Highway developers face profit caps

NEW DELHI: Companies implementing highway development projects on annuity basis may not be allowed more than 18% profit on their investments as per a proposal under consideration of the ministry of shipping, road transport and highways.

���The government is considering to cap return on equity earned by road developers for annuity projects to prevent cartels from making abnormal profits from government-funded projects,��� an official in the government said requesting anonymity.

Currently return on investment (RoI) for an annuity-based road project is a biddable item where government pays project cost plus agreed RoI to the developer for construction of a highway stretch. Payments are made to the developer in several instalments.

As per a draft Cabinet note under circulation, profits for annuity projects are proposed to be capped at 18%. For developers in difficult areas, such as north-east, this ceiling will be 21%. Presently, the rate of return quoted by private players ranges between 10 and 25%.

Under the existing system, National Highways Authority of India (NHAI) has to invite bids first on a build-operate-transfer (BOT) toll basis. In this model, the operator recovers the investment by collecting a toll for a designated period once the highway is completed. Only failing to attract investors for a road project under toll model, NHAI awards annuity-based projects.

Experts say that government should not act as a tough regulator that may dissuade investors. ���If the government fears open tendering process will result in cartelisation, it should satisfy itself by fixing a minimum number of bidders for a project,��� Feedback Ventures chairman Vinayak Chatterjee said.

���The government may have been forced to introduce a cap on IRR (internal rate of return). In the normal practise, annuity projects cost the government much more than its own estimates,��� said former Planning Commission member Anwarul Hoda.

The road transport and highways minister Kamal Nath has set a target of 7,000 kms of roads annually or 20 kms a day. The ministry is planning to award contracts for 12,000 kms by the end of this year. Several of these stretches would be on annuity model.