The government is planning to put a ceiling on annuity payment for public private partnership (PPP) projects. The move is intended to reduce the pressure on future budgets due to commitments made today.
Annuity is paid to concessionaires through periodic installments over the life of projects and a part of it is kept off budget. Due to this practice, the government is unable to properly plan for future payments of annuity and often finds itself short of funds for new projects.
Annuity is one of the models to develop infrastructure projects through the PPP route. It has been mostly used in the national highways sector with the road ministry awarding projects worth R14,986 crore under this mode till the end of 2010. The National Highways Authority of India, which supervises building of national highways, is expected to award annuity projects worth R40,000 crore during the fiscal year 2011-12.
As per the proposal being considered by finance ministry, total annuity commitments for a scheme like the National Highways Development Programme in a year should not exceed 20% of projected annual plan outlay for that scheme in any subsequent year.
In order to dissuade ministries from awarding annuity projects beyond what is possible under the Budget for the fiscal, the finance ministry is likely to impose a cap on total capital spending for annuity projects in the year. If any ministry wants funds in excess of what is permitted, it has to move the Cabinet for a special sanction.
The ministry is also discussing how to report annuity payments in annual budgets. For this, it is thinking of booking all annuity payments for the first 10 years of a project as plan expenditure and thereafter shifting it to non-plan expenditure. Currently, capital outlay is charged as plan expenditure, while annual maintenance payments over the years are normally booked as non-plan expenditure. Interest payments on borrowings used for funding such plan expenditure are also reported as non-plan expenditure.
These measures are recommended by a committee headed by Planning Commission member B K Chaturvedi. ?In the case of annuity-based PPP projects, the annuity commitments would create a burden on the future budgets over a long period of time as compared to conventional contracts where the capital costs have to be budgeted upfront. As a result of annuity commitments, the budgets for several years would become inflexible to the extent of these commitments. It is, therefore, important to determine the extent to which the future budgetary options should be restricted due to liabilities undertaken for the present,? Chaturvedi said in his recommendations.