Government Mulls Additional Financial Support for Highway Developers under BOT Projects

In a move aimed at reviving private sector participation in highway development, the Government of India is considering providing additional financial support to road projects executed under the Build-Operate-Transfer (BOT-Toll) model of the Public-Private Partnership (PPP) framework. The proposal seeks to make such projects more financially viable by extending Viability Gap Funding (VGF) beyond the existing ceiling of 40% of the total project cost.

Currently, VGF serves as a grant to bridge the financial shortfall of economically justified but commercially unviable projects. The Ministry of Road Transport and Highways (MoRTH) and the National Highways Authority of India (NHAI) are exploring a mechanism whereby additional VGF beyond 40% could be disbursed through annuity-based installments instead of a one-time upfront payment.

The proposal was discussed in a recent high-level meeting at NITI Aayog, where officials from the finance and road ministries deliberated on creating a revised framework for enhanced VGF. The move aligns with the government’s broader objective of attracting private capital and accelerating infrastructure development under the PPP mode.

The initiative coincides with NHAI and MoRTH’s efforts to revamp the standard BOT-Toll contract document to address investor concerns and improve project bankability. Several modifications have already been incorporated based on feedback from private developers, lenders, and financial institutions.

Key Modifications Under Consideration

1. The revised framework proposes to ensure at least 95% land availability before commencement of construction, thereby mitigating delays and cost escalations.
2. To address traffic-related risks, the framework proposes annual compensation to concessionaires if actual traffic during the first seven years falls short by 10% or more of projected levels, subject to a defined cap.
3. Flexible concession periods, to be extended or reduced based on traffic fluctuations, enabled by FASTag-based digital tolling that ensures accurate traffic data.
4. The revised framework may strengthen termination payment provisions to protect the interests of lenders and financial institutions.
5. Non-rectification of recurring faults leading to accidents is proposed to be classified as a default by the concessionaire, underscoring the emphasis on safety compliance.
6. Further, the framework seeks to compensate concessionaires for delays attributable to NHAI or other public authorities. Such compensation may include payment of interest on debt due, reimbursement of operation and maintenance expenses, or extension of the concession term.

The government’s decision to review the VGF mechanism follows a decline in private sector participation in BOT projects over the past decade, with most highway construction shifting to the Engineering, Procurement, and Construction (EPC) and Hybrid Annuity Model (HAM) formats. The revised structure is expected to revitalise interest among private developers by reducing upfront risk and ensuring predictable cash flows.