In this age and time, it seems inconceivable that our highway projects could go belly up due to a mix of bad planning, poor project finance appreciation, haphazard execution and plain malfeasance. Today that future is a distinct possibility, courtesy the poor functioning of the National Highway Development Programme.
Any highway project faces a clutch of different costs. These include construction costs and costs of financing the project. In a country as diverse and large as India, it is not always possible for a project concessionaire to meet all these costs on his own. Some amount of help from the government in the form of viability gap funding (VGF) to meet profitability problems is called for. Unless this is done, the whole structure of financing can collapse.
So setting the VGF level is crucial in this respect. Set it too low and the project won’t take off; set it too high and perverse incentives will set in and the government and ultimately taxpayers will have to bear unconscionable risks. Unfortunately, the National Highways Authority of India (NHAI) has, unwittingly or otherwise, chosen the latter path. The original model concession agreement for such projects had set VGF at 20% of the total project cost. NHAI has, however, revised the VGF to 40%.
This is an unacceptable waste of public resources, tantamount to socialism of the project concessionaires. The way project finances are organized and the easy exit for concessionaires after executing the project means little risk for them and NHAI taking up most of the risk. A project executor can bring little money of his own, build the project with borrowed money and public funds (VGF being on component of this mix) and then exit quickly. The result is that risks, in the form of repayment of money to banks and the bigger risk of a poor quality project are there for NHAI to bear.
Some numbers should help clarify these risks. A Planning Commission estimate has it that for projects that are likely to be awarded until 31 March next year, NHAI will have to shell out Rs25,000 crore on VGF, Rs7,500 crore on land acquisition, another Rs7,500 on ongoing construction contracts and Rs9,500 for annuity payments of completed projects. The question is: Where will NHAI get this money from?
Most Soviet enterprises were inefficient and died ultimately because of what economists call the “soft budget constraint”: spend way ahead of your budget and ask the government to foot the bill. NHAI today looks like a classic soft budget-constrained entity. It’s time the government drilled some sense into it.
Is NHAI spending its money wisely? Tell us at email@example.com