Road Sector New BOT Model
Stung by the lackadaisical attitude of both road builders and investors in the country's highway sector, the government is planning to roll out a new construction and development model that will make it cheaper to build and operate projects, particularly those that are unviable under the current fiscal conditions. The modified annuity-based model is expected to help the government move from its current dependence on cash contracts to build highways, owing to lack of interest by the private sector of late towards a workable public-private partnership, generally regarded as being superior. In this connection, the Planning Commission, which has held consultations with the National Highways Authority of India (NHAI), state governments and the private sector, is in the final stages of developing the new model concession agreement (MCA) that it is expected to be launched in a fortnight, said official sources claiming that under this new model, 50% of the project cost will be paid to the concessionaire in the construction period and the rest of the amount will be paid as an annuity after commercial operations begins. That apart, in order to neutralize inflation, interest will be based on the applicable bank rate plus 2 percent. The government will also lend some operations and maintenance (O&M) support and the developer could also collect a toll.

Experts in the field opined that the government will now pass on critical project risks such as design, construction, operation and maintenance to the private sector but retain the financial risk, in contrast with current EPC or engineering, procurement and construction contracts. The move will also reduce long-term off-balance sheet commitments, as in the case of pure annuity projects and enhance project viability in cases that are otherwise not viable on toll, said partner, infrastructure and PPP, EY, Abhaya Agarwal, adding that for the private sector, it enhances bankability of the project and will also channelize liquidity as 50% of the project cost is recovered within the construction period. In view of the fact that developers would have to bring in less investment, the exposure of banks would also be much less. The success of this model can only be determined after it is implemented on the ground as it is still unclear whether NHAI or the highways ministry would support the new model. However, state governments such as Madhya Pradesh - where more than 30 projects worth Rs 7,000cr based on the annuity model have got under way in the past two-and-half years - are likely to implement future annuity-based highway projects under this model.