Government proposes Revenue Support and Buyback Clause in New Highway Contracts

The Government of India is expected to notify a comprehensive overhaul of the Model Concession Agreement (MCA) governing highway projects implemented under the Build-Operate-Transfer (Toll) model. The proposed revised framework represents a structural recalibration of the contractual architecture for public–private partnership (PPP) highways, aimed at reducing demand-related risks, safeguarding lender exposure, and restoring private appetite for toll-based concessions. The reform seeks to address longstanding sectoral challenges including traffic volatility, delays in land acquisition, and revenue uncertainty while improving bankability, strengthening investor confidence, and ultimately accelerating the pace of national highway development.

The draft amended MCA introduces a series of measures that collectively aim to redistribute risk between the concessionaire and the public authority, providing more predictable cash flows and enhancing financial viability across the concession period:

1. Revenue support for traffic shortfalls: Where actual traffic falls more than 10% below projections during the first seven years of operations, the government is expected to extend calibrated revenue support. After Year 7, the concession period would be adjusted dynamically, extended by 1% for every 1% shortfall, capped at a maximum extension of 10%. If traffic deficits exceed 20%, lenders or concessionaires may be allowed to seek early termination, triggering defined termination payments.
2. Performance-linked tolling adjustments: To avoid windfall gains and maintain user equity, toll collection periods would be proportionately reduced when actual traffic exceeds projections. This introduces a more balanced, performance-responsive contract structure aligned with real-world demand patterns.
3. Buyback of projects exceeding design capacity: A new buyback clause is proposed to allow the government to acquire projects where traffic surpasses design thresholds, such as 50,000–60,000 vehicles per day on a four-lane stretch for two years within a three-year block. The buyback amount would be determined based on actual revenue performance and the remaining concession period, enabling the government to reclaim high-demand corridors for future capacity augmentation.
4. Stronger protections for lenders: The revised MCA is expected to provide for repayment of over 80% of debt in case of termination. A new substitution clause also appears to be included, allowing the authority to replace the concessionaire in cases of default, ensuring continuity and safeguarding lender exposure.
5. Timely handover of land: Defined timelines for handing over 100% of required land are proposed to be embedded into the MCA, directly addressing one of the most persistent causes of project delays.

The proposed changes create a risk-adjusted environment conducive to renewed private investment. Key impacts include:

1. Private Developers/Concessionaires
   • Reduced traffic and revenue volatility
   • More predictable returns and improved exit opportunities
   • Greater bid competitiveness due to rationalised and de-risked financial models
2. Lenders/Banks/Financial Institutions
   • Stronger safeguards for loan recovery
   • Reduced credit risk and increased willingness to lend
   • Potentially lower interest rates and improved financial closure timelines
3. Government/Highway Authority
   • Higher private-sector participation
   • Faster completion of road projects
   • Improved ability to manage demand variability

These amendments are intended to revive the BOT (Toll) model, which has seen a significant decline over the past decade in favour of EPC and Hybrid Annuity Model (HAM) projects. By embedding more balanced risk-sharing mechanisms and strengthening the financial resilience of concessionaires and lenders alike, the proposed revised MCA is expected to attract a broader investor base. The reforms may ultimately reposition the BOT (Toll) model as a viable and competitive option for greenfield national highway development in India.