Highways bailout policy: The road ahead

Recently major infrastructure players such as GMR and GVK have pulled out of high-profile road projects, collectively valued at ₹107 billion (US$1.7 billion). While they claimed that the exit was prompted by issues relating to obtaining statutory clearances, the real cause appears to be their inability to raise equity in the present economic climate.

In light of these developments, the Indian government is set to announce a bailout policy for road developers based on recommendations of a committee on premium restructuring headed by C Rangarajan. Premium is the annual upfront amount paid by the developer to the National Highways Authority of India (NHAI) during the bidding of build-operate-transfer projects, which increases annually. Expecting high returns and profitability, developers had quoted extremely aggressive premiums which have now been discovered to be financially unviable.

The Rangarajan model

The model suggested by the C Rangarajan committee allows restructuring of 75% of the developer’s commitment for the first three years during the construction phase for both four-laning and six-laning of highway projects. The entire premium will be recovered within three years of completion of the contract.

Shruti Sahu is a counsel at Trilegal and Megha Kaladharan is an associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.