Given that 3,470 km of highways were involved, costing nearly R34,000 crore—and with a commitment to pay NHAI over R22,000 crore in NPV terms—PMEAC chairman C Rangarajan did well to try and arrive at a solution to restart the projects. While the proximate cause for some promoters walking out of their projects was the lack of environment clearances, the larger problem was that many of the projects were bid for in an environment where a 9-10% economic growth was seen as a given. Irrational exuberance is not the government’s problem, but when the alternative is possible litigation to compensate firms for delays, and also delays in getting replacement firms in to construct the expressways, negotiation is a rational solution.
Though many developers wanted to reduce the amount of premium they would pay in the initial years while keeping the NPV unchanged, there was no guarantee the firms would make good on the promised larger payments in later years. Under this proposal, the amount the firms were willing to pay was much lower than the annual toll collections in the initial years. Rangarajan has simply tweaked the relief clause in the existing contracts—economic downturn has been added to the other conditions while keeping sacrosanct the premium that the company had promised to pay NHAI. An initial test is to be done to check the levels of stress for each project—all 23 will not be eligible for a bailout package, only some will. With the premium unchanged, the shortfall in what the companies can afford to pay is to be determined each year—obviously the shortfall will reduce as toll collections rise—and a bank rate plus 2% interest is to be paid on this. No blanket concession has been given, the relief is only applicable for the period in which the project is stressed. Which means that projects which look unviable because it will take several years for India to get back to 9% growth levels will not take off even now, the others will. The lesson here for banks that have funded several of these projects, and several others in sectors such as power where demand projections have also come off dramatically, is that sensitivity analyses needs to be a lot more robust.