NEW DELHI: To lure private risk capital into highway construction, the government has revised the concession terms for build operate transfer (BOT) projects. Liberal construction support, facility to borrow from non-bank lenders and enhanced compensation if the tariff projections are built into the revised model concession agreement (MCA).
The changes are expected to give greater comfort to bidders under pure-play public private partnership projects, and the government aims to invite bids for Rs 2.1 trillion of highway projects under the model.
The BoT model of highway construction where private developers pay for building the highway in return for the right to collect user fee for 20 years has been languishing in the last few years. As there are no takers in the private sector for it, the National Highways Authority of India (NHAI) has been forced to rely on budgetary support and borrowings to keep up the pace of road construction.
The new MCA clearly define what would constitute a breach of contract between the contracting authority and the concessionaire and the compensation which will be payable, a senior official said.
Since there were no takers for BoT, the government had come out with a Hybrid Annuity Model (HAM) where it provides 40% of the cost of construction of highways. This model became very popular. In the revised BoT a provision of equity and construction support. Earlier only equity support of up to 10% of the project cost could be provided under BoT, now equity and construction support can be up to 40% of the total project cost. The equity support cannot be more than 50% of the total equity of the project.
The changes in MCA have also brought down the performance guarantee that the concessionaires will have to furnish. Under changed rules now it will be just 3% of the Estimated Project Cost as against 5% of the total project cost. The performance guarantee can be furnished through insurance surety bonds.
For financing BoT projects the changes in MCA have allowed Non-Banking Finance Companies to be among senior lenders to the projects. This will enable many infrastructure focussed finance companies to fund projects.
The MCA changes also clearly says that in case the concessionaire faces loss in toll revenue if a competing highway is built it will be entitled to seek an increase in concession period. Earlier also there was a mention of compensation but in which form it would be provided was not defined. For loss of traffic revenue the concession period can be extended only up to 30% of the remaining years.
The new MCA also has a provision of buy-back of a project by authority in case the traffic exceeds the capacity for two years. If the physical progress of the highway is less than 40% then no termination payment will be payable by the authority.
The revised MCA also allows for refinancing of debt by concessionaires after negotiations with the lenders Earlier too refinancing was allowed but the negotiations were between authority and lenders while the highway developer stated out.
Source: The Financial Express