GS Paper III

Context of the news:

The National Highways Authority of India (NHAI) has come up with a list of high-traffic density corridors for private developers to build and operate under the Build Operate Transfer (BoT) model.

More details on the news:

• After 2 years of groundwork the government has again made a determined push towards getting greater private sector participation in building highways through the BoT model.
• In January 2024, the National Highways Authority of India (NHAI) came up with a list of 53 high-traffic density corridors of 5214 km length that will be offered to private developers under the BoT model.
• The total cost of these stretches, which include greenfield access controlled highways, is estimated at Rs 2.1 trillion.

Challenges faced under BoT model in past

•  Massive Losses and Abandoned Projects: Between 2007 and 2014, BoT was the most popular mode for building highways, accounting for 50% of the total. But since 2014, it has been languishing after developers faced massive losses and abandoned projects.
•  Fund Crunch: The government faced a massive fund crunch, prompting a shift in funding highway construction from public funds. This was due to the challenges and financial setbacks experienced by private developers under the BoT model.
• Debt Raising Limits: The NHAI raised debt and monetised assets to supplement the government’s efforts. In five years starting FY 18, NHAI raised more than `3-trillion debt before the finance ministry put an end to further debt raising.
• Slow Monetization: The pace of monetisation has also been slow, contributing to the challenges faced under the BoT model.Challenges of BoT model in present time
• Despite the NHAI’s bids being invited under BoT after consultations with all stakeholders, experts do not expect a great response from developers.
• The highway construction firms, many of whom are public listed companies and have many investors, would gravitate towards models with less revenue risk and lower capital commitments.
• With their limited capital, they can build a larger order book under HAM than under BOT. As Hybrid Annuity Model (HAM) is more attractive, offering more lucrative stretches and risk mitigation would be able to bring in the brave among them.

Reasons for Hybrid Annuity Model (HAM) to be more attractive than BoT model

As BoT fell into disuse after 2014, the government came up with the HAM model in 2016 which has been enthusiastically received by private developers due to following reasons:

• Risk Distribution: In BOT, all revenue projection risks are on the developer whereas in HAM this risk passes on to the government agency.
• Fixed Annuity Payments: The highway builder gets fixed annuity payments for 15 years to help him recover the costs. It ensures a steady income and helps the developer recover costs over the long term.
• Revenue Stability: HAM offers more revenue stability to developers as the government agency takes on the responsibility of managing revenue collection and distribution. This stability is in contrast to BoT, where developers are exposed to the volatility and uncertainties of revenue projections.
• Lower Capital Commitment: HAM needs much less capital commitment from the developer as compared to BOT. In BOT, all funds have to be invested by the concessionaire.
• In a typical project, 30% of the cost is met from equity and 70% from debt. So 30% equity capital commitment is required from the developer.
• In HAM, the government agency gives 40% of the cost of the project and 60% has to come from the developer. So equity commitment of 30% of the 60% commitment from developers comes to around 18% of the total project cost.
•  Attractiveness to Developers: The popularity of HAM has enabled it to clock a share of 58% in Bharatmala, the flagship highway building programme.
• BOT’s share in Bharatmala is a mere 1.41% while another mode of highway construction, Engineering Procurement and Construction (EPC), accounts for 41%.

Difference between BOT and HAM:

Offer by NHAI

• The NHAI has offered to cover the risk to developers if their projects face any revenue shocks in any circumstances.
• The government made changes in the Model Concession Agreement (MCA) and offered to give greater comfort to private players.
• The decision to revise the BOT concession agreement comes amid low interest from private entities in the asset monetisation model. 

Conclusion:

The government's renewed push for private sector participation in highway construction through the BoT model, coupled with enhanced risk mitigation and adjustments, holds potential for success. Positive changes and incentives may attract private developers back, fostering infrastructure development and economic growth.

Mains PYQ

Q. Adoption of PPP model for infrastructure development of the country has not been free of criticism. Critically discuss the pros and cons of the model. (UPSC 2013)