Centre Proposes Toll-cum-Annuity Model for Select National Highway Projects

The Central Government is considering the introduction of a Toll-cum-Annuity model for select national highway projects as part of the revised Model Concession Agreement (MCA) being developed by the Ministry of Road Transport and Highways. The proposed framework seeks to enhance project bankability, improve efficiency, optimise risk allocation and revive private sector participation in highway infrastructure development.

The proposal comes in the backdrop of several projects tendered under the Build-Operate-Transfer (BOT) model failing to attract investor interest despite repeated bidding attempts. The revised MCA is intended to address investor concerns by introducing a more balanced allocation of financial and operational risks between the public and private sectors.

Under the proposed model, toll collection will continue to remain with the concessionaire. In addition, the central government will provide upfront financial support during the construction period for projects requiring Viability Gap Funding (VGF). Government support is proposed to range from 10% to 25% of the total project cost for projects with VGF requirements between 40% and 70%.

The proposed framework further provides that the concession period will be fixed at 20 years, including the construction period, unlike the existing BOT model where concession periods vary depending upon the project. Further, the model will not apply to projects that are fully toll-viable or strategic projects of national importance.

The Toll-cum-Annuity model seeks to combine key features of the BOT and Hybrid Annuity Model (HAM). While the concessionaire will retain toll collection rights, government support during the construction phase is intended to reduce financing risks and improve the commercial viability of projects. Under the proposed award mechanism, the lowest annuity quoted by the bidder is expected to constitute the sole award criterion.

The revision of the MCA forms part of the broader effort to minimise financial risks for concessionaires and encourage greater private sector participation in National Highway projects. The proposed framework also seeks to facilitate faster project implementation by making concession agreements more attractive to infrastructure developers and long-term investors.

The proposed Toll-cum-Annuity model represents another step in the evolution of India’s Public-Private Partnership (PPP) framework for highways. If incorporated into the revised MCA, the framework may improve investor confidence, enhance project financing and support increased private investment in the development of National Highway infrastructure.

Write-up By: R. Chandrasekharan, Partner.