NHAI taking developers to task over execution of road projects

August 3, 2013

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Developers who can’t get projects moving in four months face cancellation which would mean having to forego their initial deposits

Ragini Verma

The executing agency for building highways has issued notices to 37 project developers that were awarded projects in 2011 and 2012, but have not deposited the performance security. Photo: Mint

The executing agency for building highways has issued notices to 37 project developers that were awarded projects in 2011 and 2012, but have not deposited the performance security. Photo: Mint

New Delhi: The National Highways Authority of India (NHAI) is taking developers to task for not executing road projects owing to procedural delays, the inability to raise funds, and a loss of interest amid sluggish economic growth.

Developers who can’t get their projects moving in four months face cancellation, according to a senior NHAI official who didn’t want to be named. This would mean having to forego their initial deposits, an expert said.

The executing agency for building highways has issued notices to 37 project developers that were awarded projects in 2011 and 2012, but have not deposited the performance security. This is usually deposited within 90 days of signing the concession agreement and is 5% of the total project cost.

“We issued the notice to developers of pending projects. They have been awarded projects back in 2011-12, but have not submitted the performance security, pending which NHAI cannot work on getting required clearances,” said the agency official. “Performance security is a sign of the developer’s commitment for executing the project and providing funds for it.”

The developers have been asked to reply to the notices by 14 November. They will have to either pay the performance security or relinquish the project, the official said.

The developers say the projects have got bogged down over difficulties in raising funds, which worsen because of difficulties in land acquisition, even though the stipulation that all the land has to be acquired before the project can start has been eased.

“Most developers are struggling to get finance from the banks. Banks are not able to finance in the current environment and are reluctant. Also, some banks are still insistent on 100% land acquisition for loan sanction, in spite of the land requirement being changed back to 80%,” said M. Murali, director general, National Highways Builders Federation.

“The other problem is that even when NHAI gets us 80% land for the project, many times it is not a continuous stretch. It is staggered, hence making it difficult for the developer to start work.”

But these delays can also be due to developers losing interest in a project because they don’t consider it viable any more.

“Most likely the developers are having second thoughts whether to continue in the projects or not,” said Pranavant, a director at Deloitte Touche Tohmatsu India Pvt. Ltd, a consulting firm.

“Most developers after emerging the preferred bidder do further due diligence. If they then find that the modified traffic and revenue projection is not in line with their earlier estimates, they are likely to rethink,” he said. “They may also be having problems arranging for other equity holders, and financing by banks is a major issue, too.”

Developers should be prepared to forego the bid security if they fail to deposit the performance security in time, said Pranavant. NHAI could also bar a firm from participating in future bids, he said.

Developers may not be too keen to take up a project because they’ve bid too high, given the state of the economy. Growth slowed to a 10-year low of 5% in the year ended March. It’s expected to accelerate, but rising inflation and a weakening rupee don’t augur well.

“Realizing that they (developers) overbid definitely may be one of the reasons because the situation of the economy has changed drastically,” Murali said. “Bids were made keeping in mind a higher rate of growth and a low interest rate environment, both of which have changed with the economy slowing down considerably and the interest costs going up.”

Earlier this year, GMR Infrastructure Ltd and GVK Power and Infrastructure Ltd walked out of their agreements with NHAI to execute two projects worth nearly Rs.10,000 crore.

GMR is currently in negotiations with NHAI for a financial restructuring of premium payments. The matter has been referred to the finance ministry.

The ministry of road transport and highways awarded 7,400km of highway projects in 2011-12, but was only able to award 1,115km against a target of 9,500km in 2012-13.

Source-http://www.livemint.com/