Investment Models in Infrastructure: Exploring PPP, BOT, and EPC Approaches

Introduction

Investment models in infrastructure refer to various approaches and frameworks used to finance, develop, and manage infrastructure projects. Infrastructure encompasses a wide range of sectors such as transportation, energy, telecommunications, water supply, and waste management, all crucial for supporting economic activities and enhancing quality of life.

Different investment models exist to meet the diverse needs of infrastructure projects

A. Public Private Partnership Projects (PPP) models

Build Operate Transfer (BOT-Toll and BOTAnnuity)

• A BOT can be broken down into three distinct phases:
  • Build: A private company agrees to build a public infrastructure project for the government. 
    • This model is used to finance large projects, typically infrastructure projects developed through public-private partnerships that would usually be funded, constructed, and managed exclusively by the government.
  • Operate: It then proceeds to operate and manage the facility for an agreed-upon period, during which it should recoup its outlay and start making money.
    • The private sector partner’s role is to bring the project’s finance and take the responsibility to construct and maintain it.
    • Private players can collect revenue from the users; the Government pays an annual fee.
  • Transfer: After the concessionary period, the company transfers ownership back to the public entity.
• BOT-Toll:
  • Purpose: This is a PPP model for the development of highway projects. 
  • Process: In this, a road developer constructs the road and he is allowed to recover his investment through toll collection. 
    • This toll collection will be over nearly 30 years in most cases. 
    • At the end of the toll period, the project is transferred to the government.
  • Payment: There is no government payment to the developer as he earns his money invested from tolls. 
• BOT-Annuity:
• • Purpose: PPP model for infrastructure projects especially road projects.
  • Process: Developer builds the highway, operates it for a specified duration and transfers it back to the government
  • Payment: The government starts payment to the developer after the launch of commercial operation of the project. Payment will be made on a 6 month basis.

Hybrid Annuity Model (HAM) 

• A mix of BOT Annuity and EPC models.
• Cost: The government will contribute to 40% of the project cost in the first five years through annual payments (annuity).
• The remaining 60% is raised by the developer from equity or loan as variable depending upon the value of assets created. 
• Revenue collection would be the responsibility of the National Highways Authority of India (NHAI).

B. Publicly Funded Projects

Engineering Procurement Construction (EPC)

• 100% funding is provided by the Government
• Full freedom to plan, design and construct is given to the contractor
• Core requirements of design, construction, operation and maintenance are specified in schedules
• The scope for adopting best practices and innovation to optimize the efficiency and economy is available in such types of models.
• Payments: are linked to specified stages of construction
• Contract Price: It is subject to adjustment on account of variations in the cost and changes in scope ordered by the employer.
• Responsibility of Contractor: Contractor is made responsible for all the activities from design, procurement, construction, commissioning, and handover of the project to the end-user or owner.
• The government awards the road construction contract to a private contractor who submits the lowest-cost tender.
• The private party builds the road and hands it over to the government then maintains the road.
• This is not a PPP project but a publicly funded Project.

Conclusion

• Various investment models exist to finance infrastructure projects, each with its advantages and considerations. 
• Public-Private Partnerships (PPPs) promote collaboration between the public and private sectors, enabling risk-sharing and innovation.
• Direct public investment remains crucial for projects deemed essential for public welfare. 
• Hybrid models combine elements of different approaches to tailor solutions for specific projects. 
• Effective utilization of these investment models is essential for addressing infrastructure needs, promoting economic development, and enhancing quality of life.