Dr. Pramod Kumar Anand JS (RC) & DG, NRRDA : : : D.O. # P-10021/1/2010/P-III August 4, 2010

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1 Dr. Pramod Kumar Anand JS (RC) & DG, NRRDA : : : anandpk@nic.in D.O. # P-10021/1/2010/P-III August 4, 2010 Dear Shri As you are aware, Government of India launched the Pradhan Mantri Gram Sadak Yojana (PMGSY) in December, 2000 with the aim to provide good all-weather road connectivity to the unconnected habitations in rural areas by way of an all-weather road with necessary culverts and cross-drainage structure, operable throughout the year. It is a fully funded Central scheme. However, State Governments have to bear the financial liability on account of staff costs, cost over-runs of the construction cost and the maintenance of roads for five years after completion of the road works. 2. Ministry of Rural Development has been envisaging the acceleration of the progress in several States in the implementation of PMGSY. One of the measures proposed is to complement the implementation of the projects through the appointment of Private Sector participants to design, finance, build and maintain the roads on a deferred payment (Annuity). The Ministry wishes to engage, on a pilot basis three or more agencies to undertake development work of approx. 500 km each. The private sector participants would be granted a concession for the design, finance, construct and maintain the roads for a definite period. The private sector partner would bear all expenses in the development of the project and would be reimbursed the same in the event of termination due to default by the Government agency. 3. Keeping this backdrop in mind and after discussion at different fora, a concept note on the subject was developed and circulated for discussions in the Performance Review Meeting held in New Delhi on 17 th July, Subsequently, two types of models, one with shorter contract period of 7 years on modified EPC mode and the other on Public Private Partnership (PPP) for a long concession period of years have been developed. Copies of the two models are enclosed (Annexure-I and II). 4. I shall be grateful if you could send views/comments of the State Government within 15 days. Details of pilot projects, if any, being implemented in the State along with their modalities may also be sent. This will facilitate finalization of the models. With regards, Encl: As above All State Secretaries/Principal Secretaries Yours sincerely, (Dr. P. K. Anand)

2 Concept Note on Modified EPC under Pradhan Mantri Gram Sadak Yojana (PMGSY) Annexure-I It is proposed to compliment the implementation of PMGSY through Public Private Partnership. A pilot Project for construction, upgradation and maintenance of Rural Roads through Modified EPC mode is proposed for discussions with the following methodology: (a) Rural roads for a specific area (say a Block or group of blocks) are offered to a Private Partner in a package of say about Rs Crore cost of project for financing, construction, upgradation, renewal and maintenance as per pre-determined performance parameters on an equated annuity payment basis as Modified EPC Contract. (b) The contract period is proposed to be 7 years, including 2 years of construction period. (c) Detailed engineering, design and preparation of DPR would be carried out by the State Government on the basis of PMGSY Guidelines. (d) The Private Partner i.e. Project Developer would be identified on the basis of transparent competitive bidding process and selection would be based on evaluated lowest rate of anticipated equated annuity amount. (e) The funding of construction of eligible new roads as well as up-gradation of rural road network limited to PMGSY norms (2001 population census) would be made by Ministry of Rural Development; however, funding for renewal and maintenance of roads for the contract period would be made by the State Government. (f) The ratio of funding between the Ministry of Rural Development and the State Government would be determined on the basis of present contribution made by the States for maintenance of PMGSY roads. 17 th July, 2010

3 PPP through Modified EPC Contracts under Pradhan Mantri Gram Sadak Yojana By: Prabha Kant Katare Director, National Rural Roads Development Agency Ministry of Rural Development, Government of India Private Sector Participation in Rural Roads A pilot Project for construction, upgradation, renewal and maintenance of Rural Roads through Modified EPC mode is proposed for discussions with the following methodology: a) Rural roads for a specific area (say a Block or group of blocks) are offered to a Private Partner in a package of say about Rs Crore cost of project for financing, construction, upgradation, renewal and maintenance as per pre-determined performance parameters on an equated annuity payment basis as Modified EPC Contract. 1

4 A PPP Pilot for Rural Roads b) The contract period is proposed to be 7 years, including 2 years of construction period. Detailed engineering, design and preparation of DPR would be carried out by the State Government on the basis of PMGSY Guidelines. The Private Partner i.e. Project Developer would be identified on the basis of transparent competitive bidding process and selection would be based on evaluated lowest rate of anticipated equated annuity amount. A PPP Pilot for Rural Roads e) The funding of construction of eligible new roads as well as up-gradation of rural road network limited to PMGSY norms (2001 population census) would be made by Ministry of Rural Development, however, funding for renewal and maintenance for the contract period would be made by the State Government. f) The ratio of funding between the Ministry of Rural Development and the State Government would be determined on the basis of present contribution made by the States for maintenance of PMGSY roads. 2

5 Annexure-II Stage I Concept Paper Development of Rural Roads under Pradhan Mantri Gram Sadak Yojana (PMGSY) through Private Sector Participation ABSTRACT: It is proposed to compliment the implementation of PMGSY through Public Private Partnership. A pilot Project for PPP in Rural roads is being designed with the following methodology: (a) Rural roads for a specific area (say a Block) are offered to a Private Partner in a package of say about 500 km length of roads for financing, design, procurement, execution, renewal and maintenance as per pre-determined performance parameters on a deferred payment (Annuity) basis, quite similar to BOT Annuity model. (b) Presently a Concession Period of about years is proposed. (c) While deciding the Concession Period, the aspect of choice of technology for construction of new roads should be carefully examined from the point of view of life-cycle cost. It has been demonstrated through various studies that rigid pavements have advantage of lower life-cycle cost compared to flexible pavement. (d) The funding of construction of new roads as well as up-gradation of rural road network limited to through routes and major link routes as per PMGSY norms would be made by Ministry of Rural Development under PMGSY. (e) The funding for renewal and maintenance of rural road network would be made by the respective State Government. (f) If State desires, in view of achieving better management and economy, even the Major District Roads (MDRs) or rural roads other than those covered in PMGSY within the project area can be packaged in the project subject to condition that funding of up-gradation, renewal and maintenance would be arranged by the State Government. A Transaction Advisor may be appointed for taking support with respect to preparation of PPP Project, financial modeling and other support including selection and appointment of Project Developer. The Private Partner i.e. Project Developer would be identified on the basis of transparent competitive bidding process and selection would be based on evaluated lowest rate of anticipated annuity amount. State Government may constitute a Technical Committee comprising of Chairman and one Member Secretary appointed by the State Government, one member from SRRDA and two official members from Project Developer. The Committee would be responsible for coordination and overall control of the project. The Independent Engineer would be appointed by the Technical Committee for independent monitoring of engineering and related parameters.

6 1) Road Infrastructure in India: Road infrastructure in India has been functionally categorized into National Highways (NH), State Highways(SH), District Roads consisting of Major District Roads (MDRs) and Other District Roads (ODRs), and Village Roads. ODRs and Village Roads fall under Rural Roads category. Construction and maintenance of National Highways is responsibility of the Central Government, however, the States are responsible for construction and maintenance of all other category of roads. 2) Pradhan Mantri Gram Sadak Yojana a) The Government of India launched the Pradhan Mantri Gram Sadak Yojana (PMGSY) on 25th December 2000 with the aim to provide good allweather road connectivity to the unconnected habitations in rural areas by way of an all-weather road with necessary culverts and cross-drainage structures, operable throughout the year. b) The prime objective of the Government is to provide Road Connectivity, through good All-weather roads, to all Rural Habitations with a population of 500 and more persons (250 in case of hill States, Schedule V Tribal Areas and Desert Areas). The primary focus of the PMGSY Scheme is of construction of new roads. The up-gradation (to prescribed standards) of existing roads is also permitted under the programme so as to achieve farm to market connectivity. c) MoRD has set up the National Rural Roads Development Agency (NRRDA) to provide operational and management support for implementation of the programme. d) Every State Government/UT Administration has nominated a department as the Nodal Department in the state for implementing the PMGSY. The Nodal Department acts in the State through Executing Agency (EA) such as Public Works Department, Rural Engineer Organizations, Zilla Panchayat etc. The EA has a Programme Implementation Unit (PIU) at the district level for implementation of programme. The EA co-ordinates and supervises all the work of the PIUs in the State. e) The Nodal Department identifies a State-level autonomous Agency to be called the State Rural Roads Development Agency (SRRDA) with a distinct legal status, under its control for receiving the funds from the Ministry of Rural Development and overall implementation of programme in the State. f) Each road work under the PMGSY Scheme forms part of the Core Network the minimal network of roads to provide the basic access to essential social economic services to all eligible habitation through at least single all-weather road connectivity. PMGSY covers only rural roads. g) The specification of IRC as given in books of Specifications for Rural Roads and the Rural Road Manual (IRC: SP 20:2002) as updated from time to time are followed for construction of rural roads. The Rural Roads to be taken up

7 under the programme are by and large, surfaced roads (black topped / cement concrete). h) The District PIU prepares the annual proposal is to be approved by the District Panchayat and to be consolidated at the State Level by SRRDA and cleared by the State level Standing Committee. DPRs are then prepared and scrutinized by the State Technical Agencies. The SRRDA is vetting all the proposals for rural roads before they are put up to the State Level Standing Committee and are sent to the NRRDA for MoRD Clearance. The Final annual proposal for the State is then sent to the MoRD / NRRDA. NRRDA scrutinizes the proposal, which are then considered by an Empowered Committee of MoRD and accorded clearances. i) The State Government /UT Administrations are responsible for execution of works including supervision and quality assurance. Up on clearance of proposal by the MoRD, the Executing Agency invites the tenders for construction & a subsequent 5 year routine maintenance and commences the work. j) A Standard bidding Document is prescribed for the programme. The construction of the roads including the maintenance for five years is tendered out at a time and in the same package. The Roads constructed under the programme require no major repairs for at-least five years after construction and for that a bank guarantee for prescribed % of total value of work valid for 5 years from the date of completion is provided by the Contractor. Ministry of Rural Development (MoRD), provides overall direction for PMGSY Schemes, funds, issues guidelines and works in close collaborations with the State Governments for implementing the programme. k) Flow of Funds: The State level Autonomous Agency (SRRDA) receives the funds for PMGSY from the MoRD. The SRRDA also receives the Administrative Expenses funds from the MoRD towards administrative and travel expenses of PIUs, travelling expenses of SRRDA and Independent Quality Monitoring. l) Cost Sharing by State Government: The MoRD accepts the liability only up to approved cost estimate and the States bear all staff cost and cost overruns of the construction costs. The State Government is not allowed any agency charges or centages etc. for PMGSY road works. The State Government is required to estimate the maintenance cost at the time of proposal and undertake to provide the required funds for maintenance for 5 years after completion of each road work. 3) Development of PMGSY Scheme through Private Sector Participation a) The MoRD has been envisaging the acceleration of the progress in several States in the implementation of the PMGSY. One of the measures proposed is to complement the implementation of the projects through the appointment of Private Sector Participants to design, finance, build and maintain the roads on a deferred payment (Annuity).

8 b) The MoRD wishes to engage, on a pilot basis, three or more agencies to undertake development works of approximately [500] Kms each. The Private Sector participant would be granted a Concession for the design, finance, construct and maintain the roads for a defined period. c) The Private Sector partner would bear all expenses in the development of the project and would be reimbursed the same in the event of a termination due to default by the Government agency. d) In view of making a viable package for PPP, the States would be free to bundle the project roads with other category roads (say MDRs or rural roads other than those covered in PMGSY) also subjected to the condition that the funding of roads other than PMGSY would be committed by the State from their own resources. e) A Transaction Advisor may be appointed by the State Government to take support with respect to preparation of PPP Project, financial modeling and other support including selection and appointment of Project Developer. 4) Choice of Technology and Concession Period: a) The Concession Period of 15 or 20 years can be decided by the State Government depending on the field conditions. The Concession Period can also be decided on the basis of choice of technology for building and maintaining road. The options for selection of type of pavement structure such as rigid pavement which may have advantageous life-cycle cost compared to flexible pavement should be carefully examined. b) The Concession Period would start from the date of financial closure of the project i.e. 180 days from the date of signing of Concession Agreement. The Concession period shall be inclusive of [12] months of Construction Period. 5) Selection and Appointment of Project Developer a) The State Government through Nodal Department shall identify and appoint the prospective Project Developer for development of infrastructure projects through a competitive bidding process. b) The appointment of Project Developer shall be done by State Government in consultation and approval of the MoRD/ NRRDA. c) The bid criteria for selection of Project Developer shall be the evaluated lowest rate of anticipated annuity amount rate (Semi-Annual) quoted by the prospective bidders. The annuity amount rate shall be of percentage (%) of the Landed Project Cost to be paid by State Government to Project Developer from SRRDA Account throughout the operation period.

9 d) Landed Project Cost = 1.30* awarded Lump Sum Turn Key Fix Construction Contract price (as adjusted for variations / changes in scope approved by State Government). e) The construction shall be carried out under a Lump-Sum Turnkey Fixed Price Contract and will include escalation during construction and both price and quantity risks f) All costs other than the Construction Cost (Lump Sum Turn Key Fixed Price) shall be estimated at 30% which includes: i) Insurance Cost for the Construction Period ii) Financial Arrangement Cost iii) Interest During Construction Period-( Months) iv) Detailed Project Report - including design and engineering v) Selection of Construction Contractor vi) Supervision and Project Management vii) Costs towards setting up of the SPV and its management g) The Prospective bidders shall also submit the following: i) The costs/expenses to be incurred towards Administrative Overheads, Routine maintenance and (iii) Periodic Maintenance Cost during Operation and Maintenance Period. ii) Details of Interest Rate for borrowing of Debt as well as the Annual Project Insurance Cost 6) Roles and Responsibilities: a) Project Developer: i) Project Development Studies of Projects proposed ii) Planning, Design, Finance. iii) Development and Implementation of programme to a pre-determined cost, schedule, standards and specifications through its own or any other implementation company set by Project Developer as the case may be; iv) Supervision and Management of development and implementation activities; v) Raising of resources i.e. equity, grant, subsidy, sub debt, debt etc. without any recourse to or any form of guarantees from State or Central Government vi) Maintenance including reconstruction or strengthening/up-gradation of Project to accepted performance levels for the period of Annuity

10 b) State Government: i) Constitution of a Technical Sub-Committee (Technical Committee) to ensure development and implementation of PMGSY Scheme under Programme Development Agreement on fast track mode. ii) Taking approvals required for development of PMGSY Scheme from MoRD / NRRDA through SRRDA and State level Standing Committee. iii) Grant or procure all statutory and project specific clearances within its control that may be necessary for implementation of Projects; iv) Ensuring availability of land free of all encumbrances including shifting of utilities etc; v) Ensure timely payment of annuities to Project Developer from SRRDA Account or as the case may be and secure the same through a mechanism acceptable to the lenders to the Project. 7) Technical Committee a) Nodal Department of State Government shall constitute a Technical Committee for development and implementation of proposed Programme on fast track mode. The core function of Technical Committee shall be as follows: i) Setting up uniform standards as per the guidelines of PMGSY; ii) Selection of Independent Engineer: iii) Co-ordination between Government Departments to ensure timely completion of proposed programme; b) Technical Committee shall have five (5) members including Chairman and Member Secretary: i) Nodal Department shall appoint the Chairman of Technical Committee and One (1) official from State Government as a Member Secretary of Technical Committee ii) SRRDA shall appoint the one (1) official as member of Technical committee iii) Project Developer shall appoint two (2) officials as member of Technical Committee c) Technical Committee shall scrutinize / evaluate the following and accord the approval for: i) Mechanism for arm s-length transactions with related parties (Independent Engineer or Project Developer or Construction Contractor); ii) DPR / FSR submitted by Project Developer; d) Any other matter as may be decided by Nodal Department

11 e) Any matter brought before Technical Committee shall be deemed to be approved only in case it is approved in a meeting where the Chairman and at least one nominee of project developer are present. f) The decision of Technical Committee shall be sought to be by consensus. g) Nodal Department shall frame rules of business for Technical Committee, including process methodologies and time-lines for addressing particular references, so as to enable the Project Developer to fulfill its obligations in accordance with this PDA. 8) Project Development Studies a) Pursuant to constitution of Technical Committee by Nodal Department, within 30 days, Project Developer shall commence the technical studies required under this PDA ("Project Development Studies"). b) Project Developer shall complete the Project Development Studies within a period of 12 Months for all selected roads and shall submit to the Technical Committee for evaluation and approval. c) Detailed Project Report (DPR) / Feasibility Study Report (FSR) shall broadly includes the detailed Scope of Project, Technical Specifications and Standards, Detailed Cost Estimate, Draft Contract for Construction, Bid Documents for selection of Contractors and any other required material for Project(s). d) Technical Committee shall evaluate the DPR / FSR and Bid Documents for selection of Contractors submitted by Project Developer and shall submit to the SRRDA / State Level Standing Committee / MoRD / NRRDA as the case may be, within 15 Days from the date of its submission. 9) Concession Agreement a) The format of concession agreement to be entered between State Government and Project Developer for each road project / group of project shall be as set out as per a Standard Annuity Agreement approved by the competent authority. b) The annuity amount (Semi-annual) payment for each project shall be (.%) 1 of Landed Project Cost. The annuity payment shall remain constant during entire agreement period and will not change under any circumstances. 10) Performance Security a) Project Developer shall within a period of 15 days from its appointment, deliver to Nodal Department for due and punctual performance of its obligations under the proposed Programme, a bank guarantee ("Performance Security") from a scheduled bank for a sum of Rs. [ ]. (calculated at [0.?]% of estimated cost)

12 b) Performance Security shall be released by Nodal Department to the Project Developer upon achievement of Commercial Operation Date (COD) of first project. 11) Annuity Payment a) State Government assures annuity payment (semi annual) from SRRDA Account or through any other appropriate fund mechanism (credit enhancement structure such as revolving letters of credit etc.) which constitutes a secure source of Annuity Payment to either SPV created by Project Developer or Project Developer as the case may be after COD. b) The annuity payment shall be released upon recommendation of Technical Committee upon appropriate feedback of Independent Engineer. c) The Annuity Payment shall be the only payments to Project Developer (or SPV created by Project Developer as the case may be) from State Government. 12) Resource of Fund for SRRDA Account a) The State Government and MoRD/NRRDA shall develop and workout an appropriate mechanism for availability of fund from the following: i) Programme Fund from the MoRD / NRRDA ii) Administrative Fund from the MoRD / NRRDA iii) Maintenance Fund from State Government iv) Funds for development and maintenance of roads other than PMGSY roads included in the PPP project from the State Government. b) Any deficit amount in to the SRRDA Account required ensuring annuity payment after resourcing the above funds shall be allocated by MoRD and the State in proportion of PMGSY roads and roads other than PMGSY. 13) Critical advantages / benefits foreseen with the above approach: a) Upfront commitment of funds by Central and State Governments on account of the capital works and more importantly, for long-term operations & maintenance thereby yielding greater value for money in the context of the projects undertaken b) Potential of attracting the investor category of road developers into the rural roads sector thereby increasing competition and improving quality of the projects c) Longer term involvement of the developer for a period of years vis-àvis the current period of 05 years maintenance by the contractor implies better quality of construction d) Enabling a larger number of projects to be taken up simultaneously on account of spread-out payments

13 e) Enabling establishment of pan-national quality and benchmarking norms in the rural roads sector, similar to the NHAI sector f) Paving the way for replication in other infrastructure sectors, such as drinking water supply and solid waste management, in rural areas.