Developers of highways, who offered huge premium to bag large projects, are now seeking ways to ease their financial burden. Many of them have approached the National Highways Authority of India to reschedule the payment of premium — the amount paid to the authority for developing the project and collecting toll for a set period. They now want to pay a lower amount in the initial years so that they can manage to service their debt from the toll collection.

According to industry observers, developers are realising that they have overestimated the projects’ profitability — their toll revenues projections are nowhere near what they thought they would get. Moreover, project implementation costs have gone up on the back of high inflation.

Misplaced optimism?

“These premiums were offered when the expectations of GDP growth were much higher. Now, the environment has changed,” says Athar Shahab, Chief Executive Officer, Uniquest Infra.

These projects were bid in days when the GDP growth rate was hovering around eight to nine per cent. For record higher growth means more goods movement

“A study of nine projects showed that the actual traffic was nine to 60 per cent lower against what the developers had projected,” said M. Murali, Director-General, National Highways Builders Federation, highway developers lobby.

Most national highways are developed on a design-build-finance-operate-transfer (toll) model, where the Government awards the rights to develop the roads to the firm, which either demands the minimum subsidy or offers the maximum premium to NHAI for bagging the right to collect toll from road-users over a predefined concession period of 15-30 years.

At the end of fiscal 2012, the highway sector landscape was entirely different from what it is today. The Government had successfully awarded over 7,000 km of highways for development. Developers were willing to offer huge premiums for bagging the right to invest in developing an existing highway stretch to four or six-lanes and collecting toll.

In 2011-12, compared to the Government’s projections of what it would have to spend as subsidy or receive as premium for developing roads, it had received bids showing potential savings of about Rs 31,000 crore over 15-25 years. For widening the Shivpuri-Devas stretch in Madhya Pradesh, NHAI had expected that it would have to shell out a grant of Rs 422.25 crore. But then GVK offered an annual premium of Rs 180.9 crore over the project’s life, resulting in potential savings of Rs 2,080 crore.

And for six-laning, the Kishangarh-Udaipur-Ahmedabad Expressway, NHAI expected to receive a premium of Rs 261.25 crore during the concession period. Instead, GMR Infra offered Rs 636 crore premium over 26 years. For four-laning the Cuttack-Angul stretch in Odisha, the Government expected it would have to pay a one-time grant of Rs 80 crore. Instead, Ashoka Buildcon offered to pay a premium for 25 years, starting with Rs 61 crore in the first year.

For six-laning the Ahmedabad-Vadodara stretch in Gujarat, NHAI expected to receive a premium for 25 years, starting with Rs 5.5 crore in the first year. But, IRB Infrastructure offered a premium for 25 years, starting with Rs 309.6 crore in the first year. For the Government, this meant potential savings of Rs 3,400 crore on a net present value basis.

Regulatory delays

The list can go on. But, developers of all these projects have now approached NHAI either to exit the projects or to reschedule premium payment, citing delayed regulatory clearances.

Developers maintain that the projects have become unprofitable due to delays in getting clearances.

There were regulatory delays no doubt, during which road building and financing costs escalated. But, delays are not the only reason, though the developers would want to focus on that as the onus shifts to Government. As pointed out by the authority Chairman R.P. Singh in January, there were delays in environment clearances earlier also, but the developers were in no hurry to dump projects then. This was echoed by Planning Commission Deputy Chairman Montek Singh Ahluwalia recently.

As more and more companies queue up to exit and seek premium rescheduling for projects awarded in 2011, the NHAI/Highway Ministry is forced to look at ways to save these projects. In fact, in the backdrop of declining GDP growth in 2012-13, NHAI did not find any response to 13 projects for which bids were invited. Hardly about 1,000 km of highways were awarded in 2012-13. There is a realisation that rescheduling premium may be a viable proposal to save highway projects. This is particularly important at a time when the Government is entering an election year and would like to showcase its success stories rather than failures. As Shahab says: “Government has two options: either cancel these projects or reschedule the premiums without compromising public interest. If these projects were to be cancelled and rebid now, they may not attract similar premiums.”

Virendra Mhaiskar, CMD of IRB Infra, says “From a Government perspective, this is a revenue neutral proposal. For the developers, a deferment in premium outgo will improve the cash flow situation. In turn, the debt-equity ratio of many stressed balance-sheets will improve. This will also help developers bid for more projects. We are not asking the Government to write-off the premium. We are only asking them to reschedule.”

THE Way ahead

Premium rescheduling will impact the financials of the project positively. Many highway projects, which are otherwise unlikely to take off because they are not profitable, may be back on track.

For instance, a developer will be prevented from taking additional loan. In GMR’s case, for example, the company offered a premium of Rs 636 crore in the first year for developing the 555 km Kishangarh-Udaipur-Ahmedabad stretch and the toll revenue is about Rs 700 crore a year. As per original proposal, in the initial years, apart from construction costs, the developer would simply be taking additional debt to pay premium to Government.

Now, GMR has suggested that it will pay less than Rs 100 crore, instead of Rs 636 crore in the first year. But, over the entire 26 years, it would pay Rs 59,000 crore instead of Rs 32,000 crore.

“An ideal situation would be to restore the financial health of the project without causing a loss to the exchequer,” says Shahab, pitching for premium-rescheduling proposal.

But what if other bidders challenge the proposal legally? “The proposal is unlikely to be legally challenged because despite rescheduling, the same premium amount will be paid to Government. So, even other bidders have to pay a higher premium amount,” said Murali of NHBF.

mamuni.das@thehindu.co.in

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