Image: Arko Datta/ Reuters
Land is a prerequisite, and as long as there is uncertainty about its availability, investors will remain interested
Fortunes of men and nations are built on the back of good roads. The Silk Road and the Grand Trunk Road brought prosperity in ancient times. The Golden Quadrilateral that connects the four Indian metros is doing something similar today, giving rise to new constructions and businesses along the highways and better accessibility to farms, processing units and manufacturing hubs.
Now Kamal Nath, the Union Minister for Road Transport and Highways, wants to build many more roads to prosperity and a faster pace. His plan is ambitious: an average of 20 km a day; 35,000 km of roads in the next five years. His budget? Rs. 1 lakh crore this year itself, and Rs. 3.5 lakh crore by 2012.
But where will the funds come from? The Union Budget 2009-10 allocates about Rs. 15,948 crore to National Highways Authority of India (NHAI) for the National Highways Development Programme. Kamal Nath expects FDI of $10 billion (Rs. 50,000 crore) over the next two years.
Much of the additional funding is likely to be through public-private partnerships (PPP) or on an annuity basis (both are part of the build-operate-transfer or BOT route). The PPP mode allows tolls to be charged; the annuity route compels the government to pay a return to the builder each year (almost akin to returns on a fixed deposit). Some roads may also be given out on an engineering, procurement and construction basis — like a contract.
But many believe that these methods are unlikely to garner the kind of money Kamal Nath needs. Even just keeping the existing road network of 33 lakh km in good repair would cost many times the amount he hopes to raise.
Roads are critical for India’s economy. Almost 70 percent of freight traffic and 85 percent of the country’s passenger traffic travels on them. National highways — which come under the Central government and account for just 2.2 percent of India’s roadways — carry more than 40 percent of the traffic. Much of the highway network is two-laned. Four-lane highways account for just 16.4 percent of India’s highways, six-lane just 0.35 percent and 8-lane a measly 0.06 percent. A New Route
To finance these roads, Kamal Nath has begun looking at the structuring of the Ganga Expressway project awarded to a private promoter, where the funding of the 1,047 km expressway is to be met through the exploitation of development rights. The government pays nothing.
Such a financing model is quite appealing because: The government ceases to be a financier allocating funds, as these will be brought in entirely by the road developer; the common man need no longer pay toll taxes, as the developer could afford to waive them off; the government earns money through a revenue share.
Kamal Nath admits that a new policy on this method of funding and development is being worked on.
The Rs. 40,000-crore Ganga Expressway project was awarded by the UP government to Jaiprakash Associates (JP) on a BOT basis. To finance the cost of construction, JP has also been given development rights along this route. JP plans developing five-six economic zones of around 4,000 acres each. Taxes and charges (commercial advertising, parking fees, etc), as well as associated businesses (real estate development, hotels and power generation) will pay for the entire project.
This large project has found favour with investors. In March 2008, ICICI Bank agreed to invest Rs. 2 billion, and also arrange for long-term loans worth Rs. 9 billion. JP is now talking to foreign investors as well. It promises to fetch excellent revenue streams both for JP and the government; the latter is expected to get a share of the revenues.
But all this was in the pre-meltdown days. Currently, fund-raising has become a bit more difficult: JP has reportedly deposited with the state government only Rs. 100 crore of the Rs. 400 crore required.
Besides, the project has run into some road blocks: The Allahabad High Court has stayed work on it till the UP government gets fresh environmental clearance. The continuing muddle over land acquisition could pose a bigger problem (over 62,000 hectares, most of it farmland, are yet to be acquired), especially if the central government does not pass its bill on this issue. Land-locked in Hurdles
Clearly, the legislative pieces have to be pegged in: The entire process has to be worked out as a policy and the issues around land acquisition have to be resolved. Such a model requires careful detailing (the minimum standard it will adhere to all through the 30 years of the mandate). Legal provisions — like the creation of a performance-and-specification-linked bank guarantee — need to be worked on. This will also require a speedy dispute resolution mechanism so that cash flows do not get adversely affected.
The project cost under the development-right-based model is likely to be twice or even thrice the cost of a conventional road project, because other infrastructure is being developed as well. But land is a prerequisite, and as long as there is uncertainty about its availability, investors will remain uninterested. In fact, the stalemate on land acquisitions could prove to be the biggest stumbling block — especially because this model requires additional land than just for the highway. Like so many other infrastructure projects, the highways mission would remain on paper if this is not resolved.
Lastly, it needs careful policy planning to determine the share that the state government will earn from the project on an ongoing basis.
Kamal Nath knows that steering such a policy will require both vision and tact. It has to be done in partnership with state governments, because exploitation of development rights is a state subject. He will have to persuade the finance ministry to create a very attractive package of financial incentives for the road sector — for the states as well as private players.
If the incentives are excellent, promoters will learn how to persuade their respective state governments. If the issue of land acquisitions is resolved, the norms well defined, and the plan contours carefully designed, money is bound to flow in.
A New Way To Fund Road-Building
- The Need is Rs 10,000 crore in 2009-10
- Budget Allocation- Rs 15,948 crore (approx)
- FDI Expectation- Rs 50,000 crore ($10 billion) in the the next two years
Allot land development rights to the private player. The Project is financed entirely by the private player, who could get an internal rate of return of 50-100%. However, assuming all iother costs to be the same, in this model, project costs could be higher as additional land would need to be acquired and developed along the highway.
(This article is excerpted from the latest Forbes India 25 September, 2009 issue which is now available at news stands and book stores. You can buy our tablet version from Magzter.com)