Highways authority revives proposal to change funding method of projects

Highways authority revives proposal to change funding method of projects
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First Published: Sat, Jun 27 2009. 12 44 AM IST

Different strokes: Road construction on NH202 in Warangal, Andhra Pradesh The proposal suggests allowing highway developers to collect toll from the public and also collect annuities from the governme
Different strokes: Road construction on NH202 in Warangal, Andhra Pradesh The proposal suggests allowing highway developers to collect toll from the public and also collect annuities from the governme
Updated: Sat, Jun 27 2009. 12 44 AM IST
New Delhi: The National Highways Authority of India has revived a proposal to change the financing method for highway projects that are not attracting private investment.
The proposal, put up on the authority’s website for public discussion, suggests allowing highway developers to collect toll from the public and also collect annuities from the government. This is currently not permitted.
Different strokes: Road construction on NH202 in Warangal, Andhra Pradesh The proposal suggests allowing highway developers to collect toll from the public and also collect annuities from the government. Harikrishna Katragadda / Mint
This would be restricted to those projects where traffic volumes are so low that a developer demands capital subsidy, called viability gap funding (VGF) that is more than the cap, which is 40% of the project cost.
Under the proposed model, the government would pay annuities only for the funding requirement in excess of the 40% VGF. The developer collects the rest through toll charges.
Currently, all highways that are being widened to four lanes under phase III of the national highway development programme have VGF capped at 40%, while for phase V projects, the VGF cap is 10% of the cost of the project.
In effect, the model is a hybrid of the two existing highway financing models: the build-operate-transfer toll model where the developer finances and builds the highway and generates revenues by collecting fees, and the build-operate-transfer annuity model where the government pays the developer annual sums of money in exchange for financing and developing the highway. Projects in the annuity model are currently not eligible for VGF.
Stake holders will have to submit comments by 1 July, the Web post said.
An analyst said the hybrid model was a positive move, especially when developers were staying away from bidding for projects because of perceived difficulty in raising finances.
“A market at a particular point is what the Indian and the global (financial) situation is. We can’t always simulate the ideal conditions,” said Siddhartha Das, national public-private partnership practice leader for consulting firm Ernst and Young Pvt. Ltd.
The annuity model is one of several methods that the authority is considering to kickstart the highway sector, which was affected by lagging bidder interest last year. Only some 22 of 60 projects offered by the authority last year have been bid out so far. “They have been talking about the hybrid model in the past also. It was even discussed in the (prime minister’s) economic advisory council headed by C. Rangarajan and it was rejected,” said a highway authority official, who didn’t want to be named.
The official, however, said that rather than adhere strictly to one model, it would make more sense to be flexible to meet with new challenges.
Planning commission officials are not in favour of the annuity model because it would entail budgetary outflow over a number of years at a time when the government is trying to rein in the fiscal deficit and ensure that scarce resources be reserved for social sector spending.
The highway ministry has recently asked for more autonomy in deciding which projects could be offered under the toll route and which ones under the annuity route.
The authority suggests that projects be put through an internal benchmarking process, through which it would decide whether the project would be amenable to public-private partnerships or would have to be done through the annuity mode.
Currently, all projects have to be auctioned under the toll system before they are considered under the annuity route. In practice, the authority offers the bids several times under the toll method before considering the annuity route, a method that some analysts say builds lag into the system.
rahul.c@livemint.com
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First Published: Sat, Jun 27 2009. 12 44 AM IST