Premium income to ease NHAI annuity burden

August 23, 2011

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The National Highways Authority of India (NHAI) says it will be able to take care of its current annuity payment of Rs 1,871 crore following the recent rise in premium income from highway projects.

The highways’ authority recently awarded 10 projects with a premium of Rs 1,628 crore annually that will increase at the rate of five per cent per annum for 25 years. This amount is over and above the Rs 300-crore premium NHAI is already earning.

“Our current annual premium will take care of our annuity payment but whether this trend will continue or not will depend on the kind of response we get for the upcoming projects,” said a senior NHAI official, who did not want to be identified

PREMIUM HIGHWAYS
Project (Rs cr)	Concession period (yrs)	Premium*
Kota-Jhalawar	25	3.51
Ahd-Vadodara	25	309.60
Barwa Adda- Panagarh	20	106.00
Nagpur-Wainganga	18	106.00
Beawar-Pali- Pindwara	23	251.01
Kishangarh-Udaipur -Ahmedabad	26	636.00
Shivpuri-Dewas	30	180.90
Gwalior-Shivpuri	29	66.60
Orissa Border- Aurang	28	29.70
Hospet-Bellary	30	18.00
*Premium increases @5% per annum

Quoting premium amounts to committing an annual payment to the government over a period of time, instead of seeking a grant for building roads. Companies bid premium if they are confident that the toll revenue accruing to them would more than offset their costs.

The official said these new projects would start paying in six to eight months, where the contractor can start collecting toll the moment it starts work on the project.

Some in the construction industry say companies are going overboard in quoting premium to bag projects. “The premium payments in some of the projects are actually unrealistic but, nevertheless, it is a respective company decision. But the NHAI needs to upgrade its mechanism for traffic projections, as their projections are not realistic most of the times,” said an executive of a Mumbai-based infrastructure company.

Analysts also think the bigger problem is a large number of companies chasing a few projects. “A company takes into account a lot of things before bidding for a project and no company will bid to make loss in a project. The bigger problem is that there are no projects in the market and people are bidding for the few available,” said Sanjay Sethi, senior executive director and head of infrastructure group at Kotak Investment Banking. Sethi added it was imperative that the government should release more and more projects.

NHAI has announced to award 59 projects covering 7,994 km with a total cost of around Rs 60,000 crore in the current financial year. It has a huge annuity liability of Rs 24,386 crore so far for 41 projects.

Among the 41 projects awarded on annuity, eight are under the first phase of the National Highways Development Programme (NHDP), 20 under the second phase of NHDP, 11 under the third and one under the fourth phase. The one remaining project is under the Special Accelerated Road Development Project for the North-East. NHAI makes the payment for all annuity projects except for those in Jammu & Kashmir and North-East which are taken care of by the central government directly.

In the case of premium income, the amount first goes into the consolidated fund of India and is accounted for in the internal external budgetary resources of NHAI. “All the money that includes cess income, toll income and premium income that comes to us is kept in a central pool and then spent according to our needs,” said another senior official, who did not want to be identified.

The official added that earlier they used to keep toll income for maintenance of highways and repaying loan tranche to Asian Development Bank but later this practice was stopped.

NHAI awards projects on two Public-Private Partnership (PPP) modes. One is BOT (annuity) and the other is BOT (toll). Unlike the BOT toll model, where the private operator takes on the risk of toll collection, the government mitigates the risk of toll income in the annuity model by guaranteeing six monthly payments over the concession period. This increases its liability but with premium becoming attractive, NHAI officials are hopeful that the annuity burden would be taken care of to a large extent

Source: business-standard.com