New development model for road projects
The weakened highways sector could get a boost with the government planning to do new construction and development model that will make it cheaper to build and operate projects.
This modified annuity-based model is expected to help the government 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.
An official says that the Planning Commission is in consultation with the National Highways Authority of India (NHAI), the state governments and the private sector and is in the last stage of constructing the new model concession agreement (MCA). This is expected to be launched in a fortnight. Under this model, 50 percent of the project cost will be paid to the concessionaire in the construction period. The remaining amount will be paid as an annuity after commercial operations begin.
To neutralize inflation, interest will be depending on the applicable bank rate plus 2 per cent. The government will give some operations and maintenance (O&M) support and the developer could also gather a toll.
The relation behind this model is that it would minimize the annuity payments and borrowings as well as inflation risk created by the developers under the current method.
An official says that the inflation risk which erupted by the concessionaire and the bids were often made assuming the worst case for inflation. As a result, the annuity amount the government had to pay was also higher.
As per the experts, the government will now sanction the critical project risk like 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.
Mr. Abhaya Agarwal, partner, infrastructure and PPP, says that this will minimize the long term off balance sheet commitments as in the condition of pure annuity projects, and enhance project viability in cases that are otherwise not viable on toll.
While the state like Madhya Pradesh, where more than 30 projects of cost Rs 7000 crore based on the annuity model have got under way in the past two-and-half years are likely to be implemented in the future annuity based highway project under this model.
Mr. Vivek Aggarwal, managing director, Madhya Pradesh Road Development Corp, says that in this model the annuity cost is smaller, private sector’s risk is less, and credit risk is lower. They had sanctioned around 18 projects on a mixed annuity cum toll model as this minimizes the pressure on the state.
Source: The Economic Times
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