E-Paper
FinMin mulls compensation for highway developers
In a move that would keep the highway developers going in tough economic scenario and not quit projects mid way, the finance ministry is mulling options to insulate them. Both the North block as well as the highway ministry is considering a new policy measure to “de-risk the highway developers from tough circumstances”.
In a move that would keep the highway developers going in tough economic scenario and not quit projects mid way, the finance ministry is mulling options to insulate them.
Both the North block as well as the highway ministry is considering a new policy measure to “de-risk the highway developers from tough circumstances, such as the economic slowdown, regulatory delays, commercial risks caused by lack of land acquisition, etc” by amending the current Model Concession Agreement, which binds both the government and the developer to build highways, senior finance ministry officials said.
The amendment would mean introducing a special chapter on “re-negotiation of the agreement”, under which the government has provisions to compensate the developer for the losses incurred.
“The compensation can be in the form of extending the period of collecting tolls, or increasing the toll amount, or extending the repayment time of the bank loan, so that the economic viability doesn’t get hampered for the developer,” the official added.
The prime reasons, which will be covered under the special chapter, will be economic slowdown, delays due to land acquisition, utility shifting, environment and forest clearances, etc.
At present, there are no provisions to accommodate such benefits and the current slowdown lead to a lot of projects getting abandoned by the developers. Some of these include 555-km-long Kishangarh-Udaipur highway awarded to GMR, which is stuck in litigation due to the government delays in land acquisition and utility shifting, among other reasons. Due to economic slowdown, the interest of major developers has faded since they do not see healthy returns and are skeptical of project viability.
“The need is to insulate all the stakeholders (developers, banks and the government) and avoid the projects getting stuck for long, which hampers growth, and the loans become non-performing assets (NPAs),” said the official, adding that the move has already got an in-principle approval from the key ministers.
Experts say the move is key to development as a large chunk of stuck infrastructure projects are in the highway sector, and have turned into NPAs. Also, the developers continue to hold these projects without constructing them, again resulting in stressed balance sheets for the private sector.
But, how will the new measure work?
To decide the quantum of compensation, the government at the time of allocation of the project will set in a financial growth and recovery model of the project as per the ideal toll and cost projections. This will be called “base case financial model” and the government will monitor the projects according to this throughout the concession period, or the time decided for the recovery of the project cost.
If the project growth gets disturbed, due to unforeseen circumstances, the quantum of loss will be decided based on this set model.
However, this might also be in favour of the government as in case of robust growth,the Centre can choose to end the contract before the time expires.
“This model will insulate bank loans from becoming NPAs, and projects will also not get stuck either for the government, or on the balance sheets of the developers, which keeps them away from participating in new projects,” the official said.
The base model will be aligned with the project cost approved by the Public-Private-Partnership Appraisal Committee (PPPAC) at the time of approval of the project. Housed in the finance ministry, the PPPAC is headed by the secretary of the department of economic affairs, which approves all PPP projects of the central government.
