Govt looking to revive BOT model for road construction after 4-year gap

Getting back to BOT will see private investment coming in upfront and is expected to benefit the Centre as the exchequer will not have to pump in money in such projects

The Union government will soon be back with the classic road construction model —build-operate-transfer (BOT) — four years after it introduced the hybrid annuity model (HAM) for executing highway projects. Returning to BOT will see private investment coming in upfront, which is expected to benefit the Centre as the exchequer will not have to pump in money in such projects. 

Union Minister for Road Transport and Highways Nitin Gadkari said the government would look at reviving the BOT model.

Under BOT, private players build, operate and maintain the road for a specified period of time before transferring the asset back to the government. In the case of HAM, the central government bears 40 per cent of the project cost and the remaining amount is arranged by the developer. 

“Much headway has been made in the roads and highway sector and good traction has been obtained in the hybrid annuity model of bidding. The time is good to line up the BOT projects for bidding. It will be critical, initially, to bid out projects which have the potential to garner good traffic and in which land has been fully acquired,” said Jagannarayan Padmanabhan, director, CRISIL Infrastructure Advisory.

HAM was brought in by the government in 2015 to encourage private participation and it served the purpose for a few years till banks red-flagged lending for these projects. HAM is a mix of engineering, procurement and construction (EPC) and BOT formats.

A few companies in the infrastructure sector have evinced an interest in highways, which is giving the government confidence about offers coming in when projects are put for bidding under BOT.

Experts feel that the government did much of the heavy lifting in terms of infrastructure investments in the last four years and, therefore, getting the private sector investment would be critical to continue the infrastructure spends.

“Re-energising BOT will be an important step in this direction. This will help tapping into the private capital, which has hitherto shied away from taking the market risk. Achieving success in the roads and highways sector will set the tone for private sector investments/participation in other sectors as well,” Padmanabhan added.

Banks had reservations in lending for these projects as they found out that companies had sought loans for their entire 60 per cent share in the project without putting in equity. 

The pool of banks that could lend for infrastructure projects shrunk further after the Reserve Bank of India put as many as 11 public sector banks under prompt correction action last year, leading to restrictions in lending. The action was taken due to the non-performing assets crisis at these banks. However, a few of them were later taken out of the PCA list.

The revival of BOT essentially means that the share of such projects in the overall project mix of the National Highways Authority of India (NHAI) would go up. Currently, the project execution mix of the NHAI is around 45 per cent each for HAM and EPC, while the remaining is BOT.