Mindblocks To Jaunty Roads

On the surface of it, the incentives recently announced by the government for private highway projects seem just the boost that potential investors in the sector were yearning for. What more could one ask for tax concessions on profit from real estate income, customs duty exemption on equipment import, government grants up to 40 per cent of the capital cost, tax holiday benefits upto 20 years, and freeing of toll ceilings? The recipe for the right bitumen mix.

But beneath this surface, the government betrays its own mindblocks regarding equally, if not more, pressing aspects of spurring private investment in road projects. Of course, the government has come a long way from its original policy announcement allowing private entry into the sector. But the corporate sector virtually spurned the offer, well realising that there were more potholes than pots of money in constructing toll roads. There was the Oliver Twist to the tale as the private investors asked for more.

 

For one, major players in the sector, while welcoming the incentives, argue that there is no policy directive from the government regarding having an agreement in place to start any project. Lenders would like their interests totally protected. Hence, in spite of these incentives no private or foreign investor would touch these projects unless shortfall undertakings and concession agreements are signed, detailing obligations to be met by the governments both the central and the state and the investor, said one of the players. In effect, the concession agreement hopes to serve as a sovereign guarantee and satisfy the lenders.

Recently, the ministry is believed to have informally requisitioned concession agreement drafts from the two short-listed tenderers to the Ahmedabad-Vadodara expressway project Reliance Industries (RIL) and HCC-Reynolds. Both the companies enthusiastically sent their drafts around three months back but there is no response as yet from the ministry. Hitherto, though there have been several expressways and road projects put to tender, there is no policy framework to infuse confidence either in the entrepreneur or the lender to kickstart the projects.

Little wonder then that unlike power projects, BOT (build, operate and transfer) road projects conceived by state governments are still non-starters. A prime example is the Mumbai-Pune Expressway project, for which RIL emerged as the final bidder. The Shiv Sena-BJP government has been averse to entering into any concession agreement with the tenderer for the project.

A concession agreement is virtually a replication of the power purchase agreement, complete with clauses of warranty, rate of return, financial closure and arbitration. It is the bible that a lender whether international or domestic would scrutinise before tying up finance to any project. In fact, experts believe that once the concept of fixed price, fixed cost with liquidated damages is accepted, backed by a concession agreement, it would lead to more of co-privatised projects than a purely privatised project. Infrastructure projects, except in power, have been a success, including in the US, only through either direct or indirect financial support from the government, including cross-subsidisation.

The government, to an extent, has taken the first step by committing itself to pick up 40 per cent of the capital cost. But still there should be a framework. Construction is not the main issue. It is the financing and framework which are critical, a source in a financial institution said. It is more so in a road infrastructure project, because of the traffic-risk involved and its non-asset based nature, he added.

A mention should be made of the Chinese and Mexican successful initiatives taken in encouraging expressway projects. The Beijing Expressways Co, created by the Chinese government but incorporated in Hong Kong to undertake various freeway projects, has floated the Beijing Economic Development and Investment Corporation (Bedic) to meet any shortfall in debt service obligations. This undertaking is absolute and unconditional and, for instance, in projects like the 45 km Jing-Shijiazhuang expressway and the 73 km Jing-Changping expressway is supported by a Renminbi-dollar mutual conversion agreement of upto $770 million.

Moreover, to further win the confidence of the lenders, shares of Beijing Expressways are pledged to the trustee Bank of New York as collateral security. The key provisions of the 20-year concession agreement, governed by Hong Kong law, entails that Bedic will not permit any new (alternative) roads and authorise assigning of rights to the trustee.

China also has a common pool of state entry tax, which acts as an escrow account to the satisfaction of the lenders. In Mexico, toll collections from two expressway projects Ecatepec-Piramides and Armeria-Manzanillo are deposited weekly by the operator to a general account and the lenders head the list of priority of payment.

According to a leading corporate: In India, there are a lot of imponderables. The economic activity on a stretch, which in turn decides the traffic risk; and propensity and ability to pay toll.

The industry also rues the fact there is no direction from the policy makers on the tolls that can be expected to be generated, where the collections would go and how it would get converted into dollars to service the foreign debt, which will constitute the main portion of the project finance.

Basically, the potential players feel there should be a clear-cut statement that the first right on the money would be that of the lenders. Even internationally, road infrastructure projects are no money-spinners but government backing is viewed as imperative as it makes eminent economic sense and the social cost benefit that such projects carry with them.

Corporates keen on investing in road projects insist that co-privatisation apart from guaranteed returns, government participation, concession agreement and shortfall obligation is the key word, without which highway and expressway projects will remain merely dream paths.

Self reliance

There is one basic flaw in the proposed Mumbai-Pune expressway project it neither begins in Mumbai nor ends in Pune, or vice-versa. Ground reality is that it is an unglamorous 84 km Kon-Dehu Road (Mumbai-Pune distance is around 180 kms) expressway. Kon is near Panvel, around 60 kms away from Mumbai city, and Dehu Road around 29 kms from Pune.

When the Maharashtra government first tendered the project for development through build, operate and transfer (BOT) scheme in 1994, only six companies picked up the bid document. The tender details were good enough to discourage most of them from making an offer.

According to Maharashtra government sources, it was only at the request of the top bosses in the then newly-installed Shiv Sena-BJP government that Reliance Industries and HCC-Reynolds-Lok Group sent in their bids for the prestigious project. Reliance won the project, but what followed was endless negotiations.

The cost of the project itself differed from estimate to estimate. As per 1996 prices, the state government maintained the project cost around Rs 1,200 crore; the Industrial Credit and Investment Corporation of India (ICICI) figure stood at Rs 1,365 crore and Reliance estimate indicated an overall cost of Rs 3,603 crore, including real estate cross-subsidisation.

Reliance argued that the real estate sop will itself require an initial investment of Rs 1,200 crore. It is not the best solution. With so much real estate coming, there would be a fall in the rates and one may not be able to recover the investment. Moreover, the land offered 800 hectares at Chowk near Panvel and 200 hectares at Dehu Road for developing the real estate was hardly attractive, a leading banker close to the multi-billion conglomerate said. Reliance is learnt to have even suggested that a state government development authority like Cidco should develop the real estate and cross-subsidise the project. Added to this was various imponderables like construction of seven tunnels totally running into three kms. Reliance then put forward over 70 conditions, and the government of Maharashtra cancelled its bid.

Presently, the state government itself has decided to begin and complete the project through its undertaking the Maharashtra Road Development Authority by floating bonds, on the lines of the Krishna valley project and Maharashtra State Electricity Boards (MSEB) proposed 30 per cent stake in the Dabhol Power Company. As an analyst in an infrastructure company put it: Let us see where this bravado minus any framework or financial structure leads to.