Premium Rescheduling : Respite for Road Developers

To fast track the slow-moving sector and in order to provide major relief to the companies the Finance Ministry approved the policy of premium rescheduling as proposed by Rangarajan Committee report. The policy proposal of MoRTH was based on the recommendations of NHAI Board, which in turn had considered various representations made by concessionaires before MoRTH/NHAI for some of the already awarded national highway projects through PPP mode.

The aim of this proposed policy initiative is to increase the pace of development of building highways infrastructure and facilitate expeditious completion of awarded highway projects facing financial stress in the current economic situation. Legal opinion in this regard from the Ministry of Law & Justice (MoU) was also obtained before the final provisions were submitted for consideration by CCEA.

The Highways sector in India is going through a difficult phase. A host of factors, a few of which are sector specific and others which are external and beyond the control of MoRTH/NHAI and Contractors / Developers, have adversely affected the sector. For instance, in 2012-13, out of total targeted award of around 8000 Km, the MoRTH/NHAI could award only 1322 Km of highways on BOT (Toll) and the trend continues this year, as well. The ministry has been able to award only 3,169 km of road projects in 2013-14 against a target of 7,500 km.

To summarize, the main reasons leading to this dismal situation for projects are:

• Overall economic downturn
•  Lack of equity in the market 
•  Difficulty in arranging debt
•    Highly leveraged balance sheets for highway developers
•   Land acquisition & approval and clearance related issues

To address the above, MoRTH is taking conscious steps like shifting focus from PPP projects to public funded EPC contracts as mode of delivery, emphasis on land acquisition and qu ality of project preparatory activities and facilitating policy level changes to make the environment more conducive for developers/contractors.

One of such enabling initiatives is to consider restructuring of premium payable by concessionaires of the projects awarded on premium, to the Authority i.e. NHAI. Premium is an amount paid by the roads developing developer to the National Highway Authority of India in PPP (BOT-Build, Operate and Transfer) projects. It is based out of the estimated Toll revenue of developers.

Rationalization of Premium

NHAI specify that there are 53 Highway Projects (4 laning as well as 6 laning ones) which were awarded on a premium basis in recent past when prevailing economic scenario was buoyant. Most of the concessionaires for such projects have recently communicated to MoRTH/NHAI - their inability to honour premium commitments upfront in the current economic environment in spite of their earlier commitments in this regard as per the executed project concession agreements. Because of this, many projects are delayed and it is feared that the implementation for such projects could get postponed for an indefinite period.

NHAI, for such projects, have two distinct options:

• Option 1 -To adopt the legally appropriate and technically straightforward choice of terminating such projects where the concessionaires are unable to fulfill their commitment of premium payments as stated at the time of bidding as per the terms of the contract.

• Option 2- To allow rationalization of project premium for all such premium bearing projects, wherein, the proposed premium offered to be paid by the concessionaire to the Authority during the bid stage may be allowed to be deferred towards the later part of the concession period. However, NPV of the total premium payable would remain the same.

Case Example: In case, the premium (P) quoted by the bidder is greater or equal to the Toll (T) collected minus Debt (D) payment & 0&M(0) expenditure, the project is stressed one at that point of time. This would imply that the concessionaire is required to borrow money from the lender in order to pay premium to NHAI. The project will only be in a comfortable position if premium quoted is less than the revenue earned minus debt payment & O&M expenditure. Consistent negative cash flows based on the revenue projected as per the traffic survey and the total project cost provided in Financing document may also lead to a project to be the stressed one, as long as estimated TPC by concessionaire is in the reasonable proximity of the TPC approved by PPPAC/CCEA. Than the project would be considered for the rescheduling of premium payment made to NHAI.

National Highways Authority of India or NHAI has approved nine projects so far for deferment of premium repayment worth around INR 6,000 crore. Deferment would be available from 2014-15 till 2026-27. During 2014-15, deferment amounting to INR 651 crore has been granted. There are two aspects that NHAI looks into before deciding which projects can get deferment:

a) There has to be a clear and visible case of revenue shortfall and

b) These companies should be able to repay the rescheduled amount along with interest at least one year before the concession period ends

This decision of deferring premium payment could provide a major boost up to infrastructure companies like GMR, GVK, Ashoka Buildcon, IVRCL, Sadbhav Engineering and Gammon Infrastructure.

                           By

       InfralineEnergy Roads Research Team

 Disclaimer :

The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of the Infraline Technologies (India) Pvt. Ltd. (organization). The organization is not liable for any use that may be made of the information contained therein and any direct/indirect consequences resulting therefrom.