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Thursday , 18 July 2024

Sustainable Solutions to Highway Development

A K Singh

I support the concept of renegotiation while at the same time taking adequate safeguards. The PPP model will not survive if we do not support renegotiation in reasonable situations, leaving this only for extraordinary circumstances. For example, if a highway project which was designed to cater to a population of one million, has now only a population of one lakh as user, how will the model survive? I agree with Mr. Ghai that if the builder takes aggressive stance and calculation, then the MCA and the government also would not support this. If in a project of 25-30 years, the traffic does not behave, or is nowhere near the projected values after eight- ten years, then the agreement should be renegotiated because the concessionaire has borne the risk for the first eight years, and the public also has to be served. The concessionaire is compensated only when there is abnormal adverse risk. The government does not support any aggressive abnormal behaviour and in future also it will not do so.

Regarding termination and substitution, globally also, if you see the history of the substitution, the lenders normally don’t prefer the replacement or substitution unless for reasons of losing a very big business. This is the spirit of banking; so substitution in normal circumstances does not occur. The authority may be happy to release the developer, the developer may be happy to exit, but it is the banker, the financer who feels the pinch. Further, even if the banker is ready to substitute, there are so many legal hassles which prevent substitution. However, If you have a developer who is not able to perform because of all his inherent problems, he is overleveraged, his expected cash flows have not come and if he is likely to collapse, then if you get an equal or better agency, the project gets moving and it will be to the benefit of the lenders too. The spirit of substitution leaves the entire decision making of substitution to the bankers or lenders; only if they are satisfied with the substitution, it will be done.

If the land is not available and if the developer is not able to do anything, in what way would having a new developer help out? Secondly, if the project has suffered because the railways are taking a long time for the approval of the Railway Over Bridge, then what would be the advantage of having a new developer?

The Government decisions are very thoughtful. If you read the operative clauses of such exits or substitutions, the first thing is that they shall not be abused during the entire construction period; it shall happen only once. Also, this substitution and exit is allowed only when all the problems of land acquisition, environmental clearances and all conditions are remedied by the government; only then the step of bringing in a new entity or new substitution takes place. So these concerns are already covered.

The very moment an asset is saleable asset, it will be sold hundred times during its lifetime and the real beauty of infrastructure asset will come in time. Very recently, L&T grouped their five projects and through a trust, they have made it a project for public investment. The NHAI have been very supportive of this. The next step, the government is already working on, is that every infrastructure can be a tradable asset which citizens of the country can trade in.

Mukesh Kumar

Substitution of concessionaire is difficult because it has already entered into agreements with lenders, EPC contractors, O&M contractors etc. and changing the company and entering into fresh agreement is very difficult. So I would request NHAI to ease the norms for exchange of shares at the promoter level to change the concessionaire. Besides, I would like to mention that PPP frame work has been made with an objective to ensure a reasonable return with manageable level of risk. If you ask any developer what is a reasonable return, they will say it is minimum 18 – 20%. But in road projects the same has been fixed with a cap of 18%. The concessionaires bid and due to intense competition ultimately what they get is 10-11% return and the project becomes unviable. So there is a need to increase that cap to a reasonable level of return because even in toll projects, it is 16%. So we need to revisit these, then we can see interest of many players in the sector.

A K Singh

I will share with you that the exit clause finalization is awaited. But we are taking note of all the concerns brought before us and resolving the situation. Substitution of concessionaires brings a lot of issues such as taxation issues, financial impact issues, transfer of clearances issues, inspection of stamp duty, dividends, depreciations, taxation free regime for 10 years etc. It is preferable to devise to allow substitution under the same entity. It is easy to define a new standard or rule for the future, but difficult to apply it for existing projects. It needs a lot of consideration, which we are doing right now. Very shortly, some developments will be there which will satisfy all the stakeholders. Now as far as the returns are concerned, our aim is to provide a platform that ensures reasonable, secured return for the concessionaires given the conditions of the economy.

After that, it is for the concessionaires to check whether the risks are more or less and place their bids accordingly. The entire bidding is on the risk perceived. If a concessionaire perceives less risk, he is very happy with 18% return but another concessionaire who perceives the risk to be very high would like to a return of 25-30%. So when we reduce the risk uncertainties, they are better defined and the concessionaire would be happy with 10-12% return also because it is very secure, like a fixed deposit. So if you see all the regulations regarding the land, environment, uncertainty of projects, of costing, of lending, of the lender feeling very unsure about the project becoming NPA, these are all in very active consolidation phase. NHAI prefers not to bid out a project unless it is ready like a green field. Then the risk will greatly be minimized. Once this happens, a return of even 14-16 percent would be quite satisfactory.

Subbarao

Before we conclude, I have a few additional thoughts to share on the subject. It was stated in many forums that MCA provides for mitigation in case of variation of traffic; however, I wish to bring the following: a) risk of variation upto 2.5% is assigned to concessionaire, b) risk beyond 2.5% which is said to be mitigated through provisions of target traffic is capped at ±14%, c) The clause is triggered only after 10 years i.e. Target year and finally, d) the mitigation benefits are only provided towards the end of the concession which is usually after 20 – 30 years. These provisions do not account for traffic variations in early stages of the project and also do not talk of mitigation beyond 14% both of which are critical for financial sustainability of concession/Concessionaire.

As reported by one of the credible rating agencies in the recent past, one of the major issues affecting the financial strength of projects is the large variation in 1st year revenues. Mining bans in the recent past such as iron ore mining and sand mining bans have adversely affected the revenues of concession in their vicinity to the extent of 40% – 60%.

Lastly, to overcome the problem of multiple and divergent interpretations of MCA, I would like to suggest that a certification programme may be rolled-out like the one recently adopted for traffic safety, by recognised institutes and the same be made mandatory for Team Leaders/Independent Engineer, Project Directors which can result in uniform reading of MCA.

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