Recent PPP models (EPC, HAM ) an analysis

Note4Student

India offers today the world’s largest market for PPPs. As the PPP market in infrastructure matures in India, new challenges and opportunities have emerged and will continue to emerge. To address this Kelkar committee submitted its report “Report on Revitalising and Revising PPP models in Infrastructure” and Infrastructure vital part of GS 3 . Makes this topic important from exam point of view.

Definition

Standards & Poor definition of PPP is any medium to long term relationship between public and private sectors, involving sharing of risks and rewards for multi sectorial skills, expertise and finance to deliver desired policy outcomes.

Introduction

According to the World Bank, India is one of the leading countries in terms of readiness for PPPs.

Rapid Urbanisation, increase in per capita income and high industrial growth led demand for basic infrastructure such as water supply and sanitation, seamless transportation and energy. To fulfil these demands India has systematically rolled out a PPP program with increasing budgetary allocation in 12th FYP for the delivery of high-priority public utilities and infrastructure.

Context

According to the data from the Ministry of Statistics and Programme Implementation’s (MOSPI) Online Computerised Monitoring System for projects and infrastructure monitoring, of 351 ongoing projects costing above Rs 1,000 crore in the infrastructure sector, 127 projects were delayed and 115 were in cost overruns, and 51 were showing both time and cost overruns as of February 2017.

Why PPP and its challenges

  1. Investment in infrastructure in India has posed a challenge in the last few years.
  2. Reports of delayed or stalled infrastructure projects.
  3. Rate of growth of Gross Fixed Capital Formation (GFCF) have been disappointing.
  4. Inadequate acceleration in private sector projects due to unfavourable market conditions.
  5. lack of appetite for fresh investment by promoters and
  6. Delays in obtaining environmental clearances.
  7. Slowdown in delivery of projects has been attributed to over regulation, problems in land acquisition and scarcity of funds.
  8. Obsolescing Bargain”-the loss of bargaining power over time by private player in PPPs due to plicy changes.

Different PPP Models

In India, road projects are awarded via one of the three models: Build-Operate Transfer (BOT)-Annuity, BOT-Toll, and EPC (engineering, procurement and construction) contract.  An advanced version  of  (MCA) Model Concession Agreement HAM model is a mix of BOT (Built Operate Transfer) and EPC (Engineering, Procurement and Construction) model.

Engineering Procurement  Model:

  1. Under this system the entire project is funded by the government.
  2. The EPC entails the contractor build the project by designing, installing and procuring necessary labour and land to construct the infrastructure, either directly or by subcontracting.
  3. Under EPC model the contractor is legally responsible to complete the project under some fixed predetermined timeline and may also involve scope for penalty in case of time overrun.
  4. In EPC as all the clearances, land acquisition and regulatory norms have to be completed by the government itself and the private players do not have to get itself involved in these time taking procedures.

Hybrid Annuity Model:

  1. In India, the new HAM is a mix of BOT Annuity and EPC models.
  2. As per the design, the government will contribute to 40% of the project cost in the first five years through annual payments (annuity). whereas the remaining 60% is raised by developer from equity or loan as variable depending upon the value of assets created.
  3. Under HAM, Revenue collection would be the responsibility of the National Highways Authority of India (NHAI).The developer doesn’t have right to collect revenue.

Advantages:

The brief picture of Risk Allocation can be tabulated as in Table:

Type of Risks/Models Financing Risk Revenue collection Risk O&M Risk
BOT Model By Private By Private By Private
Annuity Model By Private By Govt By Private
VGF By Govt and Private By Private By Private
EPC Model By Govt By Govt By Govt
HAM By Govt and Private By Govt By Private
  1. Financial burden of private players and even government will reduce.
  2. Will reduce dependency on Banks for loans private player can raise money form equity. Thus NPAs of banks for long gestation project will also decrease. Helps cut the overall debt and improves project returns.
  3. Developers will take ‘traffic risk’ help in expediting project completion. From government side it does take the traffic risk, it also earns better social returns by way of access and convenience to daily commuters.
  4. Will speed up stalled projects.

Kelkar Committee recommendations

  1. Contracts need to focus more on service delivery instead of fiscal benefits.
  2. Better identification and allocation of risks between stakeholders
  3. Renegotiation clause of Concession Agreement
  4. Infrastructure PPP Project Review Committee (“IPRC”) may be constituted to evaluate and send its recommendations on any problems of PPP project.
  5. Infrastructure PPP Adjudication Tribunal (“IPAT”) chaired by a Judicial Member (former Judge SC/Chief Justice HC) with a Technical and/or a Financial member, where benches will be constituted by the Chairperson as per needs of the matter in question.
  6. Institutionalization of mechanism like the National Facilitation Committee (NFC)to ensure time bound resolution of issues e.g. Clearances.
  7. Unsolicited Proposals(“Swiss Challenge”)to be discouraged to avoid information asymmetries and lack of transparency.
  8. PPP structures not to be adopted for very small projects.
  9. Amend the Prevention of Corruption Act, 1988 to distinguish between genuine errors in decision-making and acts of corruption.
  10. vBuild up capacity in all stakeholders, including regulators, authority, consultants, financing agencies, developers.
  11. Set up an institute of excellence in PPP to inter alia guide the sector, provide policy input, timely advice and undertake sustainable capacity building.

Conclusion

  1. India’s infrastructure deficit-whether congested roads and ports, inadequate hospitals or wastewater treatment facilities, and slow trains-is a key factor constraining rapid, competitive economic growth and job creation and thereby imposing huge costs on society. Low productivity, poor competitiveness, high costs, and the slow pace of urbanization are some of the consequences of this deficit.
  2. India will be the world’s most populated country before 2030, outgrowing China. Without sustained rapid economic growth and the resulting productive jobs, India will be unable to convert its demographic transition into a demographic dividend.
  3. To address the above concerns it is imperative to create quality infrastructure by different means. One of the most effective mean is PPP.

Questions:

Q.) Examine the features of HAM model? How it is different from EPC? Explain how it will revitalise infrastructure deficit to achieve broad developmental objectives?

Q.) Recently kelkar committee submitted report on Revitalising and reviving languishing infrastructure projects. Discuss major recommendations of kelkar committee.

References:

Kelkar ‘ Report on Revitalising and Revising PPP models in Infrastructure’.

PIB

Ministry of Statistics and program Implementation

Ministry of Roadway Transport and Highways.

News on Air and Rajya sabha Debate.

 

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