Plan panel: NHAI could go bust if contractors have their way

Plan panel: NHAI could go bust if contractors have their way
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First Published: Mon, Feb 09 2009. 10 32 PM IST

 Highway norms: Only one company each had bid in five tenders opened recently to develop the 6,500km highways in the fifth phase. Ramesh Pathania / Mint
Highway norms: Only one company each had bid in five tenders opened recently to develop the 6,500km highways in the fifth phase. Ramesh Pathania / Mint
Updated: Mon, Feb 09 2009. 10 32 PM IST
New Delhi: India’s highways regulator will go “bankrupt” if it gives in to the demands of some contractors who are seeking more financial support from the government to construct roads in the fifth phase of the National Highway Development Programme (NHDP), the Planning Commission has warned.
Highway norms: Only one company each had bid in five tenders opened recently to develop the 6,500km highways in the fifth phase. Ramesh Pathania / Mint
The National Highway Authority of India (NHAI) will, at a board meeting this week, discuss whether to provide additional support—in the form of viability grant funds (VGFs)— to firms selected for contracts to widen roads to six lanes under the fifth phase of NHDP.
Only one company each had bid in five tenders opened recently under the 6,500km-long fifth phase. These companies, an NHAI official said, have asked for VGFs of 37-39% of the total project cost. He didn’t want to be named. VGF refers to grants given by government to make unprofitable projects viable for private players.
In the letter sent to NHAI, the plan panel said companies are actually eligible only for a VGF of 10% as per the rules that govern the fifth phase of the programme. A VGF of 10% means the government will offer 10% of the total cost of the project to the winning bidder.
VGFs for such projects come from toll revenues collected by NHAI, besides a road cess.
“If NHAI allows these companies to avail of huge amounts of government support, they will empty their coffers. The total VGF that was to be set aside for the entire fifth phase was around Rs1,800 crore. That money would only be enough to support a couple of projects if NHAI agrees to pay the contractors what they are seeking,” said a Planning Commission official on condition of anonymity.
The Planning Commission has also questioned why NHAI has provided for over-engineering—which refers to building more than required—that pushes up costs. “NHAI has asked contractors to provide for service lanes, extra underpasses and overbridges in these highways. In a six-lane highway that passes through rural and remote areas, where is there a need for a service lane? All this is simply to push up the costs,” said this official.
Another NHAI official, who did not want to be identified, confirmed the regulator has received the letter sent by the commission. “We are not in agreement with the points raised by the Planning Commission,” he said.
The NHAI board is scheduled to meet on 11 February, this NHAI official added.
“There are scientific ways of restructuring projects...in such a manner that cost concerns are taken care of. Ad hoc methods (such as increasing the VGF) cannot work in the long run. All you need to do is to go back to the project consultant and reconfigure the project,” said Parvesh Minocha, managing director,Feedback Ventures Pvt. Ltd, an infrastructure firm.
“If it is viable, people will go for bidding... Many of these projects are not viable, even at 40% (VGF). We are taking a risk by bidding... We are already working on wafer-thin margins. At 40% VGF, our IRR (internal rate of return) is 2%. At that rate, some Japanese company borrowing at zero per cent interest may come forward but certainly no Indian contractor will,” said an executive with one of bidders for the six projects that saw single bids in the fifth phase. He did not want to be identified. Responding to allegations of cartelization, he said: “If there was cartelization, why is nobody bidding for many projects even at 40% grants?”
Mint had earlier reported that NHAI was unable to attract bids for several road stretches despite multiple extensions of bid deadlines.
narayana.k@livemint.com
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First Published: Mon, Feb 09 2009. 10 32 PM IST