The net present value of the bids NHAI has received this FY from NVGF from 12 projects on DBFOT is to the tune of Rs 16,500 crore. JN Singh, Member (Finance), NHAI, explains to Shashidhar Nanjundaiah why this limited revenue stream will go a long way in all-round road development.
How will the negative grants that you have received help National Highways Authority of India (NHAI) in its planning now? How will NHAI deploy the funds they have received?
We have also done some calculations as to what is the difference. In many other projects, we were expecting to pay Viability Gap Funding (VGF), but we ended up receiving premium. That reflects very well on our finances. Where we had anticipated a premium, we endÂed up getting high premium.
For example, we expect a premium from the Shivpuri-Dewas project. In the Kishengarh-Udaipur-Ahmedabad project, where we expected a lower Negative VGF, we are getting a higher premium. These cost on board and that is what we are getting from many other projects.
The ones I've mentioned are some of the very viable projects. But a majority of the projects that will come up in Phase 4 of National Highway Development ProgÂramme (NHDP), for example, are in states with relatively low traffic, such as in Bihar, Eastern Uttar Pradesh, Orissa, Assam and the North East. We will deploy the funds there. So one region of the nation will subsidise another and help in uniform development. Land acquiÂsition remains our baby, and we are also payÂing substantial amounts of money towards acquisition cost. Over time, we need to deploy huge amounts for roads nationally.
Will this (premium) form of contract continue on major highways?
This type of bidding is possible only in west and south India, and parts of north India. Recently, we had a bid in Orissa where we had higher VGF than what is expected; so, in parallel, that trend will also continue.
Since we are building four-lane highways across the country, though, the lesser developed regions will catch up over a period of time.
How do you develop feasibility reports for premium bids?
We have many financial consultants throughout the country who assess the total project cost of the road deÂpending on what projected traffic would be like. Then we get the traffic assessed 1-2 weeks before making the feasibility report and on that basis, we extrapolate traffic growth at about 5 per cent, a very conservative figure. The traffic in many parts of India will grow at more than 5 per cent, even up to 7-8 per cent. That is what diffÂerentiates between what we had expected and what actually the market responds.
In the Kishengarh-Udaipur-Ahmedabad stretch, our conservative estimate was Rs 262 crore premium. Out of the seven bids, five were between Rs 300-400 crore. Two were relatively high. (GMR, the highest bidder, will pay Rs 636 crore in the first year.)
Since a developer invests so heavily, he, too, will have his own assessment of traffic, road conditions, how much money will be required for the various stages of construction.
When private developers conduct their survey and assessment of feasibility for such long concession periods, they take large political and economic risks-and sometimes bids may be higher than realistic. Does NHAI intervene at any point to suggest those projections may be unrealistic?
There is nothing to indicate to me that they have overbid in the Kishengarh-Udaipur-Ahmedabad project. It is not in the public domain but bidders assess the viability on their own. Not everybody agrees with their assessment, and there may even be a feeling that they may have been overly aggressive. But nobody bids for charity, and when it comes to reputed players in the market, there is no reason to presume they entered the arena without understanding the financials. Although 13 companies had qualified for bidding, only seven actually bid.
Our plans for the entire year are available, and comÂpanies can conduct their own feasibility studies based on those plans. We have strong technical and financial criteria to select the bidders. For example, for a Rs 5,000-crore project, the bidder must have a net worth of
Rs 3,500-4,000 crore, and specific technical strengths to qualify.
In an NVGF bid, NHAI basically passes on all the risks of long-term political and socio-economic uncertainties-which we already face-to the concessionaire. What has been the thinking in this?
These are the risks everyone has to bear as on the day of bidding in any infrastructure project. It is not as though, if costs go down, we will ask for a higher premium.
Does NHAI give a commitment of timely land acquisition?
It is our responsibility, and in the Kishengarh-Ahmedabad stretch, the land acquisition is complete.
Is that why the bids were high in the first place?
Bidders may have felt that they would be able to complete the project much before the schedule.
The growth of multi-axle vehicles (MAVs) in India must be a big factor in any bid right now, as this will go on for a concession period of 30 years: How do you view this opportunity?
We would like that there should be more multi-axle vehicles on the road because they are more economical in fuel consumption; their uniform load distribution make them more road-friendly-MAVs do not damage the road as much as single-axle vehicles. So, the operaÂtion and maintenance costs are lower. That is why we have made certain concessions in the toll rules for MAVs from day one the toll has been much higher hitherto.
In your experience, are projects with premiums any different in their financial closure?
It is not the first time that premium projects have been coming. One of the earliest premium projects was Pune-Satara Highway, which Reliance Infra bid at a Rs 90-crore premium. We have witnessed several preÂmium projects, and financial closures have been happÂening quite successfully for most of them. It is just that several and bigger projects have bid out this time in the beginning of the year itself and it looks that NHAI has hit a bonanza. We had expected the Kishengarh-Udaipur stretch to fetch a good premium.
We had a meeting with a few bankers recently in Mumbai, and there was a feeling among them that many of the other infrastructure sectors are not doing very well: power, telecom, airports, for various reasons. Road is perhaps one of the important sectors and projects are being bid out in a very substantial manner and created by the NHAI.
Do you believe that this is a factor of confidence amongst developers in the sector?
The fact that bidders believe that country as a whole will continue to grow at a good pace over a period of 20-30 years is in a way a vote of confidence. There is also a factor of confidence in NHAI's ability to deliver and more than that it is the confidence that the country and the traffic will keep growing.
Lastly, Build-Operate-Transfer (BOT) Toll has essentially become the mainstream for road contracts. But, there is also a brewing debate in favour of Engineering, Procurement and Construction (EPC) as the PPPAC has recommended that it is less expensive. Does NHAI have any plans to shift its focus to EPC?
EPC is basically through government funding and they have to come up with such projects. The entire USA or China's road sector has been done by government funding. If a a project is not viable, we have to autoÂmaÂtically go the EPC route.
Is that the limitation of toll roads on BOT?
Naturally, because if the traffic is low, we cannot preÂdict the traffic to go up and have toll roads.