Dump PPP, NHAI prefers old route

Written by Timsy Jaipuria | New Delhi | Updated: Sep 24 2013, 10:46am hrs
While the government remains keen to build more infrastructure through the public-private partnership (PPP) route, the National Highways Authority of India (NHAI) has made a pitch for dumping PPPs and going back to the old engineering procurement and construction (EPC) method where NHAI engineers pretty much call the shots. NHAI chairman RP Singh has written to road transport secretary Vijay Chhibber arguing his case.

Singh has argued that there is no appetite for PPP at the moment, and he has cited poor response to various NHAI bids as proof. According to NHAI data, while a total of 1,116 km of road projects was awarded on a PPP basis in FY13, this fell to just 122 km till July.

Road ministry sources say the ministry is yet to take a decision, but before it does, the NHAI board has to take a view on the chairmans proposal.

A large number of PPP projects both under toll and annuity modes have not received any response. This is a clear sign of lack of equity in the market. The orders issued by the government permitting exit via substitution route has not solved the problem as there's no clarity regarding passing of the taxation benefits to the substitutee... It is desirable that we go for the EPC mode straightway, Singh wrote.

He also said that in case the government is averse to rescheduling of premium of projects already awarded, the NHAI may be allowed to foreclose them and go for bidding under the EPC mode in small packages and later switch to operation maintenance and transfer. Such an approach will kick-start the economy and save the sector apart from meeting the infrastructure needs of the country, he said.

Singh said the experience of recent awards under this mode, though smaller in size, has been quite good and the bids are substantially below the total project cost, nailing the accusation of some key developers and bankers that the NHAI's total project cost is underestimated.

Under an EPC contract, the government funds the construction and the road developer only has to develop the project in a stipulated period of time. In the BoT mode, the developer invests in the project and recoups it either through tolling rights or annuity. The EPC mode takes about 3-4 months for awarding a project, while BoT takes 18-20 months, which the NHAI thinks is another major advantage at this point in time.

Highway projects of 3,055 km were awarded through the EPC mode in 2005-06 but it rapidly lost its sheen. The next year, only 345 km were awarded, slipping to 89 km in the following year. During these years, BoT projects have generally seen an increase, peaking at 6,491 km in 2011-12. Not even a single EPC project was awarded in the sector between 2008-09 and 2012-13.

To implement the EPC strategy, Singh has urged the government to consider certain measures. He writes that projects available on the shelf with regulatory clearances should be straightway allowed to bid under EPC mode without fresh approvals by the expenditure finance committee. He's also sought that the viability gap funding should be converted into budgetary support for the NHAI, which, in addition, should also be allowed to raise higher amounts through tax-free bonds. Singh has written to the road secretary that NHAI should be allowed to explore the possibility of raising money through other instruments on the strength of its asset base.

Restore the held back cess component as well as toll revenue to NHAI to give confidence to the rating agencies to award AAA ratings to NHAI to ensure raising of funds at least cost, Singh has written.

"The proposal of NHAI chairman is in the right direction, since there is no mood in the private sector to bid for projects on BoT mode like it was earlier, but the BoT annuity mode might still attract players given that it takes away the market risk. Thus, if the government wants the participation of the private sector should continue, then some projects should be considered to be awarded on the BoT annuity mode whereas the majority should be on the EPC mode, Feedback Infra chairman Vinayak Chatterjee said.