IL&FS crisis: Road not clear for Rs 70-billion arbitration dues with NHAI

Infrastructure construction and finance company IL&FS is scouting for ways to shave off its debt while it grapples with the arbitration claims worth around Rs70 billion with the National Highways Authority of India (NHAI), which are under various stages of resolution.
 
“We want to reduce the number of court cases and, therefore, want the arbitration process to be a success,” an NHAI official said.
 
However, an arbitration award is subject to a bank guarantee to be submitted by the company. The claims by the concessionaires under the arbitration process may vary from the final outcome of the process. Also, sometimes the NHAI also makes counter claims.
 
For Moradabad-Bareilly Expressway Limited, a claim of Rs4.23 billion has recently been cleared by conciliation committee meeting of independent experts appointed by the NHAI, according to an ITNL press release of September 18.
 
In its annual report for FY2018, IL&FS noted that the introduction of the New Land Acquisition Act has prompted many owners whose lands were acquired under the previous Act to seek for additional compensation in line with the amended Act, leading to further unanticipated delays for projects. “Another hurdle has been the delay in decision making/passing of the buck at the relevant authorities, especially with regards to compensating the Concessionaire / Contractor for delays and defaults on part of Authority,” the company said in its annual report. Owing to which, IL&FS noted, IL&FS Transportation Networks (ITNL) has incurred huge cost over runs in its projects as a result of these delays on part of Authority for which it has filed claims.
 
Though NHAI officials put the disputed figure at around Rs70 billion, there are varying estimates of the claim amount. "There is a possibility the company may be pre-empting proceeds from the termination of contracts of six projects seen few months back, which have not reached an arbitration level," said an analyst. Rapid Metro Gurgaon, Rapid Metro Gurgaon South, MP Border Checkpost Development Company, Khed Sinnar Expressway, Kiratpur Ner Chowk and ITNL Road Infrastructure Development Company are projects where the company initiated a termination process but not all of these are under NHAI.
Road construction is undertaken by IL&FS mainly through special purpose vehicles floated by its subsidiary ITNL. But not all of its trouble, however, can be attributed to disputes with government entities and annuity payment delays. Projects also face issues over traffic estimate mismatch, inability to pay NHAI’s premium payments and higher interest cost due to unsecured loans.
 
West Gujarat Expressway Ltd, a special purpose vehicle for ITNL, for instance, has sought additional time from NHAI to pay the premium due in June 2018 due to the liquidity stress in the project and sponsor level, according to a July 18 ICRA report on the company.
 
In another case, Pune Sholapur Road Development Company Limited (PSRDCL), another SPV of ITNL, is facing an issue of toll receipts that are insufficient to sustain the business, according to a July 30 CARE Ratings report.

 
ITNL’s Sikar Bikaner Highway has a similar issue, which makes it dependent on ITNL for support. “At the time of operations, new traffic estimate was downwardly revised due to an economic slowdown and traffic diversion to the alternate road network. The growth levels in the base year revenue and the FY18 revenue were in line with revised estimates. Although revenue for 1QFY19 is marginally higher than estimate, the project continues to require support,” India Ratings noted in its August 17 report.
 
According to the lenders’ independent engineer report, toll collection at the second toll plaza was allowed, despite non-completion of a small portion of the entire stretch, as the authority could not provide encumbrance free land. The toll collection for both the toll plazas is lower than India Rating’s base case assumption, which increases the reliance on ITNL to support the project,” India Rating said in a August 17 report.
 
In order to get private sector investment back into road construction, the Cabinet in August 2016 approved a proposal under which the government agencies would pay 75% of the amount of the contract to clear the cases that were stuck due to contractual, land acquisition or other regulatory issues. The idea behind the move was to enable recovery of loans by banks and allowing construction companies to speed up execution of the ongoing projects. This, however, has not been of much help.