New hybrid model likely to fund highway projects

November 22, 2006

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NEW DELHI, NOV 22: The Centre is likely to stop financing future highway projects on a build-operate-transfer (BOT) annuity basis because the entire traffic risk falls on National Highways Authority of India (NHAI) or the government that collects the toll.

According to government sources, NHAI has found the BOT (annuity) model unfeasible also because private developers usually overestimate the project cost. Under BOT (annuity), the developer recovers the cost of building and maintaining a road, plus a return, from the government in the form of annual payments over the concession period. The government receives only toll collections, which, in turn, depend directly on traffic.

The road transport and highways ministry is now looking at alternate funding models for projects that are not given out on BOT (toll) basis. Under BOT (toll), a developer collects the toll, but the government provides upfront capital support to 40% of the project.

Sources said the ministry was considering using a hybrid model of annuity, toll and viability gap funding. Under this, the government will provide 40% viability gap funding, 40% annuity and will also pass on toll collection to the developer. The developer would have to ensure that he received the balance 20% through toll revenues.

“If adopted, this model would pass on a part of the traffic risk to the developer and allow the government to have some kind of control over the project,” an official said.

An inter-ministerial group with representatives from the road transport and highways and finance ministries, as well as the Planning Commission is discussing the hybrid model.