Ensuring skin in the game critical for road rejig
Ever since the GMR and GVK groups walked out of their respective road projects, in January this year, the government and NHAI have been trying to resurrect these and other projects. With several projects delayed due to clearances not coming through in time, developers are looking for easier terms to pay their premiums, given the economics of the business has changed. The plan is to backload the payments while ensuring the net present value (NPV) remains the same. A committee, headed by Dr C Rangarajan, will soon come up with the details suggesting how some R1 lakh crore worth of premiums across 23 projects can be reworked.
On the face of it, rescheduling is a good idea. To the extent some promoters will contest their projects being taken away since the delay was on the part of the government, rescheduling will ensure there is no litigation. And in case the projects are rebid, given the changed economics, it is possible firms may even be asking for viability gap funding, while the NPV remains unchanged in the case of rescheduling. But even this, were the Rangarajan panel to recommend it, is not going to be a simple task. For one, in an economy that’s growing at sub-5% and not 8-9% as expected when the projects were conceived, traffic estimates and the toll projections will change significantly. Apart from a few trunk routes, traffic elsewhere in the country is now estimated to be lower by 8-10% and tipped to grow at a much slower pace than forecast earlier. Moreover, developers will incur larger amounts building the roads since input costs have risen sharply; given how most developers are highly leveraged, their balance sheets can’t take more leverage either. Even at a discount rate of 10%, which is what developers are asking for compared with the finance ministry’s suggestion of 12%, it might not be a viable proposition because while they will be paying smaller premiums in the initial years of the concession, they will also be making smaller profits. Indeed, the banks giving loans will probably need to call for a fresh set of projections before committing any funds.
The other imponderable that the Rangarajan panel will have to deal with is to ensure promoters have some skin in the game. If promoters are going to pay much lower annual premium but keep the NPV unchanged by promising high payments in the future, what is to guarantee these will be paid? This is the point the finance ministry made initially when it said annual premiums had to be at least equal to annual toll collections in the event of a payment rejig. In cases where no loans have been disbursed and no work done, rebidding with a right of first refusal to the current concessionaire may be a better idea.