Cape Town threatens lawsuit over tolls

August 23, 2011

Outrage over proposed R10bn winelands toll road project in the Western Cape

THE City of Cape Town is threatening legal action if the state goes ahead with plans to develop the R10bn winelands toll road project in the Western Cape.

The South African National Roads Agency (Sanral), which struggled this year to apply tolls to the Gauteng Freeway Improvement Project amid a public outcry about the high costs, has not yet begun construction on the winelands route.

Cape Town mayoral committee member Brett Herron said yesterday he had written to Transport Minister Sbu Ndebele to inform him about the city’s declaration of a dispute under the Intergovernmental Relations Act.

The project encompasses 105km of the N1 highway between Cape Town and Worcester and a 70km stretch of the N2 between Bot River and Cape Town. In 2003 the project received environmental authorisation and it was gazetted as a toll road in 2008.

Mr Ndebele had not received the letter yet, Department of Transport spokesman Logan Maistry said yesterday. “But I am sure that once it has been received there will be further engagement and consultation on this matter, including by the newly announced government commission on infrastructure,” he said.

Mr Herron said the letter was sent two weeks ago.

The city wants to meet Sanral next week to select an independent arbitrator for its dispute. The city alleges that Sanral’s processes, including its environmental impact assessment and its published intent to toll, were “flawed”.

Sanral did not address the city’s concerns during the public participation process, Mr Herron said. These included the socioeconomic effects of tolling . Motorists avoiding the tolls would use alternative routes belonging to the city, which “will impact on maintenance required”. “Sanral refused to discuss the City’s concerns…. Our letter to the minister is our last attempt at resolving this dispute before legal action,” Mr Herron said.

Toll roads “are always an emotional issue,” Sanral manager Alex van Niekerk said. “The bottom line is if you cannot come up with the money through taxes then you are either going to have (tolls) or not have the project.”

Source: businessday.co.za

Written by ITW Editor · Filed Under Road, South Africa, Tolling

Private bidders see profits in govt rejected road projects

August 18, 2011

Here’s a surprise: Corporate India wants to pay the government – and not be paid – to build roads.

In six recently awarded build-operate-transfer (BOT) contracts, the National Highways Authority of India (NHAI) had budgeted for a subsidy grant of Rs 270 crore. But the bidders promised it an income of Rs 6,350 crore over the life of the projects.

Experts are not sure if this is the result of aggressive competition or an underestimation of potential revenues on the part of government bodies. What the government thought was unviable seems to have been assessed as very profitable by private sector bidders, who opted for negative grants.

A negative grant is a premium a bidder offers to the NHAI to bag a contract it finds to be potentially lucrative. A grant is generally offered for projects which will not be able to recover their investments in a reasonable timeframe.

For example, rural roads are needed to connect villages to nearby towns. This offers economic benefits to villagers who are integrated to the mainstream, but revenues for the bidder may be low due to lack of traffic and the inability to pay. Tolls thus cannot be charged or have to be kept too low. In such cases, the government comes in to fund the viability gap with a grant. This is known as viability gap funding (VGF).

But when bidders offer to pay a premium for projects which the government considers unviable, it’s time to ask why. There is little doubt that roads are the only infrastructure projects to have gained some traction after a long time. The results of NHAI’s annual pre-qualification exercise show that competition has intensified. There were 98 unique bidders for 55 projects ranging from Rs 82 crore to Rs 11,350 crore. Five of the top 10 bidders were foreign players. With interest rates going up, international players have an edge over Indian companies who pay more for their money.

During the initial days of BOT projects, project bidders worked with internal rates of return (IRR) of nearly 20 percent. IRRs are commonly used metrics to evaluate the desirability of investments or projects. The higher a project’s IRR, the more desirable it is to undertake it.

In the recent round of bidding, some companies bid so aggressively that the IRRs went negative or lower than the cost of capital (cost of raising the funds for the project). For example, the equity IRR for the Khagaria-Purnea annuity project won by Punj Lloyd was 7.8 percent while for the Barasat-Krishnagar project, the IRR was negative.

It does not make economic sense for a company to take a project with a negative IRR, unless it is compensated in some other way, like development rights along the highway. However, in most of the recent BOT cases, such rights have not been awarded.

Industry observers say that since toll is collected in cash, not every rupee collected is reported. Faulty machines, power failures at the toll gates, and theft are various ways of showing lower revenues. Some companies auction a toll booth to outside agencies and are thus assured a minimum return, but the true value of the traffic is far above that recorded. It cannot be ruled out that the toll collection company is also a front company for the developer.

There is a possibility that NHAI may have been too conservative in estimating the commercial potential in some projects. This is all the more important as NHAI has been kept out of the purview of the Land Acquisition Bill, which means that they can acquire land at rates near market value – and not pay a premium for it. Infrastructure companies will increasingly be lining up for road projects, which are relatively hassle-free as far as land acquisition is concerned, rather than other projects.

Source: firstpost.com

Written by ITW Editor · Filed Under BOT, NHAI, Road