An interview with the Secretary of the Ministry of Road, transport and highways
Let me transcript here a very interesting interview with Brahm Dutt (secretary, ministry of road transport and highways) I found last week in the online newspaper, Financial Express:
Brahm Dutt says National Highways Authority of India (NHAI) will have awarded/received bids for 6,900-km national highway projects by the end of March. This is against the plan of building 7,000 km of roads every year, for the next five years. Financial closure of road sector projects is now being done at a faster pace, the secretary says. There is no need to set up a new body for arranging the long-term debt requirements in the national highways sector, Dutt tells Praveen Kumar Singh and KG Narendranath of FE.
Is the current resource position strong enough to meet the envisaged investment of $40 billion from the private sector for building 20-km roads a year over the next three years?
Overall, around $75 billion investment is required to build the national highways that we have identified. This is under the National Highways Development Programme, which goes on till 3 years down the line. I mean the last award under the programme will take at least three years. Over the period of next five years, we have to complete 35,000 km of roads. The average comes out to be 7,000 km a year. This year (2009-10), maybe, we would achieve much less than that. In 2010-11, we must award more projects (kms) than what we are likely to do this year.
NHAI has awarded 3,166-km contracts by end of January this year. The bids have been received for 500 km and these are being processed. By the end of March, NHAI is to receive additional bids for 3,270 km. So, total awards for the year comes out to be more than 6,900 km. Besides, we have received bids for 718 km from all other packages that the prime minister had announced.
To achieve 7,000 km a year, at any given time, work for 21,000 km should be in progress. But it does not mean that we should have that amount of work in progress at all times. The award should be such that at the end of five years, you build 35,000 km of roads.
The ministry has recently made some changes in the Model Concession Agreement (MCA) to make the road sector more attractive for foreign investors.
These amendments to MCA are in accordance with the recommendations of the B K Chaturvedi Committee. The most important change is in the termination clause. If the traffic grows to a point that equals to the saturation capacity of the highway, the concessionaire can augment the capacity by building an addition lane each on both sides of the highway and continue operating on the stretch. For this to happen, NHAI will prepare the detailed project report (DPR) well in time and will inform the concessionaire about the required investment in augmenting the capacity of the road. Based on the DPR, NHAI can extend the concession period. You cannot expect someone to augment the capacity and invest money until you allow it to recover the investment. The earlier practice was that the concession period will end in three years. Now, there would be no such end date. This is one issue that had generally caused concern among the investor community.
Another issue that has been solved is that of viability gap funding. Earlier, the MCA norm was that the government would give 20% as viability gap fund at the time of construction of the highway and 20% during maintenance. Now the entire viability gap funding of 40% will be given at the time of construction. That reduces the need for the developer to bring in more equity to construct the road.
What has been the impact of the condition that in order to get the fourth project, a concessionaire has to achieve financial closure in the previous three projects?
The condition was applied to weed out non-serious players from the road sector projects. Its impact has been good, as the concessionaires are achieving the financial closure at a much faster pace now. Of course, players who were not serious enough are complaining.
What is your take on the private sector having the wherewithal to invest around $40 billion in road projects in the next five years.
The B K Chaturvedi report part-one has taken care of the NHAI's borrowing requirements. The government has also approved the road map given in the report. The government would support the authority by way of sovereign guarantee. So, NHAI is well positioned to mobilise resources. Now, as far as the private sector is concerned, there is adequate liquidity in the banking system and we don't see them (private players) facing any problem in borrowing from banks. At the same time, the committee has recommended the refinance facility of the India Infrastructure Finance Corporation Limited (IIFCL). In addition to these, the committee, in its second report, has made several suggestions on financing
of NH projects early start of take-out financing being one of them. Making the pension fund available for funding road sector is another option. We are trying to assess how these suggestions can be implemented. We propose to take the second report of the committee to the empower group of ministers on highways, consisting of road transport and highways minister Kamal Nath and finance minister Pranab Mukherjee.
The Chaturvedi Committee has recommended against setting up of a separate body to meet the long-term debt requirements of the road sector. Is the recommendation valid?
Setting up a new body would not solve the problem. The existing institutions, like IIFCL, IDBI, IL&FS and banks, are capable of taking care of financial needs of the sector. Setting up a new institution for the sake of it won't provide any succour. In fact, the existing bodies should be made more efficient.
Don't you think that IIFCL should only have a supplementary role and should not be doing what the banks are already doing?
That is why it has been given the role of re-financing while the primary activity of lending remains with banks.
Has IIFCL been successful in its role, as per your assessment?
It has the necessary resources and is playing its role.
Is equity finance a problem in the NH sector?
Nobody has brought such a problem to my notice. I had checked up in the wake of global economic slowdown when banks had reduced their lending and insisted on higher equity from the developers. Even at that time, the high equity that was demanded by banks was available. So, I think that (dearth of equity finance) is not a major problem. But, of course, there is a need for more equity funds and the concessionaires are aware of this.
The ministry had created a road fund to meet the fund shortage in the road sector. How big is the size of this fund now?
Last year, the fund size was around Rs 9,000 crore.
The need for capacity building at NHAI was identified. What is happening on that front?
There was a committee on restructuring of NHAI. The committee's report was submitted to the Cabinet in July 2007 and the Cabinet had approved the recommendations. Restructuring at the senior level of NHAI has already been substantially carried out. Some parts of the recommendations are still to be implemented. The real problem is the large number of vacancies at NHAI at the functional levels. We have taken the matter with the department of personnel and training and they have given us a special dispensation for extending the tenure of officers who are working with NHAI, up to October 2010. Within this period, NHAI has to fill up all the posts. A committee under my chairmanship has been formed to oversee the process of appointment.
Land acquisition is another area where strengthening of NHAI is required. NHAI has set up more than 70 special land acquisition units in different states and I think that another 100 such units are required to be established.
Is land acquisition still a problem?
Land acquisition is definitely an issue. I don't call it a problem. Although our compensation has been fair, NHAI has to depend heavily on states for land acquisition. Earlier, there were some issues from states but now many of them have signed the state support agreements.
Gujarat has still not signed the agreement. What are the issues the state has highlighted?
Yes, Gujarat has not signed the agreement. It has raised certain questions on the draft state support agreement, which we had sent after it was finalised by the Planning Commission and vetted by the law ministry. We are trying to sort out the issues.The Gujarat government has said it will support the projects on 'best offer' basis and such an agreement is not required. It feels that the agreement will restrict the state's right to construct alternative roads, as there is a clause that prohibits creation of any road that is parallel to the highway.
The Planning Commission had earlier said the road ministry should set realistic targets. What is the ministry's stand on this?
I think the targets that we set are realistic. Unless you construct these many highways, how will you make a visible difference on the ground and address the paucity of roads?
Is the road sector able to attract FDI?
Companies, PEs and pension funds from Europe, Malaysia and Korea are interested in investing in our road sector. But, of course, these entities are not going to bring in the entire capital themselves, even though 100% FDI is allowed in the sector. They will aim to create joint ventures with Indian firms. In the mega projects (400 km and above), interest of foreign investor is especially visible....