The proposed hybrid model of highways development by National Highways Authority of India (NHAI) to encourage bidders to come forward for bidding for highway projects has found some merit with the private companies in the road construction sector. A section of analysts feels that it is important to see how the contours of the new policy are framed, though.
NHAI has mooted the idea of a hybrid model containing the features of both toll and annuity models and is likely to draw the final contours of the model soon. As per the proposal, if the viability gap funding (VGF) required for a project is more than 40%, the annuity payment will be made for the funding requirement in excess of 40%. Significantly, even while the incremental payment will be made by the government, the concessionaire will be allowed to collect the toll through the concession period.
Both toll and annuity are a part of the public-private partnership (PPP) mode of infrastructure development. In a BoT (toll) project, the private developer is entitled to a grant of up to 40% from the government as viability gap funding and earns return on its investments in the form of toll from the project over the concession period. In the annuity model, however, there is no provision of VGF and the developer gets returns in the form of half yearly payments from NHAI, while toll revenues find their way to the NHAI kitty.
While the initial response from the private developers in the fray for the mega highways projects is favourable, experts point out at certain issues that need to be addressed to make the model workable on the ground. ?Replacing one model of road development with other for all the projects is not a good idea. At first, we need to know on what types of projects this model is going to work. The proposed hybrid model can be taken up only in case of projects in which incremental VGF demand is marginally high. The projects, which are viable on toll, are taken up on BoT (toll) model. Projects in places like Bihar and the North East where tolling is not possible are taken up on annuity,? says Vishwas Udgirkar, partner (infrastructure), PricewaterhouseCoopers. In areas like Bihar and the North East, which are prone to insurgencies, tolling may not be possible.
?However, going through the hybrid model, larger issues will not be handled. Another issue is at what stage will the final call to take the project on hybrid model will be taken,? he says.
Stressing that there is a need for the government to come out clearly on the model, he says, ?In BoT (Toll) model, if the traffic increases, there is provision of early termination and if the traffic is less, there is a provision of extending the concession period. It has to be seen how this will be done in a hybrid model.?
Agreeing that the projects that are not viable on BoT (toll) model, Parvesh Minocha, MD, (transportation division), Feedback Ventures, says, ?It may ensure that some more projects get the benefits of private sector involvement. The model may work for many infra projects, but is the annuity over and above the VGF as well as toll? And if this is without any upper limit, then it amounts to increasing the VGF. Also overall outflow from the government will go up. However, if we accept the benefits of private-sector involvement, it may not be a bad idea.?
Pointing out initiatives to make the model work on the ground, Minocha explains, ?The number of qualified bidders, weightage and concession clause should be frozen once and it should remain frozen for at least 30 months. Adequate time must be given for each stage of bidding.?
Private sector companies in the highways construction sector see the move as a positive one. ?This is indeed a positive initiative by the government and it is likely to see faster awarding of the projects,? says a top official of Hyderabad-based Nagarjuna Construction.
?Fundamentally the model is workable. Certain projects that are on the borderline and would be viable at slightly higher VGF will get bidders as whatever is required for construction can be taken up as grant. In cases where revenue generated by toll is not enough to cover the development cost, this model can be used,? says Ankineedu Maganti, CEO, Soma Enterprises. The company in partnership with others is implementing road projects worth Rs 15,000 crore.
Also, National Highways Builders Federation, a representative body of highway construction companies, has supported the move but has suggested additional impetus to encourage bidders to take up the projects.
?We fully support the concept of hybrid model. It is necessary to give additional impetus to the concessionaire so that he can achieve viability through such impetus, in addition to toll collection. This could also be in the form of additional land to the concessionaire for developing commercial activity,? says M Murali, director-general, National Highways Builders Federation.
Even as the builders have welcomed the move, they have raised concerns on land acquisition, a major roadblock in road construction projects and suggested changes in the concession agreement to tackle the delays arising out of it.
?In fact, 80% of the right of way (ROW) should be made available on the appointed day and the balance 20% of the land should be made available after the appointed date but within 50% of the stipulated construction period,? says Murali.
Last year, highways development came to a grinding halt with award of merely nine out of 60 projects worth Rs 70,000 crore build operate transfer, BoT (toll) projects, which were meant for bidding by December last year. This could be attributed to the combined effects of credit crunch caused by the global economic slowdown and certain stringent clauses in the model concession agreement that saw large scale withdrawals by short-listed bidders from the bidding process.