Chief Minister Siddaramaiah, who is on a two-day visit to Delhi, met Union Urban Development Minister Kamal Nath on Monday and sought funds for various highway projects being undertaken in the state.

According to official sources, during Siddaramaiah’s over half-an-hour meeting with the Union minister he submitted a memorandum on the projects which were being taken up in the state under the Jawaharlal Nehru National Urban Renewal Mission (JnNURM) and National Highways Authority of India (NHAI).

He also met Union Health Minister Gulam Nabi Azad and conveyed concerns of the arecanut farmers following an affidavit submitted by the Health Ministry to the Supreme Court supporting the ban on areca.

Later, Siddaramaiah told reporters that the Centre has not submitted any affidavit suggesting the SC to impose ban on the use of arecanut.

“We also brought to the notice of the Union Health Minister the medicinal properties of areca,” he said.

Higher Education Minister R V Deshapande, Urban Development Minister Vinay Kumar Sorake, Congress MPs H Vishwanath and R Dhruvanarayan and MLAs S R Mahesh and Chikkamadu were also present.

Source-http://www.newindianexpress.com

The “in-principle” Cabinet approval was welcomed by all the concerned developer groups, many of whom are currently incapable of supporting their projects in their existing form. This is because of their own financially stressed positions, unexpectedly low traffic, delays in sovereign deliverables, and in some cases – aggressive and irrational bidding. The relief package involves back-ending the scheduled premium payments in the initial years when traffic is lower, growth drivers indeterminate, and capital requirements and debt servicing at their peak. This relief in the initial years is to be compensated by higher premia in subsequent years, so that the net present value (NPV) of the promised cash flows to NHAI remain protected.

The opposition to the scheme is primarily on the issue of moral hazard and the adverse impact that any such ex-post accommodation mechanism has on the sanctity of bidding processes.

Although one cannot obviously question the imperative to avoid such events in the future, for now at least, practical considerations point towards going ahead with the reset for the following seven reasons:

(1) Renegotiations need to be understood, accepted and imbibed as an integral part of PPP processes, especially at the early stage of their evolution. An overview of more than 1,000 PPP concessions studied by the World Bank Institute in Latin America and Caribbean from 1985-2000 throw up these characteristics of PPP renegotiations:

• 41.5 per cent have undergone renegotiations.
• Out of the total concessions in transport infrastructure sector, 55 per cent of the concessions underwent renegotiations.
• 85 per cent of renegotiations occurred within four years of concession awards and 60 per cent occurred within three years.
• Renegotiations occurred mostly in concessions awarded through competitive bidding.

So, renegotiating a PPP project is by itself not taboo.

(2) It is clear in hindsight that the magnitude of risks and the ability of different stakeholders to manage them had not been adequately assessed. The private sector has shown through its overaggressive traffic estimation, high-debt leveraging and exuberant bidding that it often lacks management maturity, as well as risk assessment and forecasting skills. NHAI has also conclusively demonstrated its inability to eliminate outlying bids, procure sovereign clearances, perform timely land acquisition and clear due processes in clearly defined and accountable time frames. The need for contract renegotiations becomes inevitable till such shortcomings are addressed.

(3) From NHAI’s point of view, the high premiums accruing to it, even after the reset, would no way compare to the expected low or vanishing premia if the projects were to be put up for rebidding in the current adverse investment mood and environment. NHAI is estimated to receive more than Rs 1.51 lakh crore over the next 20 years from developers in return for awarding projects. If the projects were to be rebid, it is not unlikely that over-cautious developers could consider a 30 to 40 per cent decline in traffic projections that could effectively wipe out any premium, or even bring the bidding to a request for viability grant.

(4) Rebidding will inevitably lead to huge delays in getting these projects off the ground, and would mean further increases in project costs. It would adversely affect all downstream benefits of gross domestic product growth, job creation, spur to the construction sector, capital-goods sector order-book accretion and a required resurgence of the investment sentiment, particularly PPP sentiment.

(5) The NPV-neutrality, as a public-policy paradigm, passes the test of transparency and fairness. It legitimises the eligibility of the highest bidder to continue. GMR, for example, under the back-ended schedule, is believed to have to pay up in Rs 59,000 to 65,000 crore over its 26-year period as against Rs 32,000 crore originally.

(6) Annulling of the previous bids will send serious negative signals to domestic and global investors.

(7) Unlike the recently allowed compensatory tariff dispensation by the Central Electricity Regulatory Commission (CERC) for imported coal-based ultra mega power projects, there is no alteration in user charges (toll) as part of the restructuring.

At an office discussion led by Rajeev Bhatnagar and Debal Mitra of the Highways Division, the following views were offered on some contentious points:

(i) Coverage and eligibility: The road ministry is considering the bailout of only 23 projects but the developer community has opined that the package should be made available to all affected premium-based projects (estimated at 40 plus in number) as similar financial impediments would be faced by most, if not all. A parameter-based “stress” ranking should determine nature and grades of relief to be considered.

(ii) Discounting rate: The 12 per cent discounting rate proposed by the Cabinet seems harsh, to the point of being unacceptable, considering it had approved a rate of 9.75 per cent for the spectrum fee deferrals by telecom operators last year. Besides, the rate is based on existing interest rate levels as benchmarks that are at the high end, whereas for a typical concession period of two decades or more, one should consider mirroring through-the-cycle interest rates. Burdening the already leveraged projects with higher discounting rates would defeat the purpose of the bailout. A 10 per cent discounting rate appears fair.

(iii) Penalty: The Cabinet has also proposed levying an exemplary penalty of up to 0.5 per cent of project cost, if the default is attributed to the developer. This is conceptually acceptable both as a penalty and as a deterrent.

(iv) Bank guarantee: There is a view that developers furnish a bank guarantee to the extent of the maximum difference between the earlier and current premium. Since the original concession agreement did not impose the submission of any bank guarantee for the premium, bank guarantees for the incremental amount seem illogical.

(v) Premium re-scheduling: Developers have demanded a moratorium of 6 to 8 years, while the Planning Commission has proposed a set percentage of premium gaps being backloaded every year. Given that the specifics of each project are different, the most appropriate stance will be to leave it to NHAI to decide the optimal schedule bilaterally with the developer.

(vi) Empower NHAI after committee decision: Once the Rangarajan Committee has conveyed the format, NHAI should be fully empowered to settle with concessionaires. Kicking the settlement can once again between the PMO, law, finance, Planning Commission, MoRTH et al should be clearly avoided.

(vii) Road regulator: As I have stridently argued in an earlier Infratalk (Road regulator needed by yesterday, July 3) having an empowered and credible road regulator would have allowed the system to effect a solution much earlier rather than this practice of creating ad-hoc committees for every problem that surfaces.

In conclusion, this highway premium restructuring exercise, along with the recent imported-coal price pass-through decision by CERC, is demonstrating India’s ability to gradually come to grips with PPP renegotiations as an inevitable process issue.