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