The government started taking steps to revive the sector, which included seeking views from various stakeholders on the model concession agreement, formulating a harmonious substitution policy to enable developers to exit projects, classifying lending to toll road projects as secured, proposing to set up a regulatory authority. An important decision pertains to allowing rescheduling of premium payments, i.e. monthly payments due to be made by developers to NHAI with an escalation of 5% per annum over the concession period.
A large number of developers had approached NHAI for reschedulement of premium. The roads ministry sought the approval of the Cabinet Committee on Economic Affairs (CCEA), which was given in September 2013. CCEA also recommended the constitution of an expert group under C Rangarajan, PMEAC chairman, to prepare the framework and other modalities. The expert group considered options for rationalisation of the premium quoted by the concessionaires but thought it rational to adhere to the currently existing concession framework with minimum deviations/changes required in the already executed concession agreements.
The expert group recommended that projects where collected toll revenue cannot service the debt, O&M obligations and premium payments together on a year-to-year basis may be accepted as stressed projects and they may be allowed to avail of a revenue-shortfall loan. Although this is only applicable in case of an indirect political event, a political event or an authority default, the current situation was considered by the expert group to be treated as analogous to that. The shortfall between the toll revenue and expenses can be availed as a loan by concessionaires at an interest rate equal to 2% above the bank rate.
In case there are cash shortfalls for a project in any year, that has to be bridged with either additional debt or additional equity. It is a known fact that lenders have made lending conditions stringent and most developers are facing liquidity constraints. The decision of allowing revenue shortfall loan will provide significant support to the projects. This is expected to have a positive impact on the highways sector the way relief package helped in boosting the telecom sector in the late 1990s.
The author is senior director, infrastructure practice, Deloitte Touche Tohmatsu Pvt Ltd
The roads sector is passing through a severe downturn, most of the build-operate-transfer (BOT) projects awarded last year have not yet achieved financial closure, and the ongoing projects are languishing and there is no hope they will be completed within a reasonable time period.
A request has been made to the government to permit rescheduling of premium payment for stressed highway projects. The highway projects taken up by the developers, who anticipated a better economic scenario, have become stressed due to increased interest cost and cost of construction.
The payment of premiums to the National Highways Authority of India (NHAI) turns out to be an additional burden, which requires addressing.
The proposal for the rescheduling of premium for the highway projects will be beneficial only for ongoing projects, whereas it will not help yet-to-start projects. The delay of more than a year in finalisation of policy amendments due to lack of consensus among various ministries and the Planning Commission and also the modifications in the final draft of recommendations without taking into consideration the developers concern have been major hurdles. The developers have to absorb the increase in cost of construction due to delay, interest burden, lenders reticence to fund road projects, and revalidating all project feasibility calculations. A discriminatory stand has been taken by the government in the roads sector by imposing the discount rate of 2% above the bank rate against 9.75% extended to the telecom sector. Similarly, the contract renegotiations were allowed in ports, telecom and power sectors, which were not allowed in the roads sector. Levying penalty and imposing bank guarantee for 4-lane and 6-lane projects will further burden the developers.
Finally, while the demand-supply dynamics at the moment dont favour more investments in the sector, the lack of clear policies and responsive regulatory environment in this area deters private investments. A few projects could be abandoned midway as private investors find that the initial expectations of traffic and hence profitability were significantly optimistic. The government would need to find more durable policies and ensure reasonable rate of return before private promoters return to these projects.
One of the key elements of successful PPP projects is clear understanding of the proposed asset and prudent sharing of risks and rewards associated with the asset. Due to inaccuracies in these, risk-sharing and mitigation measures prove inadequate and inappropriate over the above, and the interference and egotistic approach of individuals will put a death kneel on PPP initiatives and investment into this sector unless the government wakes up.
The author is director general, National Highway Builders Federation