Braving the rough road
ROADS & HIGHWAYS

Braving the rough road

LALIT JALAN highlights the challenges faced by EPC contractors and probable ways to overcome the same.
India´s GDP growth decelerated sharply for the second year in succession from a high of around 8.5 per cent two years ago to a mere 5 per cent in FY13, the slowest growth in a decade. Growth has slowed, not only because of a challenging global environment but also due to ´policy paralysis´. A combination of very high twin deficits (current account and fiscal) on one hand and slowing economy in an inflationary environment on the other, has been a challenge. As if all this were not enough , the sharply depreciating Indian rupee in recent months has been the last straw, leaving the Central bank with no choice but to raise interest rates despite the slowdown in the economy.

Tough times: Companies in the infrastructure and construction sector are going through torrid times. Public Private Partnership (PPP) projects across sectors such as power, roads, ports and metros are in trouble due to a host of issues such as delayed clearances, unresolved disputes, lack of fuel availability, lack of support and partnering approach by the government. The list can go on. The blame also partly falls on the private players, who in good times, not only bid aggressively but leveraged themselves far beyond their means.

The order book of EPC players has been under severe pressure. A sluggish growth scenario has led to high competition with shrinking margins. Not only this, the financial distress of almost all infrastructure companies has led to a severe payment crisis for construction companies. With receivables climbing to unacceptable levels, most companies find themselves in severely cash constrained situations.

Crisis management: The construction and infrastructure sector has been devastated and the same is evident in market capitalisation of most companies at less than 15-20 per cent of their peak valuations. As such they have little or no ability to raise equity funding. With banks too hesitant to fund, many companies are faced with serious cash-flow issues. The issue is not only of how to maintain growth. For some even survival is a question mark. It is in this context that we need to understand how to deal with this situation.

Survival mantras: First and foremost, the most important mantra to ensure survival is to deleverage as much as possible. This cautious approach is the right way of dealing with this difficult and challenging environment, where bank and equity funding is hard to come by and payments are uncertain. All of us are aware of several instances of companies that are working on various divestment opportunities and we should draw lessons from their experiences.

At Reliance Infra (RInfra), we have been particularly careful, not to over leverage ourselves. Even during good days and times of bidding frenzy, we had kept our cool and not over extended ourselves. We participated in only those projects, which made sound investment sense. We have not resorted to aggressive bidding and this is evident in the fact that we have not won any road projects for several years now. With debt equity ratio at less than one, we are in fact in a good position to participate in infrastructure opportunities that come up from time to time. Second, talking from our experience, in the absence of clearances and permissions in advance, infrastructure projects often get significantly delayed. Delay has a devastating impact on the financial viability of the project, as it not only leads to cost overruns (equipment, manpower and interest cost continues to tick) but at the same time, revenue generation gets delayed. Clearly, infrastructure or construction companies need to address this risk adequately, more so, in the current difficult environment. At RInfra, we plan to commence work on awarded projects only once all approvals and clearances are in place.

Policies that work: To a large extent, woes of the infrastructure or construction sector is attributable to inadequate policies including the much touted policy paralysis. Quite clearly the solution lies in speedy implementation of the right policies. While various industry bodies exist, infrastructure and construction companies need to come together and actively deliberate on policies that are good for the sector and why they should be implemented. Subsequently, there is a need to engage with planners and policy makers and push for their speedy implementation. In recent months, we have seen a welcome change. The government has demonstrated a determination to implement various measures to address issues faced by sectors such as power, road etc. While a good beginning has been made, much more needs to be done.

Improve efficiencies: Further in an environment where cash is the king, companies need to focus on improving efficiencies in their existing operations rather than acquiring new projects by streamlining processes, reducing inefficiencies and finding innovative ways to generate additional revenues.

We have exhibited such focus on our road portfolio and the payback has been excellent. Also, after winning a project, we adopt value engineering to ensure the least possible project cost. We proactively engage in creating awareness amongst road users on the project benefits, thereby generating willingness to pay toll. We also offer incentives to promote frequent usage of our roads. We focus on reducing revenue leakage through a host of measures such as IT systems and processes, ensuring organisational accountability. We put concerted efforts to arrange funds for our projects at the least possible cost.

Right partners: It is crucial to have the right partners inorder to ensure quality delivery. At RInfra, we not only bring superior project delivery skills, but lay emphasis on de-risking delivery by partnering with reputed and financially strong players. Last but not the least, in the difficult current environment, with operations often shrinking, there is an obvious temptation to cut excess manpower. We strongly believe that the strength of any organisation lies in its people, and this fact has to be kept in mind while scaling down. To say the least, the environment is challenging.

However, in the medium to long term, the Indian economy will return to a higher growth path. As such, we need to focus on strategies to tide over the difficult period, so that we are in a position to participate in opportunities once the good times are back.

About the author:

Lalit Jalan is the CEO of Reliance Infrastructure. He completed his BTech at IIT Kanpur, did his MBA in Finance from Wharton School and MS in Computer Science from Moore School, University of Pennsylvania. Jalan joined Reliance in 1995, as head of the Polypropylene business, a start-up then, and grew it to a Rs 6,000 crore business. At 39, he was the youngest-ever CEO at Reliance.

LALIT JALAN highlights the challenges faced by EPC contractors and probable ways to overcome the same. India´s GDP growth decelerated sharply for the second year in succession from a high of around 8.5 per cent two years ago to a mere 5 per cent in FY13, the slowest growth in a decade. Growth has slowed, not only because of a challenging global environment but also due to ´policy paralysis´. A combination of very high twin deficits (current account and fiscal) on one hand and slowing economy in an inflationary environment on the other, has been a challenge. As if all this were not enough , the sharply depreciating Indian rupee in recent months has been the last straw, leaving the Central bank with no choice but to raise interest rates despite the slowdown in the economy. Tough times: Companies in the infrastructure and construction sector are going through torrid times. Public Private Partnership (PPP) projects across sectors such as power, roads, ports and metros are in trouble due to a host of issues such as delayed clearances, unresolved disputes, lack of fuel availability, lack of support and partnering approach by the government. The list can go on. The blame also partly falls on the private players, who in good times, not only bid aggressively but leveraged themselves far beyond their means. The order book of EPC players has been under severe pressure. A sluggish growth scenario has led to high competition with shrinking margins. Not only this, the financial distress of almost all infrastructure companies has led to a severe payment crisis for construction companies. With receivables climbing to unacceptable levels, most companies find themselves in severely cash constrained situations. Crisis management: The construction and infrastructure sector has been devastated and the same is evident in market capitalisation of most companies at less than 15-20 per cent of their peak valuations. As such they have little or no ability to raise equity funding. With banks too hesitant to fund, many companies are faced with serious cash-flow issues. The issue is not only of how to maintain growth. For some even survival is a question mark. It is in this context that we need to understand how to deal with this situation. Survival mantras: First and foremost, the most important mantra to ensure survival is to deleverage as much as possible. This cautious approach is the right way of dealing with this difficult and challenging environment, where bank and equity funding is hard to come by and payments are uncertain. All of us are aware of several instances of companies that are working on various divestment opportunities and we should draw lessons from their experiences. At Reliance Infra (RInfra), we have been particularly careful, not to over leverage ourselves. Even during good days and times of bidding frenzy, we had kept our cool and not over extended ourselves. We participated in only those projects, which made sound investment sense. We have not resorted to aggressive bidding and this is evident in the fact that we have not won any road projects for several years now. With debt equity ratio at less than one, we are in fact in a good position to participate in infrastructure opportunities that come up from time to time. Second, talking from our experience, in the absence of clearances and permissions in advance, infrastructure projects often get significantly delayed. Delay has a devastating impact on the financial viability of the project, as it not only leads to cost overruns (equipment, manpower and interest cost continues to tick) but at the same time, revenue generation gets delayed. Clearly, infrastructure or construction companies need to address this risk adequately, more so, in the current difficult environment. At RInfra, we plan to commence work on awarded projects only once all approvals and clearances are in place. Policies that work: To a large extent, woes of the infrastructure or construction sector is attributable to inadequate policies including the much touted policy paralysis. Quite clearly the solution lies in speedy implementation of the right policies. While various industry bodies exist, infrastructure and construction companies need to come together and actively deliberate on policies that are good for the sector and why they should be implemented. Subsequently, there is a need to engage with planners and policy makers and push for their speedy implementation. In recent months, we have seen a welcome change. The government has demonstrated a determination to implement various measures to address issues faced by sectors such as power, road etc. While a good beginning has been made, much more needs to be done. Improve efficiencies: Further in an environment where cash is the king, companies need to focus on improving efficiencies in their existing operations rather than acquiring new projects by streamlining processes, reducing inefficiencies and finding innovative ways to generate additional revenues. We have exhibited such focus on our road portfolio and the payback has been excellent. Also, after winning a project, we adopt value engineering to ensure the least possible project cost. We proactively engage in creating awareness amongst road users on the project benefits, thereby generating willingness to pay toll. We also offer incentives to promote frequent usage of our roads. We focus on reducing revenue leakage through a host of measures such as IT systems and processes, ensuring organisational accountability. We put concerted efforts to arrange funds for our projects at the least possible cost. Right partners: It is crucial to have the right partners inorder to ensure quality delivery. At RInfra, we not only bring superior project delivery skills, but lay emphasis on de-risking delivery by partnering with reputed and financially strong players. Last but not the least, in the difficult current environment, with operations often shrinking, there is an obvious temptation to cut excess manpower. We strongly believe that the strength of any organisation lies in its people, and this fact has to be kept in mind while scaling down. To say the least, the environment is challenging. However, in the medium to long term, the Indian economy will return to a higher growth path. As such, we need to focus on strategies to tide over the difficult period, so that we are in a position to participate in opportunities once the good times are back. About the author: Lalit Jalan is the CEO of Reliance Infrastructure. He completed his BTech at IIT Kanpur, did his MBA in Finance from Wharton School and MS in Computer Science from Moore School, University of Pennsylvania. Jalan joined Reliance in 1995, as head of the Polypropylene business, a start-up then, and grew it to a Rs 6,000 crore business. At 39, he was the youngest-ever CEO at Reliance.

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