New path or alleyway

Indian Express, 26 October 2006

Barely 35 percent of the contracts for North South East West corridor (NHDP-II) have been awarded. The delays in award of contracts by NHAI under the UPA are expected to lead to long delays in the construction of the highway network across the country. There are differences among ministries due to policies related to annuity projects and tolling policies. However, the biggest difficulty is reported to be the framework of public private partnerships. The move away from a policy in which the government pays for all roads, towards one where the private sector invests hoping to make make profits, is new for India. The PPP framework proposed by the Planning Commission Committee on Infrastructure has taken the shape of a new Model Concession Agreement(MCA). The MCA was cleared by the Committee on Infrastructure a year ago but has yet to find agreement with other ministries.

What have been the difficulties with existing road projects? What is the framework for public private partnership (PPP) projects? And, what is new about the Model Concession Agreement (MCA)?

One of the major difficulties with the national highways has been delays. For example, the 27.7 km long Delhi-Gurgaon Expressway, that was originally scheduled to be completed in July 2005, is unlikely to be completed by the revised deadline of December 2006. Only two of the five flyovers slated to be ready by September have been opened up to traffic. According to a report published in this newspaper, the project may even drag on till 2007 end. The cost of the project has escalated from Rs 550 crore to Rs 800 crore. Delays in NHAI projects in many parts of the country have been well documented in various Indian Express reports throughout the year.

Who is responsible for the delays? The builder often blames land acquisition, the NHAI blames the concessionaire i.e. the builder. For example, as the Indian Express reports on the Delhi-Gurgaon Expressway, a senior NHAI official says, "The delay in the project is due to the slow progress by the concessionaire, and also due to rains which was not taken into account."

How can the private builder be encouraged to complete the road on time? The financial viability of the project is determined by four features: traffic volume, user fee, concession period during which he will build and operate the road and capital costs. The first three are pre-determined. Under the PPP framework, depending on his costs, the builder bids for a grant/subsidy from the government which in general can be upto 20 percent of the cost of the project. This can even be a negative bid where the builder finds the project so profitable that instead of asking for money to build the road, he actually pays the government to gain the monopoly to build and operate that stretch of the National Highway.

The MCA spells out a policy and regulatory framework for investment in highways on a Build-Operate-Transfer basis. In line with current international practices it proposes technical parameters based on the output specifications which affect services for users, rather than construction specifications as has been the standard practice in India in the past. Approvals are to be given upfront when all project parameters such as the concession period, toll rates, price indexation etc. are defined. It specifies a tight schedule of 180 days for project implementation to start. In case road construction does not start in this six month period penalities have to be paid by the builder. Further, banks giving loans for the project are given a much greater role in assessment of project and financial management of the project.

There are higher risks for builders, but private builders say they find it attractive because the higher risk is offset by the possibility of getting higher returns. In the earlier framework the builder would receive a fixed sum of money. Now if there is greater traffic volume growth, or if the builder is more efficient in construction, he gets the upside. The agreement also creates a set of rules for reducing the risks for banks who lend money for the project. By increasing the possibility of higher profits for builders and by reducing the risk of lending by banks, there is an attempt to make highway project more attractive for private partners.

What is new about the MCA? The MCA takes away a lot of the discretionary power of the power of NHAI. It reduces the day to day interaction between the builder and NHAI engineers. It proposes a "hands-off" approach so that the NHAI is allowed to intervene only in the event of default. The NHAI will not be able to hold up approvals and money based on not meeting various construction linked specifications.

The NHAI and it ministry, the Ministry of Roads and Surface Transport, is reported to be unhappy with the MCA. This has led to no contracts being granted under the MCA. One of the difficulties is that the MCA proposes that 80 percent of land acquisition, which has often been cited as the cause of the delay, be done before the contract is awarded. This may be ideal, but it is often the case that the government leaves the contractor to deal with the difficulties in land acquisition. It is felt that this clause may further delay land acquisition as state governments who are supposed to acquire the land will simply not do the job and therefore actually delay projects more. Whether the MCA will actually reduce the delays, bring about more efficiency and lower costs remains to be seen. The NHAI may feel the need for greater flexibility in giving out contract and this may cause some difficulties. Only time will tell whether the MCA will be effective in bringing down costs, delays and corruption and whether the delays of the last few months over the new framework were worth it.

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