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Monday, 30 Dec 2013
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Roadways developers to get a breather soon

 

The Roadways sector is set to see a major breakthrough as the Union Government is likely to finalise a policy on rescheduling of premium obligations of private developers soon. The policy will give some relief to financially stressed highway projects that are stuck at various stages of execution or are abandoned by the developers.

 

Highway_ProjectsToday

 

NHAI is due to receive about Rs 1.5 lakh crore over the next 20-25 years from private developers of highway projects awarded on BOT basis since FY10. However, following the failure of the estimated project revenues to match the initial estimations has made the developers to default on the payment of premiums.

 

In October 2013, the Central cabinet approved a proposal for the postponement of premium payments by highway developers. Premium here is the money road developers agree to pay NHAI for building highways and collecting toll from users. The premium, which can range from Rs three crore to Rs 680 crore a year, is to be paid out over 20 to 25 years.

 

Quoting a premium for a project amounts to committing an annual payment to the government over a period of the concession years. Companies quote a premium if they are confident that toll revenues from the project will be able to offset their project cost. However, slowdown in traffic amid a weak economy has made it difficult for companies to adhere to the premium payment schedules.

 

In October 2013, a panel headed by C Rangarajan was appointed to fine tune and decide terms and conditions of the bailout policy for the road developers who were pulling out of road projects due to the premium burdens.

 

As per the Rangarajan panel, in highway projects involving expansion from four lanes to six lanes, developers would have to pay only 25 per cent of the annual premium payable up-front in the first three years, which is the construction period, while the rest can be rescheduled.

 

In the case of four-laning of projects, the developers won’t have to pay a premium during the construction period. They have to pay minimum 50 per cent of the committed annual premium during operation and maintenance period.

 

The developers will be required to provide a bank guarantee in lieu of the relaxation. The proposed discount rate is likely to be 10.75 per cent.

 

At present, highway developers pay some amount of premium to the government in the first year of the project which keeps increasing by five per cent every year. The committee felt that a reduction and deferment of premium payment in the initial period and increasing the amount later, when both traffic growth and collection of toll are expected to go up, would help the developers.

 

The highways ministry expects that projects worth over Rs one lakh crore, which have been stuck for long, will start moving as soon as a concrete decision on the rescheduling of premium to be paid by developers is taken.

 

Private bidders shunned away from roadway projects since 2012 due to delays in environment clearance and land acquisition. The premium repayment problems added to the existing issues and bidders started to abandon the on-going projects also.

 

Private participation is vital for the roadways sector and therefore it is important to make the bidding system more transparent and financially viable. Rescheduling premium payments may give financial relief to developers of on-going projects. However, it may not be very much helpful in kick-starting stalled projects. In such cases, the government has to intervene and see to it that the initial hurdles are cleared.

 

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Infrastructure Sector Developments

 

 

 

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Quote of the week:

 

M Murali_National Highway Builders Federation_ProjectsToday

"The decision will help build sentiment among investors and in the market. However, specific parameters need to be ascertained, based on which the appropriate projects can be determined... It is possible that not all developers will opt for it. It all depends on how the policy shapes up."


M Murali, Director General,
The National Highway Builders' Federation
 
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