PPP to EPC: Will it help economy?

Wed, 19 Mar Pre-Open

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Here is another example of private sector's weak sentiments about the Indian economy. Public Private Partnership (PPP) model, an arrangement between the Government and private sector is losing relevance these days because the private developers do not want to take the risks associated with getting clearances, funding etc, related to such projects, especially in the times of economic slowdown. This has not only stalled the infrastructural investment and development in the country but has badly impacted infrastructure companies as well. As per an article in Economic Times, of a total of 2000 kilometer project target of National Highway Authority of India (NHAI), just 123 Km was awarded last November.

As a result, the focus is now shifting to awarding projects as cash contracts or EPC (Engineering, procurement and construction) contracts, as widely known. Unlike PPP model where the investments are made and/or management is undertaken and significant risks are borne by the private sector entity, cash contracts or EPC model shifts such risks to the Government. Under EPC model, key issues like funding, etc lie with the Government. While this will put a lot of burden on the Government, the shift might be positive for infrastructure companies which will be able to focus on core business and issues. Already, most infrastructure companies are cash constrained and struggling because of lack of new orders. Hopefully, this will speed up infrastructural activity which is vital to economic growth of the country.

As per the EPC arrangement, the contractors get the contract on the basis of the bids or the cost of construction which is completely funded by the government. Every project has an estimated project cost and the contractor who proposes to complete the project at the lowest cost stands a good chance to get the contract. After a muted activity, chances are that the developers will be aggressive with their bids. As such, the Government will need to ensure that the contractors do not make unrealistically low bids and that the project remains financially viable. Further, issues regarding clearances and land acquisition will need to be quickly sorted so that the development work does not get affected. While the shift from PPP to EPC will transfer risks from Private players to the Government, whether the model works or not will depend on how well Government tackles these risks, something only time will tell.