Private Public Participation in Highways with Specific

Focus on Maintenance and User Fee

Introduction
It needs no emphasis that good roads contribute to the economic growth of the
nation. Roads are not only the backbone of trade and commerce but also act as arteries
for cultural exchange, social equality, national unity and integrity. Good roads are the
highways to prosperity. Out of about 33 lakh kilometers of roads in India, the National
Highways (NH) consists of only about 62000 kms. Since independence, the number of
motorized vehicles on Indian roads (excluding two wheelers) has increased more than 40
fold, from 3 lacs to 125 lacs whereas during the same period, the National Highways
have just about tripled in length. With the traffic growing between 8 to 10% a year, poor
roads have been acting as a serious brake on development, inhibiting delivery not only of
food, industrial and commercial goods but also the basic services such as health care and
education. To modernize the road infrastructure in India, the National Highways
Development Project (NHDP) covering 13146 Kms is being implemented by
Government of India through National Highways Authority of India. This organization is
constructing and maintaining another about 10000 Kms of Indian Highways. Rest of the
Highways are developed and maintained by Ministry of Shipping and Road Transport &
Highways through various state PWDs. State Governments are responsible for the
maintenance of State Highways and other roads of the state. Part of the funding for the
construction of state and other roads is done by Govt. of India through Central Road
Fund. Maintenance of these roads is, however solely funded by states out of their own
funds or borrowings.

Traditionally, Government of India has followed a conservative method of

financing the construction and maintenance of National Highways (NHs) i.e. through
budgetary support. Due to the limited resources available with the Government it is
difficult to maintain National Highways, which are growing year after year. Availability

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of funds for the maintenance of NHs is only 30% of the requirement as per the acceptable
conservative norms for the maintenance of NHs. Moreover, construction of new National
Highways and up-gradation of existing two lane National Highways have also become
very difficult in the light of constraints in the budgetary resources.

Scarcity of resources
In the past and in large part today, states have financed roads primarily through a
combination of state revenue and central assistance. The Central Govt. solely funds
National Highways and border roads. This funding accrues out of general taxes (revenue)
levied by the government and its borrowings to undertake capital-intensive projects. It
was realized at all levels of Govt. that funding from traditional sources is not keeping
pace with demands for new, expanded or improved highways. Governments are also loath
to increase the level of debt carried on their books. Accordingly they have turned to the
private sector to bring investment and non-recourse borrowing capacity to projects, which
have a potential to generate revenue stream through tolls. Taxes, after all cannot be
increased in a democratic set-up without much protest. Elected representative could raise
taxes but voters resist and ask for reduction in taxes. Motorists want better, safer, less
congested highways, but the money to build them is scare. Road engineers strain to
juggle limited resources to meet the demands. How then can road planners secure
funding for new highway projects? To augment the money raised in traditional ways
highway officials are exploring the use of innovative financing techniques. What are the
other possible sources of revenue?

The main economic instruments available for the generation of revenue are:
a) Vehicle-incident taxes:
i) on purchase and registration;
ii) for annual circulation/access to the roads
b) Fuel taxes
c) Taxes on motor components
d) Taxes/levies on tyres
e) Tolls/ User fee

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 Taxes have wider ramification on the economy of the country and it is premature
to consider taxation for the road projects in isolation. Fuel taxes have been imposed as
cess on the consumption of petrol and diesel. Fund thus collected is spent on NH in
accordance with Central Road Fund Act, 2000. Rs.1 per litre cess was expected to fetch
about Rs.2000 crores per annum for NH. Keeping the growing need of funds in mind
Government decided to enhance this cess to Rs.1.50 per litre with effect from 2004. How
far this cess may be increased? In the developed countries fund required for roads to the
tune of more than 50% is raised primarily through taxes on fuel. But their fund
requirement for the development of Highways is not comparable to India, since they
already have a well developed road network. Their fund requirement is more for the
maintenance of the roads. In India fund requirement for the construction and maintenance
of Highways is enormously high. These compulsions have encouraged the government to
look for options where funding from governments is minimized in the infrastructure
sector. Governments in developed and developing countries are retreating from owning
and operating infrastructure and are focusing more on regulating and facilitating
infrastructure services provided by private companies. This shift offers the promise of
more efficient investment in the infrastructure sector. This has further enhanced the scope
of operation of infrastructure services, as well as the potential to shift the burden of new
investment from public budgets to the private sector.

Private Public Partnership (PPP)

Private Public Partnership (PPP) in infrastructure projects may enable govt. to
increase the incomes, wealth, and well being of their residents by building highway
projects sooner than would be possible with traditional financing. PPP has evolved in
different models and forms in different environments and countries. PPP ideally looks for
fund collection by means of levying road user charges or toll. If the toll revenue is not
considered to be sufficient then the viability gap financing may be resorted to through
different financing techniques. However crux of the whole issue in India is the collection
of toll. BOT projects have been tried with toll option where by concessionaire collects
toll from the users and manages the project up to an agreed period. In NHAI BOT- Toll,
BOT-Annuity and SPV models of PPP have been tried and several projects have

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been/being implemented. Seven (7) BOT –Toll projects covering a road length of 435
Kms of 4-6 lane National Highways is being constructed at an estimated cost of
Rs.3314.00 crores by NHAI. Other form of PPP is BOT –Annuity where concessionaire
is paid according to the estimated traffic using the facility. It is the most risk free variant
of BOT method of building highways with private involvement. In this case
concessionaire does not collect toll directly from the users but is paid a certain fix sum
semi-annually by the employer for Building, operating and maintaining the facility during
the concession period. Annuities are not linked to the traffic using the facility, but are
determined through a competitive bidding process wherein the bidder, quoting the lowest
annuity amount from the employer for developing the project, would be awarded the
contract. As such the traffic risks are fully assumed by the employer. NHAI at present is
handling 8 projects through BOT (Annuity). A total of 476 Kms is being constructed
under BOT Annuity Scheme at an estimated cost of Rs.2345.00 crores. Some states have
also attempted BOT projects as one of the popular method of PPP. Shadow tolls are per
vehicle amounts paid to a concessionaire by the government. The users of the facility do
not pay toll directly. Shadow toll amounts paid to a concessionaire would be based upon
the type of vehicle and distance traveled. Shadow toll can be an element of a highway
finance approach whereby a public or private sector developer/operator accepts certain
obligations and risks- such as construction, operations and most specifically traffic- and
receives periodic shadow payments in place of, or in addition to, real or explicit tolls paid
by users. Shadow toll need not necessarily be paid in the form of remuneration to the
concessionaire. It can also be paid in addition to the toll being collected from the road
users. Other financial incentives are also granted to make projects viable. Cash support is
provided to bridge the gap as viability funding. This release is made in the form of grant.
NHAI has decided not to go for shadow toll roads for the time being. Further, there is
another path breaking approach to finance the highways construction through establishing
Special Purpose Vehicles (SPVs). Total twelve(12) projects are being implemented by
NHAI through SPVs. Out of this, two (2) projects under NHDP are being implemented at
an estimated cost of Rs.740.00 crores and ten(10) Port Road Connectivity projects are
also being implemented at an estimated cost of Rs.1889.00 crores. The NHAI equity in
these SPVs is limited to 30% of the cost of the project. Other equity holders are ports,

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State Govts. and in one case Ministry of Commerce. Port Road Connectivity roads are
intended to connect major ports with National Highways covered under NHDP. Further
10000 Kms of NH have been entrusted to NHAI for up-gradation/relaying/construction
on BOT basis. In these projects grant up to 40 % will be allowed to the concessionaire
however estimates for higher grant requirements, if any by the prospective bidders have
also been allowed. This project is likely to cost Rs.55000 crores at 2003 market prices.
Other method of lending helping hand to the concessionaire is offer low interest rate
loans, revenue short fall loans, guarantees and assurances and variety of fiscal incentives
such as tax holiday on income tax for the concessionaire company, exemption /rebate on
customs duty for the imported equipments used in the construction or operation of
project, exemption of stamp duty applicable to various contracts in the project and
exemption/rebate/deferment of other taxes such as service tax, works contract tax, etc.

Since the fund requirement is enormous, it appears that PPP will not be sufficient
enough to take care of the development of roads. At most it may be good source to
maintain Highways. Efforts made to attract PPP for the development of Highways are
commendable; however it needs to be attempted with new zeal in the areas of
maintenance and sustenance of Highways. In order to increase participation of private
sector in road development risk sharing has be explicit and adequate. The underlying
principle of PPP is that risk be borne by the party best able to
manage/control/hedge/mitigate these risks and/or influence the out comes. The degree of
private participation in highway building and maintenance varies from project to project.
For some ventures, it means complete private development and operation of a roadway;
for others, it consists of incentive contracts in which governments have primary
ownership and responsibility but private firms bear some degree of risk and are rewarded
for efficiency. Private investors generally scrutinize highway projects closely to make
sure revenues will cover costs and provide a reasonable return on their investment. Their
care in that regard enhances the probability that projects built with private money will use
resources efficiently. Tolls or other user fees that allocate use--for example, of a
congested highway--to motorists who are willing to pay, can further enhance efficiency.
In this direction option of Toll road is the most popular option available in the developing

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countries. Here, it not only ensures additional fund, but also goes well with the concept of
‘user to pay’ or ‘pay-as-you-go’. Though reaction of people by and large on the issue of
toll is still awaited since, hardly only a few number road stretches in India are operated
on toll basis; it is being tried since it appears to promise additional funds. As investors
and public officials consider an increasing number of private or public/private projects,
the most successful ways of financing and operating them are likely to emerge. However,
the potential of private investment to fund a wide variety of highway activities at this
time remains limited. NHAI for example decided not to go for shadow tolling in 2002
and it has stuck with the decision.

Toll/ User Fee

A modest beginning was made about more than two decades back to collect toll
on permanent bridges constructed on rivers falling on National Highways. Underlying
idea of collecting toll on such bridges was to recover the cost of construction of the
bridge, which was seen as an asset primarily going to benefit the users of that very area.
In 1990s, the thought process changed and it was decided to introduce toll on all
permanent bridges of significance constructed subsequently, and toll is to be collected in
perpetuity. Thus, it was agreed that toll collected on a bridge need not necessarily be
considered as revenue generated out of that bridge and may be utilized for construction of
other bridges or National Highways to foster development in other areas as well. There
are about 85 permanent bridges on NH where toll is being imposed with an annual toll
collection of about Rs.100 cores per year. In year 2000, efforts were made to rope in
private sector in the field of road construction by means of BOT and other innovative
financing mechanism. Accordingly, in NHDP Phase-I, out of the initial estimate of
Rs.54000.00 crores, private sector participation is estimated to the tune of Rs.4000.00
crores. It primarily targets private sector investment through BOT projects. In the later
part, BOT Annuity was also tried by NHDP project executing agency i.e. National
Highways Authority of India (NHAI).

Maintenance

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 Other important area requiring urgent attention is maintenance of NHs. It is a
known fact National Highways in the country are difficult to maintain primarily because
of lack of resources and well laid policy to maintain them on a regular basis.
Maintenance includes all of the following activities needed to keep road network
operating indefinitely:
i) Routine maintenance or ordinary repairs
ii) Periodic maintenance (relaying the top surface)
iii) Rehabilitation
iv) Emergent maintenance/repairs
Poor maintenance may be attributed to money not being allocated, if allocated not
spent, if spent, not spent efficiently and even if spent efficiently, not spent effectively. If
routine maintenance is not carried out, it leads to wear and tear in the top surface, which
requires early periodic maintenance. If it is not attended to in time may lead to
pavements becoming brittle and giving way to cracks, which develop into potholes.
Maintenance is carried out of revenue allocation of the budget, which is treated as in
fructuous expenditure by majority of the Governments in developing countries India is no
exception. Invariably, the entire revenue expenditure is termed as avoidable and
therefore attempts are made to reduce the allocation for each and every revenue
expenditure related activity. This has immediate impact on maintenance on National
Highways. It may be very easily established that if roads are maintained on a regular
basis, then expenditure incurred on them on a long run is much less than the expenditure
required to be incurred on relaying the road all over again. Therefore, if routine
maintenance is taken care of, expenditure required to be incurred on relaying, the old
surface will be much less. There need to be a change in outlook of the Govt. to reallocate
more funds for maintenance than creation of roads. In order to achieve this objective, we
must take care of maintenance more seriously and more resources are required to be
deployed for the same. Therefore, it is very important to have a “Road Maintenance
Fund” for maintenance of National Highways (and other roads). Normal budgetary
allocation under plan capital heads is for construction of new National Highways or
ROBs/bridges. Maintenance is carried out of the allocations made from non-plan
revenue budget. If a non-lapsable “Road Maintenance Fund” is created and part of levies

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of different types are credited to it and even a normal budgetary allocation for
maintenance of National Highways is put in this fund, it will be a good beginning. Since
it will be a non-lapsable fund whatever little resources are allocated for maintenance of
National Highways may not be surrendered at the end of the financial year as has
happened in past several years.

PPP in Maintenance
Road maintenance may be handled either through a contractor only doing the
petty maintenance work or through an O&M contractor. In the first case, it is generally
some routine patchwork or routine maintenance, which is got done through some small
contractors, whereas O&M contract, is awarded for a long stretch of National Highways
through normal process of competitive bidding. This may include collection of toll as a
part of the contract. However, toll thus collected is remitted to Government/Employer
and not spent on maintenance by the contractor directly. In the case of BOT and SPV,
maintenance is part of general contractual obligation whereby revenue stream takes care
of this expenditure. Thus toll collected is the property of the SPV/BOT and it is open to
audit as per the contractual provisions.

Attracting PPP in Development and Maintenance of Roads

Attracting private sector participation in infrastructure requires a number of
policies, legal and regulatory decisions on the part of the authorities in charge. It will
necessitate: (i) restructuring tariffs (tolls/ service fee) to reflect costs and permit
commercial operation; (ii) explicitly identifying any non-commercial requirements to be
met by privatized entities or private participation in infrastructure projects; (iii)
developing appropriate sector policies, (iv) a transparent and stable legal and regulatory
framework (v) environmental and consumer safeguards to capture efficiency gains
associated with competition and private involvement; (v) mobilizing domestic capital
markets and attracting foreign direct investment; (vi) developing mechanisms to provide
long-term debt; (vii) deciding on a consistent policy for providing government support
(guarantees, subsidies, revenue enhancements, etc.) to different types of projects; and

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(viii) developing consistent and progressive procedures for awarding infrastructure
concessions.

Using private investment to fund highway projects shifts some or all of the cost
and risk from governments and taxpayers to private investors and users of those roads.
That change in turn reduces demands on government funds and conforms to the principle
of public finance that the beneficiary pays; factors that may create greater public
acceptance of privately financed toll roads. However, Government needs to be aware that
private ventures can create new problems for them. For instance, a project may not
generate enough revenues to cover operations, maintenance, and debt repayment, and the
developers may then ask the Government to bail them out. The agreements that
governments enter into with private firms should make clear the responsibilities of all
parties in the event of such contingencies. It may be a good idea to ask the prospective
bidders to indicate commercial conditions associated with the agreement, invite
comments and alternative clauses from them and incorporate the reasonable clauses
which assign the risks more equitably. A draft concession agreement with an invitation
for comment gives ample scope to make the concession agreement workable. Every PPP
infrastructure project is unique in many respects but the underlying principles remain the
same. Public and private entities will continue to seek ways to most appropriately deliver
high quality facilities at the lowest cost, on schedule to meet social requirements.

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