Govt plans cover for road promoters

The opportunity cost will be at a discount to the sum of assured annual return on investment over the period of time for which the project is contracted to have been in the hands of the private sector. Well placed sources said that the discount rate will be 12 per cent.

The opportunity cost, therefore, will work out to be fairly attractive as most highway projects are expected to be financially structured at an internal rate of return of around 20 per cent. The gross returns are pitched much higher.

The measure will be an improvement over the existing provision under which the government guarantees to return the debt component of the project in case of premature nationalisation. The government seems to have given in to demands by the private sector for an adequate deterrant against nationalisation. Pertinently, the compensation package is a notional one, meant to provide adequate comfort to lenders and make private projects bankable. It is unlikely that nationalisation of private highwyas will ever be attempted.

In a parallel move, the Union finance ministry is working on a set of direct fiscal incentives to promoters of private highway projects. Currently, the tax breaks are available to the special purpose vehicles (SPVs) which are to be used to finance such projects. Tax rebates and other set offs emerging out of investment in the risk capital of the SPVs are under consideration of the ministry. Fiscal measures are expected to be announced shortly.

The model contract will clearly identify the risks involved in a project and apportion them to the four main participants the government, the project promoters, the lenders and the construction contractors. A framework will be established for compensation of pre-completion risks in case the project fails to take off. These risks can add up to tens of crores of rupees and are to be borne either by the government or by the SPV, the later possibly doing so by taking out an insurance policy.

The contract will outline the modalities for levy of tolls for the life of the project and pin down rights and obligations. A dispute settlement mechanism will be incorporated along with an arbitration clause. Arbitration can take place either in India or abroad.