Leading highway builders want the Rangarajan panel on premium rescheduling to factor in the rampant cost escalation due to delays that cannot be passed on to them.
Builders, including GMR, GVK, IRB Infra, L&T and Reliance Infra, have presented a detailed cost-impact maths to the panel, saying a delay of 2 years for any project over 100 kilometers will lead to around 25% cost escalation. Coupled with this would be the negative impact of less-than-projected rate of traffic growth that can be as high as 60%, the builders said, contending that the panel should consider these while deciding the contours of the premium recast.
In other words, for the 23 premium projects under consideration by the panel for premium recast, the escalation of construction cost as of now amounts to Rs 82,000 crore and the impact of low traffic growth, over Rs 2 lakh crore.
However, government sources said the panel might not adopt the perspective mentioned by the developers since the factors referred to by them are anyway to be part of the commercial risk assessment that developers should have done before bidding for the projects. “There is hardly any merit in their request and the panel might not come up with any suggestions addressing these issues,” the government source said.
“Inordinate delays have required reassessment of costs and lenders reviewing viability and impact of the escalation. Plus, there is always a higher cost differential between the total project cost (TPC) assessed by NHAI and the TPC (as revised by the developer due to the delay). Already, there are many projects delayed by more than 25 months with appointed date yet to be declared, so why would developers settle for any solution that doesn’t take into account these factors?” asked a CEO of a leading developer firm.
The road sector players are facing a sharp increase in project costs due to delays in obtaining the Right of Way, environment and forest clearances. Further, inputs such as bitumen, fuel, labour, cement, steel and other material costs after project mobilization have increased. “We have requested the Rangarajan panel to look into the projects that have got impacted in terms of traffic owing to mining ban (sand mining, iron ore mining) and their plea should be considered for premium restructuring irrespective of any start date or operational status,” another senior official of an infrastructure company said.
They are hopeful given that in the past, compensation for escalations have been provided. Cases such as Supreme Court allowing compensation on price escalation despite it not being stipulated in the contract for a case (Tarapur and Company vs Cochin Shipyard ). Even in other infra sectors, ultra-mega power plants, CERC adopted similar principle to make the contract commercially viable. For all coal plants having domestic coal linkage, cost escalation was allowed for imported coal despite the original contract specifying fuel risks on account of bidder. Thus, there needs to be compensation for cost escalation.
As per the model concession agreement (MCA), in a normal course of delay, the government and the developers have a shared responsibility to bear the escalation cost. But builders are skeptical about whether this norm would be implemented in case of the 40 projects being considered for premium rescheduling.