Govt approves hybrid annuity model for highway projects

The government today approved hybrid annuity model for building roads to fast-track highway projects, revive the Public-Private-Partnership (PPP) mode and attract more investments in the sector.
"The Cabinet Committee on Economic Affairs, chaired by the Prime Minister Narendra Modi, has given its approval for the Hybrid Annuity Model as one of the modes of delivery for implementing the Highway Projects," said a statement from the Ministry of Road Transport and Highways.
Under this model, the government will provide 40 per cent of the project cost to the developer to start work while the remaining investment has to be made by the developer.

"Adopting such a model for projects not found viable on BOT (Toll) mode, shall be more effective in terms of maximising the quantum of kilometers implemented within the available financial resources of the Government," the statement said.
The main objective of the approval is to revive highway projects in the country by making one more mode of delivery of highway projects, it said.
It said by adopting the model, all major stakeholders in the PPP arrangement - the Authority, lender and the developer, concessionaire would have an increased comfort level resulting in revival of the sector through renewed interest of private developers/investors in highway projects and this will bring relief thereby to citizens/travelers in the area of a respective project," the government said.

It will facilitate uplifting the socio-economic condition of the entire nation due to increased connectivity across the length and breadth of the country leading to enhanced economic activity, it said.

Road Transport and Highways Minister Nitin Gadkari has recently said, "No one (private players) was ready to participate in the PPP-based projects as they had lost faith (in the previous government). However, to encourage private participation, we have also introduced a hybrid model, where we will share the risk with them."
The decision taken on September 11 last year by the CCEA has delegated the authority for deciding on the mode of delivery of highway projects to the ministry.

The erstwhile Planning Commission has developed the first version of the Model Concession Agreement for roads in 2006.
This was done considering the need to standardise documents and processes for the PPP framework in the country for ensuring uniformity, transparency and quality in development of large-scale infrastructure projects.
Subsequently, the Planning Commission had developed various other versions of the MCA for highways considering the different PPP modes like BOT (Toll) and BOT (Annuity) addressing to a significant extent, the sector's changing needs of the sector.
The statement said the latest MCA provides an alternative model in the form of Design, Build, Operate and Transfer (DBOT) where the project is financed only to the extent of a certain percentage of the cost by the private investor.

This investment is recovered through annuity payments to be made by the government/Authority over a specified period commencing from the date of commissioning of the project, it said, adding that the balance percentage of the project cost is provided by the government during the construction period.
Since the need for improved road connectivity is a continuing imperative, the MoRTH including its implementing agencies like the National Highways Authority of India (NHAI) had to increasingly resort to the public funded engineering, procurement and construction.
The government said there is an inherent limitation in implementing projects on EPC mode as such implementation is restricted by the financial resources available with the government.

"In that context, MoRTH intends to introduce an alternative mode of delivery in order to sustain the pace of implementation of highway projects through optimum utilisation of available financial resources. Accordingly, it was decided to consider the Planning Commission MCA for Annuity Projects -version April, 2014," it said.
This model also provides an increased comfort level for the lenders and concessionaires as traffic and inflation risks are taken by the Authority.
An important feature of the Hybrid Annuity Model for highways development is the rational approach adopted for allocation of risks between the PPP partners - the Government and the private partner i.E. 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 financing risk, it said.
"Further, the developer is insulated from revenue/traffic risk and the inflation risk, which are not within its control," the statement said.