Ind-Ra: Quick Fix Solution to Compensate Highway Developers Offers Comfort to the Sector

The Cabinet Committee on Economic Affairs' (CCEA) approval to authorise the National Highways Authority of India (NHAI) to provide rationalised compensation to concessionaires in case of delays not attributable to them could provide respite for stranded road projects, says India Ratings and Research (Ind-Ra). According to NHAI data, more than 80 projects (annuity: 24% and toll: 76%) with a project cost of INR830bn are under implementation. The letter of award for these projects dates back more than four years.

Most of these projects were stranded and encountering cost overruns due to non-availability of land and for want of statutory clearances from the Ministry of Environment and various other departments.

The extended concession period, through additional toll collection in the later years, could improve the cash flows and positively impact project life coverage ratio. However, Ind-Ra believes that the impact in terms of improving debt servicing ability of the concessionaires could be limited since the extension of the concession period may not simultaneously result in a change in the repayment schedule.

In case of annuity projects, NHAI will pay a compensatory annuity based on the product of average daily annuity and the number of days delayed. Although there could be some erosion from the original expected net present value of annuity receipts, the timely compensation would ensure adequate liquidity and coverage ratios for the project.

Until now, the project cost overruns stemming from non-fulfilment of conditions precedent by NHAI are bridged by a combination of additional equity and debt. Increased equity contributions due to overruns without a commensurate increase in revenue could have lessened an estimated return, which is eliminated through the proposed measures.

In a recent policy measure, NHAI approved one-time funding for projects that are stuck due to the equity funding constraints, despite being not obligated to bridge the deficit. However, the current proposal aims to bridge the revenue losses due to the failure to make the land available in time for construction completion. Hence, should the NHAI fund the cost overruns as a subordinated loan, not only would the funding issues be erased, project completion would also be hastened.

The proposal continues to load the construction risk on to the developers by limiting the construction completion to a three-year period, whereas, the delays stem from the unavailability of land within the stipulated time.

The eligibility criteria for the extension of the concession period and awarding compensatory annuities shall be determined on a case to case basis in consultation with the concerned project's independent engineer and further approval by NHAI.

The recent policy initiatives such as the exit policy for developers and one-time fund infusion by the government may give a fillip to the road sector, as this may push up average daily road construction, which had dropped to 4.1km in FY15 from an all-time high of 7.4km in FY13 (FY14: 5.21km).

Proper steps needs to be ensured at the project selection level so that all the conditions precedent from NHAI are fulfilled at the bidding stage so that the road developers are clear about the risks associated with the project.

Despite the aforesaid measures, the viability of some of these projects could still be in question given the lower traffic growth (against the originally envisaged numbers) and the contraction in toll rates directly linked to inflation.

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