In a significant shift of policy, the Highway Ministry appears to have quietly dumped the public private partnership (PPP) model, after no bids were received under this model after 2012-13.
With many projects awarded in 2011-12 and 2010-11 on a PPP basis also yet to take off due to a host of issues, the Ministry has decided to go for EPC (engineering procurement construction) contracts instead, where only the design and construction parts are contracted out.
EPC model
In the EPC model, the Government funds a highway, with private firms designing and building the road. This is unlike the PPP model, where the private sector has to fund the road-building. This Highways Ministry has earmarked 6,700 km of roads for development on EPC basis this fiscal, the highest since the UPA coalition first came to power in 2004. That is, almost two-thirds of the 9,600 km of highway projects set to be awarded this financial year will be on the EPC model, with balance on PPP basis, a Highway Ministry source said.
Funds required
This would require an expenditure of Rs 24,300 crore, though the exact cost will emerge after bids. The amount will be spent over the next two-three years, which is when the roads will get built.
The awards will be made through various programmes of the Highways Ministry, including the National Highways Development Programme. The NHAI will award about 2,000 km of such projects on EPC model.
Under the UPA regime, the Government had promoted two models of public-private partnership (PPP) for building highways.
The idea was to reduce public spending on highways and divert resources to sectors such as health and food. However, PPP projects, which were a hit with investors during the period of high economic growth, have lost steam with the slowdown.
The two PPP models were build-operate-transfer (BOT)-toll and BOT-annuity. While both models required use of private sector funds to build roads, the developer’s risk was higher in BOT-toll roads, where the earnings stream depended entirely on toll collection.
Two models
In the BOT-toll mode, the road developer has to raise funds to design and develop a highway stretch. In return, the developer gets the right to collect toll from road users for the entire concession period, which ranges from 20 to 30 years. The toll rates are predetermined. In this case, for developers, the bidding parameter is the minimum subsidy sought, or maximum premium offered to Government.
In the BOT-annuity mode, the developer has to raise funds to design and widen a highway stretch, and maintain it over the concession period of 20-30 years. The toll revenue accrues to the NHAI in this case. But the developer gets payments from NHAI twice a year, through the 20-30-year concession period. The bidding parameter is the minimum payment sought.
Coming at a time when general elections appear round the corner — road development will be a key election issue — the move is an indication of Government’s view on the effectiveness or otherwise of PPP, sources said.