The National Highway Development Programme (NHDP) was launched in 1998 for the phased development and augmentation of highways in India. The initial phases of NHDP were awarded on an engineering, procurement, construction (EPC) model basis with the government funding these projects. However, the need for greater accountability for operation and maintenance along with financing from private sources resulted in road projects being awarded on a build, operate, transfer (BOT) model under a long-term concession agreement.
Growth and stall
While significant private sector interest was generated in the sector (which resulted in various bids being awarded) we have not seen these bids being translated into on-the-ground infrastructure at the pace expected. To a large extent this is due to delays faced by the projects as a result of land acquisition issues and in some cases due to extremely aggressive bidding on low margins by the participating bidders.
This coupled with the equity lock-in restrictions imposed on the developers by the National Highways Authority of India (NHAI) meant that many project developers were not able to procure the funding for carrying out the projects, thereby stalling the implementation.
Realizing the difficulties facing the developers, the Cabinet Committee on Economic Affairs on 21 June approved a proposal for the harmonious substitution of the concessionaire in a road project. As per the revised norms, subject to the consent of the lenders and the NHAI, a concessionaire can completely exit a road project.
A concessionaire intending to exit a road project is required to make a written representation to the lender’s representative with a copy to the NHAI. The NHAI and the lenders would then review if such representation is in the interest of the project and also review the credentials and creditworthiness of the nominated entity for substitution.
Following approval from the NHAI, the lender’s representative may take the final decision to substitute the concessionaire.
On substitution, the leading substituting entity is required to hold at least 51% in the project special purpose vehicle. The exit norms will come into effect once the NHAI issues a clarificatory policy circular.
Well begun, but half-done?
The intent of the government in permitting the substitution seems to be three-fold: (i) completion of stalled projects by bringing in equity through a substitute; (ii) insulating the NHAI from disputes over stalled projects by concessionaires seeking exits; and (iii) encouraging substituted entities to invest in other projects as their equity gets freed due to the substitution.
On the face of it, the easing of the substitution requirements should have kick-started activity in the sector once again. However, as we have seen over the past few months that has not necessarily been the case.
Quite a few of these projects are suffering from institutional delays and in order to attract new investments the NHAI needs to reset the clock and wipe the slate clean for new investors stepping into the project. Realistic expectations of the new investors need to be set while prescribing strong monitoring measures to ensure that the projects do not once again lag behind schedule.
The NHAI may also reconsider the equity lock-in restrictions for the substituting entity. The substituting entity’s technical criteria must satisfy the NHAI and the financial worthiness must satisfy the lenders. In light of the two-stage validation which ensures that the substituting entity has the requisite technical and financial capabilities, there seems to be no clear rational or benefit to the NHAI in prescribing lock-in restrictions of 51% equity for the substituting entity.
To draw a comparison, the wind power sector where there are no such equity lock-in restrictions (and projects are being implemented on a regular basis as a result) has seen some of the most prolific private investments. By keeping the lock-in restrictions, the NHAI is potentially only delaying the problems currently faced by the developers to a later stage.
While the revised norms are a step in the right direction to ease the financial crunch faced by private participants, this cannot be a long-term measure for encouraging or sustaining private investments in the roads sector. If the sector is to be truly revived, the NHAI must adopt a more holistic approach in addressing issues arising from land acquisition and clearances. Otherwise the sector is likely to witness phases of investment (due to short-term measures such as this substitution) and stagnation.
Saurabh Bhasin is a partner at Trilegal and Lzafeer Ahmad is an associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.
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