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Expertspeak: Building in before bidding out

Expertspeak: Building in before bidding out

How can BOT contractors with NGVF improve their returns from highway investment? JD Stuart Macaskie itemises what measures the scheme should take to extract more financial and efficiency benefits.

Since the government announced the creation of the Golden Quadrilateral and the North-South and East-West corridors in the late 1990s, there has been a significant increase in the expenditure on the major road networks throughout India. Initially, the spe­nding was through direct investment by the government and some Public-Private Partnership (PPP) projects. Generally, these projects involved Viability Gap Funding (VGF) by the government.

The recently introduced Negative Viability Gap Funding (NVGF) has the potential to provide a signi­fi­c­ant additional source of funds to the National Highways Authority of India (NHAI) while also stimulating gre­ater investment in new road infrastructure. NVGF is cle­arly a move to increase returns from highly trafficked sections of the road network and fund investment in the less viable areas. However, some measures could be ado­pted to improve and optimise the benefits to the general economy of the investment in roads, while also increa­sing returns to NHAI.

Defined benefit: First, the return to the general eco­nomy can be quantified by taking the number of vehicles travelling and the time and distance saved by the new facility. This gives a defined cost benefit for a scheme. Currently, many projects do not provide the optimum cost benefit, as they do not optimise the speed of travel.

Risk Management System: Secondly, there are sig­nificant risk factors in undertaking a road project as a concession company. These include political risk, land acquisition, right-of-way negotiations, competition from other new roads and ultimate usage volume risk, exa­c­erbated by the lack of availability of quality traffic data. Risks have to be built into any calculation for viability of a project, and hence reflect directly in the final price. The client needs to understand these risks fully and look at areas where the risk can be mitigated by the contract conditions or shared to give the most efficient return to the government. A professional risk management system for all major road projects could increase the effectiveness of those projects and the return on investment.

For whom the toll rings: Currently, tolls are collected by cash or by use of devices attached to the car, which have a prepaid amount built in, and tolls can be deducted from this amount. The refilling of these devices is often slow and tedious. Also, the “Card Only” lanes are freq­uently clogged by vehicles without cards, but wanting to join the shorter line-up, thus neg­ating the advantage of the whole system. One pos­sibility would be to use a toll collection card, suitable for all tolls through a central system, similar to Singapore. This can be topped up qui­ckly and easily remotely. To discourage cash payments in “Card Only” lanes, it is suggested that there be a dual tariff system. Hence, the driver can choose the Card Only lane fre­ely, but has to pay a significantly increased toll if he does so. This would be welcome to the person ge­nuinely in a hurry, but deter the majority of vehicles infringing the rules. This possibility would likely req­uire changes to the concession contract. Again, miti­gating these problems could significantly increase flows and improve travel times, leading to increased usage and returns.

Concession contracts for roads are always awarded following a competitive tender. Hence, the tenderer can have the option to include a request for VGF or an offer of NVGF in the offer. The NHAI must then verify the robustness of the bid and its underlying assumptions, prior to awarding to the most appropriate concession company. The principles that I have outlined above co­uld be incorporated into that evaluation, and used to optimise the level of investment, rate of return and risk mitigation. Thus, the increased returns could be utilised to speed up the whole improvement programme and bri­ng an earlier benefit to the economy.

The author is CEO, Maxwell and Stuart Project Management Pvt Ltd.

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