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Better recovery of investment in highways

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New Delhi: The Cabinet Committee on Economic Affairs (CCEA), chaired by Prime Minister Narendra Modi, has given its approval for the hybrid annuity model as one of the modes of delivery for implementing the highway projects. Adopting such a model for projects not found viable on BOT (Toll) mode shall be more effective in terms of maximising the quantum of kilometres implemented within the available financial resources of the government.

The main object of the approval is to revive highway projects in the by making one more mode of delivery of highway projects. By adopting the model as the mode of delivery, all major stakeholders in the PPP arrangement — the authority, lender and the developer-concessionaire — would experience increased comfort in revival of the sector through renewed interest of private developers and investors in highway projects. This will bring relief to travellers in a big way.

It will facilitate uplifting socio-economic conditions of the entire nation due to increased connectivity across the length and breadth of the leading to enhanced economic activity.

The decision taken on 11 September 2014 by the CCEA has delegated the authority for deciding on the mode of delivery of highway projects to the Ministry of Road Transport & Highways. The now-closed Planning Commission had developed the first version of the Model Concession Agreement (MCA) for highways in 2006. This was done considering the need to standardise documents and processes for the PPP framework in the for ensuring uniformity, transparency and quality in the development of large-scale infrastructure projects including highways.

Subsequently, the Planning Commission developed various other versions of the MCA for highways considering the different PPP models like BOT (Toll), BOT (Annuity) and OMT addressing to a significant extent, the changing needs of the sector. One of the documents developed by the Planning Commission for infrastructure including highways is the MCA for Annuity Projects — version April, 2014.

The MCA above provides an alternative model in the form of design, build, operate and transfer (DBOT) where the project is financed only to the extent of a certain percentage of the cost by the private investor and this investment is recovered through annuity payments to be made by the authority concerned over a specified period commencing from the date of commissioning of the project. The balance percentage of the project cost is provided by the government during the construction period.

Since the need for improved road connectivity was a continuing imperative, the Ministry of Road Transport & Highways (MoRTH) including its implementing agencies like the National Highways Authority of India (NHAI) had to increasingly resort to the public funded engineering, procurement and construction.

(EPC) mode as the preferred mode of delivery for highway projects in 2013-14 and 2014-15.

There is an inherent limitation in implementing projects on EPC mode as such implementation is restricted by the financial resources available with the Government. In that context, MoRTH intends to introduce an alternative mode of delivery in order to sustain the pace of implementation of highway projects through optimum utilization of available financial resources. Accordingly, it was decided to consider the Planning Commission MCA for Annuity Projects — version April, 2014. This model also provides an increased comfort level for the lenders and concessionaires as traffic and risks are taken by the Authority.

An important feature of the hybrid annuity model for highways development is the rational approach adopted for allocation of risks between the PPP partners — the government and the private partner (developer or investor). While the private partner continues to bear the construction and maintenance risks as in BOT (Toll) projects, it is required only to partly bear financing risk. Further, the developer is insulated from revenue and traffic risk and the risk, which are not within its control.

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