Rescheduling premium: NHAI differs with ministries on interest quantum

Wants removal of penalty on developers as proposed by Finnace Minstry, reduction on discount rate to 10%

The National Highways Authority of India (NHAI) has informed a panel set up by the finance Ministry that it is in favour of fixing the discount rate on highway developers at 10 per cent as part of a rescheduling of premium payments. It has also dismissed the need for a penalty on developers as proposed by the finance ministry.  
 
NHAI informed the panel headed by C Rangarajan about their decision during a meeting last week and a final decision on the rescheduling of premium is expected later this month.
 
The finance ministry had in October set up a panel under C.Rangarajan to give its recommendations on the rescheduling of premiums that highway developers owe to the government. NHAI is due to receive more than Rs 151,000 crore over the next 20 years from developers in return for awarding those projects.  

 

The NHAI recommendation for fixing the discount rate at 10 per cent instead of 12 per cent is largely due to a fear that developers may reject the plan to reschedule premium and instead choose to walk out of projects.  Discount rate is an interest cost that would be levied on the amount that is rescheduled. The committee is currently studying the quantum of premium that would be paid to the government ever year. It would be significantly lower than the earlier amounts.
 
The term for payment of the premium is usually 20-25 years. The premium payable by developers to NHAI range from Rs 3 crore to Rs 680 crore per year and the amount will go up every year by an additional 5 per cent, according to the existing norms. As per the new proposal, payments to the tune of Rs 650 crore could be brought down significantly providing some relief for developers and the balance to be carried forward will attract the interest cost.

 
The government is looking to reschedule the premium payable by reducing the amount during the first seven to eight years and asking developers to pay only a portion of the amount to NHAI. In return, the balance amount will then be raised as the economy is expected to bounce back on the growth trajectory and the net final payment will remain the same.
 
The finance ministry and the Union ministry of highways are insisting on an interest cost of 12 per cent and a penalty on developers. Following a down turn in the Indian economy and the inability of developers to pay premium to NHAI, the authority had proposed that the premium payable be rescheduled to provide a breather for the companies. “We have told the panel that we are in favour of the discount rate at 10% and the removal of a penalty on the developers. We believe that is the only way to help the developers”, a senior official at NHAI told Business Standard.

 
A number of developers also threatened to walk out of projects as they found it unviable to operate including infrastructure majors such as GVK, GMR and Larsen & Toubro. Following the threat, NHAI decided to ask the roads ministry to provide an interim relief to the developers by rescheduling the premium payable until the economy shows signs of recovery.
 
“At 12 per cent, it becomes unviable for developers and it is important that we keep it at 10%. There will be no takers. At the time of bidding for the projects, the companies offered higher premium because the planning commission said that the growth will be strong. Based on that assumption, companies paid heavy premiums. So the government should also take the blame and help developers”, M.Murali, Director General of National Highway Builders Federation said.