The government is examining a slew of measures including bidding out projects to original proponents as per norms underlined in the ‘Swiss Challenge System’ to draft in private investors who have been dragging their feet over investing in road infrastructure development projects. A senior official in the Ministry of Road, Transport & Highways (MoRTH) said, “We are looking at a proposal to allow projects to be bid out under the Swiss Challenge System. It will enable private sector investors to conceptualise projects of their choice. Since the DPR (detailed project report) will be prepared by the original proponent it will expedite the process of award and construction of highway development projects.” SWISS CHALLENGE SYSTEM TO LET PRIVATE INVESTORS CONCEPTUALISE PROJECTS The Swiss Challenge System is a bidding process designed to enlist private sector initiatives in core sector projects. As per this norm, private investors can conceptualise and offer for evaluation of a project to the government. The Swiss Challenge System allows third parties to make better offers (challenges) for a project during a designated period to avoid exaggerated project development costs. The original proponent, however, is accorded the right of first refusal and the right to counter-match any superior offers given by the third party. Industry experts are cautiously optimistic about the new approach being considered by the ministry. [related-post] Vishwas Udgirkar, senior director (infrastructure) at Deloitte Consulting said, “The roads ministry has been examining various financing models to revitalise private interest in the sector. The Swiss Challenge System has not proved to be very successful elsewhere. The private entity is required to make a lot of initial investment under this model, which he may not be able to recover unless he wins the contract. It, however, allows players to conceptualise projects of their own interest. An infrastructure company, owning a port for instance, may want to develop the last-mile road to improve accessibility.” The Centre’s initiative comes at a time when private road developers, including infrastructure majors GVK, GMR and Larsen & Toubro, have stopped investing in road projects owing to land acquisition problems and funding constraints in the last few years. And at the same time, the government led by Prime Minister Narendra Modi has drawn up an ambitious target to award highway projects worth Rs 3.5 lakh crore in the next six months. Last week, Minister for Road, Transport & Highways Nitin Gadkari said, “Infrastructure plays a pivotal role in bolstering the economy and finance minister Arun Jaitley has requested us to increase our targets to award Rs 3.5 lakh crore highway projects in next six months.” As many as 1,231 projects measuring 37,000 km have been firmed up for award this fiscal. The government has given the go-ahead to the Bharat Mala project aimed at developing 5,600 km of new roads in border areas at an estimated cost of Rs 56,000 crore. Another 4,700 km of roads to connect religious and tourism centres and to enhance connectivity in backward areas is expected to come up at an estimated cost of Rs 44,000 crore. Besides this, world-class highways will be developed to connect 100 of the 676 district headquarters in the country. With such mega projects in the pipeline, the government has been exploring different terms of engagement to lure in the private sector in investing in road infrastructure development projects. HYBRID ANNUITY MODEL TO OFFSET RISKS For the first time, the ministry is scheduled to award highway projects under a freshly conceived ‘hybrid annuity model’ to transfer a higher proportion of risk to the government while at the same time cutting down on the upfront funding required to be made by the private sector. Around 4,000 km of roads, lined up for award this fiscal, would be bid out under the ‘hybrid annuity model’, under which the government would provide 40 per cent of the project cost to the developer to start work. The remaining investment will have to be made by the contractor. The NHAI will collect toll and refund the amount in installments over a period of 15-20 years. “Since the traffic risk is not associated with the concessionaire it gives him some comfort level to lend from banks. It also reduces the upfront investment the Centre needs to make in roads projects. It is half-house aimed at bringing back private participation”, said a senior ministry official. Overall, the government has said it would award roads projects worth Rs 3.5 lakh crore this ficsal in the next six months. EXIT POLICY TO RELEASE FUNDS The government has backed up this mega push for roads development projects with policy initiatives designed to facilitate resource mobilisation. The Cabinet Committee on Economic Affairs (CCEA) earlier this month approved an exit policy permitting developers to exit highway projects two years after completion of construction to release locked-in equity as potential capital for future projects. Around 80 projects bid on the build-operate-transfer (BOT) basis and awarded prior to 2009, with locked-in equity of Rs 4,500 crore, are likely to benefit from this policy. Once this amount is unlocked and re-invested in new projects, it could support 1,500 kms of new highways on public-private partnership (PPP) mode reviving the response to BOT projects. The move comes at a time when the private sector interest in the PPP projects has dwindled with most projects failing to attract even a single bid. One of the primary reasons for this is the lack of availability of equity in the market among qualified bidders. Last year, the government awarded 7,900 km of highway projects , more than double the 3,170 km awarded in 2013-14. However, only 700 km are being executed under the PPP mode on a build, operate, transfer (BOT) basis. NHAI LOANS FOR STALLED PROJECTS Even during the UPA regime, a total of 20,000 km of roads projects were awarded between 2010 and 2012. However, most of the projects did not take off due to unavailability of land, delay in forest and statutory clearances and economic slowdown. When the NDA government came to power last year, work of stretches totalling 9,000 km was held up. Till now 39 projects covering 4,700 km have been cancelled or letters of appointment for starting work have been withdrawn. Another 16 projects totaling around 1,360 km need fund infusion to start work. The CCEA has now authorised the National Highways Authority of India (NHAI) to loan resources from its corpus at a pre-determined rate of return to kick-start such projects, stalled due to lack of additional equity or inability on part of the concessionaire to disburse funds further. GOVERNMENT TO GOVERNMENT FUNDING The ministry is also examining a proposal to liberalise norms and allow government-to-government funding to mobilising additional resources for road development programmes. Under the current norms, Exim (Export-Import) Banks of foreign countries are not permitted to lend resources to concessionaires based in their home states to develop highway projects in India. Another official in the know said, “As per extant regulations, government-to-government funding is not possible. One has to go in for open tendering. We are examining a proposal to do away with this requirement to mobilise resources for construction of highway projects.” As per the model being examined, economically viable stretches of highways can be identified and put up for development as per the proposed financing norm to attract foreign participation in the sector. “We want both domestic as well as foreign infrastructure development firms to participate in highway projects to avoid cartelisation. We are examining measures so as to ease financing constraints”, added the official. The government’s efforts to ease norms for financing projects have come at a time when foreign participation in highway projects have petered out due to regulatory hurdles and weak economic sentiments.
