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In a first, highway projects nixed as they falter on financial closure

Last updated on: June 4, 2012 12:19 IST

Highway projects nixed as they falter on finances

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Mihir Mishra in New Delhi

Two projects awarded by the National Highways Authority of India in May and July last year have been terminated after failure to achieve financial closure.

This is the first time that highway projects awarded by the NHAI have failed to achieve financial closure.

It would impact the government's target to build roads at 20 km a day from the next financial year.

A senior NHAI official told Business Standard the authority had awarded two projects worth about Rs 2,450 crore (Rs 24.5 billion) to DSC Ltd and Gannon-Dunkerley Co Ltd last year.

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"This is for the first time that our projects have not been able to achieve financial closure even after an extension of 120 days, after the 180-day period elapsed.

"This failure raises the concern whether banks are finding our projects, a lot of them awarded at a premium, as unviable," he said.

A company gets 180 days to financially close a project.

If it is unable to do so, it gets a grace period of 120 days, with a penalty.

If the company is still unable to complete it, the project award is cancelled. It is either rebid or awarded to the second lowest bidder.

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Photographs: Courtesy, AP tourism
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DSC Ltd, in its reply, said the delay was because of certain points of disagreement between the NHAI and the West Bengal government.

"It appears there are some points of disagreement between the West Bengal government and the NHAI regarding the location of the toll plazas and date of commencement of collecting toll," it said in an email response.

Calls to Gannon-Dunkerley's managing director's office in New Delhi did not elicit a response.

A number of projects awarded last year had seen aggressive bidding.

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Image: Rain clouds gather over western express highway in Mumbai.
Photographs: Punit Paranjpe/Reuters

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Of the 51 projects, covering 6,700 km, awarded by the NHAI last fiscal, 31 projects were at a premium.

Quoting at a premium amounts to committing an annual payment to the government over a period of time.

Companies bid a premium if they are confident the toll revenue accruing to them would more than offset their costs.

"Failure by the two concessionaires in achieving financial closure has raised a question mark over the implementation of projects in the days ahead.

"We do not know how many more may falter because we saw a lot of aggressive bidding last year," the official said.

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Image: Indian truck drivers cook a meal along a highway near Boksher village.
Photographs: Rupak De Chowdhuri/Reuters
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He explained the traffic projections done by the NHAI were based on five per cent annual growth in traffic but companies must have assumed much more.

"Even if the economy grows by more than five per cent, traffic growth would be in the range of 6.5-7 per cent -- much above our projections.

"But, the companies must have taken into account higher traffic growth projections of 7.5-9 per cent, which seem unachievable due to slower growth in the economy," the official said.

Bankers have always raised concern over aggressive bids received by the NHAI.

"Banks will not have problems in financing one or two projects fetched at a premium but too many projects ring alarm bells.

"These failures in financial closure are just the tip of the iceberg," said a Mumbai-based analyst, who did not wish to be named.


Image: Surat.
Photographs: Courtesy, Wikimedia Commons
Tags: NHAI

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