Compensation to developers respite for stuck road projects: Ind-Ra

Government's move to provide compensation to developers of highways projects, where delays are not attributable to them, will provide relief to such schemes as projects worth Rs 830 billion are stuck, India Ratings and Research (Ind-Ra) said today.

The government had unveiled a key policy initiatives to revive the infrastructure sector which provides for compensating developers in case of delays in highway projects.

"The Cabinet Committee on Economic Affairs (CCEA) approval to authorise the National Highways Authority of India (NHAI) to provide rationalised compensation to concessionaires in case of delays not attributable to them could provide respite for stranded road projects," Ind-Ra said.

It said according to NHAI data, "more than 80 projects (annuity: 24 per cent and toll: 76 per cent) with a project cost of Rs 830 billion are under implementation."

The letter of award for these projects dates back more than four years, the agency said, adding that most of these projects were stranded and encountered cost overruns due to non-availability of land and for want of statutory clearances from the Ministry of Environment and various other departments.

The extended concession period, through additional toll collection in the later years, could improve the cash flows and positively impact project life coverage ratio.

"However, Ind-Ra believes that the impact in terms of improving debt servicing ability of the concessionaires could be limited since the extension of the concession period may not simultaneously result in a change in the repayment schedule," it said.

Until now, the project cost overruns stemming from non-fulfillment of conditions precedent by NHAI are bridged by a combination of additional equity and debt, the report said, adding that increased equity contributions due to overruns without a commensurate increase in revenue could have lessened an estimated return, which is eliminated through the proposed measures.

Earlier in a policy measure, NHAI approved one-time funding for projects that are stuck due to the equity funding constraints, despite being not obligated to bridge the deficit.

"However, the current proposal aims to bridge the revenue losses due to the failure to make the land available in time for construction completion. Hence, should the NHAI fund the cost overruns as a subordinated loan, not only would the funding issues be erased, project completion would also be hastened," the report said.

The proposal continues to load the construction risk on to the developers by limiting the construction completion to a three-year period, whereas, the delays stem from the unavailability of land within the stipulated time, it said.