More power for lenders in road sector PPPs soon

Feb 05 2013, 03:39 IST
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SummaryLenders are set to get more flexibility in public-private partnership projects in the road sector, where investor interest is waning.

Lenders are set to get more flexibility in public-private partnership (PPP) projects in the road sector, where investor interest is waning.

The government is planning to amend the model concession agreement (MCA) for road sector PPPs, empowering lenders to seek replacement of a concessionaire failing to meet milestones even before the project starts commercial operation. The move comes soon after the proposal to relax the exit policy for highway developers.

Currently, financial institutions get the right to play a proactive role in replacing a concessionaire only in the event of a financial default. As there cannot be a “default” prior to the commercial operation of a project, financiers are unable to guide progress on a project and seek replacement of developers missing other deadlines in getting local-level clearances, appointing contractors and laying out a road map for time-bound completion of work on stretches.

“The road ministry is planning to amend the MCA to include an enabling provision which will give lenders the right to invoke the Substitution Agreement even if a project is terminated before it gets operational,” said a government official.

At present, the Substitution Agreement under the MCA between the NHAI, concessionaire and lenders gives the right to financiers to substitute a developer in the event of a financial default.

The need for amendments was felt after the finance ministry raised objections about the MCA’s silence on the issue. When projects get delayed due to problems faced by developers, beleaguered financiers are unable to change the concessionaire.

An official said: “The department of financial services had said that as per the current format of MCA, no termination payment is due or payable on account of concessionaire default occurring prior to commercial operations date.”

“This provision adversely impacts the interest of lenders,” the official said. He added that the National Highways Authority of India and the Planning Commission have agreed to amend the MCA to support the lenders.

In case of unwarranted delays, the interest of lenders could be protected by empowering them to invoke the Substitution Agreement even in case of termination prior to commercial operations date, the official added.

Experts say such a move will provide lenders extra benefit and a greater say in the projects to which they have funded. Feedback infra CMD and CII infrastructure committee head Vinayak Chatterjee said: “Besides financial delays, there are many other reasons behind a developer defaulting or in meeting the deadlines. In such cases, lenders feel they do

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