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Why are contractors exiting highway projects?

Why are contractors exiting highway projects?

16 Mar 2020 Long Read
Photo: For representational purpose

With the National Highways Authority of India (NHAI) failing to give official approval for the execution of projects, five contractors or construction companies have exited eight highway projects (see box).

The firms and projects are:
Sadbhav Infrastructure Project
(1) The Visakhapatnam Port Road
(2) Bhimaser Junction to Anjar-Bhuj
(3) Banavara to Bettadahalli

JV of IRB infrastructure Developers and Modern Road Makers
(1) Puducherry to Poondiyankuppam
(2) Poondiyankuppam to Sattanathapuram

KNR Constructions
Meensurutti to Chidambaram

Chetak Enterprises
Shimla Bypass

Oriental Structural Engineers
Viluppuram to Puducherry

Analysts’ take
These companies have exited projects owing to the undue delay in land acquisition. “Developers exhibit confidence on the model during the bidding stage; at the same time, they are cautious when the risks weigh on the return prospects,” says Siva Subramanian, Director, Infrastructure & Project Finance, India Ratings & Research (Fitch Group). “Especially when the set timelines are difficult to be met in providing land, developers express the willingness to exit projects. This approach is safe not only from the developers’ perspective but also for the entire lending ecosystem.” According to India Ratings, land acquisition and right of way (RoW) are the principal reasons for project delays and cost overruns.

“After the award of a project, typically, the requisite RoW has to be provided within one year. If the land is not available even after this time, termination may be the best option for both the parties,” says Shubham Jain, Group Head & Senior Vice-President, Corporate Ratings, ICRA.

“The companies estimated abnormal cost increase because of delay and disruption of works. Hence, they decided to exit the projects,” adds Vijay Agrawal, Executive Director, Equirus Capital.

The contractors’perspective
KNR Constructions (KNRCL)
Project exited: Meensurutti to Chidambaram
According to 10.3.4 of the Concession Agreement, within 90 days of the financial closure, the authorities have to make efforts to declare the appointed date. As per Clause 4.5 of the Concession Agreement, if the appointed date does not occur for want of 80 per cent of RoW before the first anniversary date of the Concession Agreement or extended period available to the authorities, the concessionaire has the right to apply for ‘deemed termination’. “As the land was available in bits and pieces and access was not available in several locations, pursuant to the Clause 4.5 of the Concession Agreement, the concessionaire KNR Chidambaram Infra requested NHAI to take cognizance of the deemed termination of the project,” shares K Jalandhar Reddy, Executive Director, KNRCL.

When asked if seeking an appointed or official date for the execution of projects is a challenge faced by construction companies, Reddy shares that many hybrid annuity model (HAM) projects are still awaiting appointed dates or the starting date of a project. Delays in land acquisition or regulatory clearances are major hindrances for the developer or concessionaire to commence a project even months after the project has been awarded. He adds, “Second, 46 per cent of HAM projects have gone past the five-month window available for financial closure. The cautious approach and reluctance to lending by banks appears to be the main reason for these delays. Interest of a number of banks (including SBI) in lending to highway projects (HAM and BOT) has come down drastically. Further, some projects in advanced stages of execution are yet to receive the balance RoW, potentially affecting execution and COD.”

IRB infrastructure Developers
Projects exited: Puducherry to Poondiyankuppam; and Poondiyankuppam to Sattanathapuram
“For both projects, IRB could get the financial closure on time but as NHAI could not get the required land on time, the projects reached termination time as per the Concession Agreement guidelines,” shares Sudhir Hoshing, Joint Managing Director, IRB infrastructure Developers.

He adds, “Even to date, land acquisition haunts road builders. Although to start the project and get the appointed date, 80 per cent of land is to be made available by the authority, in some cases disputes on actual ownership and payments delays the process of handing over land.” According to him, the best method to avoid delays is to start the process of land acquisition well before time; by the time, financial closure happens, 80 per cent of clear land should be made available.

Chetak Enterprises
Project exited: Shimla Bypass
The project work was bid out in 2016 and the appointed date was notified in April 2018 but to date, the Government has failed to hand over land for the project, shares Neeraj Vijay, Director, Chetak Enterprises. “Further, there was a massive change of scope of work as all the bridges on the highway were initially proposed for twolanes but we were later asked by NHAI to design for fourlanes. With this change in the scope of work and design, the estimated cost of the project increased from Rs 14.80 billion to Rs 22 billion. For one-and-a-half years thereafter, land was not available for the project. We were answerable to lenders as the appointed date was notified but the project construction had not commenced. The land had about 28,000 trees, of which the forest department could cut only 22,000 trees until December last year. Even a year and a half after the declaration of the appointed date and almost four years of the bid, land was not available and the scope of work was not final. So we were forced to terminate the project on account of authority default.” He adds that when the appointed date for the Shimla Bypass project was declared, 80 per cent land was not available; even today, it is not available. The firm had already deployed 300+ manpower for a year and a half and Rs 800 million worth of machines. It had also brought international designers from California to design the hi-tech project; signed an agreement with Galadari Engineering, pioneers in the Middle East as far as steel work is concerned; signed an agreement with Tensa from Italy who are leaders in cable-stayed bridges; signed AECOM India and Hong Kong as consultants for the project; and appointed Fugro International for geotech engineering and investigation and IIT-Roorkee for seismic studies. “All this investment has gone waste because the authority was not well prepared and declared the project without proper scope of work,” says Vijay. “Hence, we could not go ahead with the agreement and had to terminate the project.”

- SERAPHINA D’SOUZA

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