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For new projects, NHAI back to build-operate-transfer model

The BOT (toll) model was the preferred model for road projects, accounting for 96% of all projects awarded in 2011-12. But this progressively reduced to nil.

Over the last few years, especially since the onset of the pandemic, the NHAI resorted to offering projects under the Hybrid Annuity Model (HAM) that ensures funds to the company building the road, thereby insulating it from financial risk to a certain extent.

After funding highway projects through public money for a better part of the last decade, the National Highways Authority of India (NHAI) is set to return to funding through private investments and plans to offer at least two highway upgradation projects to private players using the build-operate-transfer (BOT) model during the current quarter.

Under the BOT model, a private player is granted a concession to finance, build and operate a project for a specified period of time (20 or 30 year concession period), with the developer recouping the investments by way of user charges or tolls charged from customers using the facility, and thereby taking on a certain amount of financial risk.

“We have funded road projects during the Covid period through public money and will continue to do so if required. We plan to see whether the private sector has an appetite for road projects or not and we plan to offer two projects during this quarter,” a senior official of the Ministry of Road Transport and Highways of India told The Indian Express.

Explained

Positive sign

The pPP model is key to road asset development, and the BOT scheme is central to attracting private investment. When private interest waned post-2011, the shift to the EPC and HAM models was made to plug the funding gap. The return to BOT could be a big positive for the sector.

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Over the last few years, especially since the onset of the pandemic, the NHAI resorted to offering projects under the Hybrid Annuity Model (HAM) that ensures funds to the company building the road, thereby insulating it from financial risk to a certain extent. Under the HAM model, 40 per cent of the project cost is paid by the government as construction support to the private developer, and the remaining 60 per cent is to be arranged by the developer.

The BOT (toll) model was the preferred model for road projects, accounting for 96% of all projects awarded in 2011-12. But this progressively reduced to nil. When the interest in BOT projects started to wane, road construction shifted to the traditional engineering, procurement and construction (EPC) mode, with the HAM model being devised later. Under the EPC model, the government pays the entire cost, thereby insulating the contractor entirely from financial risk.

The last time NHAI tried to assign road projects on BOT was in 2020. The projects were finally handed in March 2021 at a premium (besides building the road, the developer also pays the government), but only after a couple of extensions in bidding deadlines and inclusion of a few incentives.

As part of the incentives, the government decided to assess the revenue potential of a project every five years during the concession period as against every 10 years earlier. This would mean that the concession period (or period till which road developers can collect toll) is extended early in the tenure of the contract, ensuring surety of revenue for the private company.

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Highway construction is a priority sector, with the ministry setting a target to construct 18,000 km highways for the current fiscal. About 10,457 km of national highways were constructed in 2021-22, down from 13,327 km in 2020-21.

First published on: 15-07-2022 at 04:55:38 am
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