Road viability gap funding may be halved

Written by Praveen Kumar Singh | Praveen Kumar Singh | Subhash Narayan | New Delhi | Updated: Jun 29 2011, 06:55am hrs
Highway developers may soon face a serious financial constraint as the government is working on a reduction in the upfront payment of its share in road projects.

The change would mean that the developer will not only have to put in more money to complete projects but also work out judicious financing plans to muster funds at competitive rates.

If implemented, the proposal could also dampen the enthusiasm of private companies investing in road construction projects.

The last couple of years have seen active participation of private firms in road projects through competitive bidding.

The government, at present, pays a maximum of 40% of total project cost, called viability gap funding (VGF), to private firms during construction of national highways on build, operate and transfer (BOT) mode. The balance cost is recovered by the developer by levying a charge, or toll, on road users.

In the proposal being considered by road transport and highways ministry, the VGF component at the construction stage would be reduced to half at 20%. Developers may, however, get an additional 20% support at the time of operation and maintenance of highways. The recommendation has come from the Planning Commission, which plays an important role in finalising policy guidelines for the infrastructure sector. The Commission has been a proponent of lesser government support to such projects to manage fiscal deficit.

Road transport and highways minister C P Joshi and Planning Commission member B K Chaturvedi confirmed the development to FE. The proposal had come before I joined in January. It is under consideration, Joshi said. We prepare an appraisal note of infrastructure projects. In the note prepared this year, our infrastructure segment had suggested a cut in the upfront VGF payment to 20% as the economy is out of recession, Chaturvedi said.

Prior to 2009, VGF was given in two instalments of 20% each. The ministry, under the leadership of Kamal Nath, had initiated the current practice of upfront payment of 40% VGF at the construction stage in 2009 after the recommendation of a committee headed by Chaturvedi. The decision was taken to tackle recessionary pressure on the economy after the global financial meltdown.

However, Gajendra Haldea, adviser (infrastructure) to Planning Commission deputy chairman Montek Singh Ahluwalia, opposed the move (40% VGF) saying it would undermine maintenance of highways. Now, with Joshi being the head, the ministry has started the work on breaking down the VGF into equal instalments. Despite attempts to reach him, Haldea was not available for comments.

The proposal is likely to backfire as companies may be unable to arrange for the gap in funding at the construction stage with banks close to hitting their exposure limits and other financial sources like pension and insurance funds unavailable till now. The government has come out with guidelines to allow pension and insurance funds to indirectly invest in infrastructure projects, but final norms are yet to be issued.

If the current norm is altered, the road sector would have a financial problem as banks are unlikely to satisfy the huge requirement of funds during the construction stage due to sectoral limit being hit. The developers can still manage the monetary needs during operation and maintenance of roads, Soma Enterprises senior vice president D V Raju said.

IRB Infrastructure Developers chairman and managing director Virendra Mhaiskar said, Banks are charging 11%-12% interest on loans to infrastructure companies. How much can we borrow at such interest rates

The National Highways Authority of India (NHAI), which awards national highway projects, had bid out 5,000-km contracts in 2010-11 and 3,358 km a year before that. From 2006-07 to 2008-09, NHAI had awarded a total of 3,617-km projects. In the current year, NHAI aims to award 7,300-km projects.