For making PPP cost effective in securing basic economic and social goals some major modifications in current policies appear necessary.
In recent years the government has taken a number of initiatives for construction and improvement of National highways. The most important of these initiatives consist of (a) allocation of part of the cess revenue from petrol and diesel to the National Highway Authority of India (NHAI); and (b) relying on public-private partnership (PPP) for implementation of highway projects. The overwhelming part of investment under the National Highway Development Programme (NHDP) during 2005–15 will be undertaken through toll based Build, Operate and Transfer [BOT(Toll)] system. Under this mode of PPP private entrepreneurs will undertake construction and maintenance during the concession period; financial support from NHAI is limited to an upfront grant which cannot exceed 40 per cent of the cost of each subproject; and the concessionaire recoups the cost through tolls. There are several reasons why not only is investment likely to be suboptimal under BOT (Toll), but compared with other alternatives it imposes a heavier burden on the Treasury in the long run. In view of the dominance of fixed over variable cost, large externalities, and the huge gap between the private and social rates of discount, there is a significant difference between socially optimal and commercially viable levels of investment in highways. This is apart from the fact that commercially oriented tolls tend to be grossly distortionary. Hence for making PPP cost effective in securing basic economic and social goals some major modifications in current policies appear necessary. First, since investment in highways is long-term and attended with high risk for a private investor, it is more cost effective for the government to borrow and make the funds available to builders at market rates of interest with adequate guarantee and safeguard against moral hazard. Second, in view the of the low appetite of private agents for long-term risk related to demand, building and maintenance should not be clubbed with tolling and compensation for the former should be made in the form of pre-specified annual payments with suitable escalator clauses. Third, tolls should be imposed primarily for reducing congestion, pollution, etc., and the major part of the cost of highways met through (a) auctioning of land adjoining roads; (b) parts of motor vehicles tax and capital gains tax on land; and (c) general revenue, if necessary.
