The development of highways is expected to pick up since major political parties have mentioned it prominently in their election manifestoes this time. In the meantime, the National Highways Development Authority (NHAI) has gone ahead and is tweaking the option from built-operate-transfer (BOT) toll model of highway construction and looking at BOT Annuity model for the third phase of National Highways Development Programme (NHDP) spanning 12,000 km. The alternative model is expected to encourage participation of the private sector in the ambitious project.

It?s being done because the third phase of the project has hit a roadblock on account of the credit crunch and high interest rates. In fact, out of 60 projects for which requests for proposal were issued, 38 did not attract even a single bidder. This is despite the fact that the Planning Commission came out with a model concession agreement to encourage participation of the private sector to built roads. The total cost of 60 projects is about Rs 70,000.

The question is: Whether such a shift will encourage private players to come and bid for the projects? Both BOT (Toll) and BOT (Annuity) are part of the public-private partnership models of road infrastructure development and were envisaged to capitalise on the private sector?s capacity to raise funds and bring in efficiency in implementing the project.

Technically, in BOT (Toll) model of the highways development, the private participant is entitled to up to 40% of the total cost of the project through viability gap funding. The private concessionaire is entitled to toll revenues for the entire concession period, which ranges from 12 to 18 years. The maintenance cost has to be met by the developer who also has to bear the traffic risk. After the completion of the concession period for the private operator, which can be 12-18 years including three years of construction, the project is transferred to the government.

On the other hand under BOT (Annuity), a private operator is not entitled to toll revenue and is paid a fixed amount by the National Highways Authority of India (NHAI). The advantage for the private concessionaires in this model is that they do not have to bear the traffic risk. ?When the authority takes up projects on annuity, it commits a liability of future payments staggered over the period of concession for a project to the developer. With this model, the government is able to use the private sector resources and capacity to build and maintain the stretch and retain the tolling rights as well as the upsides of tolling,? says Didar Singh, member (finance), NHAI.

The genesis of BOT (Toll) goes back to the mid-90s when the government started experimenting with the idea of private-public partnership. Infrastructure projects like bridges, flyovers and underpasses, which were worth less than Rs 100 crore, were put under such schemes.

For the development of highways since the late 90s, the government had opted for both the models. In the first phase of NHDP?5,846-km Golden Quadrilateral?out of 128 projects, nine projects were taken up on BOT (Toll) model and eight were constructed on BOT (Annuity) model. In the second phase-the North-South, East-West connectivity corridors spanning 6,161 km-out of 212 projects, 16 projects were built on BOT (Toll) model and 16 projects were constructed on BOT (Annuity) model.

With the success of the PPP schemes, the government wants to further strengthen the model. But with the economic slowdown choking the funding channels for the infrastructure companies, the government now plans to go for a healthy mix of toll and annuity model.

In fact, of the 60 projects, seven projects worth Rs 8,739 crore for over 700 km have already been converted to annuity. The NHAI in February this year decided to take up six packages of Jammu-Srinagar stretch worth Rs 8,736 crore on annuity and is in the process of restructuring the remaining projects by changing the physical specifications of the projects. After the process of restructuring is done, bids will be invited again either on BOT (Toll) or BOT (Annuity) depending upon the need. The restructuring will help reduce the cost of the projects by 10% -20%.

Though the restructuring calls for big fiscal capabilities on the part of the government to fund these mega road projects on annuity basis, this time around the NHAI seems to be prepared. ?As far as financing of the projects is concerned, it is managed by the NHDP financial plan, which is a kind of a budget for all the seven phases of the NHDP,? says Singh.

The financial plan accounts for all the pre-construction as well as construction expenses. It also takes into cosnideration resources like cess, and multinational funds from the World Bank and Asian Development Bank. Cess on petrol and diesel was introduced in 1998 with an objective to raise resources to finance road projects. As of now, fuel cess for road development is Rs 2 each on petrol as well as on diesel. This is the funding channel that is utilised for land acquisition, viability gap funding, and annuity payments that the authority may be required to make.

However, the issue that needs due consideration is the amount of annuity exposure that the NHAI can take. ?The government set up an inter-ministerial group under the road transport and highways secretary. The group has recommended that annuity be capped at 35% of the cess accruals over the entire period of financial plan till 2030-31. We have kept the exposure at one third so that two thirds is left for expenses towards viability gap funding and detailed project reports among others,? said Singh.

It is estimated that at 2006 prices, the total investment in all the phases of NHDP till 2015, which is the target year for completion, was pegged at Rs 2,20,000 crore. But Singh stresses that NHDP has submitted a proposal to the Planning Commission to revise it upwards to Rs 3,00,000 crore. Even if the government finds it financially viable to restructure the model, the key players are divided on the issue. Some think it will be easier to mobilise funds and do the construction, others feel that private equity players who have started showing interest in the sector will be discouraged to put in their investment in simple annuity contracts.

Says Amitabh Das Mundhra, director, Simplex Infrastructure Ltd, ?In case of the project developed on the annuity model, financial closure is easier as there is no traffic risk. Because of very low participation of the private developers in BoT (toll) model last year, the government may be looking at the alternative model, which takes away the risk. With this move, more private participation is likely to be seen.?

National Highways Builders Federation (NHBF), a representative body of the highways construction companies, also finds merit in the BOT (Annuity) model of road infrastructure development in the current scenario. ?The banking sector, which is one of the major financers for the infrastructure projects, will also be interested in annuity projects as these projects come with government guarantee. Availability of funds along with the fact that the annuity model is divested of the traffic risk will attract the bidders to take up the projects,? says M Murali, director general, NHBF.

However, infrastructure consultancy firm Feedback Venutures feels the road projects have to be converted to annuity with precision. Parvesh Minocha, MD (Transportation), Feedback Ventures, says, ?Tolling on any new BOT (Toll) project will start in three years from now. So, are we pessimistic about tolling even three years from now? In case of annuity, pure developers may not come. Why will large private equity firms or commercial lenders take up annuity project, which is just a variation of EPC contract. Only those projects that are inherently unviable and where traffic volume is low should be taken to annuity.?

The view is seconded by Vishwas Udgirkar, partner (Infrastructure), PricewaterhouseCoopers. ?From the lender?s point of view, an annuity project is less risky. But the private equity funds do not really show much interest in projects being developed on annuity basis.? He adds that only those projects should be taken up on annuity basis in which either traffic is low, or toll collection is a problem.

While restructuring of the projects and shifting to the annuity model is likely to provide the much-needed impetus to the projects in which traffic projection is not high or the ones in which capital costs are high, experts feel that it is equally important that the process of awarding the projects is expedited.

?Costing for some of the projects was done four years ago. Even the maximum grant allowable is based on the earlier costing and the authority is now trying to call for bids when the scenario is entirely different. The time period granted to the bidders to submit financial bids ranges from one to two week. How is it possible for a company to finetune the financial bids for these projects which range between Rs 500 crore and Rs 2,500 crore,? asks Minocha of Feedback ventures. Others feel that instability at the top management at the NHAI has also contributed a lot in delaying the projects. NHAI has changed three chairmen in the United Progressive Alliance regime.

?One of the major reasons for delay in awarding the projects is instability at the top management of NHAI. They also need to look at how they prepare the detailed project reports (DPRs) and figure out the cost as well as traffic projections. In many instances, there is a difference of views between the NHAI and the bidder over the DPRs. These are the issues that need to be addressed to fast track the bidding process,? concludes Vishwas Udgirkar of Pricewaterhouse Coopers.