The mega road bailout – Rewarding corporate greed?

October 7, 2013

Nikhil Inamdar  |  Mumbai 

 Across the infrastructure arena, defaulting PPP developers have remained relatively unscathed despite glaring contract breaches

When GMR wriggled out of a highway project for which it had paid a whopping Rs 636 Cr as premium, seeking a renegotiation of terms with NHAI last year, 2 notes of dissent from the Finance Ministry and the Planning Commission observed the following –

 “Varying the payment schedule at this stage implies departure from a legally binding contract, an action that cannot be supported” – RS Gujaral, Finance Secretary 

“Such whimsical changes in legally binding contracts is a poor reflection on the credibility of government and its agencies” – Sindhushree Khullar, Plan Panel Secretary 


Gujaral’s note also expressed unease about this becoming a precedent for other contracts in similar distress.

His words must be ringing loud in the ears of road ministry officials today as the government sets to pick up the tab for a staggering Rs 1.5 lakh crore to bail out private developers, if a proposal mooted by the ministry goes through. A Business Standard report (read here) reveals that a total of 39 projects are likely be approved under this plan, which will entail rescheduling of premium payments to NHAI. Projects include ones bagged by marquee names like Larsen & Tubro, Ashoka Buildcon and IDFC among others.


Premium is the amount paid by a concessionaire to NHAI during the bidding of BOT (build-operate-transfer) projects which are expected to give very high returns. In the good times, when liquidity was abundant, corporate balance sheets were in the pink of health, India was growing at 9% and there was a slugfest among bidders for bagging lucrative contracts – private developers threw caution to the winds and paid hyper aggressive premiums for projects. They based their calculations on brash projections of future traffic growth, reflecting the audaciousness that’s often seen in a booming economy.


But as growth plummeted, that swagger evaporated, and traffic projections went out of whack (by as much as 45% on the down side in some cases according to Fitch) developers are being seen queuing up at the government’s doorstep for help, with the ministry more than willing to oblige, no matter that its own fiscal situation is more precarious than ever.


Think of what would have happened in a reverse scenario. Would the concessionaire have agreed to a revision of terms had profits zoomed higher than projected? Clearly not!


But the argument of the ministry seems to be that inaction will shake up the entire road sector and have a cascading impact on the rest of the economy, so this is the best way out of the mess. Experts agree.


“In this first phase of PPP in the last 15 years, there have been huge learnings for both the government and the private sector. While developers miscalculated projections, there were many things that the government did wrong as well, so I would argue for a one time reset and insist that policy be framed clearly and  transparently” says Vinayak Chatterjee, Chairman of Feedback Infrastructure.


Government sources insist that it is a ‘one-time relief’ proposal indeed, and not a policy. But relief for some means a lost opportunity for others (companies that lost out on the bids because of undue aggression by winners) and an easy way out for the barrage of non-serious players who had entered this business to make a quick buck.


A more rigorous approach to this ‘reset’ could have entailed measuring the depth of stress of each developer minutely and granting only those genuinely unable to cough up the cash, a chance at premium renegotiation. But experts feel that would be impractical and also led to potential litigation for being discriminatory in nature.

Whatever be the satisfactory solution to this quagmire, what’s clear is that across the infrastructure arena, PPP projects have been battling similar issues – be it with the UMPPs (Ultra Mega Power Projects) in the power sector, or the entire gas pricing debate in the petroleum space. In each of the cases, whether it’s Adani and Tata with regards to higher compensatory tariffs for UMPPs, or Reliance Industries which would benefit from the Rangarajan formula – it is the developers who’ve gotten away relatively unscathed, despite a glaring divergence in what they’ve promised, and what they’ve actually been able to deliver. The government meanwhile, has been left with no choice but the renegotiate contract terms and conditions keeping the larger good of the economy in mind.


Having presumably learnt from these failures, the hope now is that phase II of PPP in India will be less thorny.



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