India Ratings and Research (Ind-Ra) on Monday said that proposed changes in the concession agreement of build-operate-transfer projects are positive moves, but are inadequate to revive the participation of private sector in toll road projects.
"Proposed changes in the concession agreement of build-operate-transfer (BOT) projects such as non-issuances of work orders until 90 per cent land acquisition, de-scoping provisions akin to hybrid annuity model (HAM) projects, and transfer of projects after lenders' approval are positive moves," Ind-Ra said in a statement.
However, they are unlikely to garner increased private attention, given traffic risks and termination payment issues remain unaddressed, it said.
Delays in land acquisition and approvals have led to significant delays in project completion and have been the prime reason for significant cost overruns.
Addressing these issues by adopting the practices implemented in HAM projects could reduce some of the key risks faced by the developers, it said, adding that the revised concession agreement could delink operations and construction period, as implemented in HAM projects, which would provide certainty of the toll collection period.
Arbitration processes for the settlement of developer claims in case of foreclosure have been dragged for years, leading to significant lock-up of developers' funds.
The inclusion of a dispute resolution board and timely redressal within 90 days are welcome steps, it stated.
Also, the provision to substitute the concessionaire in case of a likely financial default would help reduce the stuck projects.
However, the fast-track resolution of arbitration awards remains a challenge, as the decision of dispute resolution board remains recommendatory in nature and courts remain the arbitration authority for dispute resolution for claims above Rs 25 crore in case the parties do not agree on dispute resolution board for arbitration, it said.
Ind-Ra believes that the tweaking of concession periods would expose projects to either refinancing risks in case of extension of the concession period or tail risks in case of curtailment of concession period, as the financial closure is accompanied with a defined repayment schedule in line with the original concession period.
However, the same could be again mitigated by using innovative debt structures such as flexi-repayment structures with long tenor debts, deferrable principal repayments and prepayment options linked to traffic performance.
Ind-Ra said that revisiting provisions of termination payment in accordance with the provisions associated with HAM and toll-operate-transfer model would better protect lenders in case of eventualities and is likely to garner increased private attention.
"HAM would remain the preferred mode of private investments for the sector, with the investor sentiment remaining muted for the pre-qualification bids invited by NHAI in September 2019 for BOT projects and the subsequent extensions of bid submission deadline," it added.
However, the pace of project awards in the mode depends on NHAI's ability to mitigate its cash flow mismatches, it said.
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