New path or alleyway

October 12, 2006

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Are contractual ‘innovations’ holding up the showpiece highway project?

It continues to be a slow trudge on the fast lane. Barely 35 per cent of the contracts for the North-South East-West corridor (NHDP-II) have been awarded. This lethargy in the awarding of contracts by National Highway Authority of India (NHAI), under the UPA, is predictably bound to lead to long delays in the construction of the highway network across the country.

There are differences among ministries due to policies related to annuity projects and tolling regulations. However, the biggest difficulty is reported to be the framework of public-private partnerships. The move away from a policy in which the government pays for all roads, towards one where the private sector invests while hoping to make profits, is new for India. The PPP framework proposed by the Planning Commission Committee on Infrastructure has taken the shape of a new Model Concession Agreement (MCA). The MCA was cleared by the Committee on Infrastructure a year ago but has yet to get agreement from other ministries.

What have been the difficulties with existing road projects? What is the framework for public-private partnership projects? And what is new about the MCA? Some of the major difficulties with the national highways draw from delays. For example, the 27.7 km long Delhi-Gurgaon Expressway, originally proposed to have been completed by July 2005, is unlikely to be completed by the revised deadline of December 2006.

Only two of the five flyovers slated to be ready by September have been opened to traffic. According to a report published in this newspaper, the project may even drag on until the end of 2007. The cost of the project has escalated from Rs 550 crore to Rs 800 crore. Delays in NHAI projects in other parts of the country have been well documented in The Indian Express reports through the past year.

Who is responsible for the delays? The builder often blames problems in land acquisition, the NHAI blames the concessionaire (that is, the builder). For example, on the Delhi-Gurgaon Expressway, a senior NHAI official said, “The delay in the project is due to the slow progress by the concessionaire and also due to rains, which were not taken into account.”

How can the private builder be encouraged to complete the project on time? The financial viability of a project is determined by four features: traffic volume, user fee, concession period during which he will build and operate the road, and capital costs. The first three are pre-determined. Under the PPP framework, depending on his costs, the builder bids for a grant/subsidy from the government, generally up to 20 per cent of the cost of the project. This can even be a negative bid where the builder finds the project so profitable that instead of asking for money to build the road, he actually pays the government to gain the monopoly to build and operate that stretch of the national highway.

The MCA spells out a policy and regulatory framework for investment in highways on a build-operate-transfer basis. In line with current international practices, it proposes technical parameters based on output specifications, which affect services for users, rather than construction specifications as has been the standard practice in India in the past. Approvals are to be given upfront when all project parameters such as the concession period, toll rates, price indexation, and so on, are defined. It specifies a tight schedule of 180 days for project implementation. In case road construction does not start in this six-month period, penalties have to be paid by the builder. Further, banks giving loans for the project get a much greater role in the assessment and financial management of the project.

There are higher risks for builders, but private builders say they find it attractive because the higher risk is offset by the possibility of getting higher returns. In the earlier framework the builder would receive a fixed sum of money. Now if there is greater traffic volume growth, or if the builder is more efficient in construction, he benefits.

The agreement also creates a set of rules for reducing the risks for banks lending money for the project. By increasing the possibility of higher profits for builders and by reducing the risk of lending by banks, there is an attempt to make the highway project more attractive for private partners.

What is new about the MCA? It takes away a lot of the discretionary power of the NHAI. It reduces the day-to-day interaction between the builder and NHAI engineers. It proposes a ‘hands off’ approach so that the NHAI is allowed to intervene only in the event of default. The NHAI will not be able to hold up approvals and money based on various construction linked specifications being unmet.

The NHAI and its ministry, the ministry of roads and surface transport, are reported to be unhappy with the MCA. This has led to no contracts being granted under the MCA. One of the difficulties is that the MCA proposes that 80 per cent of land acquisition, which has often been cited as the cause of the delay, be done before the contract is awarded. This may be ideal, but it is often the case that the government leaves the contractor to deal with difficulties in land acquisition.

It is felt that this clause may further delay land acquisition as state governments which are supposed to acquire the land will simply not do the job and therefore actually delay projects more. Whether the MCA will actually reduce delays, bring more efficiency and lower costs remains to be seen.

The NHAI may feel the need for greater flexibility in giving contracts and this may cause some difficulties. Only time will tell whether the MCA will be effective in bringing down costs, delays and corruption and whether the delays of the last few months over the new framework were worth it.