The Model Concession Agreement (MCA) for National Highway development, which attracted aggressive bids soon after it was revised in 2009, was more of a first draft that also led to delays, disputes and project exits. As a cascading effect, this has resulted in fewer takers for new projects. Janaki Krishnamoorthi examines the revisions that are due in the MCA for highways.
As many as 23 highway projects worth around Rs 16,000 crore, for which MCAs were signed between 2009 and 2012, have been delayed. Targets for projects to be bid out in 2012-13 have been scaled down with just 1,322 km awarded as against a target of 9,500 km. Several changes are en route, and the revision of the highways MCA may have the most impact of all. The single document that attracted developers like bees to honey may weave its magic again, especially considering that the industry is pretty much having its way with the redrafted document.
The government has gestured that it would grant considerable leeway in respect of allowances to developers. Oscar Fernandes, Union Minister for Road Transport and Highways, told Infrastructure Today: ´Everything from economic situation to technology keeps changing from time to time and they must be looked into and addressed. The whole system is dynamic and the government has to be responsive to it. In that sense, the MCA also needs to be updated from time to time to meet the changes.´
In January this year, several infrastructure majors like GVK, GMR and Larsen & Toubro (L&T) threatened to walk out of projects as they found it unvia¡ble, ostensibly because of a downturn in the economy they were asking for a staggered start to paying premiums.
M Murali, Director General, National Highways Builders Federation (NHBF), says: ´The concessionaires need to put in huge equities. In this difficult phase, payment of premiums to NHAI turns out to be an additional burden, and this requires to be addressed.´
Rescheduling: To continue operating the projects, the developers are now asking for rescheduling of premium payment. The cabinet recently approved the proposal for deferred premium payments in stalled projects with certain riders as recommended by the C Rangarajan Committee, set up to look into the issue. NHAI will now identify the projects that deserve a leeway in premium payment. The criteria on which the projects should be selected is again another big question.
Deferment discount: Developers and industry bodies suggest that all the premium projects where appointed date has been delayed due to reasons not attributable to the concessionaires and where toll revenues have reduced on account of post bidding government/court decisions should be considered for the scheme irrespective of whether the construction work on the projects have started or not. Some practitioners believe that a discounted rate of 9.75 per cent should be considered for deferment of premium for the road projects
in line with the deferment of the spectrum fee allowed for the telecom operators.
Periodic check: To address other issues, the developers and others have reportedly put forth several suggestions to the government including making lenders a party to the concession agreement that currently is between the concessionaire and NHAI, enabling quicker equity transfer, updating the total project cost at the time of inviting bids and a mechanism to address cost escalation after signing the concession agreement, assigning the official date for the commencement of a project, (appointed date) after environmental clearances are in place, and at least 80 per cent of the required land is acquired and the concessionaire has tied up required funds, etc. Highway builders say bids relating to BOT (Toll/Annuity) projects should be invited only in case where 80 per cent of encumbrances free of Right of Way (ROW) in a contiguous stretch of at least 25-35 km is in possession of the NHAI and the remaining 20 per cent is in its possession before the appointed date is issued to the concessionaire.
Redefining appointed date: Developers also say concession agreements must stipulate that the appointed date is issued on the date of achieving financial closure by the concessionaire which is 180 days from the date of signing of the concession agreement. In case there is a delay in issue of appointed date because of reasons attributed to NHAI escalation should be paid to the concessionaire for the period between the schedule appointed date and the actual appointed date notified to the concessionaire. They say that a compensation of 0.1 per cent of the value of performance security per day is just a token compensation and it does not compensate the concessionaire fully.
Performance guarantee: Permitting the concessionaire to furnish bank guarantee against performance security on the appointed date instead of upon signing of the concession agreement, obtaining of environment and forest clearances, state support agreements by NHAI before the issue of Request for Proposals (RFPs), relaxation of RBI´s cap on invest¡ments by financial institutions, allowing the concessionaire to exit the project once the COD is achieved are other demands. Renegotiation: While renegotiation of contract terms is a global practice, in India, it continues to be a point of debate (see November issue, Cover Story).
Ajay Saxena, PPP Expert Maharashtra, Asian Development Bank, who has drafted templates of PPP contracts, says: ´The main drawback in the present MCA is probably the absence of re-setting clause. In this scenario, either the concessionaire is hurt badly because of steep fall in expected revenue over which the developer has no control or ends up having windfall gains, which is not in the public interest. But with a road regulator in place, this can perhaps be sorted out.´
The Planning Commission has traditionally opposed the contract renegotiation clause as it believes it would be unfair to players who didn´t make the cut at the bid stage, and that it would lead to delays and become a convenient method for project exit. But with repeated appeals by the industry, and after workshops on contract renegotiation commissioned to a World Bank expert, the Commission is more convinced about introducing that clause.
´We are having a re-look at some of the issues raised. Basically, four issues have come up in our meetings with all the stakeholders, ´ says BK Chaturvedi, Member, Planning Commission, who headed the committee that formulated the existing MCA. ´All of them wanted an exit clause that allowed them to exit after they completed their project, option to sell their stake to other players without a time limit, a good dispute resolution mechanism and a policy of renegotiation of contract terms. ´
The government is open to renegotiation, but it has to be introduced with a set of conditions, says Chaturvedi. ´Otherwise, renegotiation may encourage developers to bid aggressively and then go back on contract terms. Globally, around 50 per cent of contracts are being renegotiated but under certain laid-down conditions. ´ For instance, the new MCA could permit renegotiation where conditions have changed mater¡ally such as imposition of a new tax, or some changes in government rules and regulations, etc. The document will spell out the conditions under which renegotiation can take place so that the regulator can assess the situation and take a call.
The current scenario has also set off another question: what is the ideal contract model for PPP projects? ´The DBOT model is ideal for most of the PPP contracts as it enables the developer to bring in design and construction efficiency and thereby optimise the cost, ´ suggests ADB´s Saxena. ´The developer may also decide to build a good asset with slightly higher cost and reduce the heavy maintenance cost in the longer run. He also has the opportunity to improve the financials of the project by reducing the overall cost and by increasing the revenue. Revenue increase is not a certainty and not in the best interest of project as PPP contracts are public projects which are monopolistic in nature and no government can afford to allow the developer to maximise the profit beyond a reasonable limit. So, it is the DBOT that would allow him to improve the financials by bringing technical efficiency which is also the requirement. ´
Krishna Reddy, Managing Director, Karnataka Road Development Corporation (KRDCL), which is currently executing 15 road projects, out of which four are under PPP, says: ´So far all PPP projects in Karnataka for State Highways are based on the Centre´s MCA. ´ Reddy admits that delay in resolving issues like land acquisition and utility shifting will have a signi- ficant impact on the cost and time overruns. ´In some cases where there is significant delay in acquiring the land and other issues, ´ he says, ´the revision of rate is also be looked into as per the conditions of the contract including termination towards fundamental breach of contract. ´
Evidently, any change in MCA is likely to have its own impact on other road contracts being executed by state governments. The new MCA is likely to be in place by mid-2014. The government´s move to set up a regulating authority for highways in India is also timely and may help resolve several of the issues highlighted earlier. These steps will hopefully make the road ahead smoother for highway and other road projects. Disclaimer: Views are personal.