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 MCAs 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 not have any security or any say as per the current MCA. Thus, the proposed changes will give additional powers to lenders from their ability to secure their money.
This amendment will not just revive the interest of banks, but also make them less apprehensive to lend further to road developers, said Vishwas Udgirkar partner, infrastructure, at Deloitte.
Lack of financing is becoming a major hindrance for road projects. With developers exhausting all avenues to raise equity financing, funding by banks and FIs remain key to projects achieving financial closure. However, banks worry their money may not be secure, with developers increasingly relinquishing or terminating projects. Last year, several road projects were bid on premium. With the economic slowdown and high interest rates, many of them are finding it tough to meet their commitments. Developers like GMR, GVK have already terminated some of their projects citing lack of clearance from NHAI.