New Delhi: In a desperate attempt to revive private investment in the roads sector, the government on Wednesday hit the reset button.

Not only will investors now be required to contribute only 60% of the project cost, they have also been relieved of the politically sensitive burden of collecting tolls. By derisking the project for developers, the government is seeking to put in place a gamechanger that would revive investor interest in road building.

The entry of private sector is key to the government realizing its target for constructing roads. It is estimated that the government requires nearly 2 trillion to fund 20,000km of road construction under the National Highways Development Project over the next four-five years.

The roads ministry on Wednesday proposed a new model of highway development—the so-called hybrid annuity model. The new model deviates from the existing models through reallocation of risks in road construction.

The new model proposes to cushion developers from the risk of revenue uncertainty arising from inaccurate traffic projections and divide the financial burden between the developer and the government.

Under the new model, the developer will have to contribute just 60% of the total project cost while the balance will be invested by the government. The government will collect the toll under this model and pay the developer a biannual annuity for recovering investment and interest costs and fee for operations and maintenance.

Under the existing public private partnership model called build-operate-transfer, the developer absorbs most of the risks—financial, operations and maintenance and revenue.

“The idea is to provide a transparent, time-bound mechanism to fast-track decision making and anticipating solutions to issues that could arise through a built-in approach so that private sector interest is revived," Nitin Gadkari, minister of road transport, highways and shipping, said at a Confederation of Indian Industry conference.

With this new model, the government is hoping to address several issues like access to finance, inaccurate revenue assessment, delay in clearances and long-drawn dispute resolution mechanisms that have thwarted private sector interest in the roads sector.

The ministry failed to get any bids for at least 21 projects worth 27,000 crore between fiscal years 2013 and 2014.

“I am very optimistic about the outcome of this new model. It is a practical approach to problem solving and a risk allocation model as appropriate as can be under the circumstances," said Vinayak Chatterjee, chairman and managing director, Feedback Infra Pvt. Ltd, an infrastructure consultancy.

“The key takeaways are that the private sector does not have to take the traffic risk, it apportions risks where they really belong, it is a win-win for all stakeholders and a structure that will allow the sector to attract even long-term financing by improving its creditworthiness. We could see massive resurgence of both private and foreign investment," he added.

The government has, over the last two years, taken several measures like permitting rescheduling of premium commitments of developers, allowing an early exit to developers through the substitution route to free up capital and de-linking of environment and forest clearances, in order to revive investment in the roads sector.

With the private sector not responding to these incentives, the government reverted to awarding most road projects under the government-funded model called engineering, procurement and construction.

The premium here is the money road developers agree to pay the National Highways Authority of India (NHAI) for building highways and collecting toll from users.

However, the ministry of road transport and highways concedes that funding road projects through government money is unsustainable and hopes the hybrid annuity model would mobilize some private capital for road infrastructure.

“The major advantages that would emanate from this framework are the reduced initial capital outflow for the authority, which will further allow us to spread our resources in a wider net and govern a larger portfolio of road projects," said Vijay Chhibber, secretary, ministry of road transport and highways.

“This arrangement would also ease the debt servicing for head concessionaires as the quantum of debt required would get reduced," he said.

“So in this framework while the private sector continues to take the construction and O&M (operations and maintenance) risks, unlike with BOT toll projects it is not expected to take traffic risks, which has been suggested is one of the main issues on behalf of the builders’ forum. And I think lastly, we believe it will bring back the lenders into the road sector as toll revenue streams to service the debt will be inbuilt into the framework," he added.

Chhibber said the ministry had identified 13 projects stretching to 1,100km worth 14,442 crore to be awarded under this model as of now.

The new model adjusts project cost for inflation at different stages of the project. It also staggers the government equity support in five equal instalments, linking it to physical progress of the project and expenditure incurred by the concessionaire.

The concession agreement for the model incorporates a slew of key changes. To avoid delays on account of delayed land acquisition, it raises the government obligation to acquire at least 90% of the land required, along with environment and forest clearances for the same. Earlier, NHAI was required to acquire 80% of the land.

It provides for a sharper penalty for delay in fulfilling obligations, either on the part of the government or the concessionaire.

It has proposed to raise the penalty for government to 0.2% of the performance security for each day’s delay from 0.1% earlier. For the concessionaire, a similar delay would be charged at 0.3% of the performance security as compared with 0.2% earlier.

It also sets one year as the upper time limit for terminating a project if either the government or the developer fails to fulfil obligations that prevent the project from taking off.

Interestingly, this model also incentivizes the concessionaire to complete projects ahead of schedule by offering a bonus for early completion. A provision to refinance projects has also been added.

Gadkari said that the ministry is open to feedback on this model for the next 15 days, after which it will formally notify the hybrid annuity model.

Vangmayi Parakala contributed to this story.

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