Goal to lay 20,000 km of roads in 2 years: Transport Secy

Also, the government will collect toll and pay the developer a share for recovering his investments.

Chhibber sees the hybrid annuity model as a replacement to the engineering procurement and construction method.

He said there had been less interest in Private Public Partnership (PPP) projects over the last couple of years due to uncertainty on traffic growth

He expects the bidding process for NH-14 to start in three months.

Below is the transcript of Vijay Chhibber's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: Can you layout the road traversed literally. In FY15 how many kilometers have been bid out and how many are left to be bid out. How does the viability gap funding or the money spent by the ministry this year for roads compare with last years?

A: At the outset I must disagree with your observation that the road sector is a short-term multiplier. If anything the road sector is a long-term multiplier because not only does it contribute to the economy’s growth during the construction phase but once the roads the completed they act as huge multipliers to the economy on a long –term basis.

For the current year we have a plan for awarding 8,500 kilometers, which is very major and a very ambitious programme. We have already awarded over 6,000 km by now. We had crossed 5,300 at the end of January and we hope to do in excess of 7,000 km by March 31.

As regard completion, we have a target little over 6,000 km. We had crossed 3,200 km by January. By now we would have crossed 3,500. We would get more accurate fix by the end of the month and by March 31 we should be in excess of 4,000 km of constructed roads.

Latha: When I said it was a short-term multiplier, I didn't deny that it will also be a long-term multiplier, it is just that more than any other infrastructure, this can be immediately set off demand for perhaps cement, concrete, metals, labour and therefore generate demand but be that as it may, I also wanted a number affix on how much money was spent by the government itself or the National Highways Authority of India (NHAI)? The amount how does it compare with the previous year?

A: No, the expenditure is very robust. It is in the excess of Rs 40,000 crore, but all-in-all, the sector would be spending Rs 70,000 crore-80,000 crore. The real challenge is not how much you spend in one year; the real challenge is whether we can roll this out over three-four sustained seasons. Therefore, the target for the next two years is to do 20,000 km for which the spend would be in the excess of Rs 2.2 lakh crore and that is a substantial amount of money being infused into the economy.

We are also looking at innovative ways to bring back the private players into the road sector. We have recently launched a hybrid annuity programme. 13 projects have been identified with the kilometre length of 1,100 km. We hope that with this hybrid annuity where 40 percent of the cost is infused by government as construction linked support and balance 60 percent is brought in by the private player. We hope that through this mechanism, we would be able to bring back the private sector and the lenders into the road sector.

Latha: In the previous private public partnership (PPP) road projects, how much was the government's contribution? This 40 percent compares with what in previous plans?

A: The problem in the previous plans was that we were providing the Viability Gap Funding (VGF) support but we were not getting enough takers for PPP projects. We believe that with this hybrid annuity where even the private sector investment would be guaranteed through annual or biannual payouts. We believe that there would be comfort. We have taken away the traffic risk in this model from the concessionaire and from the lenders and we believe that this was a major reason why there was shyness for PPP projects in the past.

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Sonia: Can you just give us more details on how many kilometres of road projects have been awarded under this new model? You said 13 projects in total but how many kilometres would that be?

A: This model has been rolled out only about 10 days back and while rolling it out, we had already identified 13 projects with a length of 1,100 kms. We believe that these 13 projects would be the first tranche that we will rollout sometime by April. So it is not something that has already rolled out but this would be brought into the bidding stage in the next month to a month and a half and we believe that this is the real key to bringing back the private sector into the roads.

Latha: Did you touch base with the private sector, how did they respond to this?

A: Yes. This new model contract agreement has emerged out of very intense dialogue with not only the private concessionaires but also with the lending community.

One of the issues when we were trying to examine as to why in the last two years, there has been a decline in interest in PPP, was that there is a lot of uncertainty about traffic growth. This model takes away the traffic risk entirely and places it with government. We are taking on the traffic risk and we shall arrange for the tolling separately. The concessionaire only has to build the roads and he is then assured of his repayments through the annuity payouts thereafter.

Sonia: There were certain reports doing the rounds that the government is looking to revamp the NHAI completely and a five-member panel is being set up in order to undertake this revamp. Can you give us some details on by when this process could start and get completed and what could the contours of this revamp be?

A: Panel has been set up to look at 3-4 broad issues. One of which is the structure of NHAI and whether it has delivered and whether we can tweak it in any manner to ensure that it performs more efficiently.

One of the members of this panel is Deepak Dasgupta, who has been a former Chairman of NHAI himself. We believe that with his past understanding of NHAI’s role and its orientation, he should be able to --- in a very short time -- give us some independent perspective on where we possibly have drifted from the original scheme of things and what kind of course correction that may be required in the structuring of NHAI per se.

Latha: When you say that the government’s funding will go up to 40 percent. I would assume that these 13 are being treated as pilot and you want to expand this to a larger number of projects given the broken balance sheets of contractors?

A: We have done hybrid annuity in the past. We had taken up four projects in the north east region where there was a belief that outside contractors were not easily be willing to come in. In that model we had provided for 80 percent of construction link support. In the present model we believe that 40 percent construction link support is adequate.

Yes, you are right these 13 projects are the first tranche and in the next three-six months we will have the second and the third tranche put together and we shall roll this out in a very aggressive manner. In addition we will continue to take large portfolio of projects under the engineering, procurement and construction (EPC) mode, which has been the main mode of delivery during the current financial year.

Latha: So basically the hybrid replace is PPP?

A: It is a PPP. It’s a form of PPP. It is just that in the build, operate and transfer (BOT) toll the concessionaire takes the traffic risk. In this model the concessionaire does not take the traffic risk. The traffic risk has been assumed by the authority or by the government.

Latha: How do the returns change in that case? If somebody doesn’t take the risk he will also get lower return?

A: The risk in the BOT toll is higher and therefore that is reflected in the bids itself. We believe that the market is looking for safer options and this is a much safer option both for the concessionaire as also for the lenders.

Latha: That will also mean that the government will have to chip in more money?

A: No, even in the BOT toll projects, we were providing VGF support upto 40 percent so it is not that we were not providing the support. However, yes, we will have to chip in the entire cost of this project over the lifecycle of the project but we believe that this extra 60 percent that we are providing by way of annuity, can get recovered through toll, which will be done by the authority itself.

So in a larger context, it is the same amount of money being played out but with less risk for the concessionaire and for the lenders.

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Latha: What I am trying to get a fix on is will this mean that the government will have to chip in more money in FY15-FY16 and is it ready for that bigger bill?

A: Yes, I think so. I think there is a broad understanding across government that this is one of the sectors, which has performed in the current financial year and it is also one of the sectors, which is able to absorb higher outlays and I am sure you will find a reflection of that in the Budget that the finance minister (FM) would be presenting shortly. There is no doubt in my mind that road sector will get a higher outlay and it deserves a higher outlay.

Also you have to look at this hybrid annuity model as an alternative to the EPC, which has been the main mode during the current financial year. In the EPC, there is an upfront payout for the cost of the entire project. So if it had continued down the EPC route in the next three years, the government would have to spend its Rs 2,23,000 crore directly itself whereas under the hybrid annuity at least 60 percent of the cost is a deferred payout.

Therefore, there is no need for such huge infusion of government money in the next two-three years, it gets phased out over the next 10-15 years.

Sonia: Over the next two years you said this 20,000 km target that you have. How much of it will be through the EPC model?

A: The current year almost 90 percent has been through the EPC model. The PPP is only about 500 km; the rest is entirely on EPC. So going forward rather than having this huge portfolio of EPC projects we could go half on EPC and maybe half on hybrid annuity, so next year at least 4,000 km can out of hybrid annuity. However, more importantly this would encourage bringing back the concessionaires and the lenders into the road sector and give them confidence that this is a sector which can have returns.

Latha: Minister Gadkari has expressed his displeasure about cartelised bidding by cement companies. Have you all proceeded on that to take some action against these companies?

A: We do not take action because cement is not part of our ministry’s ambit.

Latha: I mean filed with the CCI or something?

A: What we have done is slightly different. We have created an electronic platform for trading in cement. It is an electronic market place which allows the small cement manufacturing units which are not having very high capacity utilisation to offer their services and their products through this electronic market place and we are trying to bring construction industry and particularly the road construction sector directly in touch with the manufacturers so that this cartelisation that is beginning to take place is addressed.

Sonia: Nitin Gadkari also promised to widen the NH 24 highway into a 14-lane highway by the end of 2015. When will the bids for this road widening project be out and how confident are you of this project widening going through because in the past, 3-5 years, several proposals have been floated but none of them have fructified?

A: We have had a recent discussion just two days back where there were some suggestions on certain engineering changes. Those are going to be addressed in the next week or so. So we believe that in the next three months these projects will roll in terms of the bidding process and obviously it will take time, it is a fairly ambitious programme.

The construction period would be three to three and a half years but it is time, you are right that we have delayed this project for quite some time, it is an important artery, it has got a huge traffic flow on this artery and we need to address this very quickly.

Latha: Leave us with some numbers, How much was FY15 road ministry expenses by the government compared to FY14 and how much might FY16 be?

A: Certainly FY16 is going to be much higher. As I said the Budget allocation itself is going to be higher. In addition to the Budget allocation, there is going to be a huge amount of borrowing which is going to start from FY15-FY16, FY16-FY17 because the spend on EPC is going to be substantially stepped up.

While this year the expenditure per se has not been so high because the big portfolio projects that have been bid out during the year, the real cash flow to these projects would be taking place now. So the next two-three years is going to be the period where there is going to be a huge step up in gross budgetary support as also huge amount of step up in the NHAI’s borrowing programme.