COVID-19 impact | Highway builders in a bind over force majeure notification

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Even though the Ministry of Road Transport and Highways has declared COVID-19 as a force majeure event and informed National Highways Authority of India (NHAI) accordingly on March 25, NHAI has not issued a similar notification, leading to confusion at the ground level.

This has resulted in local field officers and independent engineers acting according to their discretion, to the extent of rejecting COVID-19 as a force majeure event in certain cases, according to the National Highway Builders Federation (NHBF).

The force majeure clause in a contract provides temporary reprieve to a party from performing its obligations upon occurrence of a force majeure event. This typically includes war, terrorism, earthquakes, hurricanes, acts of government, explosions, fire, plagues or epidemics or a list of events as agreed by both parties.

Rejection of COVID-19 as force majeure event has serious implications on the rights available to highway builders under the concession or contract agreement and may further affect the projects.

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There is an increasing concern among highway concessionaires over levy of damages and penalties for not meeting timelines, project deadlines and not carrying out maintainence obligations and reduction in annuity payments.

Highway concessionaires, in a letter to the Ministry of Road Transport and Highways, have sought relief measures. They have sought waiver of damages and penalties for a period of six months beyond current timelines for projects.

According to NHBF, performance on projects will be impacted longer beyond lifting of official lockdown dates.  Lenders and credit rating agencies are reluctant to rely on concessionaire or contractor statements and need direct assurance from the NHAI over force majeure guidelines.

The absence of formal assurance by NHAI is likely to result in ratings downgrade and may increase borrowing costs.

National highway projects worth Rs 5.85 lakh crore were underway under various models such as Build Operate Transfer model (BOT) and Hybrid Annuity Model (HAM) as on December, 2019.

The government had awarded road projects having a length of about 3,434 kms in financial year 2019-20.

For the BOT Toll and TOT projects, under force majeure event, the revenue loss is compensated in the form of extension in concession period.

In addition, 100 per cent of operations and maintenance (O&M) and interest costs are reimbursed for the BOT Toll projects for the affected period. This would amount to 50-55 per cent of loss of revenue incurred by these projects.

For projects that are public-funded (currently being tolled by NHAI through toll contractors), the suspension would result in a direct revenue loss for NHAI.

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