Viability norms for road projects may be eased

The government aims to make highway projects more attractive to the private sector by raising the approved or sanctioned cost of all projects to be implemented under the private-public partnership mode by 15 per cent.

The government is also planning to either remove the cap on the viability gap funding altogether for these projects, which is currently capped at 40 per cent, or increase it to 60 per cent.

Viability gap funding refers to the grant the government provides private developers to make good the difference between the economic and financial rate of return on a project.

These moves will immediately impact over 50 highway projects across the country, which require an investment of over Rs 57,000 crore (Rs 570 billion) and are currently under bidding. Once completed they will add over 6,258 km of highways.

The move to increase sanctioned project costs will be accompanied by the government increasing the concession period - the period in which the private developer collects toll to recover projects costs - by five or 10 years from the current 20 years.

Sanctioned project costs are currently pegged at 2005-6 prices but cost escalations and the 20-year concession period have made projects unviable for private developers under the build, operate and transfer scheme.

The situation has worsened with interest rates rising sharply and banks refusing to fund such projects because of poor returns on the investment.

"There is a need to revise upward the project costs for highway projects, especially those that are two years old and are up for bidding. This is a genuine demand given the change in the operating environment and escalation in critical input costs," said a top Planning Commission official.

"These measures will definitely help attract more bidders for infrastructure projects," a senior finance ministry official added.

Private developers say an increase in the sanctioned cost will prove a major boost.

"Lenders are not willing to advance loans because of the wider gap between initial cost estimates and actual execution cost. With the government considering an increase in the project cost by 15 per cent, banks will be more willing to lend," said Tapash K Majumdar, CFO, C&C Constructions Ltd, which has four highway projects.

"An increase in project cost would also help highway developers receive a higher grant from the government," a senior executive of KMC Constructions added.