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NHAI: At full throttle

Business

While the government is pulling out all stops to boost the country’s infrastructure, it needs to get its act together if it wants to attract bidders, says Shyam Vasudevan

As India fights hard to pull out all stops towards maintaining its track record of 9% GDP growth year after year, it is also toying with unique models to boost the infrastructure sector.

Renowned for inadequate infrastructure, the Indian industry has been crying for improvement. The government has committed $500 billion towards infrastructure development to be spent over the next five years. It has also set up something unique among developing countries: a public-private partnership (PPP) model.

Nine projects worth almost one billion dollars pertaining to phase III have so far got approvals from the PPP approval committee. This phase aims at four-laning of 10,000 kms of national highways on a Build-Operate-Transfer (BOT) basis. The efficiency of this model can be seen when recently, a project had come under the review of the Prime minister’s office for under performance.

NHAI promptly took action and several contractors were asked to go, warned or have been reprimanded. The present approvals have given way to the signing of 18 contracts comprising 1120 kms. The total cost of implementing the third phase is estimated to be $13.5 billion dollars.

The union cabinet has also given in-principal approval for phase VI of the NHDP. About 1000 kms of expressways will be developed at a cost estimate of $3.2 billion.

The funding for the project is expected to come from private partnerships. In cases, where there has been very little interest from private participants and where the return on investment is believed to be low, the government has provided for longer concession periods and the provision of Viability Gap Funding (VGF) where the government foots a considerable proportion of development cost.

Currently, nearly 4006 kms of highways are under toll. The PPP progress report so far indicates that 42 contracts have been awarded under BOT toll, 20 contracts under BOT annuity and two contracts under DBFO model. Together, these amount to $4.6 billion.

As at the end of FY’08, 175 contracts covering a total length of 15,803 km have been awarded under the BOT programme with a total cost of over $17 billion.

NHDP has seven phases in all. Phase I and II comprising the north-south and east-west corridors have been completed in 2007. Phase III and IV which also comprises two-laning of 20,000 kms of highway is underway. Phase V includes 5800 kms of the Golden Quadrilateral to be six-laned has received cabinet approval and is under implementation.

Phase VI has now received approval and Phase VII under which ring roads, bypasses, service roads and flyovers are proposed to be developed in the major cities is also under consideration. Tenders for these projects will likely be issued in early or mid 2009.

The National Highways Authority of India (NHAI), the nodal implementing agency for national highway projects in the country, has so far implemented 66,590 kms of highways. Of this, 55% are two-lane highways, 35% single-lane and 10% four-lane.

Road blocks along the way

Evidently all’s not well with the world’s most ambitious highway development programme. The government may have to switch from BOT to annuity models for many stretches in the NHDP to make it attractive to potential bidders. This is because projects for Orissa, Jharkand, Chattisgarh, Bihar and Kerala saw a tepid response from bidders.

This would impact the implementation of nearly 30 projects estimated to be worth over $5.5 billion. A final decision is awaited since the cabinet is yet to finalise the special package for the infrastructure sector.

The package is expected to bring in funds at subsidised rates which can generate investor’s interest. If the government still fails to elicit investor confidence, an annuity model is the only solution. Under this model, the government guarantees payment to developers.

This differs from the BOT model where the operator owns the road stretch for the period of concession and recovers investment through toll revenues. All these will be considered after the government announces its financial package for the infrastructure sector.

According to Vinayak Chatterjee, chairman, Feedback Ventures, the expected package from the finance ministry may ensure viability of some projects and attract bidders’ interest. The remaining will then be transferred to annuity model. This will ensure that road projects are not delayed, the private sector efficiency will come in and the risk factor will go.

This is nothing new to the government. NHAI has adopted to this model in the past too. Examples include initiatives to kickstart the NHDP in Bihar and Jharkand. The problem with this model is that it has led to cost and timeline over-runs . Also it can kill the smooth flow of implementation.

The ongoing liquidity crunch has not alleviated the problem. The increase in bank’s lending rates has thrown projects out of gear. Lack of assured funding and government guarantees have also taken its toll. Apart from this, the government changes bidding conditions and this leads to policy inconsistencies.

These are adding to the woes of the bidders. “Several projects under the NHDP Phase III and V have received less than the stipulated six price bids due to waning investor interest on the back of the slowdown. We have issued a circular modifying certain norms and will encourage companies to participate,” said an official from the NHAI on condition of anonymity.

The government’s decision to set up a special purpose vehicle (SPV), IIFCL, to fund PPP projects has paid off. It has successfully managed to raise $2 billion. This month, the government cleared another proposal from IIFCL to raise an additional $2 billion in bonds.

“The exercise needs to be completed at the earliest so that funds are made available for the infrastructure sector,” said SS Kohli, CMD of IIFCL. In all, IIFCL will extend a credit line to infrastructure projects amounting to $4 billion by March 2009, said Kohli.

Cleaning up the backyard

However, there were 60-odd highway projects under NHDP that were supposed to have been awarded by the year end. Of 27 price bids invited so far, 16 have received less than the mandatory five bidders and in some cases even seen large scale withdrawal from short-listed bidders.

Added to this is NHAI’s withdrawal of many projects due to a lack of interest from prospective bidders. The department maintains that projects will be awarded by end December and would be underway early next year. Industry players have demanded that the Centre make a one-time allocation of 40% project cost as per the VGF instead of the current practice of two installments of 20% each.

Moreover, while the government accuses firms of cartelisation, the reality is that the courts have already settled these arguments and most companies bow out of bidding due to lack of funds. Of late, PE and VC funding have been available to many companies operating in the infrastructure sector.

“We are raising $5 billion in the next 12 months alone, a substantial part of which would go into infrastructure, including highways. We have invested $850 million in highway projects in India,” so had said Shailesh Pathak, director (investments) of ICICI Venture in January this year.

It’s learnt that ICICI has stuck to its commitments despite the crunch. The cost of implementation has also mounted with prices of products increasing. The price of steel, bitumen and cement have started to ease, but is still considered a hindrance for project viability.

Talent crunch at NHAI is also taking its toll on the project. “We are looking for experts in the domain of road and highway development who have a minimum experience of 15 years in the field. We would prefer candidates from IITs and IIMs. As NHDP enters phase III and IV, the need for people specialising in PPP projects and technical processes is important. This is more so because a majority of phase V, VI and VII are on PPP basis,” said a senior government official.

Currently, the NHAI board is composed of six functional directors and six part-time members.

The government is also trying to restructure NHAI to enable it to cope with the increase in scope and volume of work. It is being strengthened to make it a multidisciplinary body by creating a separate cell for planning, monitoring, quality assurance, standardisation and research & development, contract management, outsourcing, and legal and arbitration.

Corporate firms are also raising issues against foreign collaborations and rating mechanisms employed to screen bids. Indian infrastructure companies fear that foreign firms with more muscle get more weightage in bids evaluation.

Another issue is litigation. While most states do not complete the legal formalities for land acquisition, presently they become road blocks of litigation.

The government should appoint special revenue officers in every district in the country to ease the acquisition process of land buying for developing infrastructure.

This practice has already been adopted by the Indian Railways for their development projects. The government should make bonds and securities available to companies for availing credits at affordable and reasonable rates.

There is a lot of will power that is required to ease the flow of men, material and ideas across India’s vast planes. The wisdom and coordinated action required to implement the project seems lacking.

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