Sweeteners in build-operate-transfer scheme to attract foreign investors

The Union government, while it readies new norms for build-operate-transfer (BOT) projects, is likely to add a few sweeteners, including an exit clause after two years.

According to the proposal in the works, the Union government may allow a construction company to sell its project to another firm after completing it and operating it for two years. It is learnt that such an amendment is being considered to attract international participation in the sector.

The exit clause will allow road operators to bring in foreign investors after construction. The Ministry of Road Transport and Highways and the National Highways Authority of India (NHAI) have had several rounds of discussions on the amendment in BOT regulations.

An official in the know said, “The ‘harmonious substitution’ clause, as proposed in the 2009 Model Concessionaire Agreement, may be considered for the new set of BOT projects.”Under the model agreement, a highway construction company will take the risk of construction and operation for two years and later the project can be transferred to a foreign pension fund or investment fund. “These global pension funds or investment funds are not interested in construction and want to invest in fully 

constructed projects with a steady traffic flow. They are keen on operating and maintaining projects,” the official quoted above said. BOT will be the preferred mode for road construction in the country, Union Highway Minister Nitin Gadkari has said on several occasions.
  • In a BOT project, the concessionaire is allowed to earn an annual compound return of 20% on the predetermined project cost
  • The concession period is fixed mostly at 30 years
  • If the concessionaire is not able to earn his predetermined project cost and earnings within the period, the concession period can be extended 
  • In case revenue shortfall persists even after extension of the contract period, additional wayside facility development 
  • rights are given to the concessionaire
The BOT mode of building highways is being revived and projects of 3,000 km will be bid out. “For private sector revival in building highways, we have identified 3,000 km. which have 17,000 passenger car unit traffic. We plan to bid this out in BOT mode,” the minister said. CRISIL Infrastructure Advisory, in its report last year, said reviving and accelerating public-private participation (PPP) in infrastructure was needed and it would require recasting the PPP framework.

Stalled projects in infrastructure have reduced investor interest and risk appetite, leading to a sharp fall in private investment in the last decade, said the CRISIL report.

Experts say it is necessary to bring in the private sector and the goal can be achieved through BOT, where revenue goes up with increase in traffic and it is a calculated risk the private sector would like to take.

The BOT structure for constructing, financing, and operating infrastructure projects is suitable, particularly for road infrastructure projects because the ownership of the main asset created (the road, bridge, or highway) usually does not lie with the private party. In the past, private participation through BOT suffered due to a weak investment appetite, apart from delays in land acquisition and approvals.

“Land acquisition and other regulatory approvals this time will be in place before the government awards these projects,” the official said.

Reviving BOT means essentially the share of such projects in the project mix of the NHAI will go up. Currently, the project execution mix of the authority is around 45 per cent hybrid-annuity and EPC (engineering-procurement-construction) each, and the rest BOT.

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