructure. Thus far, the company was focused on engineering and construction of residential, commercial and industrial buildings.
Having won the `5 crore BOT project, the company’s managing director, Satish Parakh, and his team approached a local bank to seek finance. The bank politely refused as they found the proposal incongruous to popular notion. But the concessionaire was not disheartened.
“We took an educated guess and took recourse to private finance and completed the Dhule bypass within record time,” says Parakh. Over the years and several projects later, AshokaBuildcon left behind its zeal to build real estate and began to concentrate on roads, bridges and highways, and more specifically BOT projects. Along the way the company added another feather in its cap — that of completing projects within record time if all clearances and approvals are in place. Despite this, the company maintains a low profile and let its work talk for them.
At a time when most state governments are cash-strapped to fund infrastructure projects, BOT in terms of construction management has offered some succour. Considering that developing countries like India require extensive infrastructure to meet population growth, budgetary constraints is what holds them back. In such cases, BOT is an option to finance the infrastructure project and boost the economical growth of the country without direct utilisation of government finances. Parakh says, “PPP have opened new doors for investment of foreign funds in infrastructure develoopment of our country. It can be a lucrative opportunity to generate foreign exchange which in turn can aid economic growth.”
As with all new things, when the concept of BOT projects came about, Ashoka Buildcon garnered its first financing from a company that did not have a mandate to finance BOT projects. It was a personal guarantee that worked in their favour and finance was made available at 18% interest rate. Arguably, it was the first financing closure in this sector.
What went in favour of avant-garde BOT was the championship provided by then PWD minister for Maharashtra, Nitin Gadkari. Parakh says, “He was the only soul to believe in this concept and ran pillar to post to get various government departments to understand its novelty and usefulness.”
At a time when most infrastructure developers fight shy of getting involved in BOT projects, what compelled Ashoka Buildcon to venture into this and turn it into a success? Parakh says, “There’s a certain amount of risk in BOT projects. The higher the risk, the higher the rewards. Over the years we have made this our strength and developed a strategy to address the risks, analyse them, and ultimately gain profit from them.” Bidding for BOT projects do not happen overnight. Concessionaires like AshokaBuildcon have created an entire ecosystem at every milestone of the process. The company has a team of 50 persons perambulating in different states, studying identified stretches, conducting traffic surveys, and later analysing them, so that they are fully aware of the project for which they are bidding.
A BOT project can only be successful if there are heavy traffic flows on that stretch. “It’s for this reason that projects are identified in advance. We need to understand traffic flows over the next few years and much in advance. We need to look at origin and destination of traffic.
For that reason, we also analyse various sectors on which traffic is dependent be it agriculture, industry driven, mining, etc. The future of those sectors will decide the future of toll collection for us,” says Parakh. Since bidding is done through an electronic process and the concessionaire is given a 35-day window period to bid, being forewarned helps.
Often most concessionaires are required to tackle challenges on behalf of the government prior to the execution of the project. Since most road development projects are brown field (with only expressways being green field), it means upgrading existing facilities that run through urban stretches. Parakh says, “This means relocating encroachments, utilities, not to mention the land acquisition problems. All this requires specialised skills. Though they are the state government’s responsibility, we as concessionaires are required to facilitate the government in this process.
Companies that have developed these qualities are able to complete jobs in or before time. Those on a learning curve may delay the projects which in turn affects their returns.” Besides traffic assessment, design is another element that matters in a detailed feasibility report. Unless the designs are approved by the authorities involved, the project cannot move into execution. More often than not, some issues that delay projects are the multiple sanctions and various parameters created by different states specifically related to land acquisition.
Parakh says, “We are completely dependent on state mechanism for land acquisition. Titles and land records are unclear and sometimes little is known of their whereabouts. Specifically in Orissa and some northern states, there are numerous factors to be taken into consideration when bidding for a project and promising completion dates.”
All this adds to the company’s speedy requirement to understand the nuances and workings of this sector. The learning curve for Parakh and his team has not been an easy one. The company realising that there was a lack of professional consultancy available had to create inhouse teams for traffic assessment and software development for toll collection.
According to Parakh, the company at one point tried to source software from abroad to install at toll booths. But the cost was discouraging. So it encouraged local development of software with its own investment. The incentive to create in-house resources was due to the reward it earned from its first project where toll collection went beyond expectation for the overall cost of the project.
Ask him about his commendable achievements and Parakh smiles and says that speed is the key for success in the construction and infrastructure industry. “We were the first concessionaire to finish a bridge project in 38 days when the target as 12 months. It was a record for the industry. Recently we completed another bridge in 12 months against 30 months. It was challenging to work on that project as it had been left half done by another company. NHAI has been trying to bid that out last 10 years. We not only completed the bridge, but built a new one parallel to it,” he adds.
The achievements for the company were possible only because it chose to cultivate its key persons who have stuck with the company for two decades or more. AshokaBuildcon understood that delays in execution of infrastructure projects would defeat the entire purpose of a concession. When it completed the Dhule bypass in nine months against 30 months, it gained a concession period of more than 21 months. It was an added bonus for the company. “Bonus is a motivation for success. Now the entire team is grooved into this philosophy,” says Parakh.
Success for a company is when others start believing in you. Executing BOT projects means that the concessionaire will require equity at all times to fund its projects. The investments from third-parties are structured on a project basis and require all parties to share the risks of the project. In 2006, IDFC invested `100 crore in the EPC arm. Parakh says the company knew then they had made it. It was also the time Ashoka Buildcon decided to set up an equity cell and create a special purpose vehicle so it could avail of project equity. Two years ago, Macquarie SBI Infrastructure Fund and SBI Macquarie Infrastructure Trust invested $150 million in Ashoka Concessions Ltd, the developer arm of the business. “We had grown in size and it was necessary to create a new division that would be an exclusive developer arm of the company. So Ashoka Buildcon is the EPC arm that does cash contracts and Ashoka Concessions is the developer arm that will manage theconcessions of 25 or 30 years. Investors who want to invest in a developing arm could look at Ashoka Concessions and those with an appetite for risk to do cash contracts could invest in Ashoka Buildcon,” says Parakh.
The risk factor is what disheartened several other concessionaires who were present when the economy was on an upswing. “We have seen the downturn and upturn. We have seen interest rate cycles of 8% and even 18%. There have been times when developers have got caught in slow economic growth and seen their traffic projections go awry and left the business. Traffic is a function of GDP. Unless there’s traffic on your roads and giving you revenue, you cannot service equity and debt,” says Parakh.
“Our whole strength is selecting a correct stretch of road. We look at traffic movement over two years or three years. Since we are responsible for toll collection, we ensure that our bids are realistic. There are new dynamics and risks entering this sector. But that is part of the business,” says Parakh.
The new age risks are instances when an RTI or PIL has been filed by an NGO or a conscientious citizen and tends to delay the project. This could be numerous areas like tree cutting, environment clearance, quarrying, etc. While the courts may grant a stay order on the project, it delays infrastructure projects. “So we have to build in this risk. Then there are risks like a slowing of the economy the world over, rising oil prices and bitumen, deregulating diesel prices overnight, among other things.
In 2010, the EPC company set up Ashoka Highway Research Centre that is devoted to professional excellence in the area of highway construction and designs technology through research and development programme. The centre is equipped with sophisticated testing equipments including special equipment for instant quality assessment of highway structural parts. The R&D areas of the centre are engaged in sustainable developments in highway constructions, third party assurance to quality assessment, road safety, applications of innovative construction technique, etc. “After BOT, came the DBOT (design-build-operate-transfer) concept. Since we own the highways for 30 years, we need to maintain them. We have always been conscious of bringing value addition by seeking out new technologies and new materials that will
reduce the project cost,” says Parakh.
In this light, in 2000 the company began manufacturing ready-mix concrete (RMC) to reduce dependability on third parties. Considering that projects have deadlines, an EPC contractor requires tonnes of concrete — something that cannot be called in at the last minute.
What is not utilised is sold. Every time AshokaBuildcon bags a project at a new location, it makes it a point to buy a new plant. Currently, the company has two plants in Mumbai and one in Nashik, besides another 10 plants for its use.
Having established itself in BOT projects, the company’s next move was to look at the power sector. Parakh says, “When we saw a slowdown in the roads and highways contracts, we began looking at power distribution cash contracts. Though we had the required EPC skills, we faced qualification obstacles. We tied up with a partner and executed the first project, while taking on the full responsibility of execution. Today we have more than 300 employees in this vertical alone and are executing projects across four states.” On May 29, the company was announced as the lowest bidder (`3.73 billion) for rural electrification works in Bihar.
Ask Parakh about his expectations from the new government and he lists out a few. “We want the government to recognise us as a partner. It’s a public private partnership project. Last few years, we are reduced to being mere contractors. The government must understand that the concessionaire has invested crore of rupees on highways and if decisions are not taken on time and designs are not approved faster then the purpose of investing money is lost.”
He would also like the new government to market the BOT concept. “The government puts out advertisements for paying service tax and income tax. Why don’t they advertise for building infrastructure and paying toll tax? Why do people feel they are paying something more than due?” he asks.
Despite this, Parakh says the company expects to grow its topline over `2,000 crore in fiscal 2015. “Currently, we have `3,500 crore balance order book, around `2,300 is road sector and power T&D is around `1,200 crore,” he adds.