Amendments to MCA to boost highways sector: Crisil

Mumbai :The recent amendments to the model concession agreement (MCA) for awarding projects on BOT basis is likely to improve the confidence of both developers and lenders giving the much needed boost to the sector, ratings agency Crisil said.

According to Crisil Research, amendments including— back ending of premium payments, deemed termination of projects, allowing greater equity contribution by the NHAI, stringent penalties on non-compliance of maintenance contracts and collection of real-time traffic data—will improve the confidence of developers and lenders in the sector.

“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,” the agency’s Director Ajay Srinivasan said in a statement.

Further, doubling the cap on equity contribution by the National Highways Authority of India will make more projects viable at a time when majority of the BOT (build, operate and transfer) projects being awarded are on a grant basis, he said.

“We expect project awards by the NHAI to increase nearly 50 per cent in FY16. The share of BOT projects, on the other hand, could rise from 25 per cent in FY15 to over 50 per cent by FY17,” Srinivasan said.

Though a significant improvement in overall execution rates will happen gradually, over a couple of years, things are definitely looking bright for the country’s highways sector, he said.

Under the amended MCA, premium payment starts only from the fourth year after the completion date compared with the first year previously.

“This is a significant relief to both developers and lenders because most projects end up with debt-service coverage ratio of less than 0.8-1.0 time in the first 3-4 years after completion date,” he said.

09152107 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 was complex and painful, taking more than two years in half the instances. And projects that were executed despite delays saw huge cost overruns.”

“All these things scared off banks, with the result that lending growth to the sector more than halved in the past two years compared with the five years preceding. However, the script is set to change for new projects that will be awarded under the amended MCA,” he said.

Srinivasan further noted the inclusion of new clauses on real time data for toll collection and electronic toll collection will also increase transparency and lender comfort.