An empowered group of ministers (EGoM), chaired by finance minister Pranab Mukherjee, has decided that a new mechanism should be evolved to calculate a ?reasonable? return on equity (RoE) a company can seek to develop a highway project on annuity basis. The Planning Commission is in favour of fixing a ceiling of 16% to reduce the cost of highway projects on the government. At present, RoE quoted by private developers stand between 10% and 25%.
The EGoM, which also includes road transport and highways minister Kamal Nath and Planning Commission deputy chairman Montek Singh Ahluwalia, has asked the Public Private Partnership Appraisal Committee (PPPAC), headed by finance secretary Ashok Chawla, to decide on the RoE on a case-to-case basis. ?If there is a disagreement in the PPPAC, the matter could be brought before the EGoM,? a senior official in the ministry of road transport and highways told FE.
The decision was made after Ahluwalia opined that ?high? RoE being demanded by developers is making annuity-based highway projects expensive for the government. Under the annuity system of highway construction, the government pays annuity to private developers as compensation for development and maintenance. The paid sum includes a pre-determined RoE.
Ahluwalia suggested that the project development cost should be delinked from maintenance cost while calculating RoE, against the present practice of deriving the rate on the basis of the total cost. He also recommended capping the profit from such projects at 16%, lower than the rate of 18% suggested by a committee headed by Planning Commission member BK Chaturvedi.
The decision of the EGoM could increase red tape in the bidding process of highway projects and may delay their implementation. ?It looks great in theory, but is highly impractical at the operational stage,? an infrastructure expert said.
The government has set a target of developing 35,000 km of national highways at the rate of 20 km a day during 2009-14. National Highways Authority of India (NHAI), entrusted with the job of awarding the highway development contracts, is in the process of awarding 24,000-km projects by March 31, 2011 and the EGoM decisions could immediately impact these projects. The EGoM has also decided that 25% of the projects would be developed on Build -Operate-Transfer (Annuity) basis, 60% on BOT (Toll) and the balance 15% on engineering, procurement and construction basis.
In another significant decision, the EGoM has limited the government guarantee on loans taken by NHAI. ?The group has asked NHAI to borrow without any government guarantee. In case it could not manage to raise the required funds, the finance ministry may decide to extend guarantee on a case to case basis,? the official said. As per the Chaturvedi committee, NHAI requires to borrow more than Rs 1,90,000 crore by 2024-25 to carry on work under NHDP.