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Monday, 18 August 2014 00:00
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Reducing viability won’t get more investors

Given the large number of highway projects that have not taken off for one reason or another—while promoters have blamed environmental delays, in many cases, the bids have just been unviable—the government has done well to, in the Budget, double allocations for the sector. So, instead of waiting for the private sector to bid for projects under the PPP model, the government has decided to move on and award more projects on the basis of works contracts—contractors get paid per kilometre of road instead of taking on the risk of traffic under a PPP contract. In any case, PPPs not working out is not something unique to the roadways sector, this has taken place in other sectors as well. In the case of the electricity sector, for instance, while the Tatas and Adanis had bid, and built, power plants based on coal from captive mines in Indonesia, a change in that country’s laws made it unviable for them to supply power at the contracted price. While they approached the central electricity regulatory commission (CERC) for relief, and the CERC allowed for a tariff hike—even after this, their electricity will cost less than that from other sources—but with the state electricity boards not willing to pay more, the matter is in court. At the end of the day, the uncomfortable truth is the private sector simply cannot take on the risk the public sector can—this applies to risks associated with clearances not coming on time as well as project costs spiralling out of control or projected revenues simply not materialising for one reason or another.

As part of the process of getting the roads sector back on track, while the government finds ways to deal with the private sector’s risk profile, roads minister Nitin Gadkari has been talking to environment minister Prakash Javadekar about finding ways to expedite environment clearances—not for them, the kind of embarrassment the prime minister referred to in his Independence Day address, when the National Highways Authority of India went to court against the environment ministry. What is worrying, however, is Gadkari’s latest statement that no toll collections will be allowed till the project is 100% complete—today, tolling is allowed after 75% of the road is built—and that tolling will be stopped once the cost of the project is recovered. While the first measure will lower collections, the second will mean a significant upside from a project will get capped. Since such stopping of toll collections is not possible under the current scheme of viability gap funding bids, presumably this means the government will soon be coming out with a new bidding format in which, perhaps, firms bid on the expected return on capital—once this has been achieved, tolling is stopped; as a corollary, if this is not achieved due to lower toll collections, the concession period is automatically increased.

 

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