We plan to raise Rs 10,000 crore through strategic partners or IPOs. G.M. RAO, FOUNDER CHAIRMAN, GMR GROUP
G.M. Rao wants to be a mix of Dhirubhai Ambani, Ratan Tata, Warren Buffett and Bill Gates. The promoter of the debt-laden GMR Group insists that he remains invested in all existing businesses, but is not “emotionally” attached to any of these assets, ranging from airports and power to roads and IPL cricket. Rao is also candid enough to admit that the stocks of his companies are trading at levels where he feels like selling “all my shirts and jewellery” to buy these. In this free-wheeling interview to Business Line, Rao appeared undeterred by the most recent controversy over the Comptroller and Auditor General of India’s (CAG) report on the Delhi airport modernisation project that was awarded to a joint venture, in which GMR Infrastructure holds a majority stake. Edited excerpts from the interview:
How much of a concern is the CAG report?
Not at all. You are concerned only if you have done something wrong.
Is it pulling the Group down and stopping you from going ahead on your proposed business plans?
There is no impact on our Group.
The CAG has also given a report on coal. Since you are also into energy and power, will this impact your plans for the sector?
It has nothing to do with us. We are not into trading of coal. Whenever the Government decides to go for competitive bidding, we will participate and pass on the cost to the consumer.
Have you thought of divesting some of your holdings in group companies?
We have never gone in for divesting till we built a critical mass in any business. Earlier, for airport and energy, we had private equity investors coming in, so we thought in terms of coming out with an IPO. But now we are looking for strategic investors. But for that, you get value only if you create critical mass.
In the case of power, some of the plants are just starting. This year, three of them are becoming operational and next year we’ll have another two. Likewise for highways, three projects will be operational soon. That will take our total highways portfolio to ten — nine operational and one under development. Then, there will be critical mass, which will be good for us to get a strategic partner. That is the strategy we have taken.
What do you mean by a strategic partner? Will you offload 51 per cent to that partner? Or will it be a strategic partner for technology transfer?
The partners are those (who exist) in the same line of business. They (should) bring not only money, but also some knowledge and operational efficiency, particularly in energy and roads.
How much will you be willing to divest and in which projects?
Having a strategic partner is not new to us. Earlier, in energy, we had strategic partners. We had CMS Energy and PSEG in our first two power plants (Tanir Bavi and Basin Bridge). Similarly, we have had UEM (United Engineers Malaysia) as a partner for our expressway projects. Coming to how much we will divest in future, that percentage is not decided. It will be based on the valuation and expertise that the partner can bring.
Have you identified any particular projects for divestment and what kind of money do you expect from these?
Our plans are of raising Rs 10,000 crore overall, either through strategic partners (in specific projects) or the main company (GMR Infra), or other routes including IPO. The main thing is we want to maintain liquidity in the organisation to be able to undertake future projects.
In the highways segment, what kind of expertise do you expect at the holding company/SPV level from getting a strategic partner? For your largest project (Kishangarh-Udaipur-Ahmedabad), the entire engineering, procurement and construction (EPC) contract has already been given to L&T.
Well, we are looking at some partners from Europe who will bring in value engineering, which will help reduce our building costs. The benefit of that in the EPC award will then be shared between GMR and L&T. Technology adoption is what will change the cost of construction. Even our approach to bidding has changed. When we started 15-20 years ago, we used to go by gut feeling. Now we have very strong enterprise risk management. Also, the model now is about marketing traffic.
How would you market traffic?
Suppose a huge 550-km road is coming up, but some of the traffic is going on a different route. We are adopting strategies to bring the diverted traffic to the mainline, for which we have taken some of the best people in the world who have spent two years on the Kishangarh-Ahmedabad stretch.
Wouldn’t the diverted traffic prefer the non-toll route?
No. That route is very complicated. After we start the project, you will come to know how unique our marketing is. Right now, I cannot give you the secret.
L&T is also looking to offload stakes in its own highway projects. So will you do some kind of swap deal (by buying stakes into each other)?
(Smiles) No, nothing.
You talked about strategic partners. Will you have them in the airports sector?
In airports, we think the critical mass has not come. It will come when things stabilise and more value is created.
The CAG says undue favours were made to the Delhi International Airport Ltd …
What undue favours? The bidding process went through nine levels and has been upheld by the Supreme Court. Whatever land or anything else that was offered was available to all the bidders. The process started in 1998 and from then till 2003, the Government sought to go about privatising the Mumbai and Delhi airports on long-term lease, corporatisation or joint-venture (JV) basis.
These three models were studied in depth and then they decided on the JV model, after which financial, technical, legal and other consultants were appointed before it went for bidding.
Even after bidding, not a single favour was granted to us. The user development fee (UDF) was not part of the operations, management and development agreement (OMDA) but the Airports Authority of India Act, that was amended two years before the bidding happened. The Supreme Court judgement, too, stated that the UDF is not required to be mentioned in the OMDA when the AAI Act specifically talks about it. The only thing is we cannot collect the UDF and only the AAI can collect it.
You levied the UDF (on all passengers) because the returns from real estate you expected did not materialise. Let’s turn the situation around. Suppose the returns were higher, would you have supported passengers with a negative development fee?
Well, if revenue had not come down, there would have been no UDF. There is an Airports Economic Regulatory Authority formula that says that if revenue comes down, it has to be compensated by financial support.
That formula caps the downside of the project. What about the upside?
Then, the charges will come down. That is why in the next five years we are expecting landing and other aeronautical charges to come down, and there will be no UDF. That is a benefit to passengers. Maybe after 10 years, even the landing charges will come to zero.
There were three reasons for levying a high UDF. In the last nine years, there was no increase in aero charges. Second is delay of three years in levying the UDF itself. It means we are now recovering the UDF for five years in two years. Third is the 46 per cent revenue share that we pay to AAI.
So when the next control period starts in 2014, can we expect some reduction in charges?
That depends on traffic. Today, it is 12 per cent down. If the traffic is good, the charges will come down.
What kind of traffic growth is required for that?
Our expectation is that the average traffic growth will be 16-17 per cent over the next five-six years. If that happens, the rates will come down. Besides, we are putting all our efforts to increase non-aero income. If non-aero increases, the burden on charges will come down because of cross-subsidisation.
What would be your policy wish list so that these controversies do not arise again?
As I said, the bidding was transparent, as it went through nine levels — from consultants to AAI to the Inter-Ministerial Group, Empowered Group of Ministers, Government Review Committee, Committee of Secretaries, a group of technical experts under Dr E. Sreedharan, and finally the Cabinet. Moreover, the OMDA laid down very detailed guidelines on every aspect of developing the airport.
The OMDA agreement even intelligent people do not understand! CAG or others have to really see how the Government has benefited from the airport modernisation. When we took over the airport, its profit was Rs 15 crore. In the last five years, I have given the AAI Rs 3,000 crore as its revenue share.
The Delhi and Mumbai airports today are subsidising 27 airports. When we took over, the Delhi airport was ranked 126th; today we are second in the world.
The Government should not be in business, its job should be to oversee the process. There are other models it could look at — like in the Istanbul airport, where we pay a fixed rent every year. They told us: “Okay, here is the airport, you charge €15 for international and €5 for domestic passengers and pay us an absolute rent.”
For 23 years, we just have to pay this rent. In Istanbul, we went through 42 rounds of bidding before winning the contract. It is better to have simple models in the future. Let me give you another example here of Brazil, where the bids were sent to their Government auditor (their CAG equivalent) before it was given to the bidders. To prevent any problems later, they got the documents pre-audited.
Do you think we need a second wave of reforms now?
We have a coalition government. I think it is making efforts to bring in FDI in aviation and retail. They also want reforms to happen in power sector. We should wait for three-four months and hope something will happen on these. I am very optimistic, as we Indians are good at crisis management.
What are your thoughts on the new land acquisition Bill?
We should not complicate land acquisition. Earlier, for any Rs 1,000-crore project, land cost was 3 per cent. If the land acquisition Bill is imposed, it will go up to 29 per cent of the project cost. I cannot build any factory and it cannot be competitive.
There are various airports coming up for privatisation. Will you be interested in bidding?
Definitely. When they come up for bidding, we will bid.
In which sectors are you seeking partners at the earliest?
The low-hanging fruit that we are looking at are highways and energy. Airports, we have not thought about.
Is it because valuations in those two sectors are higher?
Because of certainty in revenues and the regulatory environment, roads are perhaps the easiest. The concession documents are standardised. Everything is a given situation. The only thing that one has to factor [in] is what will be growth in GDP and traffic.
The revenue toll structure is decided upfront, making it predictable. That is why this interest in the road sector. Because the valuations can be easily arrived, that would be the investors’ first preference.
As for energy, I believe people who are strategic investors take a long-term view on any industry, which in this case is an essential commodity. This is the right time to enter because investors can really cherry-pick good assets now at attractive valuation.
How is the overall economic slowdown impacting different areas of your business? Or are there areas where you are seeing good growth?
There is huge demand in power. In most of South India, we have 10-12 hours of power cuts. If you run on diesel, it costs Rs 16 a unit and yet people are going ahead, which shows demand is there. The other good thing is that almost 18 states have increased tariffs. Uttar Pradesh has done it, Delhi has raised tariffs twice. Even Tamil Nadu, which had not increased tariff in the last nine years, has increased it now.
Today, if you had choice to decide between exiting one of the sectors you are currently in and increasing your stake in some, what would you do?
All three are very attractive. If somebody is paying a huge premium beyond my expectations, only then will I think of exiting from anything. But I do not have any emotional attachment with any asset. In the interest of the stakeholders and investors, I will disinvest anything. I have disinvested in 28 businesses, including banks.
Do you regret getting into sports?
Sports is good business. For the last two years, we have been making profits.
Will you buy Deccan Chargers?
I belong to Delhi now. Either I am a Bangalorean or a Delhiite now. One team is enough.
What message were you trying to send by picking up 14 lakh of your own company shares from the market?
I wanted to say that it is priced very low. It shows confidence in our stock. If a promoter is buying stock at any price, it means he believes that there is value in it that is much higher than the current price. That is why we are buying. If I could, I would sell all my shirts and all my jewellery to buy my stock — it is at the cheapest. I know what my assets are.
You seem to have friends across political parties, in Maldives and Turkey. How do you manage?
We are building institutions, where we focus on building assets, people, process technology and governance. 15 years back, we built one asset in one year. Today we are building 10 assets across seven countries without any tension or issues. The main reason is our institutional process. The focus on four pillars has helped us. Our group policy is that we will participate wherever there is transparent bidding.
What has been the impact of rupee depreciation on your various verticals?
We finance our projects mainly through rupee debt and equity. We have some meagre dollar debt only in cases where we have a natural hedge in the form of revenues in dollars. Keeping this in mind, we evaluate how much dollar loan can be supported by dollar revenue. Only to that extent do we take dollar loans.
Any areas where you want to go for backward integration?
No. We are a pure infrastructure company. We are not into construction. If you are in construction, you will go in for manufacturing cement and other things. But today I have the choice of buying from so many companies. I am already importing cement from Pakistan for our Male airport. We are similarly importing iron from Turkey. We are importing from those who give quality at cheaper price. Even for projects here, our central procurement department looks for cheaper price.
You take pride in institution building. What are the other companies that you envy? Or, which CEO do you wish was with you?
I do not see any competitor or anything. I don’t envy. This is the time of collaboration.
Who do you really admire?
For building assets, Dhirubhai (Ambani); for building institution, Ratan Tata; for giving back to society, Warren Buffett or Bill Gates.