‘My way or highway’ won’t work

September 26, 2013


Without a change in approach, many road projects will disappear into thin air. — K. Murali Kumar

Without a change in approach, many road projects will disappear into thin air. — K. Murali Kumar

Highway developers should perhaps be allowed to rework premium payments, given the economic crisis.

Should financially-strapped highway developers be allowed to ‘reschedule’ the annual premiums they had offered to pay while successfully bidding for projects? This is becoming a classic case where several government arms want to escape the burden of saying a clear ‘no’, even though they do not want to say ‘yes’.

With a ‘no’, the UPA-2 government risks staining its report card on the highway development front at a time when it — and the economy — badly needs projects taking off the ground. Developers dumping projects isn’t good news when elections are barely months ahead. But a ‘yes’ could also mean taking decisions that the Government’s audit arms may question in future.

For almost six months now, a proposal to permit highway developers to postpone their premium payments in a manner that keeps the net present value of these obligations constant over the entire contract period, has been doing the rounds. It has been, to use official language, “under consideration”, with the Government neither accepting it nor rejecting it categorically.


The entire “under-consideration” exercise started as an attempt by the National Highways Authority of India (NHAI) to prevent developers walking out of road projects that they had won only two-three years ago.

They had done so by quoting high premiums payable to NHAI in return for getting the right to develop or widen highway stretches, maintain these and collect toll from users over a pre-determined period of 20-30 years.

Those were, of course, roaring times when everything seemed to be going right for the economy. So, instead of seeking a subsidy — viability gap funding — most developers raced to bag ‘design-build-finance-operate-transfer’ concessions by offering ever high premiums.

But with economic growth slowing down — from 8-9 per cent at the time of the award of contracts to 4-5 per cent now — and high inflation pushing up project costs, many developers have ‘discovered’ the same projects to be financially unviable and not capable of realising the toll revenues that they had originally projected. And luckily, they have found solace in Government’s inefficiencies, such as inability to get regulatory clearances on time.

Thus, the likes of GMR, GVK and Ashoka Buildcon have laid the blame on environmental/forest clearances and land acquisition. These clearances were delayed to such an extent as to change the entire project finance equations. Besides these developers, there are others too watching from the fringes as of now, although they haven’t served any termination notices on the NHAI.

Currently, there are some 15 highway projects that were awarded in 2011 but are yet to achieve financial closure.


In January, GMR announced its decision to seek termination of a 555-km, six-laning project between Kishangarh and Ahmedabad, while officially citing delays in obtaining regulatory various nods.

The infrastructure company had committed to pay a premium of some Rs 32,000 crore over the project period of 26 years. Interestingly, the Comptroller and Auditor General of India pulled up the NHAI on GMR’s threatened pull-out, saying that it would jeopardise potential premium revenues of Rs 32,000 crore from the project.

It was in this context that the NHAI Board, in March-end, approved a proposal by GMR for premium rescheduling. The approval, however, came with a dissent from the Expenditure Secretary R.S. Gujral and concerns raised by the Planning Commission Secretary Sindhushree Khullar. Both are members of the Board.

Since then, the Ministry of Road Transport and Highways has suggested some changes to frame a common policy for all such cases, involving premium rescheduling.

It sent a note to the Law Ministry for approval. The latter, in turn, turned the proposal down on grounds that it would amount to renegotiation of contracts.

The NHAI Chairman R.P. Singh, on his part, has sought an informed decision from all concerned Ministers. A ‘no’ to the proposal would ultimately endanger potential premium revenues aggregating about Rs 98,000 crore over 26 years, having a net present value of Rs 26,000 crore.

Following the NHAI Chairman’s intervention, the Law Ministry seemingly diluted its stance on the issue, while referring the matter to the Finance Ministry.

The latter, while proposing some riders, agreed to a one-time renegotiation, subject to concurrence from the Law Ministry.

The Road Ministry has since floated a Cabinet note listing all the available options. But what will emerge from all this isn’t clear. This rigmarole was only to be expected, since the proposal eventually involved reworking the norms of a contract that private firms had already entered into with the NHAI.

Contract renegotiation is not an area government officials are comfortable with, more so, given the potential risk of attracting audit scrutiny. And the timing — with elections around the corner and a government already under attack for Coalgate, Spectrum, Commonwealth Games and whatnot — couldn’t be worse.


The Government’s indecisiveness is due to lack of confidence, and there’s some over-defensiveness born out of previous scams.

At the same time, what it needs to also bear in mind is the fact that by not going in for renegotiation and instead allowing developers to exit, it jeopardises potential premium revenues in the future. That is something even the CAG has alluded to.

In other words, for the Government, it is a case of damned if you do and damned if you don’t.

The best way out of this mess is to follow some basics. If the Government decides to renegotiate a contract, it is important to not lose sight of the core aim of such an exercise.

In this case, the purpose clearly is to salvage highway development contracts that are on the whole favourable to the Government — those that can be physically executed on the ground, while protecting the Government’s financial interests.

Second, assuming clarity in regard to the core aim, the renegotiating conditions have to be transparent.

So, if the different arms of government arrive at a consensus proposal, they should discuss the final form of proposal with the developers before taking it to the Cabinet, to get an idea of whether the rescheduling proposal has any takers.

Unilaterally presenting a ‘take-it-or-leave-it’ proposal that developers don’t find viable defeats the very purpose of renegotiation. Else, the Government should have the spunk to say a simple ‘no’ (to any renegotiation)!


Source- http://www.thehindubusinessline.com

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