Investing in roads: Issues, mitigation and incentives

By Durgesh Singh and Abhishek Sarkar, Link Legal India Law Services
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India’s 4.87-million-kilometre road network is the world’s second largest and accounts for almost 80% of the country’s passenger traffic and 60% of its freight traffic. To develop the roads sector, the government has allocated ₹649 billion (US$10 billion) in the 2017-18 budget and introduced numerous fiscal incentives and legislative reforms.

RESTRUCTURING OF THE MODEL

The National Highways Authority of India (NHAI) has introduced the hybrid annuity model (HAM) to mitigate risks, delays and disputes usually associated with public-private partnership road projects. In the earlier build-operate-transfer (BOT) model, the concessionaire bore most of the project risk. Under HAM, 40% of the project cost is borne by the government and 60% is funded by the developer. NHAI collects the revenue through tolls, thereby absorbing the traffic risk, and the concessionaire gets a steady flow of revenue and profit through annuity payments.

Durgesh Singh Partner Link Legal India Law Services
Durgesh Singh
Associate partner
Link Legal India Law Services

The government recently approved the toll-operate-transfer (TOT) model, under which investors are granted a 30-year lease of toll collection and operation duties of highway projects that NHAI has operated for more than two years, in consideration of an upfront payment by the investor to NHAI. Under the earlier operate-maintain-transfer model, the selected bidder managed the project for a shorter tenure, which resulted in poor maintenance while annual payouts to NHAI increased yearly, regardless of traffic flow or revenue fluctuations.

In the BOT projects awarded before 2009, the developer had to maintain a minimum 26% stake in the concessionaire for the entire concession period, irrespective of the revenue earned and the financial status. This compounded the debt burden and financial issues of the developers. The government eventually allowed developers to divest a 100% stake two years after the project commissioning. This has attracted interest from private equity funds, which like to hold bigger stakes in a project.

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Durgesh Singh is an associate partner and Abhishek Sarkar is an associate at Link Legal India Law Services.

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