The reported decision by the government to raise the level of viability gap funding, or grants, for projects under the fifth phase of the National Highway Development Programme, may breathe some new life into a scheme that has stuttered to a halt. No project has been awarded in recent months because no one bid for some, while for others there was only a single bid. Even for projects which have received more than two bids, progress has been stalled because bidders have asked for a higher level of government funding. Problems have arisen on account of two developments. First, costs rose sharply because of the impact of rising global commodity prices. Second, the economic slowdown has affected traffic projections and hence cash flow through toll collection, while the financial crisis has made money scarce. In a related development, some leveraged real estate firms found they could not bid. The sharp fall in commodity process in recent months has rekindled interest, but cement prices have begun to rise again.
The government’s reluctance to raise the grant component is understandable; projects under the public private partnership mode are meant to stand on their own feet. Government financial support has so far been modest, while in some projects (in Gujarat, for instance) bidders have offered to pay the government. Raising the government subvention will therefore set a new benchmark, and raise questions about the logic of the PPP model. If up to a third of the money has to be given by the government, it will be asked, why shouldn’t the entire project be in the public sector?
To be sure, as the government spends its way out of the slowdown, there can be few more deserving beneficiaries than roads, particularly highways under the national programme. The governance structure for these projects has been carefully developed and the chances of leakage are relatively low (but not non-existent), given what goes on in some public works programmes. But if it is to raise the level of grants, the government must bear in mind a few key issues. One, the new agreements must provide for a payback to the government of the additional amount that it pays up front, as and when the economic momentum picks up again and traffic and toll collections improve. Otherwise the additional grant will amount to a windfall gain for bidders. Second, the government should give up toying with the idea of diluting the quality norms for such projects, in order to bring down costs because it will be counter-productive. Third, it has to eliminate players with a poor execution record.
Lastly, and perhaps most importantly, the ministry in question and the National Highway Development Authority have to put their houses in order. The highway programme got off to a good start during NDA rule a decade ago, but has suffered a serious slowdown during the life of the present government. The aim of the next must be to get its act together in this vital area. After all, of the 69,000 km of national highways, only a quarter has been contracted out so far, and the completed portion is a sixth of the total. Another quarter is said to be ready for tendering. Even if funding issues are resolved, and contracts awarded, it will be close to another decade before the work is complete. In other words, it would have taken the best part of two decades to upgrade just half the national highway network. As should be obvious, this is no pace at which to push an important infrastructure area.