Haircut must for road renegotiations: FM

Written by Timsy Jaipuria | New Delhi | Updated: Aug 14 2013, 10:45am hrs
In a move that might help revive a few stranded road projects, the finance ministry has said it will allow concessionaires of stressed road projects to reschedule premiums payable by them to the National Highways Authority of India (NHAI) if they agree to take a haircut.

Making it clear that any formulation for a one-time rescheduling would be subject to the approval of the law ministry, finance minister P Chidambaram has informed Oscar Fernandes, minister for road transport and highways, that his ministry should come up with a formula to determine the extent to which the concessionaire should be penalised.

Cautioning that renegotiation of concessions after contracts have been awarded have an element of moral hazard, Chidambaram has said a penalty is necessary to deter concessionaires from wasting the project to force a renegotiation.

The finance ministry insists that the responsibility for the default be assigned properly, whether to the NHAI for having failed to provide the right of way for the construction of the road, or to the concessionaire for not having been able to mobilise the financial resources in time.

The finance minister has also observed that the net present value (NPV) of the payment to be made to the government must be maintained and that the discount rate, used to arrive at the NPV, should not be lower than the implied discount rate used for appraising the project in the DPR (detailed project report).

NHAI and the ministry of road transport and highways between them are to determine the penalty by either raising the implied discount rate or in any other credible manner. The current implied discount rate, in most agreements for instance the Kishangarh-Udaipur-Ahmedabad highway, to be built by GMR is 12%.

Meanwhile, developers may prefer to refinance their premiums through India Infrastructure Finance Company, which has been ready to do so at 11-12%, since this might work out cheaper than the finance ministrys latest option as the latter involves paying the penalty.

In a representation to the Prime Ministers Office, officials of the NHAI and the law and road transport and highways ministries, while discussing GMRs proposal to reschedule the premium for the Kishangarh-Udaipur-Ahmedabad project, had suggested that to protect the NPV, a discount factor of 10% will be applied, since the concessionaire had initially applied a discount rate of 9.57%. In the same letter, the NHAI said that NPV value at 12% would make it tough for developers to raise equity.

Opposing the penalty, the director general of the National Highways Builders Federation, M Murali in a letter to the government has pointed out that paying a premium during the construction phase causes financial stress, leading to delays in the project. He has suggested that for all projects awarded after April 1, 2010, the premiums payable during the construction phase be rescheduled, leaving the NPV the same with a discount factor of 10%.