Plan panel to review road contract models

Weighs between BOT and item-rate.

The Planning Commission has decided to again review the two main, and opposed, models of road contracts, namely, build-operate transfer or annuity model, and the item-rate one.

“As the earlier review did not reach any conclusion, we have started another, to decide what is better,” said a senior Commission official, who did not want to be identified.

He said the review would mainly focus on cost benefits, to find the cheaper one. “The annuity model has been opposed by various committees on the ground that it is costlier for the government,” he said. However, this model is also followed globally.

“There are various benefits. First, the government does not have to borrow directly, there’s no cost increase and time overruns, and the developer maintains the road over a period of time,” he noted.

In an item-rate contract, any increase in the project cost over the construction period is paid by the government. The contract fixes the total project cost and the construction period. The government borrows to fund the project in this model.

In the past 18 months, the National Highways Authority of India (NHAI) has not awarded any road project on an item rate contract.

The government has prepared a draft model concession agreement, being discussed within the government.

Annuity is actually one or two ways to award a BOT project. In annuity, the developer builds the road and the government pays it back in instalments. The government does not raise money but provides a sovereign guarantee for the loans raised. In the other, toll method, the developer is allowed to recover his investment by collecting a toll, over a concession period of 30 years in most cases.

The road building industry feels stretches with good traffic potential should be awarded on toll and annuity. “Why should the government invest money on roads that are financially viable? The government should focus on building stretches in areas with less traffic potential and backward areas,” said an executive of a Mumbai-based infrastructure company.