New policy for easy exit from road projects

Companies building highways might soon have the option of exiting their projects once they have recovered their investment if a new government policy is implemented. The policy is likely to be called BOT (Variable).

The companies will have to return the projects to the National Highways Authority of India once they have recovered costs through toll collections. This policy is aimed at mitigating risks in execution of highway contracts through the conventional build-operate-transfer (BOT) model.

A senior road ministry official said, “We are not getting enough interest for BOT projects. So, BOT (Variable) is one of the options we are deliberating. The proposal is at a nascent stage.”

The concession or contract period for a road project is usually 25 years. The new model will allow both the government and the contractor the flexibility to execute and exit the contract before this.

If the traffic is higher, a concessionaire can recover costs through toll collection before the expiry of the contract. In the case of less traffic, the time for toll collection can be extended.

The success of the proposed model will depend on accurate traffic projections, which can be done only through a strong information technology (IT) system. “We are trying to ensure use of robust IT systems for better traffic projections for the next 25 years,” the official quoted above said.

Whether firms will be allowed to exit five or 10 years before time is being discussed, the official added.

“Even now, there are some inbuilt clauses that trigger early exit or extension of a contract. BOT (Variable) will be a success if traffic monitoring is stringent and timely. IT audits should happen from time to time to ensure this happens,” said Vishwas Udgirkar, partner, Deloitte India.

Though private operators can monetise a project and sell it to a third party, exits where projects are handed over to the government usually come with a pay- out by the authorities or encashing bank guarantees.

There are various operational models of road construction: 1. BOT (toll), where a developer builds the road and is allowed to recover his investment by collecting toll over a concession period of usually 30 years. 2. Hybrid annuity model (HAM), where the government

pumps in 40 per cent equity to minimise the investment risk for the concessionaire. 3. Engineering-procurement-construction (EPC) model, which are government-funded projects executed by private companies on a turnkey basis.

The HAM model was introduced after it was felt that private companies did not have the financial wherewithal to execute projects in BOT (toll) mode.

Of the projects awarded in 201718, 3,791 km was on the EPC model at ~430 billion, 3,396 km was on HAM at ~765 billion, and 209 km on BOT (toll) mode at ~25 billion.