India - Covid-19: Bumpy Roads Ahead For Highway Sector.
Legal News & Analysis - Asia Pacific - India - Energy & Project Finance - Regulatory & Compliance
2 July 2020
The Covid-19 pandemic has affected the society in an unanticipated and unprecedented way. To contain its spread, the Ministry of Home Affairs (MHA), Government of India vide its order dated March 24, 2020 directed closure of commercial and private establishments for a period of twenty one days. Immediately thereafter, the Ministry of Road Transport & Highways (MoRTH) issued an order dated March 25, 2020 directing the National Highways Authority of India (NHAI) to take action as per the said MHA order (including suspension of tolling operations on the toll plazas) and added that prevailing condition may be treated as ‘force majeure’ under the concession agreements executed by NHAI with the developers.
MoRTH thereafter directed NHAI to resume toll collections from April 20, 2020. However, the suspension of toll operations until April 20, 2020, the lockdown period thereafter and the steep fall of the traffic plying on the national highways, has significantly impacted the entire transportation industry, exposing developers to high risk and financial distress with no visibility of normalcy in the near future.
Relief measure announced by the Government of India under the ‘Atmanirbhar Bharat Abhiyaan’
Taking note of the difficulties faced by sector, on May 13, 2020, the Government of India as part of the ‘Atmanirbhar Bharat Abhiyaan’ announced granting of relief to the developers in the highway sector by extending construction milestones and the concession period (under the concession agreement with the NHAI) by upto six months. Government of India has also announced that to ease the cash flows of the developers, the bank guarantee furnished by the developers to NHAI may be released to the extent of the works already performed by them with respect to the project highway.
Since the above reliefs will be granted on the basis of the contractually agreed rights and obligations of the parties, we have analysed in this blog the relevant provisions of the model concession agreement of NHAI (MCA) in this regard.
Model concession agreement
Under the MCA, force majeure events have been bifurcated into (i) non-political event; (ii) indirect political event; and (iii) political event. If any of such event has occurred which (a) is beyond the reasonable control of a party, (b) could not have been prevented or overcome by exercise of due diligence and following good industry practice, and (c) has a material adverse effect on the party, the affected party is entitled to make a force majeure claim under the MCA.
Considering the present unprecedented situation, developers are typically making a force majeure claim under the MCA. Any such claim in this regard was required to be made as per the provisions of the MCA within a period of seven days of the affected party being aware (or ought to be aware) of the occurrence of the relevant event. The affected party is also required to provide regular (at least on a weekly basis) reports in relation to the force majeure claim.
Briefly, as per the MCA, upon the occurrence of a force majeure event:
the affected party is excused from performance of its obligations under the MCA to the extent it is unable to perform on account of such force majeure event;
various timelines as provided under the MCA for achievement of the appointed date, construction milestones and concession period, typically gets extended by a period equal in length to the duration of the force majeure event. In case of partial collection of toll during the days falling within the force majeure period where the daily collection is less than 90% of the average daily toll collection calculated as per the MCA, the concession period is extended in proportion to the loss on a daily basis. For example, loss of 25% in toll collection as compared to the average daily toll collection for four days entitles the developer for an extension of one day in the concession period;
which continues for a prolonged period of 180 days (and in case of concessions awarded on toll-operate-transfer basis, 120 days) or more within a continuous period of 365 days, either party is entitled to terminate the concession agreement. In case of any such termination, NHAI is required to pay termination payments to the developer as per the provisions of the MCA.
There appears to be certain benefits of making a force majeure claim on account of occurrence of a political event (as opposed to making a claim for occurrence of a non-political event). These are largely: first, under a political event, the developer is entitled for a reimbursement from NHAI of the force majeure costs attributable to such political event. Force majeure cost as mentioned above typically covers interest payments on debt availed by the developer, expenses incurred towards operation and maintenance of the project highway, any increase in the cost of construction works on account of inflation and all other costs directly attributable to the force majeure event, but does not include any loss of toll revenue or obligations towards repayment of debt. Second, in case of either party requiring to terminate the concession agreement on account of a prolonged political event, the value to termination cost, payable by NHAI, would be higher than the termination payments payable in case of termination of the concession agreement upon occurrence of a non-political event. However, while Covid-19 should typically fall in the category of a non-political event for being an ‘act of god’ or an ‘epidemic’, it will be interesting to consider if the aforementioned governmental orders of lock-down and suspension of toll collections can be treated as a ‘political event’ under the MCA for making a force majeure claim.
Developers would also need to be mindful of the provisions of the MCA which provide that if the developer fails to complete any construction works on account of force majeure, NHAI may at its discretion require the developer to pay 80% of the sum so saved unless the parties mutually agree to full or partial waiver of such sum to ensure that there is no reduction in net after-tax return of the developer and the developer is placed in the same financial position as it would have enjoyed had there been no reduction in scope of the project.
Sometimes, concessions are awarded by NHAI on an annuity-based model or a hybrid annuity-based model. In such case, the toll collection right on the project highway is retained by NHAI and the developer is entitled to a semi-annual fixed amount (annuity) paid by NHAI.
If the force majeure event occurs prior to the commencement of the commercial operations of the project highways, the recourse available to the developers under the MCA in case of annuity-based model concessions is similar to any other concession awarded by NHAI.
If the project highway is already operational, the developer may be excused from its obligations to operate and maintain the project highway due to the occurrence of a force majeure event. Further, it may be noted that the MCA in relation to a hybrid annuity model concession provides that upon the occurrence of a force majeure event during the operational phase of the highway project, the concessionaire shall continue to be entitled to receive annuity payments from NHAI, but will not be entitled to any extension of the concession period. However, such a stipulation does not appear under the MCA with respect to a concession awarded on a build-operate-transfer (annuity) model (BOT-Annuity model). Further, the MCA in case of a BOT Annuity model does not clarify whether the concession period will get extended by a period equal to the duration of the force majeure event and rather clarifies that the force majeure costs shall not include loss of annuity payments.
In the world full of uncertainty, it will be interesting to see the consequence of the occurrence of a force majeure event in case of an operational annuity-based concession, especially from the perspective of the developer.
How will the future look for the transport industry?
Recently, NHAI has on May 26, 2020 laid down the principle of granting force majeure reliefs to the developers. NHAI has provided that Force Majeure clauses can be invoked only in a situation where the parties to the concession agreement were not in default of their contractual obligations as on February 19, 2020. The letter issued by NHAI in this regard provides that if the concession agreement executed by the developers with NHAI does not permit the force majeure principles laid down by NHAI on May 26, 2020, the provisions of the concession agreement shall prevail. NHAI has in this regard said that extension of three to six months shall be granted to all the developers whose contracts had ended on or after February 20, 2020. Concession Fee or any other premium payable by the developers under the concession agreement have also been deferred for the same period. Above measures are in line with the announcements made under the ‘Atmanirbhar Bharat Abhiyaan’ and the aforesaid provisions of the MCA.
However, extension of concession period may not be an adequate relief for the developers on account of the loss of toll revenue on a net-present-value basis. Further, these measures does not address the concern of the lenders. NHAI does not recognise the moratorium granted to the developer (pursuant to the Reserve Bank of India’s announcements) in relation to meeting debt service obligations. Therefore, such moratorium will not be included with respect to the calculation of the termination payments that may become payable by NHAI upon termination of the concession agreement.
To address the cash flow crunch faced by the developers, NHAI has also agreed to provide ‘Covid-19’ loan to the developers executing a concession awarded to them on build operate transfer (toll) basis, who are not in default of its contractual obligations as on February 19, 2020, within sixty days of receiving a request from the developers. These announcements are in line with the obligations of NHAI to provide ‘revenue shortfall loan’ to the developers as set out in the MCA. However, considering the immediate need to address the cash flow situation of the developers , NHAI should envisage a shorter time frame of thirty days to provide such loans to the developers , which will also be consistent with the provisions of the MCA.
In order to sail in the times of uncertainty, one must be well equipped with smart plan which will blend with this unprecedented market. Transport industry is facing a tremendous hardship like steep fall in traffic, negligible toll collection etc. due to the lockdown. Even post lockdown, fear of this pandemic will affect the normal commencement of transport activities, resulting in disappointing revenues and financial crisis. While NHAI has already introduced the ‘FASTag’ mechanism to collect toll electronically, the effective implementation of the same is imperative for enabling contact-less toll collection, which might serve the purpose of toll collection while adhering to the social distancing norm.
For further information, please contact:
Yash Jain, Partner, Cyril Amarchand Mangaldas