Privately-funded highway projects, the awards of which have become few and far between over the years, got a shot in the arm with a bolstered revenue protection clause brought into the revised concession pact.
Under the revised model concession agreement (MCA) for build-operate-transfer (BOT-toll) projects, revenue potential of a project would be reassessed in every five years during the concession period as against every 10 years now. Therefore, the concession period will be extended early in the tenure of the contract, adding to certainty of cash flows.
“Currently, the target traffic testing happens at ninth, tenth and eleventh year from the date of concession agreement to capture variation in traffic growth in the concession period. The revision in testing date to five years is a definite positive because projects which are fundamentally weak due to lower than envisaged base traffic would get an opportunity to increase the concession period at an early stage; based on which lenders may consider elongation in debt tenure to align the obligations with the toll collections thereby reducing the burden on cash flows,” said Icra’s Rajeshwar Burla.
However, in a negative for the concessionaire, the revision in the concession period has been capped at 20%, like earlier. The degrowth in traffic due to diversion on account of a competing corridor (upgradation of existing road network) and competing modes (dedicate freight corridor or inland waterways) could be far higher and cannot be entirely taken care of within the 20% cap, a concessionaire said. The concession period has been kept at 20 years.
Other key changes that have been brought in the revised MCA include flexibility to foreclose the contract with mutual consent.
To protect investor interest in BOT-toll projects, the growth of which will help curtail NHAI’s rising debt and find non-government, non-debt resources for highway development, the government will also guarantee to the developers that a BOT-toll project will be awarded only after NHAI taking possession of 90% of the requisite land, similar to HAM projects. In the case of fully government-funded EPC projects, the award is executed, only after 90% of the land is acquired.
Focus on limiting liability to 100% of total project cost for both NHAI and developers is largely beneficial for NHAI given the huge claims raised by developers in the past, many of which were at a multiple to the total project cost.
From a high of 96% of its all project awards in 2011-12, NHAI’s project awards through the BOT (toll) route came to a naught in the last two fiscals. However, it attempted two projects in West Bengal recently and received bidders’ response. Under HAM, the NHAI bears 40% of the project cost upfront and the remaining 60% is paid to the developer over a period of 15 years. In EPC projects, the government bears the entire financial burden.
There are only 5-7 sturdier players who have the wherewithal to play on their balance sheet strength and understand traffic risk can take up projects on BOT (Toll) in the country at the moment. The EPC and HAM spaces are more crowded with 15-20 active bidders.
