• Background
• Cost
• Strategy for Development
• Time-frame for implementation
• Revenue availability
• Sources of Investment Funds
• Conclusions

The Government of India has plans for the rapid development of the National Highway network to accelerate economic development in the country. The following two proposals are being considered:

Proposal 1
The development of a "Golden Quadrilateral", consisting of NH8 (Delhi-Mumbai), NH4 (Mumbai-Chennai), NH5 (Chennai-Calcutta) and NH2 (Calcutta-Delhi), into a 4-lane system. The "Golden Quadrilateral" forms about 15% (by length) of the National Highways system.

Proposal 2
The development of a new Expressway system along the North-South and East-West axes, estimated at about 7,000 km.

Proposal 1
The total length of the four corridors forming the "Golden Quadrilateral" (GQ) is around 6,000 km, of which about 1,200 km is 4-lane sections (existing or already taken up for implementation) and most of the balance is 2-lane sections. The cost of widening (the balance) 4,800 km of the Golden Quadrilateral from 2-lanes to 4-lanes is estimated at about Rs. 19,200 crore, assuming a cost of about Rs. 4 crore per km (NHAI estimate, assuming that no significant land acquisition is involved).

Proposal 2
The cost of developing an Expressway system of 7,000 km along the North-South and East-West axes is estimated at Rs.84,000 crores, assuming a cost of about Rs. 12 crore per km. Such an Expressway will need to be access-controlled to facilitate uninterrupted flow of traffic, and to have service roads and grade-separated crossing facilities for cross-traffic.

As we look at the overall availability of financial resources, it is obvious that it would not be feasible to pursue both proposals simultaneously and it may not be possible to find the financial resources required for Proposal 2 in the medium term. We could, however, consider an alternative proposal which may provide most of the benefits that are sought to be derived from pursuing both proposals.

Alternative Proposal
This proposal envisages development of the "Golden Quadrilateral" as described above, plus the 4-laning of additional identified "spurs" from the Quadrilateral to cover other important sections and states within and outside the Quadrilateral (this proposal may be called the "National Highway Development Project"). The "spurs" could be added in phases, depending upon the traffic economics as well as resource constraints.

While NHAI/ MOST is presently identifying the spurs and the phasing thereof; for the purposes of this paper, the following "spurs" have been considered for implementation in the first phase:

* @ Rs. 4 crore per km

The alignment of the "Golden Quadrilateral" along with the proposed "spurs" is diagramatically represented in Annexure 1.

The cost of the above proposals is summarised in Table 2 below:

* NHAI estimates, 1998 prices

Given the large resource requirements, it is recommended that the government follow a well-defined strategy of prioritising the National Highway sections to be taken up for development. This prioritisation should be based on detailed studies of the economic and financial benefits of such development. Where commercialisation is feasible, the Government could take up development on a tolling basis.

The current system of tendering road projects to private operators is through a capital subsidy that is bid up front by the operators. Although this reduces the initial investment requirements of the operator, it leaves the traffic risk to the operator. Since the extent to which traffic can be influenced by the operator is rather limited, a solution could be to address this risk by making the tenor of the concession flexible. Least Present Value of Revenue (LPVR) is one such auctioning method. Details on LPVR are presented in Annexure 2.

Time-frame for implementation

The time-frame over which the above investments could be absorbed by the economy would depend upon several factors, including:

• Constraints on raising financial resources for the required investment
• Capacity and development of the road contracting industry
• Capacity and development of the road equipment industry
• Development of sophisticated consultancy services in the sector to conduct the necessary pre-feasibility and traffic studies
• Capacity of NHAI and MOST to study, prioritise and award projects

NHAI would need to be adequately strengthened if the above proposals are to be implemented expeditiously. Further, a mechanism for co-ordination between the various ministries and state governments would have to be evolved. The resource requirements for the above proposals have been worked out for different scenarios assuming implementation time-frames of 5, 7 and 10 years. The annual requirement of resources under the different scenarios is given in Table 3 below:

Table 3
Average annual resource requirements*
under different time-frames  (Rs. in crores)

* Annual escalation factor of 7% has been assumed

The amount of private finance available in any road project critically depends on the funds the Government can make available for the project. An estimate of the quantum of funds flowing into a "National Highway Development Project Fund" (NHDPF) needs to be made. The revenue available from different sources for such a Fund is estimated and presented in Table 4 below:

Table 4
Estimate of Revenue availability for the
National Highway Development Project Fund
(Amount in Rs. crores)

@ IDFC assumption

Assumptions:

1. Funds from the Petrol cess introduced in 1998-99 represent additional resources in the system and have therefore been included in the table above
2. Diesel consumption has been assumed at about 30 million tonnes per annum @ specific gravity 0.82.
3. 20% of the NHDP, i.e. about 1,780 km, is assumed to be tolled. These sections are all assumed to be high density corridors with traffic of about 20,000 PCUs/ day.
4. Cess on public transport services would be levied on SRTCs (on revenues) and on private fleet operators (additional road tax/ cess), and would flow to State-level NHDP funds. In the absence of State-level figures, a broad estimate of Rs. 500 crore per annum has been made for the time being. Other possible sources could be additional vehicle taxes/ registration fees.
5. Excise duty is based on production of cars @ 400,000 nos. and buses/commercial vehicles @ 300,000 nos. However, given the present status of the automobiles sector it may be possible to levy the same only after 2 years.
6. The above annual revenue stream is assumed to grow at 5% per annum over the next 20 years

For efficient and transparent utilisation of the above revenue and to lend credibility to the process, the National Highway Development Project Fund would need to be carefully designed. In this regard, it is important to note that users of roads and owners of vehicles are willing to pay into a road fund if they perceive that their contributions will be used for improving the road network. The credibility of a road fund can be enhanced by:

1. Tight legal and administrative ring-fencing of the fund in the sense that expenditure from the fund will only be used for roads.
2. Having strong "user group" presence in the committee that would oversee the use of funds.

Details of Road funds are given in Annexure 3.

The annual revenue accretion as estimated above could support an investment program of about Rs. 29,600 crore (assuming a discount rate of 15% per annum over a period of 20 years, and taking into account an annual operation and maintenance cost of 2% of the capital cost). An additional revenue mobilisation of about Rs. 720 crore per annum (1998 prices) would be required to support the minimum investment program of Rs. 35,600 crore (1998 prices) as estimated earlier. To raise investment of this quantum and tenor, several sources would need to be covered.

The overall sources of investment funds for the NHDP could be funded as outlined in Table 5.

Table 5
Annual Sources of Investment Funds for Funding the NHDP
(Amounts in Rs.crore)

* See Table 3

Note :

1. If at least 20% of the NHDP stretch is commercially viable and tolls collected, an amount of Rs. 1650 crores could be raised from financial institutions (FIs) and private sector equity. At least an additional Rs. 350 crores could be invested by FIs in Government bonds serviced out of the NHDPF.
2. Investment from commercial banks, insurance sector and provident funds would mainly be in Government bonds as mentioned in Note 1 above.

The total amount that could be mobilised is about Rs. 4,500 crore per annum, as against the annual investment requirement of the NHDP of Rs. 8,200 crore per annum (for a 5 year implementation period). The balance amount of Rs. 3,700 crore per annum would have to be mobilised from other sources including multi-lateral agencies and foreign banks. Alternatively, if the implementation time-frame is spread out over 10 years, the dependence on additional sources would reduce.

It is clear from the above table that it would be difficult to mobilise the investment funds of Rs. 11,600 crore per annum required for the Expressway, even if this proposal were to be implemented over a period of 10 years.

(a) Equity and Debt Funds from Existing Domestic Sources

The equity and debt funds from the private sector and financial institutions would be largely available for the projects involving private participation. Now that issues involving the Model Concession Agreement have been largely ironed out, these projects can be implemented in the initial phases. In the absence of a foreign exchange hedging mechanism, foreign equity investment may be limited.

1. Foreign commercial debt
   Foreign commercial debt is not expected to be a significant source of funds, partly due to the problem of hedging foreign exchange risk as well as the overall adverse climate for such capital flows to emerging economies.

2. Multi-lateral funds
   Multi-lateral funds could be tapped for funding the NHDP. The NHAI Business Plan estimates about Rs. 9,000 crores as the requirement of Multi-lateral funding for projects already identified by NHAI. NHDP could easily get commitments for additional funds in case the debt is serviced through the NHDPF mechanism.

(c) New Sources of Debt Funding

1. Insurance companies and Provident Funds
   One of the financing issues for the road sector is the need for long-term funds of up to 20 years maturity. Insurance companies and Provident Funds are the most natural financiers for the road sector. Current accretions of Indian insurance companies are of the order of Rs. 22,000 crore per annum. As per the current guidelines, 25% of these funds could be deployed in Central Government securities and another 25% in "socially oriented sectors" including infrastructure. These sources should be tapped with appropriately structured financial instruments which could be serviced out of the NHPDF.
   
   
2. Highway Bonds
   The Government could make issues of "Highway Bonds" of maturities of 15-20 years for financing non-commercial sections of the Quadrilateral. Such bonds could be subscribed by commercial banks, insurance companies, provident funds, finance companies, debt funds, and perhaps retail investors as well in due course. Although the tenor of such bonds would be long, with a deep and liquid debt market, it should be possible to access a wide range of institutional investors including those concerned with asset-liability mismatches.

In conclusion, the Government needs to take a view on the following issues expeditiously:

1. Whether it would prefer to pursue 4-laning of the Golden Quadrilateral, the Expressway or the proposed "National Highway Development Project".
2. The setting up and design of the NHDPF
3. The desirability and feasibility of raising the required additional revenue. More specifically, the estimated revenue gap of Rs. 720 crores per annum (current prices) that is required to leverage the requisite investment
4. The issue of new instruments such as highway bonds to close the investment gap.
5. Other possible initiatives to widen and deepen the debt markets
6. Examining of new methods of commercialisation such as LPVR.