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The following options are identified forimproving the viability of the project.
1. Alternative tolling mechanism! Shadow toll! Annuity payment
2. Financial incentives! Grants for construction and
Operation and Maintenance(O&M)
! Low interest rate loans! Revenue shortfall loan! Least Present Value of Return
(LPVR) method3. Guarantees and assurances
! Credit enhancement throughgovernment guarantee forrepayment of loans
4. Ancillary revenues along projecthighway
5. Fiscal incentivesRebates/ exemptions/defermentfrom Income tax, import duties onequipment, stamp duties, service taxand any other tax as applicable.
1. Alternative tolling mechanismShadow Toll
The direct toll mechanism is normallyfollowed in most of the BOT projectsunder which the BOT concessionairecollects the toll charges directly from theuser. An alternative to this is the shadowtoll mechanism wherein the toll chargesare paid directly by the government /project sponsor to the BOTconcessionaire according to a pre-determined toll structure. Shadow tollneed not necessarily be the only form ofremuneration to the concessionaire. The
Shadow toll can be paid in addition tothe toll being collected from road-users(for example the difference between thetoll-charge that provides a normal rate ofreturn and the toll-charge users arewilling to pay could constitute theShadow toll.)
The benefits of shadow tolling are:! Helps operationalise projects
where direct toll mechanism isnot feasible or is inadequate tomake the project viable
! Reduces resistance associatedwith privatisation
! Revenue liability for thegovernment is spread over theconcession period
! The government can draw uponvarious revenue sources tocontribute to the shadow toll fund
The disadvantages of shadow tollingare:
! Requires higher budgetarysupport from the government
! Government funds used forservicing private debt, which islikely to be more expensive thandebt raised by the government.
! It would be difficult for thegovernment to justify direct tollon certain highways and shadowtoll on others (i.e. subsidisationof cost of road usage in selectivecases)
Annuity payment
Annuity payment is a variation ofshadow toll wherein the payment to theBOT concessionaire is determined inabsolute terms with no direct referenceto the number of vehicles using thehighway. Under annuity paymentscheme the government retains the rightto charge toll from users at any stage ofthe project. In most cases, it also retainsall rights relating to propertydevelopment, advertising along theproject site, etc.
The key difference between shadow tolland annuity is bearing of traffic risk.Under shadow toll, traffic risk is borneby the BOT concessionaire while underannuity system, the concessionairedoes not bear the traffic risk.
Annexure I.4 OPTIONS FOR INCREASING RETURN ON ROAD PROJECTS
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2. Financial incentives! Grants: According to NHAI
guidelines, NHAI could providecash support to theconcessionaire. This amountshould be utilised for meeting thetotal project cost and balance, ifany, should be used for meetingthe O&M cost
! Low interest rate loans: Thegovernment could provide theconcessionaire access to lowinterest debt, either directly orfacilitate the same throughfunding agencies
! Revenue Shortfall Loan:According to NHAI guidelines, ifthe realisable revenue falls shortof the subsistence income levelduring any accounting year, theconcessionaire would be entitledto meet the shortfall (referred toas Revenue Shortfall) througha loan at an interest rate equal toSBI PLR. This debt is to berepaid from the net cash flows ofthe concessionaire and needs tobe completely repaid within 2years prior to completion of theconcession period
! Least Present Value of Return
(LPVR): Under the LPVRmethod the concessionaire isguaranteed a certain presentvalue of returns. This method iscalled LPVR as the firm biddingfor the least present value of tollrevenue is awarded the contract.The duration of the concessionperiod is upto the point theconcessionaire achieves thepresent value bid for. Thus,LPVR method reduces the
demand risk borne by theconcessionaire by automaticallyadjusting the concession periodto fluctuations in demand (traffic)
3. Guarantees and assurances! The government may guarantee
the loans taken by theconcessionaire, therebyimproving the credit rating of theconcessionaire. This woulddirectly reduce the finance cost.The financial guarantee can beprovided by a state/centralagency that specifically providescredit enhancement services fordevelopment of state/nationalhighways
! The government could provideassurances for developingancillary infrastructure in andaround the project site therebymaking the revenue forecastsmore realistic. Such guaranteearrangements reduce demandrisk and enable the developerobtain project debt at a moreattractive rate
4. Ancillary revenues along projecthighway
! The concessionaire may begiven permission for propertydevelopment along the projecthighway. The variousalternatives for ancillary
revenues could be as follows: Transport terminals
consisting of garages,service stations,warehouses, rest houses andother relevant infrastructure
Restaurants, shops andmotels
Publicity and advertisingspace
5. Fiscal incentivesTax incentives are a very importantcomponent of any fiscal package.The various forms of tax incentivescould be:
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! Tax holiday on Income Taxfor the concessionairecompany
! Exemption/rebate oncustoms duty for importedequipment used inconstruction or operation ofproject highway
! Exemption of stamp dutyapplicable to variouscontracts in the project
! Exemption/rebate/defermentof other taxes such asservice tax, works contracttax, etc.