Gajendra Haldea, principal advisor (infrastructure) in the Planning Commission, believes in public private partnerships for growth. He gave the country the model for its first major PPP road project, from Jaipur to Kishangarh. With the poor performance of the roads sector being blamed on the PPP model, he tells Mihir Mishra and Vandana Gombar that the real problem is the attitude and working of the National Highways Authority of India (NHAI) and not the PPP route. Excerpts:
We all know that the roads sector has turned in a dismal performance and one view is that it is the model concession agreements (MCAs) which have impeded progress. Do you agree?
There have been motivated reports about the MCA. They could perhaps, be with the intent of covering up for other failures or vested interests. I am not aware of any proposal of the Highways Ministry to amend the MCA. They are free to amend the MCA after consulting other relevant Ministries, but no such move was made during the past two years. The MCA was finalised by an inter-ministerial committee under the chairmanship of Secretary, Roads after extensive consultations with all concerned. Subsequently, it was approved by the Committee on Infrastructure in September, 2005 i.e. almost 4 years ago. A number of concession agreements have also been signed on that basis and no problems have been reported. So I really don’t understand why this issue is being raised time and again in the media. If there are any problems, I see no reason why they can’t be resolved.
So, what do you think is the reason behind the dismal performance of the road sector?
My own view is that a large part of the responsibility rests with the NHAI, which has shown poor performance relating to projects under the Public-Private Partnership (PPP) mode. Not that it has done any better under its traditional cash contracts for construction. NHAI had all the freedom and opportunity to at least do well in its traditional contracts. However, its own construction projects suffered from huge time and cost overruns. For example, most of its projects take an average of about 60 months to complete while PPP projects take about 29 months. The cost to the exchequer is also about twice the contract amount whereas PPP projects have no cost overruns. So with double the time and twice the costs, can NHAI claim to have delivered in its traditional role?
So far as PPP projects are concerned, lack of capacity and relevant skills as well as the prevailing mindset have been responsible for the dismal performance. Pursuant to a Cabinet decision two years ago, NHAI was expected to create a separate PPP division with the requisite skills for structuring and delivering PPP projects, but they have not done so yet.
It is a common phenomenon that organisations dealing with cash contracts for construction and maintenance typically resist the introduction of PPPs. NHAI seems no different.
When we speak to the bidders they say that the problem is projects are not viable...
That is because of the problem of over-engineering which leads to unsustainable costs. NHAI has added several expensive elements to the project design. As a result, the estimated costs of six-lane projects have been doubled in just about two years i.e. from Rs. 6 cr. per km to Rs. 12 cr. per km. This includes introduction of mini-flyovers every four kilometers to enable bullock carts, camels and elephants to pass under the highway. If such expensive structures are to be built, then either the users will have to pay higher toll rates or the taxpayers must bear the additional burden. No bidder can subsidise these costs.
In recent years, NHAI has built four lane highways where traffic for the next decade will only require two lanes. This means that an investment of over Rs 5 crore per km will lie idle. With the same money, several thousand kilometers could have been upgraded across the country. The real problem with over-engineering is that it prevents an optimum use of scarce resources, as a few roads get over-engineered at the expense of the network as a whole.
The other significant problem was that the NHAI did not invite any bids for nine or ten months in 2008, but bunched a large number of bids in December 2008 when the global financial meltdown was at its peak. Given the unsustainable project costs and the financial crisis, lack of bidder response was entirely predictable and NHAI should have seen it. Unfortunately, NHAI did not pay heed to counsel from several quarters.
So the funds crunch was part of the problem too...?
Not really. If the bidding process had been phased out and the project costs had been rationalised, credible bids would have certainly come. For example, only last month, NHAI got a negative grant for the Hyderabad-Vijayawada highway where no viability gap funding was sought by the bidders. On the contrary, the successful bidder will share about 32 per cent of its annual toll revenues with NHAI for the entire concession period. As long as the projects are viable, which means that they have been designed rationally keeping in mind the traffic volumes, bids have come and will continue to come.
Take a specific example. If the traffic justifies a two-lane highway as per established standards of the Indian Roads Congress, but NHAI invites bids for a four-lane highway, it would fail as the toll revenues cannot support the cost of a four-lane highway.
Is there any proposal to make some changes in the MCA?
The MCA is not cast in stone. Changes have been made in the past at the instance of the Ministry and the NHAI. For instance, the MCA provision requiring the handing over of 80 per cent of the project land prior to commencement of construction was modified to 50 per cent even though the Planning Commission did not think it was a good idea. I believe, many people are now convinced that we should revert back to 80 per cent.
For the present, I cannot recall any proposal of the Highways Ministry suggesting changes in the MCA. If the Ministry wishes to modify the MCA, they are free to do so after following the due process. Surely, all others would like to support the Highway Ministry in accelerating their programme.
On a separate note, we need to recognise that an MCA addresses the rights and obligations of multiple stakeholders such as the concessionaire, the lenders, the public exchequer and the users. Sometimes, these interests are conflicting. For example, the concessionaire’s profit motive would drive it to seek lower standards and higher toll rates while the users would want the opposite. There would always be demands from different stakeholder groups for modification of the MCA in their favour. The Government has to take a call and ensure a balance.
Going forward, what do you think needs to be done to ensure that roads are built?
First and foremost, NHAI needs to be restructured as per the Cabinet decision of 2007. Secondly, project costs need to be rationalised and wastage of scarce resources must be checked. Our main objective should be to build high quality roads at the lowest possible cost and to extend the road programme speedily to all parts of the country. The present Minister has announced an ambitious programme and I think that is the way to go.
Is there a case for increasing the viability gap funding?
No, the viability gap funding (VGF) limit of 40 per cent is already high. I think every project should be structured in a way that it attracts bids with a zero VGF. Please remember that the concessionaire is not bearing the cost of land, resettlement, afforestation etc. It is also getting the existing road free. So the projects already have a high level of government support and the concessionaire is only required to meet the incremental costs of upgradation, which in my view, should be supported by toll revenues. This is possible in most cases by using cost-effective designs and by adopting phased development. However, VGF may be required in some backward areas or where the law and order situation poses additional risks. In my view, VGF should be an exception, not the rule.
The new roads minister Kamal Nath has talked about laying 20 km of roads a day. Is that realistic? Can it be done?
It is very much possible, but it cannot happen immediately. It will take a great deal of effort to restructure and energise the NHAI. Several procedures and processes would have to be streamlined and standardised. Moreover, NHAI alone cannot deliver such a large programme and the respective state governments would, therefore, have to be authorised to take up national highway projects with central support. I believe the present Minister can do all this and more. Given his track record, I think the highways sector can really look forward to a complete rejuvenation. Its time has come, at last.
On the broader infrastructure front, how have we fared in the first two years of the 11th Plan? Will we be able achieve the investment target of $500 billion for the plan?
I do’nt think we will be able to achieve the $500 billion investment target. This is mainly because of some start-up delays which were compounded by the global meltdown. Moreover, this projection of $ 500 bn was based on an average GDP growth of 9 per cent per annum, which has now been scaled down. As a result, there will be some shortfalls. The trends are, however, positive. Investment on infrastructure has already increased from 4.8 per cent of the gross domestic product (GDP) in 2003-04 to about 6 per cent of GDP in 2008-09. The target is to ramp it up to 9 per cent of GDP by 2011-12. With concerted efforts, this may still be possible. A great deal of work has already been done and there is a huge volume of low-hanging fruits ready to be plucked. I am very hopeful that we will see a great deal of progress in the infrastructure sectors during the next few years.
