Patience is essential for infrastructure finance

It helps to keep a cool head when building large projects in a notoriously fickle environment.
Subbarao Amarthaluru, GMR Infrastructure
Subbarao Amarthaluru, GMR Infrastructure

Building infrastructure in India could present a trillion dollar opportunity during the next five years, says the govern­ment. But for anybody willing to invest in a fluid regulatory environment, it will likely cause a mammoth headache as well.

Bangalore-based GMR Infrastructure has built new airports at Delhi and Hyderabad, power plants, roads and urban infrastructure and is one of the fastest growing firms in the field. The man who helps the company negotiate this often bewildering and shifting landscape is Subbarao Amarthaluru, the group’s chief financial officer.

Subbarao, 51, is soft-spoken, reticent and a bit shy. But his quiet demeanour hides a tough customer. A chartered accountant by training, he worked in audit, manufacturing and financial services before joining GMR. He says he once had a mercurial temper but has since learnt to control it through years of Buddhist meditation. That could be just what the doctor ordered: infrastructure finance is all about patience, as is dealing with India’s mendacious bureaucracy.

GMR’s experience in building the two new airports is a case in point. The company signed the concession agree­ments for Delhi and Hyderabad with the Airports Authority of India (AAI) and the concerned state governments. The Hyderabad airport concession was a “dual till” tariff model where the company’s permitted return on equity (ROE) would be calculated only on revenues from airport operations (or “aeronautical revenues”). Of the 5,500 acres acquired under the concession agreement for Hyderabad’s new Shamshabad airport, 1,500 acres earmarked for commercial development was to be excluded from the tariff computation, as it was expressly intended to compensate the developer over and above the fixed ROE.

But after the construction of Hyderabad airport and midway through building the Delhi airport, the govern­ment set up a new regulator, the Airport Economic Regulatory Authority (AERA), which unilaterally changed the tariff model to a “single till”, in which the airport operator’s returns would be calculated on both aeronautical rev­enues and non-aeronautical revenues.

Given that Shamshabad was a greenfield project, the AAI’s revenue share was fixed at just 4% as against 45% for Delhi, where the old airport was to be modernised and a new terminal built. “The single-till model has been proposed for Hyderabad and Bangalore airports, whereas no tariff order has as yet been passed for Delhi and Mumbai,” said Subbarao. That effectively left the latter projects’ finances in limbo.

By contrast, GMR’s brand new Istanbul Sabiha Gokcen International Airport in Turkey, built at a cost of €450 million ($625 million) and commissioned a year ahead of schedule, has a simple revenue-sharing model where the conces­sionaire has to pay the government €1.92 billion during the 22-year conces­sion period. Meanwhile, in comparison, airport privatisation in India has run aground thanks to opposition by the AAI and has been limited to just five of the country’s 126 airports.

GMR has had better luck in road building. “Banks have been quite willing to lend, and at concessional terms, because the risk perception is lower,” said Subbarao. Here the annuity model where the National Highway Authority of India (NHAI) pays the developer a fixed return and virtually guarantees the project’s success allows banks to lend as much as 85% of the project’s cost. Land is acquired by the NHAI, capital costs are relatively low and the projects are not very complex.

Toll roads have proved a little more risky as the developer takes the traffic risk to recover his investment over the 15 to 25 year concession period and so bank lending rarely exceeds 75% of project costs. Here the challenge is to keep execution costs to the minimum and ensure that all borrowings at this stage are at fixed rates with no room for escalation, said Subbarao.

In power generation, banks tend to see significantly greater risk and usually insist on floating rates. Here the trick is to leverage the expensive term loan from the bank to borrow short term at cheaper rates through letters of credit and suppliers credit and thus reduce the project cost during the construction period, which can last three years. But the biggest risk remains the state utilities’ capacity to pay.

With the reform of the power sector, the unbundling of generation, transmis­sion and distribution, the recapitalisa­tion of the state electricity boards (SEBs) and repayment of unpaid dues to power generators, the government had significantly reduced payment risk. In its place came concerns regarding fuel supplies, land acquisition for power plants and environmental clearances.

But the problem of payment risk is gradually resurfacing, said Subbarao. According to him, the SEBs are losing huge amounts of money through transmission losses, power theft and subsidies to farmers they are forced to provide. As a result, they have been borrowing heavily from government agencies such as the Power Finance Corporation and banks to meet payment obligations. He estimates that the SEBs lose more than $13 billion a year, and so they collectively swallow 5% of all bank lending.

Despite uncertainties regarding policy and the rising cost of funds, investing in infrastructure has proven both feasible and profitable, said Subbarao. “In the past 10 years, India has built about 18,000 kilometres of four-lane highway, four airports, six seaports and around 75,000MW of power generation capacity. That is no mean achievement.”

GMR already generates 800MW of power and is adding another 4,000 MW in the next three years, and has completed more than 400 kilome­tres of highway. The company is in the process of setting up two multi-product special economic zones, one on 10,000 acres in Kakinada in Andhra Pradesh and the other on a 3,000 acre spread in Krishnagiri in Tamil Nadu. The company has recently taken over Male International Airport in the Maldives.

The GMR Group evolved from small beginnings, starting with a jute mill and expanded to brewing and ferro-alloys before acquiring a controlling stake in a bank, which it subsequently sold to ING.

Subbarao, whose interests include reading, Carnatic music, chess and table tennis, sums up his personal philosophy in two words: self-transformation. A long term student of the Vipassana school of meditation, he has made time to attend a 10-day residential course every year for the past nine years and sets aside two hours a day, however busy his schedule, to practice the technique. As he explained, “It helps purify your mind.”


This story was first published in the July 2011 issue of FinanceAsia magazine.

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