Post-Nath, RoadMin may ease annuity stand

In what could cause discomfort to construction companies, annuity mode of building highways may take a back seat with the change of minister at the Union transport and highway ministry.

Officials say the new minister, CP Joshi, is convinced by the Planning Commission that the government should award more contracts under the tolling mode.

Industry players are not enthused by the likely change in project model. Unlike tolling where the contractor is dependent on toll revenue to recover his costs, annuity covers a contractor risks through periodic payment from the government over the concession period.

In the case of annuity model, the government also guarantees loan taken by the concessionaire.

"The minister is of the view that the annuity mode of building roads is good for contractors and not for the government. If the government has to pay the contractors then why should it not build roads on Engineering Procurement Contract basis," said a senior ministry official, on condition of anonymity.

The government pays contractors upfront in the EPC mode.

Prior to opening up of the road sector, highway contracts were given out on EPC.

National Highways Authority of India now awards less than 20 per cent of its projects on EPC basis.

The build, operate and transfer model was introduced to bring in private investment into construction through tolling and annuity modes.

Public-Private Partnership Appraisal Committee, an inter-ministerial committee that approves subsidy for pay outs to infrastructure projects by way of viability gap funding, is also opposed to the BOT annuity mode of bidding.

PPPAC has also preferred EPC over annuity.

"The minister feels that the government guarantees their (contractors) loans and their investments are also secured, as the government bears the risk and the government does not benefit out of it," said the official.

The Planning Commission is currently reviewing the annuity model, which has been successfully used in the US and Europe.

The industry feels that in the Indian conditions all the three models -- toll, annuity and EPC -- are needed.

"Our condition is such that we cannot do away by phasing out annuity. Also, EPC cannot take annuity's place because the liability of the contractors in EPC projects is almost zero and that is precisely many EPC projects in the past took ages to complete," said secretary general, National Highways Builders Federation, M Murali.

Under NHAI's work plan, 20 per cent of projects would be awarded on BOT annuity, 65 per cent on BOT toll and the rest on EPC basis.

With this, the annuity outgo of NHAI is expected to increase to around Rs 13,000 crore (Rs 130 billion).

NHAI also does not see much merit in shifting away from annuity.

"Our Viability Gap Funding payment will automatically increase, if we are to award more projects on toll. Increase in VGF amount raises another concern," said a senior NHAI official, who did not want to be identified.

Gajendra Haldea, advisor to the Planning Commission deputy chairman, had in a paper expressed apprehension that NHAI would become 'bankrupt', as it is awarding a number of projects on VGF.

According to the paper, the highway authority is expected to have an outgo of about Rs 50,000 crore (Rs 500 billion) over the next three years, whereas the cess used to finance it -- Rs 2 on the sale of each litre of diesel and petrol -- may not exceed Rs 25,000 crore (Rs 250 billion) during the period.

NHAI will have to take on a debt of Rs 25,000 crore (Rs 250 billion), in addition to the Rs 5,000 crore (Rs 50 billion) already on its books, to bridge this gap.