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Amendments to model concession agreement a big boost for highways sector: Crisil

Changes will improve the confidence of both developers and lenders in the sector, says a report by the rating agency

Mumbai: India’s national highways sector received a big regulatory boost with the ministry of roads and highways clearing amendments to the model concession agreement (MCA) for awarding projects on a build-operate-transfer (BOT) basis, rating agency Crisil Ltd said in a report on Tuesday.

Under the MCA amendments, which were cleared last week, payment of premium starts only from the fourth year of completion of a project, compared with the first year previously. This is a major relief for both developers and lenders, said Crisil.

The amendment also allows termination of projects that do not progress even after a year of award. Almost half the projects awarded between 2011 and 2013 had to be terminated because of delays in land acquisition and other clearances. The termination process itself was complex and painful, taking more than two years in half the instances, said the report.

In BOT projects, a private developer builds the project with its own funds, operates it for a period and then transfers it to the government.

In August, the government approved a conditional bailout package to help so-called BOT road developers exit highway projects two years after completion of such projects, irrespective of the year when the project was awarded. The proceeds can be used to retire corporate debt or for investment in other road projects, said the Cabinet Committee on Economic Affairs.

Last month, the National Highways Authority of India (NHAI) also removed a clause which required companies to invest the money received from monetization of their operational assets. The body also offered to fund projects that are stuck in advanced stages of completion. The government is also working towards being better prepared with clearances before putting up projects for bidding.

These changes will improve the confidence of both developers and lenders in the sector, said the report.

“Lender confidence, which was severely damaged in the last few years, will revive with the change in the clause related to premium payment, and introduction of the clause on deemed termination. Further, doubling the cap on equity contribution by NHAI will make more projects viable at a time when a majority of BOT projects being awarded are on a grant basis," said Crisil Research director Ajay Srinivasan.

Project awards by NHAI could increase nearly 50% in the current financial year with the share of BOT projects rising to 50% by 2017 from 25% a year earlier, Crisil said.

“But things are definitely—and finally—looking bright for India’s highways sector," added the report.

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