Policy on staggering premium obligations of developers soon

The Government is keen on kick-starting road projects, which have hit a roadblock for a variety of reasons in recent years.

The focus of its attention is on 53 projects for developing 6,415 km of highways, awarded during the UPA’s second term. Most of them are stuck or financially stressed.

Developers secured these projects based on the premium they offered to pay the National Highways Authority of India (NHAI) for the right to design, build, operate and collect tolls.

They have not yet started any work on many of the projects, especially on the 31 projects awarded in 2011-12. Some developers – GMR, GVK, Ashoka Buildcon and KMC Constructions – have backed out from the projects by serving termination notices to the NHAI.

The next few days could, however, see a breakthrough as the Centre is set to finalise a policy for rescheduling the premium obligations of developers.

The Government has more or less firmed up a formula. It involves giving the developers the option to pay 25 per cent of their original premium outgo for the first three years and 50 per cent in the following years, subject to discharge of the entire postponed obligations three years before the concession period of 20-30 years ends, Highway Ministry sources told Business Line.

The developers will, however, have to pay interest on the premium payments postponed.

“Just as the premium obligation is fixed, this rate will also be fixed. We have tentatively decided a rate of 10.75 per cent,” a source said. The Government, to protect its financial interests, is also planning to prevent developers from paying any dividends before meeting their postponed premium obligations in full.

Any takers?

The logic here is that developers should not use the project cash flows from the staggered premium commitments for rewarding promoters/shareholders, they added.

However, it is not clear whether this formula will help developers get started on their projects.

Developers most likely to make use of this option are the ones who are six-laning their existing four-lane projects, where construction and toll collection are already under way.

“Right now, we are borrowing at 11-11.25 per cent. If the discount (interest) rate is set lower, we will certainly use the option,” said Virendra D. Mhaiskar, CMD, IRB Infrastructure Developers.

IRB is executing the 114-km Chitradurg-Tumkur bypass and the 102-km Ahmedabad-Vadodara stretches, involving a combined premium outgo of Rs 450 crore in the first year with a 5 per cent annual escalation factor.

Another developer who could benefit is Reliance Infrastructure Ltd, which also has three projects already under construction with a total premium outgo of Rs 200 crore: Pune-Satara (140 km), Kandla-Mundra Port (71 km) and Hosur-Krishnagiri (60 km).

But the real problem would be in kick-starting projects where developers had quoted high premiums and are yet to begin work.

“At 10.75 per cent discount rate, I don’t see more than six projects making use of the proposed policy. The developers have already commenced work in these and are stuck. So, any deal reducing cash outgo in the initial years and keeping their debts from ballooning is probably welcome,” said M. Murali, Director-General, National Highways Builders Federation.

(This article was published on December 22, 2013)
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