More reports on: Government policies

Cabinet panel approves hybrid annuity model for implementing highway projects

29 January 2016

The government on Wednesday approved a hybrid annuity model for building roads, in order to revive the public-private partnership (PPP) model and fast-track highway projects thereby mobilising more private investment in the infrastructure 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," the ministry of road transport and highways stated in a release.

The annuity-based 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 and 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.

The balance percentage of the project cost is provided by the government during the construction period.

Since the need for improved road connectivity was a continuing imperative, the ministry of road transport and highways (MoRTH) and its implementing agencies like the National Highways Authority of India (NHAI) had to increasingly resort to the public funded engineering, procurement and construction  (EPC) mode as the preferred mode of delivery for highway projects in 2013-14 and 2014-15.

There is an inherent limitation in implementing projects on EPC mode as such implementation is restricted by the financial resources available with the government. The ministry, therefore, 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. 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, ie, 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. Further, the developer is insulated from revenue/traffic risk and the inflation risk, which are not within its control.

The adoption of hybrid annuity model could be used as one of the modes of delivery for implementing highway projects that are not found viable on the build-own-transfer (BOT) with toll collection empowerment for effective maximisation of project implementation given that the financial resources at the disposal of the government are limited.

The main objective of the approval is to revive highway projects in the country by making one more mode of delivery of highway projects.

By adopting the model as the mode of delivery, 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 release pointed out.

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.

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