Decision to compensate developers likely to unlock Rs 35,000 crore of investmentshttps://indianexpress.com/article/business/business-others/decision-to-compensate-developers-likely-to-unlock-rs-35000-crore-of-investments/

Decision to compensate developers likely to unlock Rs 35,000 crore of investments

In all, 34 projects stretching across 3,500 km are expected to benefit immediately from the measure, said ministry sources.

The government’s decision to authorise the National Highways Authority of India (NHAI) to compensate road developers for delays not attributable to them could potentially unlock investment of around Rs 35,000 crore in 34 stalled projects. This, along with a decision to empower the roads ministry to clear projects with civil construction cost of up to Rs 1,000 crore (by excluding land acquisition costs from total project cost), will speed up the approval process and hasten development in a sector where the government has lined up new projects valued at an estimated $45 billion for award over the next couple of years.

The Cabinet Committee on Economic Affairs (CCEA) last week accorded approval authorising NHAI to allow extension of concession period for all current projects in BOT (Toll) mode that are languishing during the construction period due to causes not attributable to the concessionaire. The decision regarding eligibility of projects for the extension of concession period, and the extent of time extension required will be taken by NHAI on a case-to-case basis based on the recommendation of the concerned independent engineer.

In all, 34 projects stretching across 3,500 km are expected to benefit immediately from the measure, said ministry sources.

[related-post]

The relief is, however, subject to many conditions including that the project will have to be completed within a period of three years. NHAI will now call the concessionaire and the bankers to sort out the issues, besides helping in releasing of more funds.

Advertising

Industry experts informed that while the said measure will help ease cash flows, it may not significantly help improve the debt servicing ability of the concessionaire. India Ratings and Research in its latest report explained, “The extended concession period, through additional toll collection in the later years, could improve the cash flows and positively impact project life coverage ratio. However, Ind­Ra believes that the impact in terms of improving debt servicing ability of the concessionaires could be limited since the extension of the concession period may not simultaneously result in a change in the repayment schedule.”

The government additionally has allowed NHAI to pay compensatory annuities to the developer for the actual period of delay upon successful completion of the project. “Although there could be some erosion from the original expected net present value of annuity receipts, the timely compensation would ensure adequate liquidity and coverage ratios for the project. Until now, the project cost overruns stemming from non­fulfilment of conditions precedent by NHAI are bridged by a combination of additional equity and debt. Increased equity contributions due to overruns without a commensurate increase in revenue could have lessened an estimated return, which is eliminated through the proposed measures,” the India Ratings report added.

“By adopting the policy, all major stakeholders in the public private partnership (PPP) arrangement — the Authority, lender and the developer, concessionaire would have an increased comfort level resulting in revival of the sector and this will bring relief thereby to citizens /travellers in that area,” the government said in an official statement.

Apart from this, the decision to exclude land cost from total project cost of Rs 1,000 crore (which can be approved at the ministry-level) will entail faster clearances and aid road development. A senior ministry official informed, “Land cost used to be 10 per cent of the total project cost 8-9 years back. In several cases since the implementation of the new compensation norms, land acquisition expenses are more than 100 per cent of civil costs.

There are projects where land cost is Rs 1,300 crore as against civil cost of Rs 600 crore. This is happening especially where projects are close to urban areas.” Though the distortion in land acquisition costs vis-a-vis construction costs is happening across the country, land prices have particularly risen sharply, sources in the NHAI informed, in Maharashtra, Punjab and Haryana.

Previously, all projects costing over Rs 1,000 crore had to be approved by the Cabinet Committee on Economic Affairs (CCEA) and given the high cost of land, many projects will remain below the threshold if this component is not included in the project cost.

A big push in the roads sector is key to the Centre’s infrastructure focus, wherein it has drawn up an ambitious target to award new highway projects worth $45 billion under the National Highways Development Programme (NHDP). The Centre has given its nod to the Bharat Mala project aimed at developing 6,000 km of new roads in border areas at an estimated cost of Rs 76,000 crore. Another 2,500 km of roads to connect religious and tourism centres in mountainous terrain is expected to come up at an estimated cost of Rs 51,000 crore. Also, world-class highways will be developed to connect 123 of the 676 district headquarters at an estimated cost of Rs 96,000 crore.