NHAI plans bids based on returns

The National Highways Authority of India (NHAI) may soon approach its parent ministry for consent to auction road projects based on a new mechanism. 
 

According to one source, the NHAI was working on a different approach from the current "waterfall" method of execution of highway projects. The new mechanism will focus on the internal rate of return (IRR).

The proposal aims to award highway projects on build-operate-transfer (BOT) basis where the IRR is expected to be 15 per cent.  Contracts, where the IRR is likely to be in the range of 10-15 per cent, will be tendered in the hybrid-annuity model (HAM). Those with less than 10 per cent IRR will be awarded as engineering, procurement and construction (EPC) contracts, according to an official.

According to NHAI data up to May 2017, as many as 38 contracts were awarded as EPC contracts, 35 as HAM contracts and four as BOT contracts.

A similar idea was proposed by B K Chaturvedi when he was member of the Planning Commission and it proved to be a drag on project execution, an official said.

Concession periods based on the IRR can be problematic. For instance, an IRR of 16 per cent for a four-lane road can be achieved in 14 years but the life of the contract is usually 25 years. The concessionaire would work at a slack pace and the quality would be substandard, the official added.

The waterfall model is a sequential design process, used in software development, in which progress is seen as flowing steadily. The NHAI adopts this approach while awarding highway projects.

The Chaturvedi panel had said roads with traffic below a certain threshold did not merit BOT (toll) as the process led to delays. 

Before implementing a project on EPC basis, it will be compulsorily tested for BOT (annuity) and if unacceptable bids are received it will be awarded as an EPC contract.

BOT (annuity) projects exceeding an IRR of 18 per cent will be bid out on EPC. In areas with law and order issues or inhospitable terrain, a bid working out to an IRR of up to 21 per cent will be acceptable on merits,  considering a risk premium of 3 per cent.

The decision of shifting a project from BOT (toll) to BOT (annuity) will be taken by an inter-ministerial group chaired by the road transport secretary and will have to be approved by the minister.