Annuity-wary government veers towards toll road projects

Buoyed by increasing competition among private sector players for highway projects, the road ministry plans to tender the maximum number of projects under build, operate and transfer (BOT) - toll funding model.

The move is aimed at abating the load on the fisc arising out of annuity liability, surface transport minister C P Joshi said. “Our intention is to tender maximum number of projects on BoT (toll) basis, because ultimately the annuity payment made to the private sector has to be borne by the government itself.”

As per its plans for the current fiscal, the ministry aims to award 7,300 km under the BOT (toll) category and only 1,000 km as a mix of annuity and engineering procurement and construction (EPC).

Both BOT (toll) and annuity models are used for highway development in public-private partnership. Under the BOT (toll) model, the developer is entitled to receive a viability gap funding (VGF) of up to 40% of the project cost and earns revenues from the project in the form of toll through the concession period. The project is transferred to the government after the concession period.

Under the annuity model, there is no VGF provision and the toll rights are also retained by the government. The developer gets a return on his investments in the form of fixed semi-annual payments (annuity) by the government through the concession period.

The emphasis on BOT (toll) projects is based on encouraging response received from developers by the National Highways Authority of India (NHAI). In six  recent cases, the NHAI in fact
received a total premium of Rs823.53 crore from developers, compared with the finance ministry’s appraisal that it will have to pitch in with a total VGF of Rs265 crore.

Both finance ministry and the Planning Commission have expressed concern over pressure on the fisc owing to annuity outgo. In at least 41 projects worth around Rs24,400 crore awarded on annuity funding basis till date, the government’s annuity liability is around Rs84,000 crore through the concession period with the average annual outgo at around Rs5,300 crore.
No wonder the government is bullish on the BOT (toll) model of development.

“Toll mode should indeed be the preferred mode. The government needs to test the bidder interest on toll mode before deciding for annuity mode of bidding,” said Sanjay Ubale, managing director and CEO, Tata Realty and Infrastructure.    

A section of experts, however, believes only viability will decide the mode of bidding going forward. “Earlier, bulk projects were viable on toll mode. Since most of them are exhausted, the mode of funding will be decided only by viability on case-to-case basis,” said Parvesh Minocha, MD, (transport), Feedback Ventures.
Meanwhile, competition has been catching on even in annuity projects. In as many as five cases, bidders have quoted annuity lower than expected by the government. Still, with a payout involved, the government’s pro-toll stand may be here to stay.