From sub-prime to prime PDF Print E-mail
Wednesday, 28 December 2011 06:29
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NHAI's come a long way, may do 20 km a day now


Last year, in June, the Planning Commission chairman’s advisor Gajendra Haldea earned the ire of then roads minister Kamal Nath when he wrote a paper “Sub-prime Highways”, basically pointing out that the way things were progressing, the National Highways Authority of India (NHAI) would soon be a fit case for loan restructuring. Given that there were just 1 or 2 bidders each for most road projects at that point in time, and most projects were getting a viability gap funding (VGF)—an amount of money required to fill the gap between what the company would earn out of tolling the road and what it needed to make reasonable profits—equalling to around 35% or so of the project costs, Haldea argued, VGF payments were likely to exceed NHAI’s income from cess collections on roads very soon. Indeed, if you took into account NHAI’s committed liabilities on other existing piece-rate-contracts, NHAI was probably in the red already.

That was then. Today, as NHAI goes about finalising its R10,000-crore bond issue, the picture looks very different. For one, NHAI says it is on track to award 7,300-7,500 km of road projects this year, or around the 20 km a day target that most scoffed at when Kamal Nath announced it. So what did NHAI do to get to this achievement? There are a lot more bidders for projects today, making you believe there was a problem with the earlier process. In one case, after allegations surfaced of rigged bidding, CBI raided some NHAI officials as well as top officials of one of the contracting firms—permission was sought to prosecute one NHAI official. As a result of the changes in the way NHAI is functioning, for 16 bids it has received since April for 2,600 km of roads, instead of giving out VGFs of R660 crore (in terms of net present value, NPV, using a discount rate of 12%) that NHAI had estimated would be required, the winning bidders have offered to pay NHAI R16,000 crore (on an NPV basis). In the case of the 102-km-long Ahmedabad-Vadodara road, NHAI had estimated a small VGF of R63 crore—the winning bidder, however, said he would pay NHAI R3,542 crore.

But, the question arises, surely the winning bidders will want to renegotiate the project later, as happens in so many PPP projects. That’s always a danger, but the new model contracts don’t have a provision for this—if a firm can’t fulfil a contract, the only available option is for NHAI to take it over and re-bid it. Of course, the sanctity of a contract depends on whether the powers-that-be wish to enforce it. Other changes that have helped have been the shift to e-bidding as well as the policy to get bidders to pre-qualify for a full year instead of to pre-qualify for each project. NHAI’s come a long way and its new procedures certainly look a lot more transparent.



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