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Why no private companies want to construct roads in India

December 24, 2013 17:14 IST

Why no private companies want to construct roads in India

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Business Standard Editorial Comment in New Delhi

Government does not have adequate money to fund the projects and the framework to award contracts is flawed, too.

India's highway-building programme is in crisis. This is partly due to its very ambitious scale, which means that public funds are not adequate to meet the programme's demand for capital, given the swiftness with which roads need to be rolled out.

There are other reasons as well. The crisis is also caused by the government's inability to design auctions that eliminate unrealistic bids and delays that, in some cases, are a direct outcome of tardy clearances and regulatory hassles.

The road sector's problems have also arisen because the government's private sector partners failed to take into account the effect a growth slowdown would have on their revenue, or were too ambitious in their forecasts.

Thanks to a combination of these factors, not even a single build-operate-transfer (BOT) project was awarded in the first six months of the ongoing financial year, indicating the degree to which the private sector has soured on road-building. Basically, nobody wants to touch it.

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Photographs: Reuters
Tags: India , BOT

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In October, the government set up a panel under the chairman of the Prime Minister's Economic Advisory Council, C Rangarajan, to figure out if there was a way out of this conundrum.

The panel had some difficult decisions to take. In particular, many existing highway concessionaires wanted to defer the premiums that were due to the National Highways Authority of India, or NHAI, under the BOT system.

The premium, which can range from Rs 3 crore to Rs 680 crore (Rs 30 million to Rs 6.8 billion) a year, is to be paid out over 20 to 25 years, increasing by 5 per cent every year. The total premium due over the next few decades is Rs 1.5 lakh crore (Rs 1.5 trillion).

But the fact that revenues have not matched estimations means that many companies are grumbling about having to pay out.

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Photographs: Reuters

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The government, meanwhile, alert for once to the concern that the private sector is trying to feather its own nest at the expense of the public exchequer, may reportedly want to cut off the payment of dividends by road-building companies - usually special purpose vehicles, or SPVs - to their parent company as long as premiums to the NHAI are still outstanding.

Another possibility that the Rangarajan panel is considering is reducing the upfront payment of premiums for the next few years by a fixed proportion - 75 per cent, in fact.

The NHAI has already argued for a low discount rate and against penalties for private developers.

It is certainly true that the private sector must stay involved in road-building in India. The government cannot pay for everything. And something must be done to enable stalled projects to move forward.

However, an arbitrary and opaque mechanism is a very bad idea; nor should the private sector be allowed to dictate terms.

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Photographs: Reuters

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The government must take account of the fact that just giving into demands for renegotiation sets up a severe moral hazard problem, and that it also renders past auctions unfair and future auctions problematic.

Thus, two criteria should be front and centre in the final decisions taken by the government. First, the mechanism for dispute settlement should be transparent, consistent, and independent.

Second, it should not unduly benefit the private sector. In fact, there should be clear penalties - regardless of the request from the NHAI - for anyone who has delayed a project.

This should include the government, since in some cases private developers have suffered because the government has sat on clearances for five years.

Transparency and financial accountability are essential to clean up India's vital roads sector.


Photographs: Reuters
Tags: India , NHAI

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