Transport minister Nitin Gadkari addressed a press conference in Mumbai on Thursday where he said that all new roads laid by the central government will be of concrete. He added that target of increasing the speed of highway construction to 30 km a day will now be achieved within 18 months against an earlier estimate of 24 months as work on 95% of 190-odd stuck road projects stuck has re-started.
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.
Given the tight situation in which the government finds itself, the road ministry is now contemplating using a hybrid model to fund highway projects. Under this mechanism, government will fund 40% of the value of the project through viability gap funding (VGF).
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 – Toll 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 industry.
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.