As road sector gears up to resume work, uncertainty looms over compensation

As the road sector gears up to resume work on some of the projects under construction, uncertainty looms on what costs are covered under the political force majeure. Industry executives point out demonetisation precedence for tolling of operational projects but those being constructed under the hybrid annuity model lack past reference.

As work came to a halt, mobilised equipment remain stranded with idling costs rising. There is no clear answer on who would bear the cost. “For projects under construction, we do not know how they are going to deal with it,” said Virendra Mahiskar, chairman and managing director of IRB Infrastructure, which has a HAM project under construction.
 

“Hybrid annuity model (HAM) projects have an inbuilt escalation provision, so may be the National Highways Authority of India (NHAI) can consider just giving an escalation without any penalty and the cost rise will get covered in the clause. One needs to see if the entire cost gets covered in it or not.”

Mahiskar said for companies where equipment are rented, payment will depend on the clauses in the individual rental contracts. IRB is an asset-based company and owns its equipment and does not rent it. In this case, industry analysts said: "Asset-based EPC companies will lose out on margins due to idling of equipment,” said Ratnam Raju, from CARE Ratings.

Some have written to the NHAI seeking further clarity on the compensation. "We have written to the NHAI seeking compensation, we will need to wait and see how those discussions go. The compensation details and formula are yet to be decided,” said Vasistha Patel, executive director for Sadbhav Engineering. The company owns some of its equipment, while part of its earth works is sub-contracted.

“The contract for earth works is on rate basis for work items so we will not need to make payments as machinery belongs to the contractor,” Patel said. The company has resumed work on three to four of its projects, post receiving local permissions.

Raju from CARE Ratings said that for road companies using the asset light model, their sub contractors stand to lose. “The equipment rental companies who would have contracted their equipment to the asset light road companies may face contract cancellations.”

For now, uncertainty on the terms of compensation is not limited to state and central authorities. For a city, like Mumbai, for instance, expensive tunnel boring machines (TBMs) have been idling at its under construction metro sites. The compensation, officials from the Mumbai Metropolitan Region Development Authority (MMRDA) on Friday said, will be decided later and on “humanitarian ground”.