The Hindu Business Line : `New model concession norms for roads may cut profitability of pvt sector'

THE new model concession agreement (MCA) set for the road sector may lead to increased grant requirements from the Government as it brings down returns for the concessionaire, according to an expert in consulting firm Ernst & Young.

"We ran the terms and conditions of the new MCA on a live road project that a firm is interested in doing without any grant as per the present model concession agreement," said Mr Rajesh Samson, Vice-President, Ernst & Young, speaking at an Assocham conference here.

"We found that the internal rate of return is down to 7 per cent with the conditions laid out in the new MCA, even if the concessionaire takes a 20 per cent grant as viability gap funding," he said these returns are fairly low for the private players.

While admitting that quite a few issues are well addressed in the new MCA, Mr Samson said that the issues of concern are decreasing the concession period to 12 years per se as compared to 20; indexing the toll price increase to 40 per cent of wholesale price index (WPI) instead of the current level of 100 per cent; and the revenue share (or the concession fee) levied starting from the 9th year of operations.

"These issues are likely to reduce profitability of the private sector," he said.

Ploughing back benefits: Additionally, experts also stressed on the need to have methodologies that would plough back the "external benefits" of the infrastructure such as roads back into system so that the projects become more attractive and viable.

"Within the urban transportation policy, we are tackling the issue of how to internalise the externalities so that part of the benefits goes to the private sector," said Mr B.N. Puri, Advisor-Transport, Planning Commission.

Giving an example of how external benefits are not captured in a project, Mr Manu Trivedi, Principal-Project Finance, IL&FS Transportation Networks Ltd, pointed out that in the Delhi-Noida toll road project, though the returns were lower than expectations, significant benefits did accrue to a large section of the society with the real estate prices soaring high in Noida after the toll bridge was put in place.

"If a mechanism could have ensured 0.1 per cent of benefit was ploughed back to project owners, then the returns would have been much higher," Mr Trivedi said.

Mr Puri added that RITES has been commissioned for a study that would make traffic projections over the next few years.