Will premium rescheduling work?

Mar 19 2014, 03:19 IST
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SummaryThough a large number of road projects are looking for succour, Rangarajan’s restructuring formula will help only a few

PPP in the highways sector has been considered as India’s success story. Key reasons are the relatively high number of projects awarded (over 235), substantial interest in market and standardisation of contracts. But what started as a downward trend in the sector two years ago threatened to become a crisis by mid-2013. Many projects awarded by NHAI were not able to achieve financial closure, equity constraints of developers surfaced, there was a slump in project awards, capacity constraints in the construction industry were observed and issues being raised in the model concession framework.

The government started taking steps to revive the sector, which included seeking views from various stakeholders on the model concession agreement, formulating a harmonious substitution policy to enable developers to exit projects, classifying lending to toll road projects as secured, proposing to set up a regulatory authority. An important decision pertains to allowing rescheduling of premium payments, i.e. monthly payments due to be made by developers to NHAI with an escalation of 5% per annum over the concession period.

A large number of developers had approached NHAI for reschedulement of premium. The roads ministry sought the approval of the Cabinet Committee on Economic Affairs (CCEA), which was given in September 2013. CCEA also recommended the constitution of an expert group under C Rangarajan, PMEAC chairman, to prepare the framework and other modalities. The expert group considered options for rationalisation of the premium quoted by the concessionaires but thought it rational to adhere to the currently existing concession framework with minimum deviations/changes required in the already executed concession agreements.

The expert group recommended that projects where collected toll revenue cannot service the debt, O&M obligations and premium payments together on a year-to-year basis may be accepted as stressed projects and they may be allowed to avail of a revenue-shortfall loan. Although this is only applicable in case of an indirect political event, a political event or an authority default, the current situation was considered by the expert group to be treated as analogous to that. The shortfall between the toll revenue and expenses can be availed as a loan by concessionaires at an interest rate equal to 2% above the bank rate.

In case there are cash shortfalls for a project in any year, that has to be bridged with either additional debt or additional equity. It is a known fact that lenders have made lending conditions stringent and most developers are

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