A wise man once said that if you want to develop a place, the best thing you can do is connect it with the rest of the world. Going by this old wisdom, the Indian government has been very upfront in ensuring that the entire nation is connected through a highway network so that development can reach even the farthest places in our country. 

There are three main ways through which the government can build upon this dream and get the highways ready:

1. Engineering Procurement Construction (EPC Model): This model is the most common way of building highway projects. The government hires a company to design, build, and maintain everything. It’s like hiring a contractor for your house – you pay them a set amount, and they do all the work.

2. Hybrid Annuity Model (HAM): This model is a better version of EPC, where the government pays a portion upfront of the project cost (up to 40%) and then some more over time annually while a private company builds and maintains the highway. It’s like the government gives the company a loan to build the highway, and the company pays it back slowly. The company bears the risk of cost overruns during construction and collects user tolls during operation to recoup their investment and earn a profit. 

3. Build Operate Transfer (BOT) Model: In this model, a private company finances, builds, operates (collects tolls), and maintains the highway for a set period. It’s like the company builds a toll road and collects money from drivers to make back their investment and earn a profit. Then, after a certain time, they hand the highway back to the government.

Selecting the most suitable model depends on factors like project complexity, available financial resources, traffic volume projections, and government priorities. EPC might be preferred for smaller projects where speed and control are crucial. HAM balances risk-sharing and affordability, while BOT is suitable for high-traffic corridors with predictable revenue generation. 

What Exactly is the issue then?

While the EPC and the HAM models have worked out as per the expectations of the government. On the contrary even in the areas where good profitability could be seen for the private players, the adoption of the BOT model has been minimal. Hence, National Highways Authority of India (NHAI) was forced to rely on budgetary support and borrowings for project financing of highways.

As per Bharatmala project data till FY23 you can see how miserably the model has performed when compared to others.

ModelLength (KM)Capital Cost (Cr)Share (%)Target (%)
EPC11,2503,24,83341.230
BOT 40811,1111.410
HAM11,6104,52,69657.460

Why is the BOT Model Important?

The government wants to reduce its fiscal burden over the next few years and make sure that the dream of building more highways isn’t affected. However, based on the current data, they will need to raise more funds if they keep using the HAM and EPC models. 

Hence, the government wants to use the BOT model more because it saves them money upfront. In the other models, they have to pay a lot at the beginning. With BOT, the private company pays most of the cost.

Why Wasn’t BOT Used Much Before?

Before, the BOT model wasn’t very attractive to companies because they might not make enough money from tolls and hence HAM became the go to option as can be seen from the above table. 

The government has now decided to change the rules to make it more appealing for highway developers to apply for projects through the BOT route.

What has Changed?

The government made the BOT model more attractive by revising the Model Concession Agreement with the following changes:

  1. Liberal construction support 
  2. Facility to borrow from NBFCs (earlier, only banks could finance these projects)
  3. Enhanced compensation if traffic projections are not met
  4. Increase in concession period up to 30% of the remaining years if a competing highway is built 
  5. Negotiation provision for refinancing of debt by the company with the lenders (earlier, the highway developer was not involved in the refinancing negotiations)
  6. Performance guarantee requirements have been reduced from 5% of the total project cost to 3% of the estimated project cost. (This reduces the initial capital requirements for the developer)

Who Wins?

Highway development companies like IRB Infrastructure, PNC Infra, Dilip Builcon, and L&T will benefit greatly from this move as it will provide them with a sustained revenue stream over a long period, up to 20 years.

Along with them, a lot of NBFCs will deploy their funds into supporting this infrastructure boom that is going to take place in this sector.

The government aims to invite bids up to ₹2.1 trillion through the BOT model in the upcoming years, thus reducing its borrowings significantly as well as providing benefits to the highway developers.

Conclusion

The government hopes to achieve a win-win situation by making the BOT model more attractive. Highway developers will have a chance to secure long-term profits. India can accelerate its highway network expansion with less strain on public finances. This ultimately benefits everyone by creating better connections, boosting economic activity, and making travel throughout the country smoother and faster.

For investors, stocks with exposure to the highway development sector and NBFC, which are likely to provide them with loans, will provide great investment avenues.