Govt funding still rules highways

Nitin Gadkari said government would continue with its focus on EPC because it helps contracting companies to increase liquidity

Hybrid-annuity contracts in infrastructure have revived private sector participation, with the number of projects awarded during the last financial year under this mode nearly equalling the EPC (engineering-procurement-construction) deals.

Some experts say that the EPC mode of highway construction is a better option than the hybrid annuity one because the government can raise funds for these contracts at a much lower rate than a private company. 

For instance, the Union government or the National Highways Authority of India (NHAI) can raise funds at 8 per cent while the rate of interest for a private company, executing a hybrid-annuity highway contract, is about 14 per cent, which pushes up the project cost. 

Union Road Transport and Highways Minister Nitin Gadkari has said that the government would continue with its focus on EPC because it helps contracting companies to increase liquidity, enabling them to further invest in a public-private partnership project.

Pointing out another shortcoming of the hybrid-annuity model, analysts say a concessionaire’s equity in such a project is so little that the contractor has no interest in the contract. The debt component is raised at 14 per cent and the banks’ exposure is sometimes higher than even the contractor’s equity.

Hybrid-annuity, however, is still a better option for the government because it does not have to park a huge sum of money in one project and instead utilise the money for financing a number of projects. Typically, in a hybrid-annuity project, the central government pumps in 40 per cent equity while the remaining is arranged by the concessionaire, according to another expert. 

“For every one EPC project, the government can finance three-four hybrid-annuity contracts, which also means staggered payments. Therefore, it is a better model for the government,” said Adil Zaidi, partner, economic development, and infrastructure advisory, EY.

Hybrid-annuity contracts are maintained by the concessionaire even after the completion of construction whereas EPC projects are handed over by contractors as soon as they are built and, therefore, the concessionaire’s responsibility is curtailed.

In terms of financial efficiency, hybrid annuity scores over EPC because the cost overrun in the latter is 20-25 per cent and is borne by the government or the NHAI. In a hybrid-annuity contract the cost overrun is the private player’s responsibility, Zaidi said.

It can also be gauged from the trend in awarding highway contracts. Of the highway projects awarded till May 31 this year, 38 projects have been awarded on EPC and 35 on hybrid-annuity, while a miniscule four projects have been awarded in BOT (build-operate-transfer) mode. As many as 63 projects were awarded in EPC mode in 2015-16, nine on hybrid-annuity and seven on BOT, according to the NHAI data.