NEWS UPDATES: March 06, 2012

TABLE OF CONTENTS: NHAI hits fly-ash hump BIA road toll nominal Rs 23 cr released for development of roads, says Muniyappa Rs 60.7cr to be spent on Gurgaon roads Smart tags soon for Delhi-Chandigarh highway Better highways save time and logistics costs Toll collection disrupted Where do we go from here Banks want developers to bring in more equity Sgr-Jmu highway upgradation project in limbo Realtors' body seeks more tax sops for consumers, developers NHAI to miss FY12 target says PINC Research State proposes flyover at Hero Honda crossing 3 extra lanes at Gurgaon toll plaza Road projects: from despair to hope MCD sanctions 54 projects, Rs 160 cr in 15 minutes to beat election code PE interest in road sector on the wane Close look at borrowing must: ex-Fin Secy

Infrastructure Specialists
Roads Bridges Railway Power Sanitation Water Works Renewables

NHAI hits fly-ash hump As Odisha guns for more power from thermal sources in the years to come, the challenge of ever increasing generation of fly-ash looms menacingly large, prompting the State Pollution Control Board (SPCB) to crack the whip. The Board, for the first time, has issued a showcause notice to the National Highway Authority of India (NHAI) for not using fly-ash in the widening of Panikoili-Remuli stretch of NH 215. The move is aimed at paving the way for increasing fly-ash utilisation since the State is going to generate millions of tonnes in the next few years. Going by the Ministry of Environment and Forests (MoEF), use of fly-ash is mandatory in 100-km radius of a thermal power plant. The Fly-Ash Notification of MoEF in 2009 clearly prescribed that no agency, person or organisation shall, within a radius of 100 km of thermal power plant undertake construction or approve design for construction of roads or fly-over, embankment with top soil. Top soil is considered extremely essential for environment protection but the NHAI was found using it in road expansion work along the Panikoili-Remuli stretch. When the NHAI proposed its four and six- laning work, it was sanctioned the consent to establish with the condition to utilise fly-ash to maximum extent and the project authority had submitted to comply with the provisions of Environmental (Protection) Act. In its notice, the SPCB pointed out that the NHAI was yet to submit the compliance status whereas work for the road expansion has already begun. Interestingly, the NTPC-SAIL Power Company Ltd (NSPCL), a joint venture between the two PSUs for captive power generation, which is located at Rourkela had also communicated to NHAI for utilisation of fly-ash from its ash pond since it is located 55 km from Rajamunda. The Board which invoked the Water (Prevention and Control of Pollution) Act and Air (Prevention and Control of Pollution) Act stated that since road widening of NH-215 has been started, the NHAI has to reply within 15 days as to why fly-ash is not being utilised in the construction though construction activities are being carried out within 100 km radius from thermal power plants operating in that area. The Board will initiate legal action if no response is received. The NHAI is expanding the NH 215 in two stretches - 163 km from Panikoili to Remuli and 106 km from Remuli to Rajamunda. Contacted, General Manager, NHAI, Keonjhar, Chander Kant said, the notice is yet to reach them. Bangalore Mirror BIA road toll nominal Highway authorities say the current Rs 25 will go up once the route becomes signal-free corridor in a years time First the good news. In about a years time, the International Airport road will be a signal-free corridor. And the bad news is, once that happens, you will have to cough up a higher toll.

National Highways Authority of India (NHAI), which is developing the six-lane road, says the current toll (of Rs

25 for cars, going up to Rs 175 for a return pass for oversized vehicles) is nominal and it will be enhanced when the road is turned into a signal-free corridor. The work is going on at a brisk pace and may be ready for operation from March 2013. When questioned about the exact increase in the toll, the NHAI officials were tightlipped. They said as per rules, the more the investment on the road, more will be the collection and toll will be revised once the road is upgraded to a world-class highway. An official, however, said, The exact amount will be decided a month before the collection date. So, at this point of time, it may not be possible to specify the toll hike. He said as per the agreement (between the NHAI and the construction agency), there will be an annual revision of toll on the expressway starting April 1 every year. The toll hike will be based on the wholesale price index, he said. ONE-WAY TOLL So far, the toll burden had fallen only on motorists entering the city from other states, while those exiting the city were exempted from paying the toll. Once the toll collection plaza is widened, vehicles moving in both directions should pay the toll. Unlike the advantage on Tumkur or Hosur Roads, where motorists can avoid the toll by taking the service road, there is no escaping the toll plaza on the international airport road. DOUBLE TOLL Meanwhile, the NHAI is widening the toll plaza. Currently, due to shortage of space, no toll is collected from vehicles moving out of the city, while those entering the city have to pay a double toll. What we are seeing now is only a temporary toll plaza. We are widening it and will start collecting the one-way toll soon, said the official. But the major disadvantage is the absence of a service road on the route. The officials claim they would provide a service road up to the plaza but if one chooses to go beyond the plaza, then he/she needs to switch to the main carriageway. Which means there is no escaping the toll. However, the NHAI officials said two-wheelers will be exempted from paying the toll. No logic According to traffic expert M N Sreehari, There should be an option of the service road being kept free beyond the toll plaza so the common man who doesnt want to pay the toll can use it. He said he couldnt understand the logic of collecting toll and then revising it. Why cant they wait till the road is completed as the NHAI is yet to collect toll on the completed four-lane roads on Kolar and Devihalli route? Among the NHAI roads, the Nelamangala elevated highway allows motorists to either choose a toll highway or the service road, which is free. Another transport expert Ashish Verma said there is definitely an issue over location of the toll collection plaza: whether or not to have it just before the trumpet interchange.

ELEVATED STRETCH The airport expressway corridor will be a crucial link between Bangalore and Bangalore International Airport. As per the project plan, the initial 3.2-km stretch between Hebbal flyover and the beginning of Yelahanka bypass (near GKVK) will be an elevated stretch. From Yelahanka-bypass to the trumpet interchange (gateway to the BIA), all the major junctions will be made signal-free. For instance, two flyovers will come up at the Kogilu Cross and Vidyanagar junctions, while four more grade separators will come up at other crucial junctions. According to officials, once the project is complete, motorists can reach the airport within 15 to 20 minutes from Hebbal as against 45 minutes now. The project was announced by then union minister of state for surface transport K H Muniyappa. DECCAN HERALD Rs 23 cr released for development of roads, says Muniyappa Seeks more funds for water supply to Sghatta taluk A grant of Rs 23 crore has been released for development of roads in the taluk, said MLA V Muniyappa. He was speaking after laying foundation for developing a road between Doreganahalli and Palicherlu at a cost of Rs 50 lakh, on Thursday. Grant has been released under Public Works Department (PWD), Pradhan Manthri Gram Sadak Yojana and Central Reserved fund, and the road works throughout the taluk will begin by March end, he said. Out of total 6.3 crore grant from PWD, Rs 1.4 crore will be spent on developing road between Jangamakote Cross to Shidlaghatta city; Rs 1 crore each for road from Shidlaghatta to Vijayapur; Shidlaghatta to Cheemangala and development of Cheemangala tank bund; Rs 50 lakh for Doreganahalli border to Palicherlu road; Rs 40 lakh for road from Goramadagu to K Muttagadahalli; Rs 90 lakh each for Thimmasandra to Dibburahalli and Kencharlahalli to Chilakanerpu road. Tender process is underway and the road work will begin shortly, he added. Under Pradhan Manthri Gram Sadak Yojana, Rs 3.5 crore will be utilised to develop Peresandra to Sadali road which goes via Iragappanahalli, Gadiminchenahalli, Devaganahalli. These roads come under Chintamani and Bagepalli. For developing 11th Milestone Road in between Palicherlu, Dibburahalli and Chintamani, Rs 3.5 crore will be spent. Rs 1.5 crore for Marihalli, T Peddanahalli, Chowdareddahalli, connecting road from Doddatekahalli to Dibburahalli. RS 2 crore for repairing roads at Bellooti, Bhaktarahalli, Kakachokkandahalli, Ankatatti to connecting road from Vijayapur to Shidlaghatta. Amount of Rs four crore has been released by the Central Reserve Fund. This will be utilised for developing roads from Chokkanahalli to Kundalagurki, that is Y Hunasenahalli, Sheegehalli, Gajjiganahalli to Kaivara road.

Roads being asphalted After a wait of four years, either sides of the Ashoka Road is being asphalted. A proposal of Rs 30 lakh to asphalt the complete road, has been sent to the concerned authorities. Work will begin as soon as the fund is released, legislator said. Taluk Panchayat president Venugopal, former president of Zilla Panchayat V Subramani, former president of Block Congress Munikrishnappa and others were present. Water funds Speaking to the media later, Muniyappa said drinking water has become severe in the taluk. I get telephone calls from more than 10 villages asking to solve the drinking water problem. Though borewells are being sunk, it is not helping solve the problem. The fund released by the government in this regard is not sufficient, he said. Presently there is stock of fodder, which will suffice for some more days. But surely in coming days, the officers have been directed to see to it that situation of fodder scarcity does not arise, he said. The authorities concerned have also been asked to take action to solve water problem. Acting on the direction, the authorities are conducting task force meeting once in a week, in every taluk. District-level task force meeting will be organised once in 15 days, In charge Minister A Narayanaswamy will participate, he added. I will request the minister to release adequate fund to solve water related problems. This year under due to various reasons, work was nor carried on under MGNREGS. In this backdrop, the minister will be asked through the task force, to release fund under drought scheme and Employment Guarantee Schemes, he added. THE TIMES OF INDIA Rs 60.7cr to be spent on Gurgaon roads The public works department has announced its plan to spend Rs 60.70 crore on construction of roads and buildings in four blocks of Gurgaon. An official spokesman said that out of the total amount, Rs 54 crore would be spent during the next financial year whereas work on projects amounting to Rs 6.70 crore was already in progress. He said the department had prepared a work plan to carry out construction works in the next fiscal year under which these development works would be undertaken in Gurgaon, Sohna, Farukhnagar and Pataudi blocks in the district. New roads would be constructed and old roads would be repaired. A multipurpose hall would be constructed in the government college of Sector 14 in Gurgaon for which Rs 7.26 crore has been sanctioned by the state government. He said that bridges would also be constructed in Kulvaka village on way from Nimoth to Ghanghola at Gurgaon canal at an investment of Rs 1.62 crore. The scheme of works includes construction of the buildings such as tehsil office, primary health centre, sub health centre and rooms of colleges. The official said that a tehsil office would be constructed in

Farukhnagar block at a cost of Rs 3.18 crore and a sub-magistrate's office would be built at Pataudi at Rs 8.86 crore. THE TIMES OF INDIA Smart tags soon for Delhi-Chandigarh highway The highway ministry's ambitious project of introducing a common smart tag for all toll plazas across the country will be tried out on the NH-1's Delhi-Chandigarh stretch. By May-end, the new technology will be tested on a pilot basis before other tolled stretches are included in the project. The government aims to introduce a singe radio frequency identification (RFID) smart tag that can be used at all toll plazas by end-2013. At a meeting held on Friday, under the chairmanship of highways minister CP Joshi, it was decided that the first project - on the 250-km stretch in NH1 - needs to be expedited. Three toll operators own different stretches of the corridor, and the NHAI will also test the technology's inter-operability. Sources said the facility would be first installed at the toll plaza in Panipat. A major private banker has offered free service to manage the collection and disbursal of the toll charge among all the three operators - GMR, Soma-Isolux and L&T. The bank will provide facilities for recharging the tags at commuters' convenience. The RFID tag promises to improve vehicle clearance at toll plazas since the vehicle users don't have to stop and pay cash at counters. The censors placed at toll gates will read the tag from a certain distance and bamboo barrier will go up automatically. The new tags will come cheaper and are likely to shift most of the cash lane users to tag users, reducing congestion and help plug revenue leakage. Annually, the NHAI loses about Rs 1,200 crore due to leakages and several man hours are also wasted because of idling vehicles at plazas.

Better highways save time and logistics costs One of the fastest growing infrastructure enterprises in the country with interests in airports, energy, highways and urban infrastructure sectors, GMR Groups top boss spoke to Vikas Srivastav on issues related to construction, project funding and land acquisition in the country. Excerpts: What is the status of mega highway projects and freight corridors? What are your expectations from such projects, would you like to participate in them? The National Highway Authority of India (NHAI) announced 10 mega highway projects, of which only one has been awarded as a mega highway, while 3 others have been split into 2 projects each. The fate of others is yet to be known. Mega projects will continue to be a priority area for us. Freight corridor is still in a nascent stage and will take off later than planned. How aggressive are the bids now? Are collections likely to go down by the time the projects start collecting tolls? Do you expect any decline in the estimate of toll collection?

Some of the bids may be aggressive, but not all can be said to be so. Variation in toll revenue depends on local reasons unless the economy as a whole is not doing well. Since the economy as a whole is still good, there may not be reduction in revenues for projects coming up for toll collection in the coming years. Another issue is that of lower entry barrier for concessionaires. How is it affecting the developers and would it impact on the overall growth of the sector? Though encouraging competition is beneficial for the society as a whole, it is important to look for allround capability of a concessionaire which requires great financial, technical, implementation, managerial and operations and maintenance capabilities. These are not verified in the present bidding system. This leads to a large number of bidders, who in turn face shortage of consultants for pre-bid services. This also results in incomplete and inadequate analysis of the project cost, as well as financials that lead to bids which may not be correct. For a new bidder with lower capabilities, it becomes difficult to implement the project on time. In general, this will impact the NHDP programme itself. What is the total lane kilometres that GMR has constructed and how much is under construction? We have about 1,684 lane km under 6 operational projects and another 1,636 lane km under construction. This excludes Kishangarh-Ahmedabad project of 3,333 lane km, which has been awarded recently. How challenging is the funding of these projects? How much is required to be raised for the upcoming projects? The financing of projects has not been a challenge for us. Normally, we are able to tie up financing at 70:30 debt equity ratio. How important are the state road projects to your portfolio and which states are you participating in actively? The state highway projects are equally important to us. We are keen to participate in large state highway projects. Land acquisition is feared to pose a serious challenge to the construction of 20 km of road per day by 2014. What could be other challenges for the NHAI and what is the way out? Other than land acquisition, some of the challenges that the NHAI will have to encounter would be due to lack of research and slow adoption of technology for the biggest road development programme in the world. Policy issues like the NHAIs dynamic bid schedule, which clubs a large number of projects in short span for bidding, followed by long periods of inactivity. Also, the quality of feasibility reports and wrong assessment of local needs at the project preparation stage apart from the high escalation risk due to increase in costs of bitumen, diesel, steel and cement impacts the overall progress of our road projects. How do you see the sector as a whole to progress in the next couple of years? Overall, the privatisation in highway sector has produced good results for the economy. Without private participation, it was impossible for the government to mobilise such huge investment in one sector alone. The improved highway infrastructure has resulted in reducing the transportation and travel time along with the logistics costs. The average speed on highways has increased from 20-25 km per hour (kmph) to almost 50-60 kmph.

However, safety and maintenance on highways still needs to be improved if we are concerned with the overall growth of the sector.

Toll collection disrupted Will face toll boycott issue legally: officials Toll collection at the Namakkal toll plaza on the Salem to Madurai National Highway (NH-7) at Keerambur was disrupted for six hours as members of the Namakkal Taluk Lorry Owners Association (NTLOA) boycotted it from 8 a.m. to 2.30 p.m. on Thursday. The demonstrators led by president of the State Lorry Owners Federation Tamil Nadu (SLOFTN) K. Nallathambi stopped toll collection as the contractors had failed to complete the pending works in the Namakkal - Karur stretch of NH-7 before February 29. Mr. Nallathambi, who is also an Advisory Committee Member of the National Highways Authority of India (NHAI), said that the protest was to oppose toll collection while lot of other works on the 42.6 km-long stretch of the highway were pending for more than two years. Collection of toll in the plaza began on September 22, 2009 after the contractors obtained the Provision Completion Certificate from NHAI, he said and added that the contractors were supposed to complete the pending works in six months from then. He alleged that the contractors continued collection of toll to the tune of lakhs of rupees everyday while no effort was taken to complete the works. He noted that the major pending works were laying service roads and connecting roads to the National Highway at 26 locations in the stretch. According to him, minor pending works include constructing toilets, resting sheds and drinking water facilities at the toll plaza. He alleged that they failed to complete works despite repeated representations. Earlier, the demonstrators decided to boycott toll collection from February 1, 2012, but postponed it after the contractors assured to complete the works before February 29, at a meeting chaired by Namakkal Sub-Collector in January. The protest came to an end after Project Director of NHAI (Karur), M. Thangamani chaired a meeting with the demonstrators in which a written assurance was given to the truckers promising completion of the minor works before March 15 and major works before April 15, 2012. Toll plaza officials claimed that more than 2,000 light motor vehicles, buses, trucks and other heavy vehicles passed the gate without paying the toll during the boycott. Stating that they incurred a loss of nearly Rs. 2.5 lakh during the demo, they said that they would face the toll boycott issue legally.

Where do we go from here Nothing behind me everything ahead of me as is ever so on the road. Jack Kerouac, author of On the Road

Ever since policy liberalisation began in the early 1990s, Indias road sector has never looked back. Roads, the unsung heroes of Indias economic reforms, have been the catalysts for the growth of Indian economy from a frail slow-moving nation to one of the largest and fastest growing economies in the world. All roads lead to the target of building 20 km a day. After initial hick-ups, all concerned now seem confident of achieving the target by 2015, if not by the scheduled date of 2014. In the rush to meet the target, however, India could be potentially endangering the ambitious National Highway Development Programme (NHAI) itself and derailing what has been the countrys single-most successful infrastructure development story of the past 10 years. An array of top executives from toll road companies and road construction companies that FC Weekend spoke to is hopeful that the target would be achieved, provided the issues related to increased competition, aggressive bidding, financing and land acquisition are taken care of, without any time lag. Credible voices associated with India's highway development, in the public and private sectors, caution against the race to meet the target without addressing these basic issues. So, is it time to pause and look back on the road? Where do we go from here? The Golden Quadrilateral that connected the four metros Mumbai, New Delhi, Kolkata and Chennai is 99.81 per cent complete, with 5,835 km out of 5,846 km already laid. As on January 31, in the NorthSouth-East-West (NSEW) corridor, 5,945 km of the total 7,300 km is complete while the rest is under implementation and around 420 km as balance is yet to come up for awarding of contracts. Several other highway projects across the country are at various stages of construction, bidding or planning. Amitabh Mundhra, managing director of Simplex Infrastructure, a Mumbai-based infrastructure major, says the progress of India on the roads and highways has been tremendous and even better than what countries like Thailand and Malaysia have achieved, given the vast and varied geography of India. China has a bigger infrastructure development programme compared with what we have, but the two cannot be compared for reasons that China is a totalitarian country and only focused on execution, whereas India has to have interaction with the public, which does not happen in China. Given these issues, we believe that NHAI has done a very good job of executing big projects, says Mundhra. The ministry of road transport and highways has set a target to build an average of 20 km of road per day which would translate into 7,300 lane km in a year and over Rs 10,000 crore in toll revenues. The big question is whether the target is achievable by 2014, the deadline set at the beginning? NHAI hopes that the target would be met by 2015, with a delay of one year. The role of roads cannot be underestimated, given India's massive growth in vehicular traffic and growth of GDP at over 8-9 per cent in the past decade. India has the worlds second-largest road network of over 4.24 million km comprising national highways, expressways, state highways, major district roads, and village roads, while an additional around 50,000 km is in process of being laid over the next five-six years. These are huge numbers and raise doubts in the minds of people over the estimates and capabilities of the developers and NHAI alike, given the concerns of higher raw material cost and land acquisition issues, as the concession awards now move into small towns and villages, and financing of these projects such as availability of credit to achieve the target within the stipulated time frame. For the benefit of readers, let us explain how the target of constructing 20 km a day was reached. It was reached on the premises that the government would have awarded contracts for around 7,000 lane km annually from 2010 for the next four years, that is by the end of 2014. Chief general manager of NHAI, G Suresh, says India has around 5,000 km of road work in progress at present, around 5,000 lane km was awarded in 2010-11 and this financial year has already seen an

award of 5,000 km by the end of December, which is expected to go up to 7,000 km by March. The pipeline of roads to be awarded by NHAI in next financial year is also large, at around 6,000 km. It would take the capacity of operational roads to around 23,000 km by 2013, which theoretically would mean India would achieve the target of 20 km per day by 2013 itself," claims Suresh. But is it a simple arithmetic as it looks on paper? Paresh Minocha, managing director of transport division at Feedback Infrastructure, says that though 80 per cent of the land is given when the project is awarded, the remaining 20 per cent leads to a delay of around one-and-a-half to two years. The very nature and location of the land and issues of environment are going to be major roadblocks during the next round of awards when they pass through hinterlands and villages, says Minocha. There are several infrastructure-related development activities going on in India be it the construction of metros, development programmes in Bihar and Uttar Pradesh and NREGA, which take away the major chunk of labourers. Also, lack of engineers for the road projects would be another challenge, since every 100 km requires some 70 engineers. Our dependence on the IIT-bred engineers needs to be curtailed through adoption of technology and higher level of mechanisations, Minocha says. Besides, NHAI does not have a chairman for over one-and-a-half years and that has affected new initiatives, direction and decision making at the top level. There is an urgent requirement of a chairman, a regulator for the road sector and an empowered group of people, who would look into the issues more seriously, says Minocha. Another major concern bothering developers is the persistent competitive intensity seen over the past few years for bidding of projects due to lowering of entry barriers. This has resulted in aggressive bids. This could result in defaults by small players who would not be able to achieve financial closures. Morgan Stanley in its latest report on road sector said the established players have won a majority of the road awards over the past three years, further frustrating new entrants. Hence, we expect the competitive intensity to remain at elevated levels in the near term restricting IRRs (internal rate of returns) of projects to lower teens. Arun Kumar Sharma, CEO-highways, GMR Group, told FC Weekend that with low entry barriers for participation, many of the bidders who bag projects are not capable of delivering. This would hamper timely completion of national highway development programmes as a whole." Lalit Jalan, CEO of Reliance Infrastructure, also believes that bids were aggressive with highly unrealistic traffic growth being assumed, at least in the past one year. We have been conservative in our bidding process. So, we have not won any project in roads, in the past two years. We are comfortable with our current order book and have no compulsion to bid at a supernormal premium. We look for profitable growth and do not want to devalue our portfolio," Jalan said. NHAI is not perturbed by the aggressive bids as they get substantial positive premium from the build, operate and transfer (BOT) projects. However, it acknowledges that aggressive bidding would eventually lead to default in later years. The authority can penalise bidders who pull out of the projects by taking back the projects and blacklisting them against future awards. Abhinav Bhandari, senior infrastructure analyst at Elara Securities, says although NHAI, on its part, has time and again urged players to analyse the longer-term financial consequences of aggressive bidding. We don't expect a respite in the same until the basic policy framework relating to the PPP (public, private partnership) format and structural issues across major infrastructure segments (power, railways

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and water supply) are favourably addressed keeping interest of the developers and stakeholders in consideration, said Bhandari. The irony is that aggressive bids are also supported by bankers and lenders who are lending to these projects without looking at the downside risks. Earlier, the feasibility reports were made with hardly 5 per cent upside, but now, developers factor in a lot of upsides like higher traffic potential and early completion with very little space for downside risks. I believe bankers should be more reasonable and saner in lending to these companies and due diligence should be done thoroughly. The process has started now where bankers are holding up the funds even when the financial closure is achieved by the companies. Hence, the biggest trouble for developers is the availability of hard cash, even as financial closures are achieved," said Vishwas Udgirkar, partner, senior director at Deloitte Consulting. Udgirkar adds that if NHAI does not accept the lowest bid, the officials may come under the scanner of Central Vigilance Commission and the likes. But what they can do is to set a low and high benchmark, beyond which no one can bid. Also, he adds that despite various issues being raised over lack of traffic growth as estimated for several projects and aggressive bidding, there has been no defaults yet. The road sector was among the most successful of all segments within the infrastructure sector, in the past decade. The financing mechanism of an autonomous body like NHAI is much better compared with rail and coal sectors and even compared with the ports sector, due to a senior-level board that independently takes care of financing. Besides, NHAI gets around Rs 4,000-5,000 crore in the form of cess on oil. A part of the cess charged on petrol and high-speed diesel goes to NHAI. (According to the ministry of road transport and highways, half of the cess on high-speed diesel (HSD) oil is meant for development of rural roads. The other half of the cess on HSD and the entire cess collected on petrol are allocated thereafter as follows: An amount equal to 57.5 per cent of such sum for the development and maintenance of National Highways, an amount equal to 12.5 per cent for construction of road under or over bridges and safety works at unmanned railway crossing; and an amount equal to 30 per cent on development and maintenance of state roads. Out of this amount, 10 per cent should be kept as reserved by the Centre for allocation to states for implementation of state road schemes of interstate connectivity and economic importance to be approved by the Union government. The balance cess of 50 paise per litre is entirely allocated for development and maintenance of national highways.) Besides, NHAI gets a premium from BOT projects, which takes care of its viability gap funding requirements. It is also the reason why public has invested in their highly successful tax-free retail bonds, oversubscribing them several times. However, it is assumed that with some sort of maturity being achieved by the organisation in the past decade, it is high time that innovations are introduced at the level of standardisation of documents and contracts that would help them ramp up projects. Now, we need to look at some innovation in terms of standardisation of projects, as the same yardstick cannot be applied to all projects of different sizes. Where some projects are coming up for second-time bidding and is mostly conversion from four lane to six lane, the same model cannot be applied that was used when roads were converted from two to four or when they were awarded the first time, said Udgirkar of Deloitte. Virendra Mhaiskar, chairman and managing director of BSE-listed IRB Infrastructure, a leading toll road operator, moots the idea of NHAI handling the shifting of utilities such as pipelines and cables, at the planning stage itself, instead of leaving them to developers. This would help in early completion of projects. Also, the railway foot-over bridges require some 22 clearances in all and is the major impediment in completion of projects on time, Mhaiskar said.

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NHAI has already approached the railway ministry in this regard and the matter is resting with the Cabinet committee, according to senior NHAI officials. Mhaiskar suggests that a lot of projects under phase IV where roads need to be upgraded from one lane to two lanes at a total investment of some Rs 15,000 crore should be funded by the government, and once they achieve the scale and traffic and need further upgradation, private players should be invited for development of toll roads. This would give them good premium and they can recover their cost in a few years. It would also help in developing the infrastructure in smaller towns and villages, he adds. According to him, land acquisition would not be a major challenge as only a narrow strip of land would be required; there wont be massive requirements as with the special economic zones. Besides, NHAI is a good paymaster and they compensate the farmers very well. "One reason land acquisition could be a challenge is due to the long-awaited National Land Acquisition and Rehabilitation & Resettlement Bill (LARR) which was cleared by the Cabinet committee in September 2011, but has not been passed by Parliament yet. It is expected that people are holding up their lands in expectation that the bill would be passed soon, this would change the whole compensation policy leading to three to four times the price for the land they would pay now. Abhinav Bhandari of Elara, however, says, "We don't expect the LARR Bill to be presented for debate in either houses before the monsoon session slated in July 2012. Consequently, projects where the acquisition wasn't entirely through are already facing execution challenges in the wake of rising protests by villagers/locals and land owners demanding higher prices for selling their holdings. NHAI, on its part, says that India always had the capability to award around 7,000 km of roads for development, but it was weighed down by structural deficiencies. However, now the outlook is brighter and the next two to three years would see awarding of around 20,000 lane km. Suresh of NHAI says that barring minor land acquisition issues in pockets such as Kerala, Goa, West Bengal and Orissa, where the state governments have not been cooperative in allocating the land to the awarded projects, it is relatively a smooth road ahead. We do not see any major problem in achieving our target. We hand over pieces of land stretches to developers as we complete the long process of seeking approvals. However, this delay is seeking approvals is not a big issue as no developer, even the biggest player, is capable of completing more than 15 per cent of the total length awarded at a given time, says Suresh. Ronak Sarda, auto analyst at Morgan Stanley, said in another road report that the viability of toll-based projects depends on the traffic growth of the light commercial vehicles (LCV) which is expected to register 15 per cent compounded annual growth (CAGR) over financial year 2011-13 estimates, and heavy & medium commercial vehicle (H&MCV) segment which is expected to grow by 10 per cent during the same period. "We believe these growth rates coupled with Indian economy growing by 7-8 per cent year on year, would ensure sufficient growth for toll-based stretches. It should be noted that CVs contribute the most to total revenue collection of Indian toll roads (around 70 per cent of total toll collection)." NHAI believes that even as the road sector faces a slew of issues of land acquisition, environment, clearan-ces from the railways and aggressive bidding by concessionaires, the target of ach-ieving the 20 km per day of road construction will be ac-hieved by 2015, if not 2014 itself.

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Banks want developers to bring in more equity The aggressive bidding for new road projects and higher interest costs, which is resulting in lower profitability, has spurred banks to demand more equity participation from road developers. Rajiv B Lall, MD and CEO of IDFC, told Financial Chronicle Weekend, I do agree. Lenders have to be cautious against aggressive bidding and not dilute their underwriting standards. Pawan Agrawal, director, Crisil Ratings said, several road projects have been awarded with a negative grant. The sector is seeing participation from smaller players with a relatively limited track record. Higher size of individual projects is enhancing the project implementation-related risks. Also, the challenge to secure land for the project continues. Therefore, banks are likely to demand more equity participation from developers. As per the latest central bank data on sectoral deployment of bank credit, total outstandings in the sector, as on January 27, grew 26 per cent to Rs 1,09,700 crore from Rs 87,210 crore a year ago, on January 28, 2011. Banks total outstanding in the sector was Rs 66,960 crore as on January 29, 2010. Funding road projects has gathered momentum only in the past four years with banks emerging as primary lenders to the sector. Around 70 per cent of the lending is through banks while the remaining funds come from NBFCs and ECBs. Total bank lendings to the sector has nearly doubled in the past three years. This represents nearly 2.5 per cent of the total bank credit outstandings. Given the ongoing projects under construction and the expected pace of awarding new projects, total debt in the sector has a potential to more than double over the next three years, added Agrawal. Public sector banks with larger appetite for longer tenor loans are keen to fund good road projects. Project completion takes 36 months while repayment takes more than 7 years. Anjan Ghosh, senior group vice-president at Icra, said, During the construction phase, land acquisition and consequent delay are the two major risks while in the operational stage there is a risk of traffic not ramping up as estimated. Once traffic ramps up as estimated then a road project becomes safer. SK Goel, CMD of India Infrastructure Finance Company (IIFCL), said his companys total lending to the road sector was Rs 6,000 crore as on January 31, recording a growth of 60 per cent. Bidding has not started for road projects and is pending with NHAI, said Goel. According to him, the delay could be due to land acquisition or the bidding documents being incomplete. We are bullish on the road sector. There are no NPAs. We expect a growth of 50-60 per cent in financing to continue for the next two to three years, Goel added. Punjab National Bank deployed advances of Rs 5,553 crore as on December 2010, which increased to Rs 7,791 crore on December 2011, a growth of 40 per cent. We do not have any problem in funding to the road sector, said KR Kamath, CMD, PNB. Of the total restructured amount of Rs 16,888 crore from April 2008 to December 2011, none came from the road sector, he said. A senior official of Union Bank of India said the entire viability of a road project depends on the overall traffic volume, stretch of the road and toll collection. Our total exposure to road sector is Rs 3,557 crore as on December 2011 and is growing by 12 per cent.

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Since most road projects sanctioned are under implementation, repayments will come when they are completed. We dont have any NPAs. Toll collection has started in few cases, said the official. Agrawal said that the debt capital markets can provide additional funding to the sector through securitisation, especially for the operational roads with a track record of one-two years. Industry officials believe that the sector could be better off if few other funding options were made available. Creation of infrastructure debt funds for the sector, takeout financing scheme of India Infrastructure Finance Company (IIFCL), and credit enhancement scheme of IIFCL (under which it will provide partial guarantee to enhance the projects credit rating) could be other options, said an industry official. GREATER KASHMIR Sgr-Jmu highway upgradation project in limbo Two Crucial Sectors Await Centres Approval Srinagar, Mar 4: While successive regimes in Jammu and Kashmir and at the Centre are crediting themselves for 4-laning project of Srinagar-Jammu highway, the chances of timely accomplishment of this crucial flagship project seem to be very bleak as work on its two vital patches is yet to be approved by the Government of India. The project is to be completed by 2016. Informed sources told Greater Kashmir that completion of 4-laning of Srinagar-Jammu highway is likely to be delayed as two out of the total six sub-projects, are yet to be approved by Public Private Partnership Appraisal Committee (PPAC), an inter-ministerial committee and Cabinet Committee on Infrastructure (CCI). The National Highway Authority of India (NHAI) which is the overarching body for the implementation of the project has divided the work on widening of the highway into six sub-projects which include Srinagar-Banihal sector (67.76 Kms), Qazigund-Banihal sector (15.25 Kms), Banihal-Ramban sector (36 Kms), Ramban-Udhampur (43-Kms), Chenani-Nashri (12 Kms) and Jammu-Udhampur (65 Kms). While contract for Srinagar-Banihal segment has been awarded to Ramkey Infra and JPTEG Indian-China, QazigundBanihal has been awarded to Navyuga Engineering Co. Ltd, Chenani-Nashri to IL&FS Transportation Networks Ltd, JammuUdhampur to Shapoorji & Palonji Co. Ltd, the tendering process for Ramban-Banihal and UdhampurRamban sections is yet to be completed. According to sources in NHAI, the tenders were invited for these two sections twice in 2010, but were rejected, both times, due to higher bids quoted by the private firms. Now, we have restructured the proposals and they will be put before PPAC for approval. Then the proposals will go to CCI for final nod, they said, adding, Tenders are unlikely to be floated by the end of this year as the clearance of the same is going to take some time. Not only this, NHAI is yet to take over few portions of the highway from Border Roads Organization (BRO), that have already been awarded to the private firms. NHAI was supposed to take over the entire highway by March- April 2011. But till date they have only taken over 100 Kms, Chief Engineer Beacon, Brigadier TS Rawat told this newspaper. He said that initiation of new work becomes difficult as two agencies cannot work on the same stretch.

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Project Director of NHAI Srinagar, Veerendra Singh admits that work on the two stretches is yet to take off, but at the same time expressed ignorance over the reasons behind the delay. He further said that work on other segments is in full swing and it will be completed within the stipulated time. Jammu and Kashmir Government too echoed the same views for delay in undertaking the work. I dont know the cause for delay in bidding of this 79-kilometer patch (Ramban-Banihal and Udhampur Ramban). We have nothing to do with tendering as it is prerogative of Centre, Minister of State for Roads & Buildings, Javaid Ahmad Dar said. He said their mandate is confined to facilitating the land acquisition, but added that Chief Minister Omar Abdullah is actively pursuing the matter with the Centre. This highway project will not only shorten the distance between Srinagar and Jammu, but would also give us respite from the frequent closure of the highway and the accidents taking place on it, he added. Once the project is completed, the distance between Srinagar-Jammu will be reduced by 50 Kms. Pertinently, the work on the four segments of highway was handed over to the private companies under Build Operate Transfer (BOT) package through bidding by NHAI. It will also have two long tunnels. The 9-km Qazigund-Banihal tunnel is being constructed by Navayuga Engineering Company Limited while work on Chenani-Nashri tunnel is being undertaken by IL&FS Transportation Networks Limited. Besides the two long tunnels the highway will also comprise of 12 short tunnels with a cumulative length of 6.2 kilometers. The 4-laning project of Srinagar-Jammu highway is part of the North-SouthEast-West Corridor (NS-EW) - largest ongoing highway project in India. It is managed by the NHAI under the Ministry of Road Transport and Highways.

Realtors' body seeks more tax sops for consumers, developers With a view to accelerating housing development in the country, the National Real Estate Development Council (NAREDCO) has suggested a series of measures to boost growth in the sector, including tax breaks and incentives for consumers and developers. In its pre-Budget recommendation, the apex body for real estate development has sought an increase in the exemption limit of rental income and also hiking of deduction limit on account of interest payment on home loans from Rs 1.5 lakh to Rs 3 lakh. Deduction of Rs 1.5 lakh paid as interest on home loan was introduced in 2001. Before that, 100 per cent of interest paid on home loans used to be deducted. Ten years have passed and on the basis of cost of inflation indexation, Rs 1.5 lakh in 2001 would be close to Rs 3 lakh in 2012. Also the indexed cost of Rs 20 lakh property in 2001 would be around Rs 40 lakh in 2012. We believe there is a strong case to increase deduction limit on account of interest payment on home loan, Mr Navin M. Raheja, Managing Director and President, NAREDCO, told reporters.

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Other recommendations include providing special incentive to developers to undertake construction of smaller houses. There used to be incentives for 100 per cent deduction of profits derived from the construction of housing projects up to 100 sq. feet built up area in Mumbai and Delhi. This was withdrawn in 2009. We believe that this was a big incentive for developers to construct smaller size housing units to suit the requirements of low and medium income households, he said. NAREDCO also sought bestowing the tag of infrastructure on housing sector. This will enable developers and housing finance institution to raise funds at low rate of interest from domestic and foreign markets. It will also incentivise developers by bringing down their income tax liability, MY IRIS NHAI to miss FY12 target says PINC Research ``With only one month left to meet its target of 7300 km, National Highways Authority Of India (NHAI) is putting its act together to award the remaining 3015 km of road projects. Considering the awarded projects, current bid stage and execution; we believe NHAI will miss both its target of awarding and completion,`` said PINC Research. It further said the following: Till date (FY12), NHAI has awarded 4,285 km of road projects worth Rs 408.9 billion. We believe it`s difficult for NHAI to award 7300 km this fiscal, as current bid stage of projects suggest possibility of awarding 1635 km by end of March. Though NHAI may stretch and award 2000-2200 km, still it will fall short by 800-1000 km of awarding. The Cabinet Committee on Infrastructure had approved three projects worth Rs 35 billion spanning 332 km and awarding of these projects will start from today. Though we have witnessed very competitive bidding throughout the last year, we believe competition would ease going forward, as already developers are facing challenges regarding financial closures and our channel check suggest 40 projects are on the block. Our stance get further vindicated by looking at the recent bid of Kiratpur - Ner Chowk in Himachal Pradesh won by ILFS Transportation that witnessed only four bidder. Recent sentiment dampeners like policy paralysis, difficulty in environment clearance, and achieving financial closure had impacted execution of projects. Total length completed has only increased by 8.6% YoY till December-end, despite record awarding of projects last year. Till December 2011 NHAI has completed 1,258 km of roads and is likely to miss its target of 2,500 km. However, we expect NHAI to complete 2,110 km in FY12 an 18.2% YoY growth.

State proposes flyover at Hero Honda crossing Haryana government has proposed to build a flyover across the Gurgaon expressway at Hero Honda crossing in place of the NHAI's proposal of an underpass without any government investment.

The state submitted this plan after opposing the Centre's proposal of equal cost sharing for construction of an underpass here by the state and NHAI.The new proposal that has been submitted to the road transport highways ministry recently is on the lines of elevated roads built in Tokyo.

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The proposal says the elevated roads can be built across the expressway by any private party, which would get long lease of properties that would be developed as a part of the composite project."Commercial space can be created in these buildings over the expressway. Enough clearing space can be left for straight moving vehicles. Those heading towards Jaipur Sector-10 side or those from Hero Honda towards Delhi can take the elevated roads which will be through different floors of the buildings," said a senior Haryana government official.He added that the issue was discussed and a sketchy model has been submitted to the highways ministry at a recently held meeting in the capital. The official, who has been associated to the Hero Honda issue for long, said that there would be private players to undertake the project under build operate and transfer (BOT)mode."The project can go to a private player who would quote the minimum years of lease for these commercial spaces. The lands for commercial development can be identified by the HUDA. We will have a solution and that too without any government investment," said the official.A highway ministry official also said that they are considering the proposal and a high-level technical committee would look into the case for a quick decision. Once awarded, it would take about two years to complete the project. He agreed that without an innovative solution, the mess at Hero Honda crossing cannot be addressed.However, this means commuters who have been suffering for years due to indecisiveness of both the Centre and Haryana governments would have to live with the mess for at least 2-3 years from now.

3 extra lanes at Gurgaon toll plaza Commuters travelling from Delhi to Gurgaon can bid goodbye to long queues at the Sirhaul Toll (KM 24) as three additional lanes are being added to the existing 16. With this, the total number of lanes on the Delhi side will increase to 19, while the total number of lanes on both sides will increase to 35. At present, construction work is underway and the existing sidewalls, pillars and lamp posts are being dismantled. The Haryana Urban Development Authority (Huda) administrator, Praveen Kumar, inspected the site on Saturday to take stock of the situation. He also directed DS Constructions, the toll-maintaining agency, to complete construction work within 15 days. Officials of DS Constructions said they will add 10 to 12 lanes on both the sides in future. Currently, we have 16 fixed lanes and two reversible lanes on each side. The additional three lanes on the Delhi-Gurgaon side will ease congestion by about 25 per cent, said the spokesperson of DS Constructions. Upon completion, staff will be deployed at the three additional lanes and they will carry out operations till a final decision is taken by Huda, Gurgaon traffic police and DS Constructions.

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The issue of lane-widening was discussed during a meeting held between National Highway Authority of India (NHAI) chairman AK Upadhyay, Huda administrator Kumar and officials of DS Constructions on February 13. The matter came up for discussion after a proposal was forwarded by the Huda administrator. The chairman had given his nod to the widening work. This is being done in the larger interest of the public, said Kumar. Heavy traffic jams are witnessed during peak hours at the toll plaza. With long queues of vehicles becoming a routine affair, city residents have staged several protests demanding removal of the toll plaza. Gurgaon residents have also given several representations to NHAI, Gurgaon administration, and Haryana chief minister Bhupinder Singh Hooda for removing the toll plaza. MINT Road projects: from despair to hope Intense competition, aggressive bidding at lower margins, and subsequent uncertainties on toll traffic, however, still pose risks Since September last year, road projects in the country have gained greater momentum than other infrastructure segments such as power, water and irrigation. Shares of companies, including IL&FS Transportation Networks Ltd, IVRCL Ltd, Ashoka Buildcon Ltd, GMR Infrastructure Ltd and IRB Infrastructure Developers Ltd, with significant exposure to road projects, have mirrored this improvement. The question isdoes it make these companies investment-worthy? Poor order inflow was a grave concern, but its getting better now. A road sector report by Icra Ltd states, About 1,898km of projects were awarded in the December quarter, taking the nine-month figure up to 4,553km during fiscal 2011 (FY11), 3,338km during FY10 and 643km in FY09. Although the award of such projects may continue, it is unlikely to translate into higher investor returns in the near term for many reasons. With other infrastructure segments in limbo, theres increased competition in roads. Industry estimates are that about 90 companies have pre-qualified for National Highways Authority of India projects. The competition, aggressive bidding at lower profit margins to secure orders and subsequent uncertainties on toll traffic estimates are risks that are yet to be alleviated. Average revenue clocked by six leading road construction companies shows that the poor pace of execution has brought down year-on-year growth rates over the last five quarters to around 15% at the end of the December quarter. The risk-reward ratio, therefore, remains unfavourable, given the long working capital cycles, stretched balance sheets, poor returns on equities and corporate governance issues in some companies. What can improve the scenario is a reduction in interest rates. The December quarters average interest cost as a percentage of sales for six leading road companies (that are also into other infrastructure projects) jumped 230 basis points from a year ago, although it was lower by 200 basis points from the preceding quarter. According to Rohit Inamdar and Shubham Jain of Icra, As interest rates cool off, we

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will see higher funding possibilities for projects, as they become more viable. One basis point is onehundredth of a percentage point. Also, debt refinance measures on project completion have already improved the morale among road makers. Further, companies themselves are trying to divest equity and non-core assets to fund critical projects that can improve revenue and cash flow. The Union budget may give these companies a shot in the arm by raising tax exemption limits for investments (currently up to Rs 20,000 under section 80 CCF) made in infrastructure bonds and perhaps increasing the limit of foreign institutional investment (now at $25 billion, or Rs 1.23 trillion today) in these projects. Private sector participation needs to be boosted, given the pathetic fiscal state of the government. These measures could improve sentiment towards the sector. But it may translate into earnings momentum only from the second half of FY13.

MCD sanctions 54 projects, Rs 160 cr in 15 minutes to beat election code In a frenzy to clear projects before the election code of conduct kicks in on Monday, the BJP-led MCD passed 54 projects to the tune of Rs 160 crore in a span of just 15 minutes on Saturday. Nearly 60 proposals were tabled in the Standing Committee meeting. While six projects were postponed, the remaining were given the nod without any discussion. These projects were listed on the agenda. Some of the additional projects were introduced at the last moment. All these proposals are for development projects. We had to pass them urgently over the weekend as the poll code will come into effect on Monday, said Standing Committee Chairman Yogendra Chandolia. More than half of the Rs 160 crore was sanctioned for road and drainage works. Targeting the urban voters, the Committee approved a majority of these projects in the up-scale area of South Delhi. A road strengthening project to the tune of Rs 50 lakh was approved in Block A, B, C and D of Lajpat Nagar. Around Rs 5 crore has been sanctioned for construction and maintenance of Mathura Road. In Defence colony, Rs 4.89 crore has been approved for maintenance of roads and Rs 58 lakh for drainage development. Apart from this, the meeting passed a multi-level automated parking lot plan at Defence Colony. Another Rs 40 lakh has been reserved for roads in Rajouri Garden and Moti Nagar. Around Rs 4.97 crore has been sanctioned for the roads under Central Zone. If this wasnt enough, the MCD also approved 20 road renaming projects.

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The councillors, too, are working round-the-clock, taking part in inaugural ceremonies across the city. Over 500 inauguration and foundation-laying ceremonies have been organised over the last two days. Since the day the Election Commission announced dates for the municipal polls, councillors have been busy with inaugural ceremonies. Each councillor is inaugurating three projects a day, said BJP councillor Vijay Prakash Pandey. Pandey was present at the inauguration of the First Naturopathy Hospital in Delhi. Health Committee Chairman Dr Vijay Monga also attended a series of inaugural ceremonies on Saturday. We need to put in a lot of time, energy and money into the campaign. There is just two days for the code of conduct to come into force. I have a few inauguration ceremonies to attend in my ward before that, he said.

PE interest in road sector on the wane Private equity (PE) investors, who ramped up their investments in Indias road sector last year, have hit a slow lane now. PE giants such as JP Morgan, Morgan Stanley and Goldman Sachs, which found a fancy for roads, are taking a more cautious approach. Darius Pandole, partner at New Silk Route Advisors, an Asia-focused private equity firm, said a lot of PE interest is seen in road construction companies with a diversified portfolio. The pure-play asset owners (BOT players) in road sector have drawn limited attention from PE players, because of the relatively low margins they offer. The low entry barrier in road sector has led to high intensity of competition, and typically low margins, says Pandole. Newer players are trying to break into the sector due to the low entry barriers. Several big players vie for relatively smaller projects, and pricing gets beaten down to uneconomical levels, says Pandole. An investment banker with Morgan Stanley told Financial Chronicle Weekend that aggressive bidding is driving down the internal rate of return (IRR) in the sector. PE investors fund special purpose vehicles (SPVs) with few projects under their belt. Since the PE investor does not have any sway over its operational management, the SPV may continue to bid for other projects aggressively, raising its risk profile. This is a major concern, he said. The sector doesnt look rosy any more to PE investors. In 2011, PE investors increased their exposure to the roads sector to $670 million, up from $120 million in just two deals in 2008, as the biggies in the PE business sensed lucrative exits in the coming years. In fact, the past four years have seen PEs pumping in around $1.5 billion into several companies in the road sector, according to Venture Intelligence, which tracks PE or VC deals. Of late, however, PE interest in the sector is on the wane, says another Mumbai-based PE investor. Alok Gupta, managing director of US-based private equity firm Gerken Capital Associates, said while the road sector has attracted quite a lot of capital historically, PE investors are taking a cautious look because now returns are hard to come by, due to several constraints. According to him, there are worries of projects getting delayed, leading to cost escalation. In a few cases which may involve viabilitygap funding, there have been delays in funds from state governments. Besides, land acquisition has become a major cause for projects getting delayed. As a result, private equity players are taking a call on a

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case-by-case basis and will commit more capital when the government addresses these issues, Gupta said. However, Pritish Kandoi, associate director investment banking, Equirus Capital feels that the sector is likely to wrap up some major PE investments during this year. We expect the trend of PE investments to continue for the remaining of FY12 and the next financial year due to heightened activity in terms of contract. Road developers will also benefit from slowdown in the power sector, which usually competes with roads for investments from infrastructure-focused private equity funds. Among the major deals in the road sector in 2011, Morgan Stanley invested $200 million in the unlisted Isolux Corsan India, followed by JP Morgan infusing funds in the tune of $110 million in Soma Enterprises and 3i IIF investing $97 million in KMC Infratech, Venture Intelligence data showed. Ajay Jindal, executive director of Four-S, a research firm, said: With increased focus on road projects, we may see more private equity firms looking to close deals in infrastructure companies, focused on the road sector. Private equity firms will be more interested in companies executing build own transfer (BOT) projects where visibility is high. Despite some operational hiccups faced by the sector, there has been increased focus on roads, which has resulted in several steps by National Highway Authority of India (NHAI) fast-tracking the process of awarding projects and bringing in more transparency with the introduction of processes like e-tendering, according to Pritish Kandoi of Equirus Capital.

Close look at borrowing must: ex-Fin Secy When Finance Minister Pranab Mukherjee presents the Union Budget 2012 on March 16, experts will be keenly hearing his comments on fiscal deficit. India's fiscal deficit is a cause for worry now. It is expected to exceed the targeted 4.6% of GDP. Former finance secretary S Narayan says, fiscal deficit in percentage terms will be optically low due to inflation. "Projected fiscal deficit for the next year is unlikely to be below 5%," he adds. According to him, one needs to look at borrowing figures closely in the Budget. Narayan says, Oil and Natural Gas Corp 's (ONGC) auction was mismanaged. ONGC share auction was affected by a system glitch due to large last minute orders. He further says, the auction needed better coordination. "The auction was mispriced and didn't factor in the market condition," he asserts. Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos. Q: How you have read this reworked plan by the government in order to raise cash from some of the public listed companies and what look like a fiasco that went down with ONGC yesterday? A: A little bit of strategy in putting it into the market was lacking from the investment ministry, the finance ministry, disinvestment ministry and the petroleum ministry. They saw that the market was

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going down. They priced the issue fairly high. They didn't have plan B of picking up the shares, if the retail interest was not there. So, I think a bit of strategy was missing. I do hope going forward, when they do the disinvestment of the other PSUs, they would work out a very carefully planned strategy. We saw only last week a very well managed public issue where a private company was able to get 55 times its offer subscribed. So, I think there is a lesson to be learnt there more on the processes and the details, nitty-gritty of the offer. This is very important because it makes a difference between Rs 12,000 crore and Rs 8,000 crore, it makes a difference in asking LIC to come in at the last minute to pick up the shares. So, I think there are a lot of lessons to be learnt in pushing through this disinvestment carefully. Is it important? I think it's important because if this is not done then there is very little room for the finance minister in the forthcoming Budget. The fiscal deficit is fairly large, it's very big. If he allows this fiscal overhang to carry-on to the next year then he would have very little room for anything in the Budget in terms of any expansionary public expenditure. He would have to go and cut subsidies very seriously, he would have no opportunity of giving any benefits to industry or manufacture. The effort that the government is making, at this time, I would call it a necessary effort. I would perhaps call it an effort that is dictated by the circumstances in which the effort is being made. Q: Do you think the Finance Minister can in anyway indicate a sub-5% fiscal deficit target for next year, given the way growth is and the kind of growth assumptions that he may realistically be working with or be projecting as also the kind of subsidy pressures that are coming in now from crude oil etc? Do you think it's possible that he can indicate sub-5% number, which the market or economic participants will believe? A: I think there is a clever arithmetic in the fiscal deficit, if you are looking at it in terms of percentages. If you have a high inflation rate then automatically the GDP in nominal terms goes up. The denominator goes up. So, with the same kind of a gap, you can still show a lower deficit. In a way, you are inflating your way out of the fiscal deficit. So, the numbers of 5-5.5% need to be viewed with caution. What you need to look at very carefully is the kind of borrowing that the government is making. If the borrowing is going to be substantially higher than what it was last year and if it is eating into the total amount of liquidity that is available in the market then you have a serious problem; money available for capital investment, infrastructure money available in the market reduces. So, without the inflationary numbers, I don't think he can give a number which is lower than 5%. Q: What is your sense of how growth will pan out? We had 6.1% print on the GDP few days back. People, who we speak to, are saying that that is the trough and we should not worry about it because things are substantially on the mend, despite some of the capital formation figures looking quite awful. Should one be complacent about how tepid growth could be over the next four-five quarters? A: My anxiety comes from a slightly different source. If you read the report of the Prime Minister's Economic Advisory Council, they saying that you would get about 7% growth and it is good compared to the rest of the world. So, in a way, we have started patting ourselves on the back that we are going to be around 7%, which is better than a lot of countries. That means somewhere along the line the real fight for getting 8-9% growth has been more or less given up. If you look at the capital formation, the numbers are certainly worrying. That means that the results of any fresh capital formation would be available in the goods and services sector only about two-three

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years down the line. That means that certainly an immediate improvement in 2012 appears very unlikely. So, with the best efforts of the Finance Minister, with the best possible opportunities of FII flows, money flows and even if FDI is opened up in several sectors, I do see that 2012 being only close to 7%, at the most 7.5%, no better than that. Q: What would strike a warning bell to your mind in terms of the borrowing figure that the Finance Minister sets out? By extension of that, what kind of position does that leave the Reserve Bank, which in any case is struggling to manage what is a very tight liquidity situation and they haven't been able to move on rates yet? A: I think bond yields, particularly government bond yields, would be a signal. At this moment, the bond yields are artificially kept a little low because of the OMO operations that the Reserve Bank is doing. But if it were not doing that and this is the kind of a borrowing that the government is going to make in the market then one would certainly see interest rates of these bonds having to go up. That would be worrying. A major worry for me and signal worry for me was the recent issue of tax free bonds by people like NHAI and by other companies, which offered more than 8% tax free. That means government, in a way, surrogate of the government is prepared to pay 12% pre tax for borrowing. That's a huge burden on any kind of industry or infrastructure or any kind of public expenditure activity. So, these are the kind of signals that I find very much worrying that the government has to borrow a costlier paper. Unless it is directing these funds into areas where the returns are atleast equal to the borrowing rates, I think we would be starting to dig ourselves into a fairly deep hole. Q: Growth has slipped considerably over the last few quarters, but the sense seems to be that in this Budget the government will not be able to move too much in terms of spend either on any of the rural schemes or on infrastructure. It's going to be more or less status quo with few incentives here and there. In that case, would you be more worried about what the course of growth maybe over the next few quarters or atleast through this calendar year? A: I think consumer demand is still robust. Employment formation in the goods and services sector, particularly in the services sector IT, continues to be robust. If employment growth is robust, that means consumer demand will continue to be robust. So, I don't think that you would see great softening of the Indian growth story. It is important that the Finance Minister incentivises this growth. He can do that by providing some good incentives for the manufacturing industry. In fact he can target those industries which are growing very fast and give opportunity for them to grow little faster. He could give incentives to exporters. He could give incentives for bringing in more capital through ECBs. He could give incentives for fast tracking power projects and other infrastructure projects. I think there is a lot that he can do by giving a few incentives, which would not necessarily have immediate revenue implications. So, I would even think that that is a good way for the government to proceed, while at the same time going back to the expenditure control board and saying where one can control expenditure. He can perhaps bring back his earlier idea of reducing subsidies on diesel, providing for some kind of LPG distribution where the number of cylinders under subsidy is limited.

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There are a lot of opportunities available to him. All in all, I do see this Budget as an opportunity for him to have course correction, to have a good developmental Budget, given the fact that the fiscal room is limited.

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