The minister, however, did not elaborate how he intends to finance new road construction. Most of the older projects which were stuck had lined up their finances and were held up on account of various clearances. But on the new ones, the government does not have any clarity on how they will be financed.
Reports say that the Road Transport Ministry needs at least Rs 2 lakh crore
for expanding at least 20,000 km national highways
(NH) in the next few years. However, there are no private funders for these projects. The Transport Minister has raised the issue with the finance ministry. But with the fiscal deficit already touching 99% of its targeted limit in the first eight months of the fiscal year, it is unlikely that Arun Jaitley will be able to help Gadkari.
In India road projects are awarded through one of three models: Build Operate and Transfer (BOT) – Toll, BOT
–Annuity, and Engineering Procurement and Construction (EPC). The key differential in each of these is the risk profile of the developer. In the BOT-Annuity case, the risk of the developer is to construct the road and maintain it. In BOT
the developer not only has to construct and maintain the road but also has to recover his money by collecting tolls; here an additional traffic risk has to be borne by the developer. In an EPC contract, only the construction risk is with the developer.
The Hybrid model proposed by the road ministry is for BOT-Toll
mode, where the traffic risk component of the project will be largely borne by the government and will thus act as a quasi BOT-Annuity model. Reports say that three highway projects – one each in Odisha, Bihar and Karnataka will adopt the hybrid model.
In a note, Morgan Stanley has said that the hybrid model will be a win-win for developers as well as the government. In the current situation where developers lack capital, a move to lower the upfront costs is significant. Given the certainty of cash flows in the annuity model – the government will be in charge of toll
collection – developers can obtain more leverage from banks, thus reducing their equity requirements quite significantly. This model helps the government, which is relying mainly on the EPC model, as it lowers their upfront contribution for the project.
The model has the potential of reviving the road sector as the risk element of pricing based on traffic movement on the roads
will be taken over by the government. Morgan Stanley feels that while this move actually benefits the weaker (read funds-starved) players in the industry, it is a continuation of the impetus the government is putting on the roads
In the same model, the government is also allowing players to completely exit from the project two years after the start of toll
collection. This would help the companies free up their capital for investment in other projects.