Road ministry plans conditional premium recasts

Written by Timsy Jaipuria | New Delhi | Updated: Aug 29 2013, 13:50pm hrs
The road ministry has proposed allowing concessionaires of stressed road projects to reschedule premiums due to the National Highways Authority of India (NHAI) if they agree to take a haircut by paying a penalty and a higher discount rate during the concession period.

The ministry, in a note to the Cabinet, has proposed that such stressed projects be given the option of rescheduling the premium on the new terms or government rebid these projects after settling dues of existing developers.

The proposal is aimed at rescheduling R98,115 crore of premium due to NHAI from 25 highway projects that were bid out in 2011. Due to bullish market conditions then, the NHAI bids attracted premium payment from developers instead of the authority providing subsidy support to projects in the form of viability gap funding.

However, the current slowdown, coupled with a fall in the traffic projections, has made these projects unsustainable at existing levels of premium payment. As per the road ministry's Cabinet note, developers who have sought rescheduling of premium would be asked to pay a higher discount rate of 12% on the premium payment during the concession period, which, it reckons, won't result in any decline in the net present value.

The road ministry has also proposed that developers getting the benefit of premium rescheduling would also have to pay a penalty at the rate of 0.5% of the total project cost. FE had reported earlier that finance minister P Chidambaram told roads minister Oscar Fernandez that any formulation for a one-time rescheduling should include 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 said a penalty is necessary to deter concessionaires from "wasting the project to force a renegotiation".

In the current scenario, the developers are terminating the concession agreements with NHAI on the authority's inability to provide statutory clearances. This leaves it for the NHAI to pay the developers for the delay.

The Cabinet proposal, however, is contrary to NHAI's view that if the rescheduling has to be allowed, then it should be without any penalty and at a discount rate of 10%.

NHAI has already communicated to the road ministry, Planning Commission and other departments that if it goes for a rebid of these projects, it will be difficult for NHAI to get revenues it is getting now.

Supporting the NHAI's view, developers have said they will be interested in rescheduling only if they get to pay a discount rate of 10% and not added penalty.

" If we are asked to pay a 12% discount rate, coupled with a penalty of 0.5%, then the project will become very costly and it will not be viable for the developers to pay such high costs. Thus, none of the developers will go for this option," said M Murali, director-general, National Highway Builders Federation.

The Planning Commission is also against the proposal of premium rescheduling. A road ministry official said that the Cabinet is likely to take up this matter next week itself.