The Government is looking for funds to expand expressway project

India has the third-largest road network in the world spanning 4.69 million km, next in line only to the US and China. However, when it comes to the quality of roads, India lags far behind. Compared to the length of expressways in leading countries, China (84,946 km), the US (75,238 km), Canada (17,000 km), Spain (15,152 km) and Germany (12,800 km), India’s progress in the road sector seems dwarfed at just 200 km.

On an overall basis also, highways constitute only a 1.7 per cent share at 79,116 km.

Given the importance of expressways, the Government of India had approved the construction of 1,000 km of expressways under the National Highways Development Project (NHDP) Phase VI.

Besides, the ministry came up with a project report to formulate a master plan aiming to construct 15,600 km by 2022, marking the end of the 13th five year plan.

Financing expressways

The Government of India has not yet been able to identify a suitable funding model for expressway projects, while the cost of building expressways has escalated significantly over the years.

At present, many experts estimate the cost of constructing expressways to be Rs 500-800 million per km, as against Rs 200 million estimated by NHAI in 2010.

As arranging the funds required to build expressways is a challenge for the government, it has envisaged developing these projects on a public-private partnership basis and is mulling alternative financial models. As the expressway access is controlled, the existing traffic may fall short from justifying the viability of the projects, unless higher tolls are charged.

In this scenario, the government may consider granting development rights to private concessionaires. Although, leveraging the value of adjacent land through real estate development seems to be the ideal solution at the onset, land development poses associated challenges.

The value and cost associated with the land may not be clear at the time of bidding, whereas age old issue of land acquisition may also affect the project economics. Given the rising real estate prices in India, this may also lead to a shift in the focus of the developer to real estate from the asset.

In this scenario, it would be worthwhile to look at the best practices of international counterparts.

China

China deserves immense credit for development of expressway networks at breakneck speed . The country’s ambitious National Trunk Highway System (NTHS) was launched in 1990. The plan envisaged 35,000 km of expressways to link all the major cities and ports and was completed by 2007, 13 years ahead of schedule.

It is pertinent to note that the fast-paced expansion of the road network in China has been made possible by the systematic tiered approach of the government.

Provinces financed 65-90 per cent of the capital cost through their own budgets and debt, an approach in stark contrast to India where the government relies heavily on private participation.

It opted for a toll-based network that was financed predominantly by debt. In some expressway projects, private participation was sought, but in a distinct manner.

Once construction was completed, provincial governments set up an expressway corporation as a public limited company listed on the stock exchange.

The money paid by the shareholders would then be invested in construction of new toll roads. Overall, private investments constitute a meagre 7 per cent of expressway financing in China.

Germany

In Europe also, long-term debt has been the main source of funding for expressways. Recently, Via Solutions Südwest, a consortium led by VINCI Concessions, achieved financial closure of A-Modell section of the A5 Autobahn in Germany. The project has been funded in a debt equity ratio of approximately 85:15. The company raised € 400 million of bank loans with maximum maturity going as high as 28.5 years.

This includes € 200 million raised from a syndicate of four commercial banks (BBVA, Santander, KBC and NIBC) and € 200 million from the European Investment Bank (EIB).

In addition, this robust funding is further reinforced by a €25 million Loan Guarantee Instrument for Trans-European Transport Network Projects (LGTT guarantee), a new financial instrument which was recently introduced by the EIB to secure bank funding for traffic projects comprising revenue risk. Revenue for the project will be generated by charging tolls from heavy good vehicles.

Outlook

Given the current precarious economic conditions, constructing expressways through the EPC route seems to be the most pragmatic approach. The government can raise long-term debt through bonds or low-cost foreign loans from multi-lateral and bilateral institutions while revenue can be generated by charging tolls from vehicles at entry and exit points.

Also, as witnessed in other countries, state governments should be urged to increase contribution toward these projects, as they will be the key beneficiaries of expressways.

Another way to expedite the process could be that the government could develop the first 50-100 km of the expressway to attract private developers, a model being followed by Jaipur metro.

Once traffic picks up on the expressway, developers could construct the remaining length and be allowed to charge toll on the entire length.

If India needs to achieve the next level in highway development, it has to focus on transit efficiency. For this, the country will have to increase reliance on public funding and shift focus from PPP.

It could also opt for innovative financial models, as suggested above, to make expressway construction a viable business in the country.

(The author is a Partner & Leader - Public Private Partnership at EY. Views expressed are his personal)

(This article was published on July 15, 2013)
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