The’ approach to road-building in the PPP mode appears to have taken something of a U-turn with the government now planning to shoulder most of the risk, including that of predicting and collecting the toll. The private sector partner is now expected to contribute 60% of the project cost, presumably both the equity and debt, with the government bringing in the rest. The model, in which the developer will be paid a biannual annuity, is being billed as a ‘hybrid annuity’ one; in reality, it resembles the EPC mode to some extent, in that the risks for the builder are limited. Given the track-record of road projects in the PPP segment, and the slow build-out over the last few years, this is probably the best way forward, though it is apparent the compulsion to keep costs down is lower in PPP projects as compared to EPC ones. According to an estimate by CRISIL, construction between April and October 2014 slipped to 3.2 km per day from 4.3 km per day in the corresponding period of 2013.
Although the government had taken measures to ease the pressure on builders by delinking the environment and forest clearances, and later by allowing them to reschedule the payment of premiums and to exit the project early so that their capital can be freed up, the response from the private sector to NHAI’s latest round of awards has been lukewarm. Apart from the fact that they are over-stretched and are not able to put together equity for new ventures, builders aren’t willing to take on projects in the absence of a robust dispute resolution mechanism.
More important, very few bankers are willing to back them. As the roads minister has pointed out, 40 projects promoted by big companies have had to be shelved and there are another 40 for which a solution is yet to be found. In a situation like this, NHAI has had little choice but to pursue the EPC route; of the 4,000 km or so of roads that it will award in the current year, approximately three-fourths will be via EPC contracts. The government’s decision to take on more of the load may also have been influenced by the feedback from some foreign players who were keen to invest but not comfortable with the risks. However, with the government now taking care of clearances, acquiring land and estimating the traffic, a partnership should be a more acceptable proposition. While the government may be confident of raising the necessary resources—whether by securitising toll receivables or floating NHAI bonds—foreign funds will certainly come in handy even if the initial project outlay of R14,442 crore across 13 projects is modest. While the returns for developers are unlikely to be as attractive as they were earlier, they should be able to access loans more easily and there are incentives for early completion. Even without that, the greatly reduced responsibilities and financial commitments should make it an attractive enough investment.