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Recently, the finance ministry approved a request from the roads ministry to allow the rescheduling of premium that road developers owe the National Highways Authority of India (NHAI). The approval came a day before the poll code of conduct came into effect. Premium is the amount companies agree to pay the government when they bag a public-private partnership (PPP) project and is based on future toll collections. If the projected toll revenue falls short of the cost plus premium, the government will extend a loan to the developer. It is expected to charge annual interest of 10.75 to 11 per cent on the loan.
Developers in the country had bid aggressively over the past few years, promising the government a higher premium during a period in which the government bid out as many as 147 projects. The high expectation while bidding was attributed to India’s high economic growth, which has slowed considerably over the past few years. So far, companies have managed to complete only three such projects.
“Companies bid aggressively over the past few years, expecting that gross domestic product (GDP) would grow at more than eight per cent (annually). But then things slowed and traffic projections declined drastically, forcing developers to rethink where they bid aggressively. Now, companies want to sell their stake in projects and are not finding enough takers,” says Vinayak Chatterjee, chairman & managing director of Feedback Infra.
Companies owe NHAI premium worth a staggering Rs 151,000 crore, spread over the next 20-25 years across various road projects. The GMR-operated 555-km highway stretch between Kishangarh and Ahmedabad alone owes Rs 59,000 crore to the government over the next 26 years. The Delhi-Gurgaon expressway project was the first instance of a project awarded on a premium basis instead of a grant that the government extended earlier. But experts and officials now believe of the 40 projects eligible to be rescheduled, as many as 20, worth Rs 20,000 crore and awarded between 2011 and 2013, could be scrapped and might be re-bid.
The re-bidding is expected largely due to an escalation of 30 per cent in the cost of construction. Earlier, NHAI Chairman R P Singh had written to the roads ministry about the rising costs. According to the letter, projects witnessed a 26 per cent rise in costs in the past two years and private developers were seeking the rescheduling to factor in the rising costs of construction, on the back of an economic slowdown.
“In all likelihood, the developers would walk out of the projects. There is a level of equilibrium that needs to be in the market. Companies and government have realised that aggressive bidding is not the right way to go and now we will see a more sensible approach,” says a senior NHAI official. According to the official, NHAI has worked out deals with 10 developers and the projects could be re-bid soon. “Some have been terminated and, in some cases, the developers have backed out. There are 10 such projects and we are likely to see another five or 10 being added,” the official says.
In an interview to Business Standard in January, Planning Commission Member B K Chaturvedi had said the projects should be scrapped and re-bid because work had not started on any. “We need to draw a line somewhere and in some of these projects, not a brick has been laid out... My view is, we scrap them and go for re-bids. I think the committee has proposed a reasonable package and all they are saying is, build up the roads and service the debt,” Chaturvedi had said.
NHAI, meanwhile, had proposed that the developers be given a lenient rescheduling norm. It suggested companies pay 25 per cent of the premium in the first three years and the deferred payments carry an interest rate. “The idea was to help companies tide over this period. We need to kick-start projects soon”, another official at NHAI says.
The roads ministry, too, has been looking at ways to improve investments into the sector. It recently notified a revamped exit policy for projects. Under the new norms, companies can exit a special purpose vehicle that was formed to undertake a road project and sell their stake to another company. But even as the policy has been cleared, developers have been struggling to find the right buyers. According to experts, at least 30 projects are waiting to find buyers.
“The recommendations will help developers involved in the two-lane to four-lane construction. There are so many riders in the report and one is on the loan. India Infrastructure Finance Company currently lends at 11.35 per cent and the committee recommendations also work out to the same. Then there is the penalty. In that sense, it will become difficult for highway developers but otherwise, something is better than nothing,” says M Murali, director-general, National Highway Builders Federation.
“The host of policy measures announced by the government over the last few years will resurrect waning investor confidence in the struggling sector. However, benefits are likely to accrue only in the long term. While the sector is saddled with a plethora of problems, largely due to the economic slowdown, policy issues also play a major role. Significant delays in land acquisition by concession granting authorities and problems pertaining to regulatory clearances are the two common issues across projects.
As India grows and its roads are expected to grow, a change in the governance at the Centre is what highway developers are looking for.
