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The Capitalist | New toll policy is great for investors, lenders. But for taxpayers?

The Capitalist | New toll policy is great for investors, lenders. But for taxpayers?
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First Published: Thu, Jan 08 2009. 12 10 AM IST

Updated: Thu, Jan 08 2009. 12 10 AM IST
On 5 December, the Union government notified the National Highways Fee (Determination of Rates and Collection Rules), 2008. While it clearly states that these rules shall not apply to agreements that have been effected before the date of the notification—a sensible step occasionally ignored by the government—it does state that all new road projects will be covered by it.
Some highlights of this policy are:
The rate of toll for the use of permanent bridges, bypass or tunnel constructed with the cost exceeding Rs10 crore will be different from the tariffs prescribed.
Toll charges will be allowed to escalate each year by 3% simple interest plus 40% of the Wholesale Price Index (WPI) during the year.
Toll charges will be rounded off to the nearest multiple of Rs5.
Broadly speaking, the toll tariffs fall into two categories: one relates to national highways of four or more lanes, and the other to bridges, bypasses and tunnels.
The first has a basic toll charge which is not significantly different from the tariffs currently in force. In case it’s just a two-lane road, the tariff that can be levied shall be 60% of the base rate prescribed.
The second is for other types of roads where the tariff is based not just on the length of the road, but also on the capital cost incurred.
Also See More Cost, Higher Returns (Graphic)
While some analysts (including Batlivala and Karani Securities India Pvt. Ltd) have welcomed the new tariffs, there are others who are a bit worried. They are alarmed at the manner in which major projects (bridges, bypasses or tunnels) have been offered a rate of return that is based on capital costs. Such a policy, they argue, provides an incentive for pegging the costs high, as it would allow fatter profit margins both during the implementation phase as well as in subsequent years. Such a policy could easily invite the wrath of public interest litigants as well, as it would make use of taxpayers money both for the construction as well as for the tolls.
One of the biggest supporters of the new toll policy is Infrastructure Leasing and Financial Services Ltd (IL&FS). It has a wholly owned subsidiary called Consolidated Toll Network Ltd, which is engaged in developing and promoting toll roads in India. It remains one of the biggest players in this segment, and could therefore be one of the biggest beneficiaries of such a policy.
What defies logic, though, is why the new policy has allowed the basic toll for a bridge, bypass or tunnel to be seven to eight times higher than the toll for four-lane roads. It presumes that such projects should involve capital costs that are at least seven times larger. That could be a dangerously imprudent premise.
Another issue that worries people is the willingness of the government to allow for an annual 3% escalation fee plus a WPI-linked escalation. It would further fatten the margins of road developers.
These fears are not entirely misplaced, in view of the fact (reported in this column last week) that road construction costs appear to be spiralling even when other costs (steel, petroleum products and labour) are going down.
Finally, there has been no attempt to reduce the tariffs once the volume of traffic goes up, as the collections would then be significantly greater. Like many policies, this one protects the interests of investors and lenders far more than it protects the interests of common citizens who have already been paying taxes which should have been used for building these roads in the first place. It is obvious that a widespread levy of tolls is a tacit admission that taxpayers’ funds that should have gone towards infrastructure spending have actually been frittered away.
Prudent banks will sport healthy balance sheets
Banking in India is in a funk. And it is not only on account of the global financial meltdown. Pundits believe that the banks’ non-performing assets could climb from the current levels of 2-2.5% of amounts loaned out, to almost 5% by the end of next year. Bankers admit this privately, though at least one research outfit, Antique Stock Broking Ltd, has openly said the same.
But then, there are people who say Indian banks are mature enough to cope with the crisis, which may be confined to some, not-so-well-managed banks. After all, they have survived bank nationalization , loan melas of the 1980s, and loan write-offs of last year.
There is, thus, no reason why they cannot cope with the real estate crisis (this time it was largely the banks’ own doing than on account of a government fiat). True, the government fanned this fire with its SEZ policy, which encouraged more of real estate activity than economic or infrastructural growth. But bankers have become wiser. They have been helped by regulatory changes of the mid-1990s that compel banks to maintain credit quality. Hopefully, the most prudent of banks will still sport healthy balance sheets.
The politics of securing security: we’re watching
Security could become a hot political issue once the ordinance permitting Indian companies to ask for Central Industrial Security Force (CISF) protection is passed. On 30 December, home minister P. Chidambaram let the cat among the pigeons when he declared that “Ratan Tata, Oberois, Infosys and Jamnagar refinery have approached me (for CISF cover).” He had introduced the CISF Bill in the Rajya Sabha in the just-concluded Parliament session but the House adjourned sine die before it was passed. It will obviously take away a major element of “grease” that local police charge for “security” and allow companies to adopt a uniform security apparatus across the country. Obviously, such an ordinance may not be popular with the chief ministers.
It will be interesting to see how this pans out in the coming months.
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at capitalist@livemint.com
Graphics by Ahmed Raza Khan / Mint
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First Published: Thu, Jan 08 2009. 12 10 AM IST