The government is putting in place a stricter, more transparent framework for harmonious substitution of highway concessionaires amid concerns that developers were using proxies to retain control and lenders were exercising excessive discretion, two people aware of the development said.
The revised framework, being incorporated into the new model concession agreement (MCA) for build-operate-transfer (BoT) toll projects, empowers the government to replace developers facing prolonged delays in projects or liquidity stress while laying down clear eligibility criteria for new concessionaires and step-by-step procedures for such substitution, the persons cited earlier said on the condition of anonymity.
Harmonious substitution is a collaborative, pre-emptive mechanism to replace a distressed operator smoothly and avoid disputes. This is triggered when financial stress is detected before an outright breach or default, such as missed project deadlines or substandard construction quality, occurs.
The changes are being proposed in the model concession agreement after it was observed that, in many cases of harmonious substitution, large contractors routed projects to their own subcontractors or affiliates to retain control. “This showed in the [poor] quality of the work,” the first person said, explaining the rationale for tighter norms.
According to the second person, the revised BoT (toll) MCA would be notified soon after finalising provisions related to substitution of concessionaires—an issue that has emerged as a key area of concern in public-private partnership (PPP) highway projects.
Under earlier concession agreements, lenders largely wielded the authority to replace a concessionaire in cases of financial stress or default, with decisions guided mainly by loan recovery considerations rather than project outcomes. Government agencies had limited powers to intervene directly, even when projects faced prolonged delays.
The revised framework now proposes to give the ministry of road transport and highways (MoRTH) and implementing agencies greater oversight over substitution to ensure projects are completed on time and that the process is not manipulated by large contractors or lenders.
“For harmonious substitution, we are outlining the process because the feeling was that such substitution was getting misused,” said V. Umashankar, secretary in the ministry of road transport and highways, when contacted over the issue.
“We are laying down the process. It cannot be pick-and-choose, objective methods have to be there. We need control over the way harmonious substitution is done,” Umashankar said, adding that the MCA for BoT (toll) projects was almost final and would be notified soon.
Under the build–operate–transfer (toll) model, the developer finances and builds the project, operates it, recovers its investment through tolls collected from road users, and transfers the asset to the government at the end of the concession period.
The proposed MCA has also attempted to rebalance risks between concessionaires and the government while protecting the interests of lenders. The persons added that the lenders’ interests have been fully safeguarded under the revised framework.
Analysts said the clearer substitution norms could help improve lender confidence and reduce uncertainty around stressed road projects.
“The proposed changes to the MCA for BoT (Toll) projects are a structurally positive step for the highways sector, particularly at a time when the government is looking to revive private participation in road infrastructure," said Bhavik Vora, partner and transportation & logistics industry leader, Grant Thornton Bharat. "Giving the Centre substitution rights in cases of prolonged delays or financial distress can help reduce project uncertainty, expedite stalled execution and improve overall asset continuity, while lender protection should provide greater comfort to financiers and support future capital flow into the sector.”
Other experts feel that changes would do no better given that both the government and public sector banks follow the same regulatory processes.
“This step may not lead to very different results, as government and banks (mostly PSU banks) are likely to follow a similar detailed and transparent process to undertake substitution—as both are exposed to the same regulatory review environment. It would not be possible for government to simply nominate substitute agencies. In fact, due to the presence of private banks in the lending consortium, bank-led substitutions may actually be faster in certain cases,” said Kuljit Singh, partner and national infrastructure leader, EY India.
“In the case of stressed projects, finding a substitute becomes particularly challenging as the underlying project economics remain largely unchanged. Further, where the project is undergoing bankruptcy proceedings or is admitted under the NCLT (National Company Law Tribunal), the process is typically fraught with additional complications. Against this backdrop, the proposed change is a welcome development from a lender's perspective,” said Devayan Dey, partner -transport, logistics and infrastructure sector, PwC India.
“The intent here may not necessarily be to prevent proxies from taking over projects. The real challenge arises when the project economics themselves are unviable, and no credible substitute is forthcoming. In such situations, the government stepping in to assume the role to substitute is undoubtedly a more pragmatic and sensible approach,” he added.