Pvt Road Projects May Be Assured Of 20% Return
The ministry of surface transport is likely to incorporate a clause ensuring 20 per cent annual rate of return on investment in the concession agreements for bypass and bridge projects as a safeguard for private promoters in the event of premature termination of the agreement.
Larsen & Toubro, the promoter of the Narmada Bridge and Coimbatore bypass projects, has this clause incorporated in the concession documents.
The 20 per cent return, sources said, will apply if the pact goes into force majeure (termination of the project due to unforeseen reasons) during the operation and maintenance phase of the project. However, this RoR will apply only if the force majeure is due to direct political events like nationalisation and change of law. During the construction phase, the equity compensation has been fixed at 2 per cent above the State Bank of India (SBI)s prime lending rate.
According to the concession agreement signed by the ministry of surface transport, the entire paid up equity capital of the project will be eligible for the compensation payment. These payouts are to made on the basis of a discounting rate of 12 per cent during the remaining years of the concession period.
Sources say that this method of providing force majeure guarantees provides investors with security against losses with an inbuilt capital gains. The sources added that even if dividend payments have been made during the period before the force majeure, it will not be taken into account in making payments to the equity holders.
Sources say that L&T intends bringing down the equity exposure to about 26 per cent which is the minimum ceiling prescribed by the MoST for the original bidders.
Sources say that this method was worked out to provide comfort to equity investors against of any kind of force majeure event, against any capital losses. So far about 11 projects have been signed by the ministry and almost all of them have used the L&T model for preparing their concession pacts.
The agreement with L&T also covers payment of cent per cent of the project debt. L&T is involved in two projects, Coimbatore bypass project and the second Narmada bridge project. The concession agreements are for 12 years after the date of concession. L&Ts concession agreement is the only to have used this method of compensation to equity holders.
In the event of an indirect political force majeure (due to industrial strikes and other similar events), L&T is to be compensated by an extension of the concession pact (the agreement between the promoter and government). For instance, if the projects are not used for, say, six months, the concession pact will be extended by an equal period.
The force majeure RoR that L&T has agreed to is substantially lower than what is set out in the draft concession pact for four-laning of highway projects. The draft concession agreement, which has been cleared by the high power committee on infrastructure, had offered compensation to the extent of 120 per cent of the paid up capital in the event of an indirect force majeure political events. For direct political events, the force majeure compensation offered in the draft agreement is 175 per cent of the paid up equity.
In the event of a indirect political events, L&T has no right for compensation . Instead the concession period is to be extended by the period of the event. In addition costs uncovered by insurance is to be borne by the National highways Authority of India /MoST either in the form of an toll increase to recover the incremental costs or in the form an increase in the concession period.
In addition the government has also agreed to provide the L&Ts special purpose vehicles, bridging loans to the extent of 50 per cent of the outstanding principal payments.
This arrangement has been worked on the basis of providing debt service support during the period when there is no revenue flow.