The ambitious National Highways Development Programme announced by the prime minister two years ago has made some progress. But given the vast scale of work and the many risks involved, particularly in generating assured revenues, will the project finally see the light of day? And if so, when? Road sector experts comment on the project, the methods of tolling that can be used and, indeed, on the sustainability of such mega projects in the long run.

The National Highways Development Programme (NHDP) is an ambitious project. Do you think it will become a reality or will it remain just a pipe-dream?

K.B. Gopalakrishnan
NHDP is certainly an ambitious project. But I do believe that we need to harbour such ambitions, if we are to call ourselves a civilized society and be part of the developed world in due course of time. The NHDP is not just one large project. As I perceive it, it is a project assembly of a homogenous set of sub-projects. I am categoric that it cannot remain a pipedream. Can we afford it that way?

Mohit Saraf
A project that aims to connect the four metropolitan cities and the north-south east-west corridors of the seventh-largest country in the world through high-quality roads is indeed ambitious. Definite strides have been made towards the real-isation of this dream project announced by the prime minister two years ago. A policy framework for implementing the project has been put in place by the National Highways Authority of India (NHAI). Contracts for small stretches have already been awarded, of which some have been completed. A major part of the NHDP is to be awarded before the end of this year. It is expected that work on the Golden Quadrilateral would be completed by December 2003-04 and that on the cross-country corridor by December 2009. Considering the importance of the project and the role it will play in the growth and development of the country, its implementation has been placed directly under the supervision of the Prime Minister’s Office and the Ministry of Finance. This ambitious project has already embarked on the road to reality.

Pradeep Singh
NHDP will be a reality. There is money behind it. There is also the political will behind it. Some of the administrative bottlenecks are being dissolved. There were some problems with the annuity scheme. Many financiers have not been able to understand the financial risks. But over a period of time, the market will clear itself. The other programme of the project – of contracting – has substantial money from cess. The problem will arise in the eventual management of these assets because the O&M strategy is not yet in place.

Is the project likely to be completed on schedule? If not, what could be the possible impediments?

K.B. Gopalakrishnan
It is indeed a Herculean task to achieve the target. There are several hurdles along the way. The basic issues are:

• The country lacks sufficiently skilled project development companies (PDCs) which can professionally handle project development that is crucial to the success of the programme. Companies have to necessarily grow from the status of contracting companies to PDCs.

• Lack of sufficient long-term resources required for financing these projects. Funding may not be available after some time unless sufficient care is taken to nurture these types of financing. Tenor, risk profile, assessment and structuring skills required are altogether different from financial methods in the country. This may really pose a problem in the not-too-distant future.

The legal framework, contracting practices as well as divergent political stances are also serious hurdles in achieving this objective.

Mohit Saraf
It is unlikely that the project will be completed as targeted since a major part of the contract is yet to be awarded. The broad deadlines set by NHAI may not be adequate to achieve completion by the target dates. It may be prudent to set shorter deadlines within the large framework to monitor the stages of work to be performed. This would ensure that each stage has a deadline to be met.

Incentive-based schemes for achieving the deadlines can be introduced and for every failure to adhere to them, fines/costs can be imposed. Deadlines can be fixed with respect to awarding of contracts by NHAI. NHAI should also be made answerable for delays in awarding contracts.
The following possible impediments could come in NHAI’s way, preventing it from completing the project as targeted:

• Environmental clearances

• Acquisition of land

• Resettlement and rehabilitation of the displaced people.

• Raising finances for the required investment

• Capacity and development of the road and equipment industry

• Development of sophisticated consultancy services in the sector to conduct the necessary pre-feasibility and tariff studies

• Capacity of NHAI and MoST to study, prioritise and award projects by the target dates

• Force majeure

• Lack of enthusiasm from the private sector for stretches that are commercially less viable.

Pradeep Singh
There is a deficiency in the contracting industry in the country. Large contractors are simply not there. They do not have the modern equipment they require. They also do not have the financial muscle that is needed. Plus, NHAI is a small organization with limited manpower though, under the constraints, it is doing quite well. Therefore, there could be some delays.

What type of tolling should be used – annuity, shadow or a combination of both?

K.B. Gopalakrishnan
I would certainly welcome a combination of both and more. Recovery of user charges needs to be understood as a necessary evil if we need progress in infrastructure. The feasibility in each case has to be professionally evaluated and decisions should be taken on the basis of social cost-benefit analysis and with due consideration to balanced socio-economic points of view rather than on the basis of purely political or regional considerations. The general feeling that annuity-based projects are free from tolls needs to be dispensed withy, as this is only a method of financing and the authority/state can always toll the roads. I do not subscribe to the viewpoint that the annuity method is not suitable for India. An intelligent appreciation of the risks and mitigation measures would balance the risk and reward parameters, and it is a method a try.

Mohit Saraf
Shadow tolling is a lot similar to direct tolling except that the tolls are not paid by the users but by the government. The private entrepreneur receives a revenue stream from the concessioning authority based on the number of vehicles using the facility. Therefore, the traffic flow has to be monitored in order to determine the revenue stream. This model, therefore, relies on the use of forecasted traffic flows, which may not be reliable in the absence of reliable traffic studies. Since the revenue is based on count, this has the potential of being infested with a high risk of disputes and litigation. Therefore, under this model the risk is shared by both the government and the private entrepreneur.

In contrast, an annuity-based road financing scheme offers the lowest risk option for the private investor where a cash stream is guaranteed upfront and allows the investor to configure the project on a firm basis. Fixed annuity payments for the government would help maintain a cap on outflows and allow for flexible planning for a larger number of projects as the size of the cess-based revenue stream grows. Also, bids for projects based on this concept will be transparent, easy to evaluate, and have low risk of renegotiation and litigation. However, in this method one important ingredient for true public-private partnership, that is, sharing of risk, is missing.

In the case of long stretches, the annuity method would be preferable as it would reduce the revenue risk arising out of traffic risk. In the case of bridges, rail overbridges, bypasses and stretches where access control is not an issue, direct tolling would be preferable. However, where there are no alternative roads and it is politically difficult to collect or impose tolls, shadow tolling could be considered.

Pradeep Singh
The annuity method has an advantage of keeping the traffic risk with NHAI. Since it is the risk which is not within the control of the investor, it is a good idea to adopt the annuity method of tolling. In the early stages of market development, the annuity method is a better scheme.

Do you think such mega projects are sustainable in the long run?

K.B. Gopalakrishnan
I reiterate that we need to appreciate that the NHDP is a programme rather a single project. If this is appreciated, the concerns associated with mega projects may not be as relevant as they are perceived. I would consider this as an ambitious programme which requires vision and sustained efforts, coupled with indomitable will, for its execution.

Mohit Saraf
Before getting into the sustainability of such mega projects, I am of the firm view that such mega projects are essential for meeting our projected economic growth rate and easing the growing strain on the existing national highways. The alternative method of development, that is, a piecemeal approach, would increase this strain rather than decrease it.

Such mega projects are sustainable in the long run by an admixture of government initiatives and public-private participation. The identifiable sources of finance to sustain such projects could be budgetary allocations, cess levied on petrol and diesel, bonds, external aid, commercial loans, private sector financing, toll-related schemes, public/private sector partnerships, etc. It is unlikely that presently such mega projects can be funded on the basis of tolls – shadow or direct – and therefore, they require a combination of annuity and shadow tolling methods on a short-term basis. The aim should be to gradually move from annuity to direct tolling.

Pradeep Singh
Why not, as long as there is an O&M strategy in place. If we cannot maintain it properly, the project will get a bad name. This is a traditional problem in this country. We make assets but do not maintain them. In the process, the asset deteriorates and the initial investment is lost.

Will the revenue from NHDP be attractive enough for Indian banks and FIs to participate in more such projects in the future?

K.B. Gopalakrishnan
The revenues from individual projects may not be sufficient by themselves in many cases, undertaken as part of the programme. However, these projects are generally not sustainable on their own. Primarily, these are intended to encourage private sector participation in infrastructure and should not be seen as pure private enterprises. The state has a role to play in a variety of ways when it comes to funding these projects. Grant components, cash flow support, traffic guarantees, debt reserve guarantees, etc. are some of the methods followed to make the projects bankable. I am confident that if the projects are well structured, there will be sufficient interest from lenders. Certainly, there is a need for innovative financing packages to suit the requirements of long-term rupee financing of the projects. As the deal flow improves, the market is sure to see new and innovative structures that meet these needs.

Mohit Saraf
Yes, the revenue from such projects will be attractive for Indian banks and FIs to participate. The portion of revenue stream to cover debt servicing cost and operation and maintenance cost would come in the short term from annuity and shadow tolling arrangements and a portion of the equity returns from the realization of traffic projects. This is just the beginning and there is a long way to go before such mega projects can be funded on the basis of direct tolling. Direct tolling can only be successful in India if there is a political will to collect tolls and if the users can visualize the benefits of good roads and (as in the Western countries) agree to pay user charges for the same.

Pradeep Singh
This will depend on the willingness of the government and NHAI to understand the demands of the market and to provide adequate revenue to sustain investment interests. There should also be greater willingness and political will to charge the tolls that are required to be paid by the traveling public for good quality service. A strategy can be devised to target those corridors that have a high density of traffic and greater user willingness to pay, thereby using these to cross-subsidise other corridors.