Today's Editorial

15 January 2017

PPP projects now at the crossroads

 

 

Source: By Bhai Vijay Chhibber: The Statesman

 

 

The relevance of Public Private Partnership (PPP) as a mode of delivery of infrastructure projects is it in terms of leveraging private sector investments or in the use of most appropriate technology and capacity enhancements needs little elucidation. With over 350 PPP Projects with investment of around INR 400,000 crores already rolled out, it is an opportune moment to review and focus upon the impediments that are being faced by this mode of delivery, particularly given the slowdown in award of PPP Projects in the last two to three years.

 

This is not to say that efforts have not been made to strengthen the PPP environment, particularly in the highways sector. Premium deferment in stressed projects, harmonious substitution of concessionaires in projects that face financial constraints, timely infusion of funds to revive languishing projects and restoring the operating period for levy of toll or securing all annuities in respect of projects delayed not on account of concessionaire default, are all extremely relevant and dynamic decisions taken by government in the recent past aimed at mitigating the stress faced by PPP projects. And yet, there is no disputing the fact that the contracting community, in general, has become averse to the PPP mode of delivery of projects with Engineering Procurement and Construction (EPC) emerging as the preferred route. So what ails the PPP mode and what further steps are required to revive the PPP mode with its concomitant advantages, in parallel with the EPC?

 

Firstly, there is an urgent need for clear distinction between ‘’Concessionaires’’ and ‘’Contractors’’, which appears to have been allowed to be blurred in the anxiety to make PPP the “default” mode of delivery.  This was the primary reason for excessively competitive bidding in recent years, making many of the PPP projects unviable.

 

Besides nothing was done either by the Authority or the lenders to arrest this trend which only added insult to injury. The bid parameters require immediate correction to limit participation in PPP projects to only those SPVs which correspond to the basic definition of a “Concessionaire”.

 

Second, while all projects can be streamlined to be awarded on the PPP mode that may not always be in the country’s best interest.  It may be prudent to frame standard methods or comparators for each infrastructure sector to help determine/identify the projects which have comparative advantage and value for money in adopting the PPP mode vis-à-vis other alternatives.

 

Thirdly, there is need to have a more effective and accurate assessment of the Civil Cost of each project.  There have been several instances in the past where Civil Cost as assessed by the Authority has been subsequently reassessed by the Concessionaire and accepted by lenders at a substantially higher level. One way around this persistent problem is to replace the existing practice of the Authority preparing only a “feasibility report” for purposes of inviting bids with a more comprehensive Detailed Project Report (DPR)

 

This will help capture the Civil Cost with increased accuracy, taking into account market rates of key materials. These estimates should also cater to the element of inflation, based on previous years’ data. This will not only inspire greater confidence amongst   bidders, but also help reduce infructuous expenditure being incurred currently by all bidders as they separately assess the likely Civil Cost. Moreover, it will take away the ambiguity which allows lenders to accept potentially inflated assessment of Civil Cost, an element which has contributed to several projects becoming unviable.

 

Fourthly, in all cases where there have been delays in rolling out projects from the time the initial estimates were prepared, the financial viability and bankability needs to be reassessed. As a thumb rule, no cost estimate should be taken as the basis of assessing a project which is dated beyond 9 to 12 months.

 

Fifthly, the Authority needs to be more focused on fulfilling its obligations, as any delay in achieving the Conditions Precedent has a disproportionate impact on the Cash Flow of the Concessionaire. The triggers that will determine a default and the exact scope and nature of compensation, including methodology of computation, must form a part of the Model Concession Agreement (MCA). Similarly, the time frame within which such compensations would flow from the defaulting party should also be embedded into the Contract itself.

 

Sixthly, PPP Concessions are usually envisioned over extended periods. Any disruption in revenues during the operation period can have deleterious impact on the cash flows of the project.  Even where the Authority accepts the claims of the Concessionaire for compensation, this is usually in the form of extension in the concession period, benefits of which are available at the end of the period.  There is need to review this framework to provide for such compensations to be provided upfront either wholly or substantially, and not back ended as at present.

 

More importantly, there is need to revisit the nature of relationship between the Authority and the Concessionaire. A “mai baap” approach, typical of Government contracts, is inimical to the creation of a conducive ecosystem required for the success of PPP, particularly where large programmes are being undertaken. Once the Conditions Precedent has been met, PPP projects must be allowed to go ahead on a reasonably autonomous basis.

 

All decisions should be taken strictly as per the Concession Agreement, without undue interference and influence of the client agencies. Where decisions rest with Independent Engineers/Concessionaires, there is no need for Authorities/Officers to interfere, e.g., change of scope, extension of time, etc.  The Authorities/Officers should concentrate on matters of land acquisition, removal of utilities and interfacing with the representative of the State Government with the overall objective of fulfilling the Conditions Precedent in a timely manner.

Now that sufficient experience in the award and operation of PPP projects is available, it may perhaps be prudent to have an Independent Regulator. In the roads sector, for example, the Regulator could be tasked to not only deal with all “interpretation” issues, but also look at observance of service and safety conditions.  The continued role of Government/NHAI, both as Regulator as well as the Authority, is not appropriate, as they are interested parties with an obvious conflict of interest.

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