Alarm bells have started ringing in the government over recent trend of highway builders quoting huge premiums to bag contracts. Road transport and highways minister CP Joshi has directed his officials to do a risk analysis of such bids and devise a mechanism to secure the completion of projects. Essentially, the minister?s fear is that bidders, in their enthusiasm to grab projects, might be over-estimating the lucrativeness of these projects and if their calculations go awry, the projects could get stalled.
Since January 2011, the National Highways Authority of India (NHAI) has awarded at least 16 projects and received close to R16,000 crore as premium from winning bidders. GMR Group alone promised to pay a premium of R636 crore a year for 26 years, with a present value of nearly R9,000 crore, to expand the highway on 555-km Krishangarh-Udaipur-Ahemdabad stretch.
It is interesting to know that NHAI had anticipated payment of negative grant to bidders to make construction of these roads viable. The roads are to be constructed and operated for a number of years by concessionaires with a right to charge toll from day one.
Government sources told FE that Joshi is worried that if traffic projections of bidders are not realised, the projects may be stuck or concessionaires may ignore quality aspect of roads. ?This may create challenges in road construction and maintenance programme of the government,? an official in road ministry said.
One way being considered by government to counter any risk to highway projects in future is to fix responsibility of consultants in cases where their projections vary widely from NHAI?s. NHAI generally makes a conservative traffic growth forecast of 5% while preparing the bid documents. However, in some of the projects awarded till now companies expected 8-10% growth in traffic volumes, thus quoting high premiums. A senior official in NHAI said that consultants should be careful in doing due diligence on a project. ?An ambitious projection may jeopardise the entire project.? he added.
GMR Group refused to comment saying it has just received the letter of award for Krishangarh-Udaipur-Ahemdabad stretch and is in the process of finalising details of the project.
Some developers and financiers are also doubtful of the health of highway projects where high premiums have been offered, but said the bidders themselves have to exercise caution. ?Bidders? desperation to bag highway projects is understandable as no other infrastructure sector is offering these many projects today. But they have to be careful while bidding. Otherwise they may land up in trouble,? Srei Infrastructure Finance chairman and managing director Hemant Kanoria said.
?Bidders are to be blamed for initiating such an unhealthy trend in the industry. There is too much speculation going on in the industry. I can?t think of traffic growth of 8-10%. Even 5% is sometimes overstretched,? Soma Enterprises senior vice president D V Raju said.
Planning Commission member (infrastructure) BK Chaturvedi tried to douse the fire. ?Bidders are free to put in what bid they feel is right. I am sure they would be doing proper due diligence before moving forward,? he said. However, he added that the government could set up a mechanism to prevent forming of a bubble in highway sector. ?I think something can be done in 12th five-year plan (which starts from April 2012),? he said. The plan panel is in the process of finalising the fineprint of 12th five year plan.