Road annuity payments may be linked to inflation

February 9, 2012

To align the annuity outgo by the National Highways Authority of India (NHAI) with inflation, the government is likely to link the payments to the wholesale price index (WPI). Currently, the payments are fixed and made every six months.

“The Planning Commission has asked us to link annuity payments to WPI, not on the basis of fixed payments. This could increase our annuity payment burden by 1.5 per cent in the long run. We are discussing it at various levels,” said a senior NHAI official, on the condition of anonymity.

Build, operate and transfer (BOT) annuity and BOT toll are the two public-private partnership modes through which NHAI awards projects. Unlike the BOT toll model, in which the private operator collects toll, the government mitigates the risk of toll income in the annuity model by guaranteeing six monthly payments through the concession period, which usually lasts up to 18 years.

So far, the government has awarded 41 road projects worth Rs 24,386 crore, with an average annual annuity outgo of Rs 5,263 crore. A senior Planning Commission official confirmed the proposal, saying the recommendation was being discussed by various government departments. “Why do you think power projects are seeing a cash crunch? No one can predict inflation, and any rise and fall affect projects. That is a risk companies cannot take,” he said.

Power projects are experiencing a cash crunch because input costs have increased by up to 50 per cent in recent times. Analysts, however, feel this could be good for new companies. “In a way, this is good because new companies would have one less variable to worry about, as linking the payment with WPI would take care of any increase. This is because inflation would only increase in the near future,” said Parvesh Minocha, managing director (transport division), Feedback Infrastructure Services Pvt Ltd.

The annuity mode of building roads has been opposed by various government departments on the ground that it was more expensive for the government. The public-private partnership appraisal committee, an inter-ministerial committee that approves subsidy for pay-outs to infrastructure projects through viability gap funding, is also opposed to the BOT annuity mode of bidding and prefers engineering procurement contracts. A new model concession agreement for engineering procurement contract projects is being prepared by the government.

Source: www.business-standard.com