Road developers hoping for early relief from the government will have to wait longer.

A committee set up under C Rangarajan, chairman, Prime Minister’s Economic Advisory Council, is reworking its report on providing such relief, after concerns were raised by  Gajendra Haldea, advisor, Planning Commission.

Last Friday, Haldea raised concerns on the proposed recommendations. The issues in question were the structure of premium rescheduling and the penalty norms, following which the committee sought more clarity from the roads ministry.

The key recommendations of the report include rescheduling the premium that companies owe to the National Highways Authority of India (NHAI) and fixing the interest payment on the deferred amount at 10.75 per cent. In addition, it felt no penalty should be charged on the developers.

Premium here is the amount NHAI concessionaires have to pay for a BoT (Build-Operate-Transfer) project, as the returns are expected to be high. It is usually decided on the basis of estimated future traffic flow at the time of bidding. The term for payment of the premium is usually 20 to 25 years and the amount payable ranges from Rs 3 crore to Rs 680 crore a year. The amount goes up yearly by five per cent, according to existing norms. NHAI is due to receive about Rs 151,000 crore over the next 20-25 years from private developers.

“The report was to be ready early this week. But, following a letter written by Haldea, Rangarajan has decided to study the concerns raised and we can expect final recommendations only in the next 10 days,” said a senior official in the roads ministry. Haldea confirmed he’d commented on the report but declined to disclose details.

The Rangarajan committee was set up this October. This was after a number of road developers threatened to walk out of projects due to the economy’s slowing. They’ve complained about inability to generate adequate revenue for repaying the premium. The committee had also proposed that the companies not be allowed to pay dividend to their parent companies until they cleared their dues to NHAI.

There was also a recommendation to allow private road developers to pay only 25 per cent of the premium they owed NHAI in the first three years. Companies were to raise this to half the amount due after three years. The sum carried forward was to attract an interest rate of 10.75 per cent.

“The trigger point for Haldea to raise the concern seems to be the absence of penalty. He does not want the companies to be given a breather and wants to overrule a cabinet decision which wanted projects to continue. If we do not allow this rescheduling, then we have to go in for re-bids. Given the current environment, we will not get any bidders,” the ministry official added.

The government has already cancelled a plan to award projects on public-private partnership during this financial year and is moving towards government-funded projects. The roads ministry plans to now award 5,000 kilometres this year under the engineering-procurement and construction mode this year, after the developers decided to stay away from bidding.

Source-http://www.business-standard.com

Better-than-expected numbers for the quarter ended September have turned analysts positive on IRB Infrastructure Developers, among India’s largest road construction and operating companies.

KOLHAPUR: City-based social activist Subhash Vani has filed a public interest litigation (PIL) in the Bombay high court seeking a thorough inquiry into the work as part of the Kolhapur Integrated Road Development Project (KIRDP) and the land leased to the IRB Company.The high court will on Monday hear the PIL, which will be clubbed with a writ petition filed by the IRB Company seeking police protection for collection of toll. The PIL seeks an inquiry into the cost escalation of the project, which has gone up to Rs 512 crore from Rs 220 crore at the time of the agreement.Vani said, “There should be an probe into the quality of the roads and the pending work. We have also raised the issue of the policy of the build-operate-transfer (BOT) which we believe has failed across the state. Our demand is that the BOT policy should be suspended by the state government.”

He added that as per the agreement, the IRB Company will be allowed to collect toll for 30 years. The developer company may demand extension of the toll collection for a few years to recover the additional money it claims to have invested, he claimed.

Kolhapur was the first city in the state where the Maharashtra Road Development Corporation ( MSRDC) decided to experiment collection of toll on a public-private-partnership basis for an intra-city road development.

On the other hand, city-based communist leader Govind Pansare alleged that there were many flaws while drafting the project proposal and its implementation by the IRB Company. The KMC has leased out the land of about three lakh sq ft at Temblaiwadi in the city at an annual rent of Re 1 since 2009. The IRB leased out the land to a private hospitality firm, which is now constructing the luxurious hotel at the site, he said.

“The developer company has leased out the land given by Kolhapur Municipal Corporation to a hospitality company without taking the requisite permissions from the civic body. We want all these matters to be discussed in the high court and demand a CBI probe. Strict action should be taken against those found guilty,” Pansare told mediapersons.

When GMR wriggled out of a highway project for which it had paid a whopping Rs 636 Cr as premium, seeking a renegotiation of terms with NHAI last year, 2 notes of dissent from the Finance Ministry and the Planning Commission observed the following –

 “Varying the payment schedule at this stage implies departure from a legally binding contract, an action that cannot be supported” – RS Gujaral, Finance Secretary 

“Such whimsical changes in legally binding contracts is a poor reflection on the credibility of government and its agencies” – Sindhushree Khullar, Plan Panel Secretary 

Gujaral’s note also expressed unease about this becoming a precedent for other contracts in similar distress.

His words must be ringing loud in the ears of road ministry officials today as the government sets to pick up the tab for a staggering Rs 1.5 lakh crore to bail out private developers, if a proposal mooted by the ministry goes through. A Business Standard report (read here) reveals that a total of 39 projects are likely be approved under this plan, which will entail rescheduling of premium payments to NHAI. Projects include ones bagged by marquee names like Larsen & Tubro, Ashoka Buildcon and IDFC among others.

Premium is the amount paid by a concessionaire to NHAI during the bidding of BOT (build-operate-transfer) projects which are expected to give very high returns. In the good times, when liquidity was abundant, corporate balance sheets were in the pink of health, India was growing at 9% and there was a slugfest among bidders for bagging lucrative contracts – private developers threw caution to the winds and paid hyper aggressive premiums for projects. They based their calculations on brash projections of future traffic growth, reflecting the audaciousness that’s often seen in a booming economy.

But as growth plummeted, that swagger evaporated, and traffic projections went out of whack (by as much as 45% on the down side in some cases according to Fitch) developers are being seen queuing up at the government’s doorstep for help, with the ministry more than willing to oblige, no matter that its own fiscal situation is more precarious than ever.

Think of what would have happened in a reverse scenario. Would the concessionaire have agreed to a revision of terms had profits zoomed higher than projected? Clearly not!

But the argument of the ministry seems to be that inaction will shake up the entire road sector and have a cascading impact on the rest of the economy, so this is the best way out of the mess. Experts agree.

“In this first phase of PPP in the last 15 years, there have been huge learnings for both the government and the private sector. While developers miscalculated projections, there were many things that the government did wrong as well, so I would argue for a one time reset and insist that policy be framed clearly and  transparently” says Vinayak Chatterjee, Chairman of Feedback Infrastructure.

Government sources insist that it is a ‘one-time relief’ proposal indeed, and not a policy. But relief for some means a lost opportunity for others (companies that lost out on the bids because of undue aggression by winners) and an easy way out for the barrage of non-serious players who had entered this business to make a quick buck.

A more rigorous approach to this ‘reset’ could have entailed measuring the depth of stress of each developer minutely and granting only those genuinely unable to cough up the cash, a chance at premium renegotiation. But experts feel that would be impractical and also led to potential litigation for being discriminatory in nature.

Whatever be the satisfactory solution to this quagmire, what’s clear is that across the infrastructure arena, PPP projects have been battling similar issues – be it with the UMPPs (Ultra Mega Power Projects) in the power sector, or the entire gas pricing debate in the petroleum space. In each of the cases, whether it’s Adani and Tata with regards to higher compensatory tariffs for UMPPs, or Reliance Industries which would benefit from the Rangarajan formula – it is the developers who’ve gotten away relatively unscathed, despite a glaring divergence in what they’ve promised, and what they’ve actually been able to deliver. The government meanwhile, has been left with no choice but the renegotiate contract terms and conditions keeping the larger good of the economy in mind.

Having presumably learnt from these failures, the hope now is that phase II of PPP in India will be less thorny.

Source-http://www.business-standard.com