The finance ministry today suggested a transparent auction system with no involvement of the government in awarding road projects.
If private developers are made to compete with one another, this would lead to the contractors offering projects on most cost-effective terms. “To make the tendering process in road projects more effective, there is a need to put into effect a transparent well-designed system of auction whereby developers are made to properly compete with one another with no involvement of the government,” said the mid-year review of the ministry released today.
If the system was well designed, the implementing agencies should be able to find developers who would take the projects with internal rates of returns as low as 12, 13 or 14 per cent, said the analysis.
The document placed in Parliament today also proposed a new system of building roads by amalgamating the existing build, operate and transfer (toll) method and BOT (annuity) by making the contractors more involved in the project.
In the new system, the paper has proposed that 10 per cent of the total viability gap funding (VGF) should be paid upfront and the balance should be paid in equal instalments for the next 20 years. The toll collection should also be managed by the developer that builds the roads.
“In this system, the developer will be interested in the road, as it will receive annual payment. Further, since the developer will be collecting toll, it will have a direct interest in maintaining the road,” the review says.
And since the developer will maintain the roads itself, by the argument of backward induction it follows that the developer will have an interest in building good quality roads, for which the maintenance cost is not excessive, it adds.
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BOT toll and annuity are two forms to build roads under public-private partnership. In the toll method, a developer builds the road and collects its investment over the concession period during which it can collect toll.
In annuity, it builds the road and the investment made in that particular project is paid by the government to the developer in equal instalments. Toll collection in such projects is not done by the developer that has built the road. Instead, the state-run National Highways Authority of India collects the same.
VGF is the fund released by the government to make the projects financially viable and is paid only in BOT (toll) projects.
The survey also identified delays in land acquisition and forest clearances as major stumbling blocks in road construction.
The progress of road construction in the first of half of this financial year has also been dismal. According to the mid-term analysis, during this period, only 691 km of roads have been completed against a target of 2,500 km for the entire year.
Contracts and concessions for only 3,051 km had been awarded against an annual target of 8,724 km, it added.