Annuity Concessions are a variant of the Build Operate Transfer (BOT) PPP model in which the private operator is remunerated via a fixed, periodic payment (“annuity”) from the government rather than through toll proceeds. Under these PPP contracts, the private operator is responsible both for constructing the road, as well as for operating and maintaining it for a fixed period of time. However, this option significantly reduces revenue risk for the private sector and also incentivizes the private sector to then propose innovative financing and construction options.
Why the Annuity Payments Concession Model?
Because the annuity payments are fixed and not indexed, the private sector retains any risks associated with higher than anticipated operations and maintenance (O&M) costs.
This model is effective for de-risking road PPPs and attracting Private Sector Participation since revenue streams are more predictable. Under this model, concerns about the economic viability of a road are linked to the concession payments and not the traffic volumes the road witnesses.
Annuity concessions have been successfully used in India and are perceived by the investment community as having a secure and stable source of funding (the annuity payments, are financed by ring fenced fuel taxes in India)
Generally, there is no requirement for debt servicing during the construction period and repayment begins after project commissioning
How does this model work?
1. Annuity Concessions are usually procured via a competitive bidding process. This will include prequalification based on bidders’ experience and financial capability.
2. The Annuity concession is then awarded to the bidder offering to perform the work with the most technically and financially sound proposal (indicated by the lowest annuity payment).
3. Although selection would primarily be based on the financial bid of prospective concessionaires, the technical proposals must comply with predefined design, construction, O&M and hand-back requirements.
Other advantages include: –
– Transfer of initial financing, construction, O&M, and project completion risks to the private sector;
– Construction completed much faster and less expensively than under traditional EPC contracts;
– The annuity payment structure allows a firm calculation of Governments financial exposure under the contract;
– The fixed nature of the annuity payments significantly reduces the risk of contract renegotiation with the private sector; and
– Substantial growth of domestic private sector capacity (not just in construction, but in operations and maintenance as well) in the roads sector in countries like India that have practised it.
This is a new model being introduced across Africa to address the challenges facing most PPP toll road projects. It is proposed that annuity payments concession model should be considered as a viable option for development of roads in Africa under the PPP arrangement.