NEW DELHI: The government’s recent efforts to revive the highways sector will turn out to be a non-starter because the new rules have inherent gaps, road developers have told Prime Minister Manmohan Singh and Finance Minister P Chidambaram.A long-awaited policy notified last fortnight to unlock equity funding for new projects by letting concessionaires exit ongoing and completed highway projects will not help bring any new investments or FDI into the sector since it’s mired in legal, taxation and commercial mess, developers have said.

In June, the government had approved a policy that would allow substitution of concessionaires in highway projects at any stage as long as financial closure had been achieved. This was done to revive the sector – marked by dramatic fall in investments — by freeing up equity and using it in new projects that are not taking off for want of buyers.

“The current circular has failed to address the issue of unlocking of equity in healthy, operational projects that will release about Rs 6,000 crore of equity in older concessions. This would have also brought serious, long-term FDI to road sector,” National Highway Builders’ Federation (NHBF) has said in a missive to the prime minister and finance minister.

“The policy has a large number of legal, commercial and taxation challenges that investors and sellers would not be willing or prepared to deal with,” they added.

Industry members have pointed out that the policy does not include projects where financial closure is not achieved despite the fact that there are several such projects because the authority has not fulfilled its obligation.

However, road ministry officials said allowing substitution where financial closure has not been achieved would mean giving complete leeway to developers which would be detrimental to the PPP framework and that an NHAI default is already covered in the existing model concession agreement (MCA).

The letter also points out that it is not clear whether completed projects include partially completed ones and projects that have received provisional COD. It is also unclear whether the incoming entity can get the tax benefits available for infra projects.

According to M Murali, director general at NHBF, the government’s intention will not succeed with this route since the substitution mode will not be acceptable. “The process is also long, confusing and would involve more expenditure. Also, what’s the point of imposing a penalty on exiting developers when they are already stressed in the first place,” he said. The penalty clause however, said government officials, was opposed by the road ministry but it was included at the insistence of the finance ministry.

Meanwhile, NHAI officials said that international players, including sovereign funds, have expressed interest in taking over existing projects where developers are interested in selling their stake.

Source-http://economictimes.indiatimes.com

In a bid to revive the road sector and also insulate the National Highways Authority of India from heavy financial claims and disputes, the government will now allow harmonious substitution of the concessionaire in ongoing and completed national highway projects awarded under Public Private Partnership on Build-Operate-Transfer mode.

The measure has been initiated taking into account the subdued investment climate in which there is lack of interest on the part of highway developers to bid for projects under Public Private Partnership and also the difficulties being faced by concessionaires in achieving financial closure for many of the projects awarded in the recent past.

The proposal for substitution of the concessionaire in ongoing and completed national highway projects was approved by the Cabinet Committee on Economic Affairs last month.

The decision permitting substitution of the existing concessionaire is applicable to ongoing two-laning and four-laning national highway projects where financial closure has been achieved by the concessionaire but Commercial Operation Date not yet declared by NHAI, Six-laning national highway projects where financial closure has been achieved by the concessionaire but project completion certificate not yet issued by NHAI, completed two-laning/four-laning/six-laning national highway projects awarded under Public Private Partnership on BOT mode and all new national highway projects under Public Private Partnership on BOT mode that are yet to be bid out.

A concessionaire seeking substitution has to make a written representation to the lender’s representative with a copy to NHAI. The lender’s representative, in turn, would ask for approval from NHAI for substitution.

Upon receiving the request from the concessionaire, the lender’s representative would assess as to whether substitution by a nominated company is in the interest of the project. If satisfied, the lender’s representative in consultation with the concessionaire would invite, negotiate and procure offers either by private negotiations or public auctions or tenders for takeover and transfer of the project including the concession to the nominated company.

Selection of the nominated company and valuation of equity is to be done by mutual consent of the lender’s representative and the concessionaire.

The NHAI, upon receiving the proposal of the lender’s representative, would satisfy itself about the credentials of the substituting entity and give its decision regarding the substitution. It may levy a penalty, subject to a maximum of 1 percent of the Total Project Cost, on the concessionaire seeking substitution for any default. No penalty, however, would be levied if the concessionaire had been unable to fulfill his obligations because of delays on NHAI’s part in land acquisition and obtaining statutory and regulatory approvals.

The nominated company would have to form a special purpose vehicle for taking over the project along with the rights and obligations of the concessionaire.

Subsequent to the substitution, in case of completed projects, the leading substituting entity is required to maintain at least 51 percent holding in the project SPV.

Substitution would be permitted only once during the construction period.

Highway developers are opposed to the provision that allows NHAI to levy a penalty on the concessionaire in case of any default.

“It won’t be appropriate to penalize the concessionaire,” said M. Murali, Director General, National Highways Builders Federation.

“In case of completed projects where toll collection has already commenced, it is obvious that the concessionaire fulfilled his obligations. Therefore, there is no cause for levying penalty. Even for projects at the execution stage, a penalty would place additional financial burden on the outgoing concessionaire. It must be kept in mind that many projects under execution have been impacted because of lack of equity. With the penalty clause, it is going to be very difficult to attract investors,” he added.

Source –http://www.projectsmonitor.com

In February this year, while presenting the Union Budget for the year 2013-14, Finance Minister P. Chidambaram had announced the Centre’s decision of constituting an independent regulatory authority for the road sector.

“The road construction sector has reached a certain level of maturity. But it faces challenges not envisaged earlier, including financial stress, enhanced construction risk and contract management issues that are best addressed by an independent authority. Hence, government has decided to constitute a regulatory authority for the road sector,” Chidambaram said in the Budget speech.

At present, the National Highways Authority of India, responsible for development, management and maintenance of national highways, functions as an executing agency as well as regulator. The dual role is perceived by many as contradictory.

The Ministry of Road Transport and Highways created a task force in April to expedite the setting up of the regulatory authority for the road sector. The task force released its draft report on the constitution and structuring of the proposed regulator last month.

The draft report suggests setting up the proposed regulator through an ordinance/executive order and then subsequently converting the same into an Act of Parliament for adequate enforceability and acceptance.

The regulatory authority, in addition to facilitating the expeditious implementation of the National Highways Development Project, would address the concerns of all stakeholders including road users.

A source associated with the road sector told Projectmonitor that in the current scenario, with general elections due in less than a year, setting up the regulatory authority could be an uphill task.

“The process of setting up the regulatory authority, which includes seeking the Parliament’s nod and selection of members, would take more than a year after the Cabinet’s approval. The question is whether the government has enough time in its hand,” the source said.

Interestingly, the Planning Commission is opposed to the proposal for setting up an independent regulatory authority for the road sector.

“An independent regulatory authority would dilute the powers of the Planning Commission. Currently, the Model Concession Agreement as well as rules and regulations concerning the sector are drafted by the Planning Commission. Once a regulator is in place, these could very well get challenged,” the source said, adding that the proposal for setting up an independent regulatory authority might not find favor with the NHAI for the same reason.

Source-http://www.projectsmonitor.com

Facing a situation that may jeopardise the fate of many road development projects awarded two-three years ago, the Highway Ministry has decided to speed up its proposal to allow premium rescheduling.

The proposal will then be referred to an inter-Ministerial group headed by the Cabinet Secretary.

The Law Ministry has taken a stance against a proposal to permit deferment of premium payment for highway developers. The Highway Ministry had sought legal vetting of the proposal.

The Highway Ministry and National Highways Authority of India (NHAI) have favoured implementation of the proposal. “We will ask a Committee of Secretaries (CoS) to take a call on the issue,” said a source.

ROAD AHEAD

The future of some 26 road projects – where developers offered a premium of Rs 96,000 crore to the Government over the pre-defined concession period of 20-30 years – now hangs in balance.

Premium is the amount offered by a developer to the Government for bagging the right to invest in widening existing highways and collect toll from users over 20-30 years.

LESS REVENUE

The premium is payable annually and goes up by 5 per cent every year.

Many developers have expressed their inability to implement projects as the actual toll revenues end up being lower since the Indian economy entered a slowdown phase, leading to project cost escalation. They have approached NHAI and have sought staggered premium payment over the project life period.

The developers want to pay a lower amount in the initial years and higher amount in later years, while keeping the net present value constant.

FUND CRUNCH

Also, developers of about 30 projects awarded till early 2012 have not been able to tie up funds from banks and achieve financial closure.

Bank lending also got squeezed after developers directed banks to stop lending for road projects till 100 per cent land was available.

All these road projects were awarded on public-private partnership (PPP) basis, as the Government wanted to increase spending in sectors such as health and education.

However, as the economy slowed down, with the growth rate touching 5 per cent in 2012-13, investors stopped bidding for highway development.

In 2011-12, about 7,500 km of road development projects were awarded. In contrast, less than a 1,500 km of highways were awarded in 2012-13, with no response from bidders for several projects.