NHAI back to build-operate-transfer model

NHAI back to build-operate-transfer model

Subject: Economy

Context: After Funding highway projects through public money for a better part of the last decade, the National Highways Authority of India (NHAI) is set to return to funding through private investments and plans to offer at least two highway upgradation projects to private players using the build-operate-transfer (BOT) model during the current quarter.

EPC

• Under the EPC model, government pays private players to lay roads. The private player has no role in the road’s ownership, toll collection or maintenance (it is taken care of by the government).

BOT

• Under the BOT model though, private players have an active role — they build, operate and maintain the road for a specified number of years before transferring the asset back to the government. Under BOT, the private player arranged all the finances for the project, while collecting toll revenue or annuity fee from the Government.
• The BOT model ran into roadblocks with private players not quite forthcoming to invest. The private player had to fully arrange for its finances be it through equity contribution or debt. NPA-riddled banks were becoming wary of lending to these projects. Also, if the compensation structure didn’t involve a fixed compensation (such as annuity), developers had to take on the entire risk of low passenger traffic.

HAM

• HAM’s a hybrid – a mix of the EPC (engineering, procurement and construction) and BOT (build, operate, transfer) models. HAM combines EPC (40 per cent) and BOT-Annuity (60 per cent).
• On behalf of the government, NHAI releases 40 per cent of the total project cost. The balance 60 per cent is arranged by the developer.
• HAM arose out of a need to have a better financial mechanism for road development.
• HAM is a good trade-off, spreading the risk between developers and the Government