Premium recast not enough to revive stalled highway projects

December 23, 2013


Real hurdles: Under the new proposal, in the most optimistic scenario, 10-12 out of 53 premium-based projects may be revived.
Real hurdles: Under the new proposal, in the most optimistic scenario, 10-12 out of 53 premium-based projects may be revived.

Regulatory delays, rising cost, drying up of bank funding are major worries


The Government’s proposed premium rescheduling package may help financially-strapped highways projects already under various stages of execution.

But it is unlikely to help much if the aim is to jump-start over 4,000 km of projects where construction is yet to start.

There are three main reasons for this.

The first is project delays, for which the Government’s own tardiness in giving environmental and forest clearances, and making available encumbrance-free land to developers, are partly responsible.

In fact, GMR Infrastructure cited precisely the above factors while issuing termination notice on the National Highways Authority of India (NHAI) for six-laning of a 556-km stretch from Kishangarh to Ahmedabad via Udaipur in January.

Even the idea of premium rescheduling — wherein developers could postpone these payments even while keeping their net present value over the entire concession period unchanged — was floated almost a year ago when GMR itself proposed it to preserve the viability of the single largest project awarded during the UPA regime.

The NHAI Board had even approved GMR’s proposal in March. But no decision has since been taken.

But delays in regulatory clearances have led to increased projects costs. That constitutes the second reason why mere premium rescheduling may not help.

Delays equal Cost

The last two years have, moreover, seen road construction costs rise by an average of 10 per cent a year. Prices of bitumen have gone up sharply. The same is true for diesel, cement, and labour costs, even if to a lesser extent. “For a project costing Rs 2,000 crore, construction costs have gone up by Rs 200-250 crore a year,” claimed Sudhir Hoshing, CEO-Roads Business at Reliance Infrastructure Ltd.

Besides, toll revenues have slowed. The highway projects in which developers bid aggressively by offering to pay high premiums were all awarded prior to 2011-12 when the Indian economy was clocking 8-9 per cent growth. Most of them are today unviable.

Banks wary

The third reason is drying up of bank funding.

Banks — mainly State Bank of India, Canara Bank, Syndicate Bank, Punjab National Bank, Oriental Bank of Commerce, Bank of India and ICICI — have outstanding exposure of Rs 1,31,000 crore to the road sector as of March 31, 2013. Increased project costs and slowing toll collections have now made them cagey about lending.

“Even for projects that achieved financial closure in 2012, banks insist on doing fresh due diligence. They are re-evaluating if the projects are feasible and whether the promoters are willing to put in additional equity,” said a senior NHAI official.

That being the case, the Government may have to go beyond premium rescheduling to even partially compensate developers for increased project costs on account of regulatory delays.

The most optimistic scenario, according to an infrastructure analyst, is of 10-12 out of the 53 premium-based projects being revived by the proposal now under consideration.

The only other alternative before the Government is to cancel projects that are heading nowhere and re-invite bids. “They may not fetch the kind of attractive premiums that developers had committed earlier. But we those know those premiums will anyway not accrue,” the analyst pointed out.



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