Cabinet approves hybrid annuity model for national highways

The model will be the fourth to be introduced in India for road projects’ execution, re-starting stalled projects

 

The cabinet committee on economic affairs (CCEA) on Wednesday approved a hybrid annuity model for national highways, clearing the ground for stranded road projects worth Rs.25,000 crore.

 

The model will be the fourth to be introduced in India for the execution of road projects and is intended to kickstart stalled projects and accelerate highway construction. Under this model, the government will share 40% of the project cost and would allocate funds to the developer to start work depending on the case. The remaining investment would come from the developer over the duration of the project’s execution. Revenue collection would be the responsibility of the National Highways Authority of India (NHAI); developers will be paid in annual instalments over a specified period of time.

 

Road projects in India are awarded in three formats. One is build-operate-transfer (BOT) annuity, in which a developer builds a highway, operates it for a specified duration and transfers it back to the government, which pays the developer annuity over the period of concession.

 

A second model is BOT-toll, under which a concessionaire generates revenue from the toll levied on vehicles using a road.

 

The third model is engineering, procurement and construction (EPC), under which a developer will execute engineering design, procure equipment, materials and labour and build a project; the government provides the money. The hybrid annuity model is a mix of (BOT) toll and EPC models. An important feature of the hybrid annuity model is allocation of risks between the partners—the government and the developer/investor. While the private partner continues to bear the construction and maintenance risks as in BOT (toll) projects, it is required only to partly bear the financing risk. The developer is insulated from revenue/traffic risk and inflation risk, which are not within its control. The cabinet, in a media statement, said the hybrid annuity model would be adopted for highway projects not found viable on a BOT mode. The main objective is to allot new highway projects that are stuck because of a funding crunch faced by developers.

 

The hybrid model will provide stakeholders in public-private-partnership (PPP) arrangements—the NHAI, creditors, and the developer—increased comfort in reviving stalled road projects, the statement said.

 

“The approval is going to clear around two dozen projects costing over Rs.25,000 crore that have been stranded. The new model reduces the financial burden on the concessionaire as the government gives money to start the work,” a senior official in the road transport and highway ministry said on condition of anonymity. The projects pass through Delhi, Uttar Pradesh, Himachal Pradesh, Jharkhand, Maharashtra and other states. The road ministry had identified 27 project worth over Rs.25,000 crore out of which 12 were to be undertaken during the current fiscal year and the rest during 2016-17. NHAI chairman Raghav Chandra said the new model would help accelerate projects, adding he hoped it would find wide acceptance.

 

In September, CCEA had delegated the authority to the road transport and highways ministry to decide the mode of delivery of highway projects after the latter batted for the introduction of the hybrid annuity model.