Download New concession agreement is a booster shot for highways

September 15, 2015
Mumbai
New concession agreement is a booster shot for highways
MCA amendments offer comfort to both developers and lenders, says CRISIL Research
India’s national highways sector received a big regulatory boost with the ministry of roads and highways
clearing amendments to the model concession agreement (MCA) for awarding projects on a build-operatetransfer, or BOT, basis last week.
CRISIL Research believes two changes – back ending of premium payments and deemed termination of
projects – are particularly significant. Allowing greater equity contribution by the authority is also another
positive step. Further, stringent penalties on non-compliance of maintenance contracts and collection of realtime traffic data would lend clarity and fix responsibility appropriately. These changes will improve the
confidence of both developers and lenders in investing in the sector.
Ajay Srinivasan, Director, CRISIL Research, said, “Lender confidence, which was severely damaged in
the last few years, will revive with the change in the clause related to premium payment, and
introduction of the clause on deemed termination. Further, doubling the cap on equity contribution by
the NHAI will make more projects viable at a time when majority of the BOT projects being awarded are
on a grant basis.”
Under the amended MCA, premium payment starts only from the fourth year after the completion date
compared with the first year previously. That’s a significant relief to both developers and lenders because most
projects end up with debt-service coverage ratio of less than 0.8-1.0 time in the first 3-4 years after completion
date. Additionally, the government has enhanced the scope of revenue-shortfall loans to include projects where
judicial pronouncements impact cash flows.
Deemed termination of projects that do not progress even after a year of award gives greater clarity on the
termination process, but no penalties have been mooted on the awarding authority. Almost half the projects
awarded between 2011 and 2013 had to be terminated because of delays in land acquisition and other
clearances. To boot, the termination process was complex and painful, taking more than two years in half the
instances. And projects that were executed despite delays saw huge cost overruns.
All these things scared off banks, with the result that lending growth to the sector more than halved in the past
two years compared with the five years preceding.
The script is set to change for new projects that will be awarded under the amended MCA.
The inclusion of new clauses on real time data for toll collection and electronic toll collection will also increase
transparency and lender comfort.
“The interest of users has also been protected because developers cannot increase toll rates prior to -or more than – what’s given in the official notification. Flouting will attract a steep penalty of up to 200%
of toll fees. Also, if traffic is more than what the road is designed for, developers will have to spend on
maintenance and augment capacity. It they don’t, another stiff penalty kicks in,” said Srinivasan.
CRISIL Research believes the changes to the MCA, and to some policies earlier, have significantly improved
the outlook on the national highways sector. We expect project awards by the NHAI to increase nearly 50% in
fiscal 2016. The share of BOT projects, on the other hand, could rise from 25% in fiscal 2015 to over 50% by
2017. A significant improvement in overall execution rates will happen gradually, over a couple of years. But
things are definitely – and finally -- looking bright for India’s highways sector.
September 15, 2015
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Annexure
Please find enclosed Annexure 1 detailing the key changes in MCA and Annexure 2 on key changes to various
policies related to the roads sector
Annexure 1
Key changes to the Model Concession Agreement
Amendment
Previous clause
Current clause
Impact
Premium
payments
To begin from Year One of
the completion date (COD)
To begin from Year four of COD
and increase by 3% till the 10th
year, and 8% per year until the
end of the concession period
Will help developers and
lenders reduce cash flow
mismatches
Equity
contribution by
authority
Equity support should not
be more than the equity of
the developer nor can it
exceed 20% of the project
cost
Equity support (including O&M) by
authority shall not be more than
two times the promoter’s equity,
and cannot exceed 40% of the
project cost
Facilitates higher equity
support by authority,
especially since most
BOT projects awarded in
Q1 of current fiscal are on
grant
Revenue
shortfall loan
Revenue shortfall loan
available for political
events, default impacting
cash flows
Revenue shortfall loan available
additionally for judicial
pronouncements impacting cash
flows
Will improve the scope to
avail of revenue shortfall
loan
Termination of
projects
No provision for deemed
termination
There will be deemed termination
if the appointed date is not within
one year of the agreement date
Will reduce the number of
projects stuck due to of
lack of progress in work
Maintenance
obligations
No provision for higher
traffic beyond the capability
designed. If maintenance
obligations are not met, a
penalty of 0.5% of the
average daily toll, and 0.1%
of the cost of repair for the
balance concession period
(whichever is higher), will
be levied.
Added obligations if traffic is
higher than designed capacity. If
the concessionaire fails to repair
or rectify defects then the
authority will levy penalty for each
day of delay at 5% of the average
daily toll and 1% of the cost of
repair, whichever is higher, for the
balance concession period.
Will fix responsibilities for
maintenance on
developer
Toll fee
notifications
If the toll collected or
displayed is in excess of
notified fees, the surplus
needs to be deposited
along with penalty equal to
25% of the excess amount
If the toll collected or displayed is
in excess of notified fees, the
excess amount, along with
penalty equal to 200% of such
excess amount, will have to be
deposited
Will prevent misuse of toll
collection rights
Contd…
September 15, 2015
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Amendment
Previous clause
Current clause
Impact
Will enhance
transparency and lender
comfort because of better
traffic estimation
Will enhance lender
comfort
Data on toll
and traffic
collection
Not present
Install appropriate mechanism to
ensure real -time traffic data count
and corresponding revenue
collection
Refinancing
obligations
Not present
NHAI shall permit and enable
concessionaire to secure
refinancing in whole or in part
Source: MoRTH, CRISIL Research
Annexure 2
Key changes to various policies related to the Roads sector
Date
Policy change/ initiative
Sep 15
Amendments to MCA
Aug 15
Removal of clause related to investment of money earned on exits in other NHAI projects
May 15
NHAI funding for projects that are stuck in advanced stages of completion
May 15
100% exit for developer after two years of project completion both for pre-2009 and post2009 projects
Feb 15
Govt budgetary support to NHs raised by 178% to Rs 856.1 bn in Union Budget 2015-16
Dec 14
5:25 scheme which allowed banks to refinance or sell their long-term project loans every
5 years
Aug 14
Fast track clearances: i)States to clear projects with up to 40 acres of forest land, ii)
Increased limit for sand mining, iii) Online filing and clearing of ROBs and RUBs
Aug 14
Waiver of charges for mutual usage of land between the railways and roads ministries
Jul 14
Bidding of tenders only after 80% land has been acquired
Mar 14
Premium rescheduling for stressed projects
Mar 13
De-linking of forest and environmental clearances
Contd…
September 15, 2015
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Media Contacts
Analytical Contacts
Tanuja Abhinandan
Media Relations
CRISIL Limited
Phone: +91 22 3342 1818
Mobile: +91 98 192 48980
Email: [email protected]
Prasad Koparkar
Senior Director
Industry and Customised Research
CRISIL Research
Phone: +91 22 3342 3137
Email: [email protected]
Jyoti Parmar
Media Relations
CRISIL Limited
Phone: +91 22 3342 1835
Email: [email protected]
Ajay Srinivasan
Director
Industry Research
CRISIL Research
Phone: +91 22 3342 3530
Email: [email protected]
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