Expedite complete exit to fuel investor interest, says NHAI

Unhappy with the lingering uncertainty over a proposal to allow developers to fully exit completed projects, the National Highways Authority of India (NHAI) has asked that it be implemented in earnest so that a clutch of deals that private equity funds, corporates and foreign pension funds have either already clinched or are negotiating with incumbent developers could materialise soon.

Such equity churning is badly needed in a sector witnessing investor apathy and fading equity support, NHAI chairman RP Singh wrote to Vijay Chhibber, secretary at the ministry of road transport and highways, a week ago. Singh also sought to allay the concern that such change of ownership could put the projects at risk, saying that due diligence would precede such acquisition of projects. Lenders, he noted, would have to satisfy themselves about the new investors’ credentials before allowing change of management and the investors would anyway have to meet all obligations in the concession agreement.

The NHAI chairman, lamenting that if the proposed exit policy is not implemented it would be futile to keep targets for public-private partnership (PPP) projects in the sector during the year, also listed deals (for equity transfer) that have either been clinched or in the pipeline to buttress his argument that PE funds and some leading corporate groups like Reliance and the Tatas and Piramals are interested in taking over completed road projects. PE funds, he said, are averse to assume construction risks of projects. Neither would these funds invest in holding companies of developers due to their leveraged balance sheets, he said, adding that these investors were interested only in completed projects.

Recently the road transport ministry was empowered to change the mode of award of projects after appraising their viability and even make changes in the model concession agreement from time to time with the consent of the Cabinet secretariat.

FE reported earlier that NHAI has decisively shifted to conventional cash contracts (engineering, procurement and construction or EPC) for award of new projects given the lack of investor interest in build, operate and transfer (BOT) projects under the PPP model. NHAI argues that after the premium rescheduling allowed for a number of projects (which have faced costly delays and/or reduced toll revenue), banks are tending to become more comfortable with the road sector.

The finance ministry and Planning Commission have, especially in the UPA regime, raised doubts about the ability of pension funds and PEs to operate and maintain even completed road projects. Addressing the concern, Singh wrote: “There are sufficient provisions in the concession agreement to remove any investor in case he does not perform or maintain the road. Most of the PE funds and the companies who have shown interest in acquiring completed projects are capable of putting in place a credible O&M system... There is, therefore, absolutely no risk involved as far as Government or NHAI is concerned."

On Friday, the National Highway Builders Federation in a representation to Prime Minister Narendra Modi requested the government to “allow existing road developers/promoters to divest their entire stake holding on achieving commercial operations”. The builders along demanded further policy liberalisation to encourage investments in the sector, including by insurance and pension funds to give an impetus to PPP projects.

So far this fiscal, NHAI has awarded seven projects of 798 km, all under EPC contracts. In the last two years, of the 13 projects for 1,115 km for which bids were invited, a larger share of 841 km was awarded under EPC. Additionally, 11 proposals are currently being evaluated by the inter-ministerial PPP-appraisal panel involving construction of 1,098 km of highways, of which 1,010 km will likely be awarded under the EPC mode.