Builders, lenders can benefit from proposed changes in road contracts
NHAI has proposed to relax norms for payment of premium, upfront annual revenue quoted by developers
Oct 20, 2014
Source : The Economic Times


NEW DELHI: The government is set to overhaul highway contract documents to provide extra comfort to lenders and project developers to get road projects going and boost investment. Some of the major changes proposed include the provision to align NHAI's total project cost (TPC) with that of assessment made by the lenders, which will ultimately reduce the gap between lenders TPC and that of the national highway authority.

This is crucial for lenders considering the fact that in the past they have suffered due to a divergence in the project cost estimated by the developer and that of NHAI. In case of termination of a concession agreement, NHAI pays only 80 per cent of the remaining debt based on its own TPC and not that of the cost worked out by the developers and bankers. "So, bankers face huge risk of losing. NHAI always tried to keep the project cost low to make them viable. But, when lenders engineer and developers assess the cost it is much more than that of NHAI's official cost," said a senior executive of a major infrastructure company.

A new proposal will reconcile NHAI's TPC with project cost appraised by lenders before financial closure happens. This will be done in consultation with the independent engineer, developer and lenders' engineer. "The reconciled TPC to be relevant for termination payments only," mentioned a policy document circulated by NHAI for major amendment in the existing model concession agreement (MCA).

Providing more comfort to lenders, NHAI has proposed co-insurance for lenders/ bankers along with NHAI and the developers, which will help them cover their risk in case of problems. At present, only NHAI and developers get the insurance claim in case of problems or damage to the asset during construction and operation whereas lenders get nothing despite largely it's their money that is at risk in such cases. Though this provision will increase the annual premium payable to insurance firms, it will protect the interest of lenders.

To facilitate greater participation of private players, there is also a proposal for change in ownership and full divestment of equity by the developers immediately after NHAI allows it to collect toll. This will help companies specialized in construction to take up new projects. Considering land acquisition has been the key stumbling block in project take off and completion, there is a proposal to acquire at least 80 per cent of required land before NHAI allows work to start.

Similarly, NHAI has proposed to relax norms for payment of premium (upfront annual revenue quoted by developers). While at present the developers need to make premium payment as soon as tolling starts, the amendment proposed has the provision where developers would be asked to pay premium four years after tolling starts.

"This has been proposed since concessionaires don't get huge toll revenue in the first few years and they need to meet other major financial demands. But, to ensure that we don't lose the promised amount during the contract period, there will be a provision to escalate the annual premium payable by a developer by 3 per cent upto 10th year of tolling and 8 per cent thereafter," an NHAI official said.

These proposals will be soon placed before the apex committee under cabinet secretary, which has been authorized by the government to make amendments in the MCA.

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