Money & Banking

Rework infra contracts to ease bad loans burden

Our Bureau Mumbai | Updated on August 21, 2014 Published on August 21, 2014

Nature of contract with Govt decides risk allocation to private sector

To tackle the rising bad loans at banks in the infrastructure space, RBI has suggested a rethink on the contractual arrangements with private sector. “While the share of advances to infrastructure continued growing, albeit slowly (the share of the other four sub-sectors have declined), from 13.5 per cent in March 2011 to 14.4 per cent in March 2014, infrastructure as a share of stressed assets has risen sharply, to 29.2 per cent from 8.4 per cent,” RBI said in its Annual Report.

Further, it is important to avoid a repeat of the past, where a push for infrastructure projects, many of which later stalled, resulted in accelerated growth in gross NPAs. The nature of contracts with the Government determines the risk allocation to the private sector in infrastructure. The broad principle is to allocate such risks as can be controlled or managed by the private sector, but many current contracts do not fully reflect this principle, the report added.

Based on learning from existing projects, revamped contract arrangements that limit risk transfer to project costs and controllable revenue items, and use of innovations such as Least Present Value of Revenue (LPVR) bids — for electronically tolled roads, for instance — may be examined.

According to the central bank, “Revamped infrastructure contracts also need to factor in the possibility of renegotiation and include mechanisms that clearly lay out the process to be followed in such an event.”

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Published on August 21, 2014
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