Will the roads' MCA spur or stop investment?

The issue is whether the greater sharing of risks involved in the Model Concession Agreement will help bring more private investments in roads.

HEMANT SAHAI,
Managing Partner, Hemant Sahai Associates, Advocates

"The earlier model of fixed returns offered few incentives while the MCA does this; insisting on pre-acquisition of land reduces litigation"

I t appears that certain vested interests are carrying out a systematic campaign using the MoST/NHAI as a surrogate, to undermine the Model Concession Agreement (MCA) for built-operate-transfer (BOT) projects for highways. An impression is being created that the MCA will not promote private investments. It also appears that some of these objections are being attributed to the Ministry of Surface Transport (MoST)/National Highways Authority of India (NHAI). The reasons being advanced for objecting to the MCA include "" (i) the returns to the concessionaire are severely impacted; (ii) greater risks are being put on the concessionaire; (iii) MCA provisions on land will delay execution of projects.

The facts are that the MCA was originally proposed by the MoST and was discussed at length by the inter-ministerial group (IMG) chaired by secretary, transport, with the chairman of NHAI and representatives from the law ministry and the Planning Commission as its members. The IMG recommended the MCA to the Committee on Infrastructure (COI) headed by the prime minister, which approved the MCA. The MCA was evolved through a process involving wide debate, meetings, consultations and interactions with diverse stakeholders, including private developers, bankers, investors, international consultants and lawyers. The MoST/NHAI was part of this entire process. Significantly, to my knowledge, no official objections have ever been filed by the NHAI to the MCA.

On merits, the MCA evolves a structure with a balanced sharing of risks between the concessionaire and the authority (NHAI/state) "" this is not only consistent with international practice, but it also meets the long-standing industry demand for a greater sharing of risks as this would enable it to maximise returns too, commensurate with the risks. The earlier model of pre-determined, fixed returns did not incentivise developers adequately.

As regards returns to the investors, the MCA framework does not specify any rate of return, it merely establishes the risks sharing matrix and the investors bid on the basis of the lowest grant sought from the government or the highest negative grant, that is, amounts that investor will pay to the government. Therefore, the investors bid on the basis of their assessment of the risks and their ability to manage them. Significantly, the bundle of risks is the same for all investors and, therefore, the bidding process under the MCA maximises efficiencies, is market-driven and throws up the most efficient bids.

The land-related provisions in the MCA are innovative and provide that the NHAI/Authority must make available not less than 80 per cent of the land required before the appointed date, that is, before the rights and obligations of the parties are triggered. The balance 20 per cent of the land has to be made available in due course and in the meantime, the concessionaire is entitled to complete the project and commence collection of tolls. I understand that based on subsequent inputs from the NHAI, the figure of 80 per cent above has apparently been reduced to 60 per cent "" this demonstrates that the MCA continues to be essentially an NHAI document.

Under the earlier regime, delays by the NHAI in acquiring the entire land, delayed completion of the projects and led to claims by the concessionaire who was allowed to start construction in anticipation of the balance land being made available to him. The notable example is the Delhi-Gurgaon expressway where, due to a relatively small amount of land not being made available, the completion of the project has not only been delayed, the concessionaire has raised significant claims on the NHAI.

The MCA obligates the NHAI/Authority to complete acquisition of significant portions of land before awarding the contracts. This framework ensures timely completion and also obviates grounds for claims for damages for loss of profits. Clearly, ensuring efficient project execution is more desirable than awarding contracts without adequate preparatory work and planning. A myopic approach of awarding flawed projects for the sake of maximising numbers, has to be avoided "" the long-term costs of this approach can be debilitating.

PARTHA MUKHOPADHYAY,
Senior Fellow, Centre for Policy Research

"The one-size-fits-all approach of the MCA can dampen usage "" this and other shortcomings will be misused to delay PPP in the roads sector"

Even if the new Model Concession Agreement (MCA) does attract investment, which is as yet undetermined, it will attract the wrong kind of investors. It has, inter alia, a complicated mechanism for linking concession period to traffic growth and a complex option on the concession period, leaving ample room for dispute. Thus, investors who believe they can renegotiate contracts will bid aggressively. Ex post, it means that the government is unlikely to get good value for money. Another feature that is likely to lead to delay and renegotiation is the restriction on competing roads, which is anti-growth.

The complexity of the MCA is due to an ill-thought through effort to address many objectives, such as sharing of traffic risk, keeping road capacity flexible and forestalling unreasonable bids. It is a cacophonic melange without a cohesive framework. This is a pity since a much simpler and elegant concession structure, that is, bids based on Least Present Value of Revenue (LPVR) could, with little refinement, address all these concerns.

In an LPVR concession, the government pre-specifies a discount rate; and the bidder who bids the least present value of gross revenue wins. The actual revenue collection from toll is monitored and when its discounted value reaches the bid amount, the concession is closed. When traffic exceeds expectations, the concession period becomes shorter, and vice versa. Lending to these concessions is safer, since it will be possible to repay loans, albeit with a little delay at times and with prepayment on occasion. This concession also preserves flexibility on road capacity.

The equity returns from traffic upside in LPVR concessions is limited, which is fair, since such upside on highways is unlikely to flow from the concessionaire's efforts, who can do little to affect traffic flows. Indeed, once the initial construction risk is over, roads under this concession structure are attractive to investors looking for relatively assured long-term stable returns like pension and insurance companies, providing them a much needed new investment opportunity.

The new MCA also makes poor use of private investment in tolling by specifying an antiquated toll system. Negative capital grants raise the question of whether public interest would be better served by providing a higher level of service. Sensible toll policy should focus on growth and development, by promoting road use, tempered by considerations of cost recovery. A key benefit of roads is the externality from better connectivity. Badly designed one-size-fits-all user charges can dampen usage, reduces this benefit and may be self-defeating, even for viability.

Today, with our dense telecom networks, we can implement a smart road pricing system that is inter-operable and barrier-free, based on a grid of electronic roadside devices and plazas that communicate with on-board vehicle units (OVUs) at regular intervals, and permits tolls to vary by time of day, vehicle type, location and distance traveled. Such a system is affordable even today both in terms of implementation and in terms of the cost of OVUs and could be installed in short order, especially for heavy goods vehicles. The Railway's Freight Operations Information System already uses software with similar characteristics. Until then, a uniform national toll system could begin, based on Taiwan's practice, where users pay with standard priced coupons purchased in advance, which give benefits like shorter waiting times at plazas low-cost working capital and easier revenue monitoring. This can be implemented forthwith on the non- built-operate-transfer (non-BOT) sections of the completed National Highway Development Programme (NHDP).

There are many other inadequacies in the new MCA, such as its insistence on 80 per cent land acquisition, which, while good in principle, is overdone. This and other shortcomings of the new MCA are likely to be misused to delay public-private partnerships (PPP) in roads by those who do not want it. Fixing these glitches in the MCA now will forestall this and ensure much needed progress on the NHDP.