15 th International Road Federation World Meeting

Transcription

1 15 th International Road Federation World Meeting Bangkok, June 2005 Guang Z. Chen Sector Manager, Transport South Asia Region The World Bank

2 Today s Presentation Principles of Road User Charges Objectives Highway Financing Approaches Current Highway Financing Mechanism in India Road Sector Rev vs. Requirement Funding Gap Major Issues & Causes Reforming the charging structure Private Sector Participation (PSP) Principles PSP in India Ongoing Constraints India China Comparison & Recommendations Potential Lessons for India Recommendations at GoI & State Level

3 An efficient Highway Sector Financing Mechanism requires a clear Link between Objectives and Instruments Objectives Costs to be recovered Instruments Efficient allocation of resources between sectors Full Road Maintenance Costs PREVALENCE HIGH Efficient use of resources within the road sector Equity System Administration Costs Environement & External Costs Congestion Costs Income tax Corporate tax Sales tax License fee Customs VAT Excise Environment tax Agri. Mktg. cess LOW Entry tax Registration tax Annual fee Fuel tax Fuel cess Flat-rate toll Transit fee Variable toll Weight distance charges Congestion charges Environment Capital Costs LOW HIGH DIRECTNESS

4 Highway Finance in India follows a largely traditional Approach Traditional Approach Roads are treated as public goods Roads are financed from general revenue with little connection between the costs of road provision and the taxes or charges paid by road users There is no attempt at direct road pricing Commercial Approach Roads are treated as capital assets Commercial accounting is applied and users are charged either directly or indirectly for road use Taxes are designed to minimize distortions to transport patterns or choices Road users are increasingly involved in decision making Indian Approach The traditional approach largely persists National and state fuel cesses exist; However, tolls are being increasingly applied The approach has contributed to under funding of road maintenance, distorted vehicle fleet, perverse incentives for traffic allocation between road and rail and substantial economic losses

5 Agenda Principles of Road User Charges Objectives Highway Financing Approaches Current Highway Financing Mechanism in India Road Sector Rev vs. Requirement Funding Gap Major Issues & Causes Reforming the charging structure Private Sector Participation (PSP) Principles PSP in India Ongoing Constraints India China Comparison & Recommendations Potential Lessons for India Recommendations at GoI & State Level

6 Classification of Taxes & Road User Charges in India Taxes (Central Customs) Excise on Motor Vehicles User Charges & Fees Cess on fuel Road user tolls Central Government Central sales tax on inter-state transaction & shipment of vehicles Excise duty on fuel State Governments Excise duty on spares/ lubes/ accessories Sales tax on vehicles Entry tax Sales tax on fuel Sales tax on spares/lubes/ accessories Excess over average sales tax (for broad definition) Registration fee Taxes levied on passenger & goods vehicles Cess on fuel Road user tolls Permits, licenses, fines & penalties

7 Road User Charges vs. Costs per Vehicle - Km Rs./Km 6 5 Road User Charges Vs Road Costs by Vehicle Category (National & State Highways) FY2002 Total Tax Revenue Road User Charges (broad definition 1 ) 4 Total Costs Total Maintenance Costs Wheelers Cars Jeep/Taxi Bus LCV HCV MAV (1) including excess over average taxes for excise and sales taxes on fuel, fuel cess, road & passenger taxes, tolls

8 Road Sector in India appears to generate a Revenue Surplus of Rs. 289 Billion per annum Total Road Sector Revenue & Expenditure for FY 2002 (Rs. Bil.) Rs. Bil Surplus Union States Total Union States Total Road Sector Revenue Road Sector Expenditure Revenue Surplus

9 There appears to be sufficient Funding from NH & SH Users to cover identified Expenditures on NH & SH Networks Rs. Bil. 254 Total Road Sector Revenue & Expenditure from NH & SH FY 2002 (Rs. Bil.) Total RUC (Broad definition) Revenue from NH & SH Const. Exp. Maint. Exp. Maint. Req. Expenditure on NH & SH Surplus

10 But in reality there is a Rs. 1,000 Billion gap in Highway Financing over the next 10 years Rs. Bil. Revenue from Road User Charges vs. Highway Requirements, (Rs. Bil.) 3,765 1,721 2,677 1,048 1, Maint. Requirement Capital Requirement Total Requirement Total Revenue from Highways RUC from Highways Shortfall

11 Sub Optimal Highway Financing Structure is due to the following causes... Road Users seen as general tax revenue generators Widening Road sector of taxes 13,000 account Km for of 15.5 core % existing of total tax national revenue in highway India (The figures for the US & West during at a cost of European countries are in the range of $ %) billion Road related taxes are generally cheap and easy to collect Only a third of road user taxes are returned to road sector as investment or maintenance Fragmented tax-decision making structure Aims Absence at of connecting a national road by pricing/ 2003 every user charging village policy that or has any a procedures to harmonize the type & population of and every level of road taxes village of population 500+ by 2007 Different through levels & all types weather of sector roads taxation, which are established by different agencies and layers of 50% government of the Central Road Fund (about $ 500 million p.a.) is Overriding motivation for changing tax dedicated levels appear for to be the to rural generally roads program increase tax revenue, with little disregard to economic efficiency or World equity Bank is funding part of the program in 4 states, ADB is funding partly in 2 states Lack of Information for policy formulation Policy makers cannot make coherent taxation policy & expenditure decisions without accurate data Sound information is necessary to monitor impact of road user charges policy and provide basis for corrective changes Lack of information makes it difficult for road users to hold anyone accountable for efficient use of taxes collected

12 Four Major Issues Require Urgent Attention... Highway FInancing Road User Taxation Road User Charges Intermodal Transport Policy Widening Inadequate of maintenance 13,000 Km funding of core existing Applies to both national & national highway state highways and is partly during due to low 1998 political profile at of a cost road maintenance of $ 13 billion Investment financing gap Results from the rapid increase in investment (NHDP, PMGSY, etc.) and the inadequacy of budget funds Proliferation and overlapping of taxes This arises from the allocation of expenditure responsibilities and taxing powers to the states, together with the lack of standardized approaches. Significant differences become entrenched and are very difficult to eradicate Regional disparities No national guidelines or consultative forum to help ensure consistency among the states Undercharging of heavy goods vehicles Fuel taxes are inadequate to reflect the costs imposed by heavy vehicles. The costs are not fully recovered by fixed annual fees Overcharging of buses Bus transport is an easy revenue source. The levels of charges appear neither equitable nor efficient Urban congestion There is no urban road charging nor extensive traffic management to control congestion Lack of coordinated intermodal policies There is limited coordination between the policies of Indian Railways and the rest of the transport sector. Railway pricing and road user charges encourage too much road freight and too many rail passengers, resulting in an inefficient distribution of traffic

13 Various Options exist to restructure Road User Charges Regime Higher diesel cess Purchase & Ownership taxes Tolling the National/ State Highways Weight/ Distance charges Goal To remove economic distortions & raise revenues for road investment & maintenance Urban Congestion charges

14 Agenda Principles of Road User Charges Objectives Highway Financing Approaches Current Highway Financing Mechanism in India Road Sector Rev vs. Requirement Funding Gap Major Issues & Causes Reforming the charging structure Private Sector Participation (PSP) Principles PSP in India Ongoing Constraints India China Comparison & Recommendations Potential Lessons for India Recommendations at GoI & State Level

15 PSP in Roads revolves around three basic Principles Enabling Environment Public Private Risk Regime Additional Support by the Public Sector

16 A sound Legislative, Regulatory and Institutional Framework is a necessary Foundation for enabling PSP Legislative Environment Regulatory Environment Institutional Environment Grant of concession i.e. transfer by Government of the right of construction and maintenance of roads to a private party Levy and collection of tolls for use of roads and facilities by the private investors Statutory backing for the Concession Agreement specifying the rights, duties and obligations of the parties involved Repatriation of investment and net profits after expiry of the Concession period Safeguarding of investors interests in case of change of Government/Government policy Regulatory environment plays a significant role in dispute resolution, fixation and revision of tolls and monitoring of construction and maintenance contracts There is a need to strike a fine balance between investors legitimate concerns in getting a reasonable return, the genuine needs and requirements of users and governmental concerns of getting value for money Regulatory Authority should ideally be a statutory, autonomous and impartial body with appropriate powers and functions Responsibilities should be clearly delegated between central and local approval authorities and rules and regulations for approval process should be made transparent Standardized processes such as inquiry and submission forms, concession contracts and O& M contracts facilitate PSP by introducing efficiency and transparency in procedures Providing all relevant approvals under a single statute is one way to simplify the approval process

17 Risk should be allocated to the party that is best suited to either control or bear that risk Public-Private Partnerships and the Risk-transfer Continuum HIGH Degree of Risk Public Sector Private Sector LOW HIGH Maintenance Management Design & Construction Operations & Management Rehabilitate- Operate- Transfer (ROT) Build- Operate- Transfer (BOT) Corridor Management (DBFO)

18 Road Concessions require varying forms of Government Support (I) Support Measures Comfort Letter International Examples The Chinese government commonly issues a legally non-binding letter to give support to certain actions not clearly stated in contractual agreement such as performance of a public corporation as a grantor of concession Land Acquisition Common in China, Thailand and United States and is helpful to the concessionaire because the right of expropriation usually resides with the government Extension of Concession Period The Indonesian government takes measures to provide compensation for the loss of profit due to circumstances caused by the government Construction of Related Facilities The British and the Thai governments commonly provide for the construction of connecting roads, access ramp, etc Revenue Support Revenue support is usually done with a minimum threshold for compensation paid by the governments in Malaysia and China (including Hong Kong SAR) Revenue Sharing with Existing Facilities In Malaysia, Thailand and the United Kingdom, deriving revenue from an existing toll road facility can take the form of taking over the complete facility including employees and assets as well as debts

19 Road Concessions require varying forms of Government Support (II) Support Measures Shadow Toll International Examples The British and Argentine government pay toll to the concessionaires according to the vehicle- kilometers of the traffic counted automatically Provision of Development Rights and Third-Party Revenue This measure involves the transfer of right of commercial development along the toll road to supplement project economics Subordinated Loan This is a common measure in Malaysia for facilitation of financial closing because it is treated as equity Foreign Exchange Guarantees In Indonesia, the Philippines, and Spain, government provides compensation for the impact of the devaluation of local currency Loan (Bond) Guarantees The Chinese government gives a guarantee on repayment of loan and on redemption of bond for the facilitation of project proposals and implementation Equity Guarantees Guarantee of equity investment may be given for facilitation of financial closing in foreign currency when country risk in this respect is high

20 PSP Models adopted by NHAI demonstrate a sliding Scale of Risk Management PSP Models used by NHAI Risks Allocated to Private Player Progression towards maturity Construction Risks Design, Construction & Operation Risks NHAI today Design, Construction, Operation & Traffic Risks BOT Concessions Annuity Concessions NHAI has awarded tolled concessions of approx. Rs 3,400 Cr. (US $ 750 million) on highly trafficked road sections with relatively low traffic/ financial risks NHAI has awarded 467 kms (8% of NDHP) of annuity concessions amounting to Rs 3,000 Cr. (US $ 670 million) for projects with generally higher traffic risks Construction Contract Annuity Concession BOT with tolling Concession Special Purpose Vehicles (SPVs) Examples include the Moradabad bypass, Jaipur bypass (phase II) as well as some port connectivity projects

21 Achievements in PSP at State-level have been limited State Extent of Private Participation Agency and PSP Mechanism Approx. length constructed (Kms.) Value of Private Funding (Rs. Cr.) Andhra Pradesh Some, but in very small sized projects Andhra Pradesh Road Development Corporation (APRDCL) Mainly Bridges and ROB s plus 36 Kms. 188 Debt to APRDCL & BOT Gujarat Limited, although many are under preparation Gujarat Road Development Corporation 110 SPV and BOT Karnataka Limited in new construction, but maintenance of most of the core network outsourced on term basis Karnataka Road Development Corporation Ltd. (KRDCL) Debt to KRDCL Nil Nil Madhya Pradesh Significant, but only a few of the project envisaged have progressed to financial closure and construction MP Bridge Corporation Debt to MPBC and BOT 2000 (rehabilitation only) Maharashtra Many toll based projects being implemented, but limited private investment Maharashtra State Road Development Corporation (MSRDC) Debt to MSRDC and BOT Tamil Nadu Significant, but few projects have reached financial closure Tamil Nadu Road Development Corporation (TNRDCL)

22 While overall Environment for PSP is improving, a number of Constraints remain Absence of reliable Information Data on construction unit costs, traffic, and the history of construction of any existing road or structure is absent This affects ability to forecast cashflows Where there is data available, there are concerns over the accuracy of the data, especially in relation to traffic counts High Price Elasticity of Demand Due to high levels of existing taxation on road users, willingness to pay for tolls is rather low, despite the fact that Indian toll levels are on average some of the cheapest in the World Dispute Resolution The time and costs of arbitration are however, often high and a more certain and swift dispute resolution mechanism may reduce perceived risks for private investors. Additional Weakness at State level State governments not only have lower creditworthiness when concessionaires are considering the timeliness and completeness of any public subsidies, but also networks generally with lower traffic

23 Agenda Principles of Road User Charges Objectives Highway Financing Approaches Current Highway Financing Mechanism in India Road Sector Rev vs. Requirement Funding Gap Major Issues & Causes Reforming the charging structure Private Sector Participation (PSP) Principles PSP in India Ongoing Constraints India China Comparison & Recommendations Potential Lessons for India Recommendations at GoI & State Level

24 India China Comparison in Highway Development ( ) Road Network in the two Countries India s road network grew 600,000 km during 1992/2002 (2.7 to 3.3 million km), but mostly in rural roads China s road network grew only 376,000 km (1.3 to 1.7 million km) but emphasis on arterial highway network Between 1992 and 2002 China added 52,000 km to its highway and expressway network, while India is still working on its four-lane interstate highway network connecting four mega cities (6,000 km) Completion of 52,000 km of highway in just over a decade compares with the US interstate system of 69,000 km which took over 30 years to build.

25 Potential Lessons for India Finance As a strategic decision, public investment in highway has increased continuously and dramatically since the early 1990s, when China embarked on the development of NTHS system. $13 billion in 1997 to $38 billion in In contrast, India spent about $1-2 billion a year until the late 1990s, increased to about $4-5 billion a year in recent years, much more is needed. For India, a vast expansion of investments in highways will be required to sustain more rapid economic growth on the order of 3% of GDP ($15 to 20 billion p.a.) for highway sector alone. At the peek of China s highway development program, private finance (through JV developers, securitization, etc.) was well under 10% of the total investment. Few institutional investors participated, but large share financed by domestic bank loans guaranteed by local gov t and central gov t bond proceeds, which may not be sustainable Private finance can play a larger role in India domestic capital markets and associated legal infrastructure are better established than in China the yet to be built arterial controlled access networks provide attractive opportunities for Private-Public Partnerships

26 Potential Lessons for India Network Design China focused on arterial network development Highly modern network integrating markets across the country & with the rest of the world Chose mainly high standard controlled access, grade separation, with higher speed and improved safety Presently under-utilized due to segments built ahead of demand; and the existence of parallel non-tolled roads India focused on secondary and tertiary network with minimal design standards Caused congestion between major cities At grade design and lack of access control produces a mix of slow and fast traffic posing safety problems The recent program on its arterial network (NHDP) are not access controlled and with mixed traffic, will need to develop expressway soon. The optimum strategy lies between these two extremes and varies from segment to segment

27 Potential Lessons for India Cost Recovery Avoid myriad of short tolled segments with high collection costs by grouping toll finance initiatives through state- or region-wide highway corporations Pooling of assets to reduce operational costs and risk Facilitating network expansion through securitization of revenue streams from existing assets India s current reliance on fuel levies and shadow tolls, combined with direct tolling (of new facilities with heavy traffic and inelastic demand) appears to be appropriate.

28 Recomendations to GoI Improve the level of information Road agencies need to start taking seriously the need to regularly collect, store, analyze and make public basic information that can used both by themselves in managing the network, by prospective private investors as well as by general public Quality of financial information can be greatly enhanced Project Planning, Prioritization and Justification Projects should be prioritized using well defined selection criteria such as type of vehicular traffic, traffic volumes, connectivity with major roads, present road conditions, and decide on the form of private sector engagement (e.g. PSC in Canada and UK) Corporate or Project Finance Approach? Bypass and bridges may be suitable for project finance, but what about main network? Dedicated revenue stream from cess/tolls could be used to borrow on network basis either through debt or non toll based DBFOs contracted to NHAI or an RDC at State level This would help diversify traffic risk, allow cross subsidy, enhance user accceptance, help ensure uniform standards, allow incremental introduction of tolls, provide incentive to manage whole network Establishment of a Mechanism to Coordinate Charging and Expenditure Regime Either establish Council of State Ministers for Transport as in the EU Or create a Highway Regulatory Authority drawn from the engineering, legal and industry professions Enforcement of the revised Arbitration and Conciliation Act Improve dispute resolution mechanisms to ensure to reduce delays in arbitration

29 Additional Recomendations at State level Institutional Framework Establish a State Road Development Corporation with improved governance and more nimble procedures may be given responsibility to act as a nodal agency for induction of private investment in the sector by commissioning project preparation and procurement activities on behalf of states Toll Structure Definition States should design and notify a variable distance-based toll rate structure enabling a gradual shift from indirect to direct charging for roads Use of road funds Ring financing and securitizing revenues from dedicated road user charges will increase the creditworthiness of road agencies, reduce risk perceptions by potential investors and lenders and strengthen government financial capacity to contribute to PPP projects Corporate Finance Approach Corporate financing could be implemented through the establishment of semi autonomous Road Development Corporations Adoption of a PPP framework and enactment of accompanying laws

30 Where to find more information?

31 Thank You!