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Negative VGF: A new angle in confidence?

Negative VGF: A new angle in confidence?

Roads Minister CP Joshi recently remarked that the success of NVGF bids reaffirms the confidence of developers in the efforts taken by the government in the highways sector, and that investors see prospects in the road sector. It was as though someone opened floodgates when 12 projects were bid out under NVGF. The number of bidders and the astronomical bid amounts reflect the confidence of the private sector in the overall growth of the economy, based on which they made the calculations. Could NVGF be the springboard for the catalytic leap that the sector has hoped for? Shashidhar Nanjundaiah says it just might be.

In late July, the Kishangarh-Udaipur-Ahmedabad str­etch became the poster boy of the National Highways Authority of India (NHAI). The largest ever high­way contract bid out is expected to cost Rs 5,500 crore. As one of the heaviest traffic corridors in the country, the contract tender was designed under the Negative Viability Gap Funding (NVGF) method, and GMR Highways bagged the spotlight for bidding what some experts, offline, are calling too aggressive, while others term visionary. NHAI had set a minimum bidding NVGF figure at Rs 298 crore, but was expecting up to Rs 500 crore per year. GMR's clinching bid of Rs 636 crore a year (with a 5 per cent increase each year) sur­prised even NHAI. Over a concession period of 26 years, GMR has guaranteed to pay NHAI a dramatic NVGF figure of Rs 32,506 crore that for the mammoth stretch.

As the VGF scheme is being studied by world experts as a benchmark, NVGF, the none-too-new method of Design-Build-Finance-Operate-Transfer (DFBOT), was first introduced two years ago, when Reliance Infrastructure bagged the 140 km Pune-Satara stretch of National Highway (NH) 4 in December 2009 through its aggressive Rs 90.90 crore NVGF bid. The Rs 1,725 crore plan to widen the stretch to six-lane also meant that R-Infra could start collecting toll while working on the six-laning. NHAI's sudden aggression is strategic and may prove fruitful in closing the gap with the tar­geted 7,300 km, scaled down from the earlier 9,000 km. Now, NHAI says, the 9,000 km target is quite achievable.

Shared vs fixed revenues

In 'normal' highway Model Concession Agreements (MCAs), up to a maximum of 40 per cent of the project cost has been provided under National Highways Development Project (NHDP) under capital grant, or VGF. Under NVGF, a constructor pays the government to get a contract on the grounds of estimates that a large surplus will arise on account of high traffic usage, on the basis of the company can offer to pay the government. The scheme enables NHAI to then deploy the additional revenues to less viable roads in underdeveloped regions and rural areas. Over time, the social benefit of this osm­osis is to ensure uniform development. In India, this would mean that the high-volume Northern, Western and Southern corridors would pay for the development of the less developed Eastern, North-Eastern and
Central corridors.

NVGF, also called negative grant or premium, is arrived at by calculating national growth, regional gro­wth, the growth of traffic in the region and on the stretch that is bid. Needless to mention, the revenue projections are more prone to political, economic and other external risks than other forms of bidding. This is particularly so in the new form of NVGF, which entails fixed annual revenues to NHAI regardless of traffic.

The funding to NHAI can ensue either in the form of an upfront premium by the company or on a revenue-sharing basis. NVGF started with revenue-sharing, but NHAI has bid out its projects in recent months only on fixed-revenue basis. The upfront premium method is the riskier method for the concessionaire, but with growing competition for the more lucrative highway corridors, companies seem more willing than ever to stick their necks out. NHAI has focused on reducing its own fin­ancial burden and risk in the process, opting to invest in non-plan, unviable projects from this assured sum. The projects bid out so far are expected to fetch the Authority a handsome Rs 77,000 crore (see table). Even at a nati­onal average cost of Rs 5.94 crore per km, it should be possible to build nearly 13,000 km of roads with the funds.

Limits of viability

The NVGF scheme, applied on the right corridor, will be the likely catalyst that NHAI and the roads ministry need right now. Saddled with accumulated shortfalls in achieved targets of constructed roads, pri­vate participation of quite another kind is being wel­comed with open arms. According to some estimates, a whopping 80 per cent of NH project investments will come from the private sector.

What are the factors that went into this vibrant and highly competitive welter of activity in NVGF? Only last year, Chief Economic Advisor Kaushik Basu had exp­ressed concern over what he called a “faulty policy” of VGF, whereby private developers enjoyed up to 40 per cent VGF and did not commit to quality. The past three years witnessed a build-up of rhetoric but not enough projects bid out, and so constructors waiting in the wings jumped at the opportunity when they saw in, causing intense competition. This is in contrast to previous bids, when takers were fewer and demanded 35-38 per cent VGF. Many experts also believe that companies have been keen to grab orders to shore up their order books and share valuations, and in the process are making unheard of high bids for the projects. One way or ano­ther, “Negative grants are economically the right model for the country,” says Vinayak Chatterjee, Chairman, Feedback Infrastructure. “We should look at negative grants as an equivalent of a licence fee.”

As with any project, extra aggression bothers pot­ential financing agencies, which depend almost solely on cash flows through the concession period for the purpose. More lucrative than any greenfield roads (none so far are greenfield) are the brownfield projects that require widening and where toll would start on the existing road while widening is ongoing. As 6,500 km are up for widening under Phase V of the NHDP, the Pune-Satara experience sets the perfect example for what is to follow on the remaining parts of the Golden Quadri­lateral. R-Infra says there was initial public resi­stance to the toll, but the project is on track now, and is paying toll each month to NHAI. Lalit Jalan, CEO, attributes this positive trend to the company's and NHAI's efforts in effective liaisoning at the ground level: “There have been relentless efforts from R-Infra towards continuous improvement of checks and balances with respect to toll management and communication with various stake holders for optimum toll collection.”

Although NVGF comes with the big question mark on where to draw the limits of viability, experts are optimistic about its sustainability in selective Indian conditions. Predictably, the conditions are region-spe­cific, which in turn depend on the degree of develo­p­ment of hinterlands and ports. The nation's busiest ports are in the West and have hinterlands and markets in the North, making that corridor the most lucrative. With the Western Dedicated Freight Corridor (DFC)-pro­jected to be completed before its 2017 deadline-and the Delhi-Mumbai Industrial Corridor (DMIC) in the making, an estimated 70 per cent of the cargo traffic in the country will ply on the western seaboard. The demand for this stretch will therefore remain the most competitive, as showcased in the Bharuch-Vadodara and Bharuch-Surat stretch bids, the highest so far. The Kishangarh-Udaipur-Ahmedabad stretch will beat both in the NVGF figure, although the former have much smaller lengths (83 and 65 km respectively).

Dealing with competition

So, are the quotes for the Kishangarh-Udaipur-Ahmedabad stretch unrealistically aggressive? Feedback's Chatterjee does not believe so, and calls the bid amounts 'visionary'. He explains the factors why the amounts probably showcase the true potential of the corridor: “The stretch, up for NVGF bidding, caters to the ind­ustrial heartland of India and is one of the highest den­sity traffic corridors with very high regional and traffic growth potential because of regional industria­lisation and export growth. The shift in India's vehicular mix towards multi-axle vehicles (MAVs) is imminent, as a continuing growth in containerisation indicates-yield­ing higher tolls on highways. Considering these factors, the quotes are visionary.”

MAVs actually reduce the costs of maintenance, since they help in reducing the burden on the pavement surface. Clever bookkeepers would factor that fact into their estimates; indeed, some experts believe MAVs should be given toll concessions, both in encouragement and for doing less damage to the road. Similarly, double-stack container movement on roads, too, will mean more efficient ways of transport.

Unseen circumstances such as political decisions and external situations such as the global economy, do have some impact on estimated revenues, but most pra­ctitioners believe it all evens out over time. Competition from unforeseen aspects will continue to give developers the jitters-such as a parallel un-tolled road, which may be necessitated by a social-develo­pmental decision taken at the government's level. Such competition will have two effects: it will reduce the revenues, throwing pro­jections out the window, and second, it will elevate the level of resentment towards toll roads in other areas where there are no alternative roads, and perhaps raise demands for more un-tolled roads.

Infrastructure finance experts have always lamented that project structuring and the players' lack of infrast­ructure experience, not the availability of finance, is the real problem in the department. Whether NVGF will truly catapult the roads sector towards a healthy len­gth of highways and roads every year, and what the spe­cific plans are for utilising the revenues from NVGF, are speculations into the horizon.

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