NHAI opts for ARC model to revive pending road projects

New Delhi: The board of National Highways Authority of India (NHAI) has approved the formation of an entity similar to an asset reconstruction company (ARC) to take over bank loans extended to road projects that are likely to turn bad.

This decision was taken at a meeting held on Thursday, two government officials said on condition of anonymity. The objective is to keep bank balance sheets healthy and at the same time revive road projects.

“The board has given an in-principle approval to the formation of an ARC-like company. The company will try to turn around these stalled projects after buying loans extended to them if the concessionaire defaults on debt repayments and doesn’t have the equity to invest further in the project,” said one of the officials.

Once the proposed entity takes over a loan, it will underwrite completion of the project.

One of the options being considered is ejecting the defaulting concessionaire from the project.

NHAI, which is responsible for the development, maintenance and management of national highways, will set aside an initial corpus of Rs.1,000 crore for buying such loans.

“We are looking at a structure where NHAI will have a 25% stake in the company and 75% will be owned by banks, financial institutions or any other interested private company,” the official said.

Many infrastructure projects, including roads and highways, have run into trouble because of delays in securing government approvals and completing land acquisition, among other reasons, crimping the cash flows of developers and causing them to default on loan repayments.

“Forming such a company is a good move overall, given that many road projects are in the ICU (intensive care unit),” said Parvesh Minocha, managing director overseeing the transportation practice at infrastructure consultancy Feedback Infrastructure Services Pvt. Ltd.

“The details will have to be worked and watched. At the same time, however, it is important for the government to go back to the reasons for the projects getting stalled and resolve some obvious issues like inappropriate risk allocation, aggressive bidding, aggressive lending, quality of project preparation and continued positive involvement of NHAI post the allocation of work and completion of projects,” he said.

Separately, the NHAI board also approved a payout of Rs.271 crore on Thursday to settle financial disputes worth Rs.2,348 crore. With this, NHAI has, over the last eight months, employed an internal dispute resolution mechanism to settle Rs.12,898 crore in pending financial claims.

These are financial disputes with concessionaires arising from projects previously awarded under the so-called item-rate model wherein the procurement prices of raw materials for construction of roads are fixed.

“So now about Rs.5,000 crore of financial disputes is pending on item-rate projects. However another Rs.12,000 crore of disputed projects awarded on the BOT (build-operate-transfer) model have also come up for consideration,” said the second official.

About Rs.27,210 crore was stuck in disputes involving 189 road projects worth Rs.2.17 trillion, the ministry had said in July.