With sources in the Planning Commission and National Highways Authority of India (NHAI) confirming to FE that not a single road project was executed in the last calendar year?the first time since 2001?and with general elections just three months away, the government has decided to bear 50% of the risk capital for commercially unviable road projects.
For the government, the delay is embarrassing, as companies find no reason to raise funds from banks despite the two stimulus packages announced recently, unless contracts are awarded. The hike in viability gap funding will help the government show progress, particularly in difficult rural stretches, as well as in the northeast.
The government developed the viability gap funding model for road projects where traffic is low, and so too are projected returns. It bridges the difference between the interest rates on loans raised by companies from banks and the actual returns from a project. Once viability gap funding is raised, construction companies are expected to bid aggressively for several road projects. A senior official connected with the approval process said single bids would be taken up on a priority basis for 50% viability gap funding.
?Of the 63 projects tendered, bids have come asking for 38-39% viability gap funding for heavy-traffic corridors. But what is worrying is that in several cases, particularly in less profitable stretches and areas with low accessibility, we have received no response. Before there is a demand for a changeover to the annuity model, we may increase viability gap funding up to 50%,? the official said. In the annuity model, the government provides minimum revenue to the contractor every year of the project, irrespective of traffic loads.
However, the official added that it is unlikely that viability gap funding would be increased above 40% as a blanket rule for all cases. For instance, the government is keen on offering viability gap funding of 40% or even up to 50% for Phase-III projects (upgrading and four-laning roads), but for Phase-V projects (widening of existing four-lane highways to six lanes), it has ruled out viability gap funding above 5%. ?In individual cases for Phase-V, it can go up to 10%,? the official said.
A senior official with a construction major said, on condition of anonymity, that while the government has increased the length and size of projects, it had not taken into account the increase in costs. ?We have to look at our returns. If there are several high-traffic corridors (as the Centre claims), then why isn?t the government getting many bids with negative VGF??
The finance ministry, Planning Commission, NHAI and urban development ministry have held several rounds of discussions on viability gap funding in the past two weeks. The issues centred on a revision of guidelines and the riders on higher viability gap funding, including the revised terms for beneficiary companies. Though there have been demands to increase viability gap funding by up to 10% in heavy-traffic corridors as well from the limited number of players in that sector, since the demand ?smells of a cartel formation?, as one government source put it, the Centre is not keen to take those up.