These contracts are for periods ranging from 15 to 60 years. The problem is there is an ostrich-like belief that once negotiated, ground conditions will continue to hold forever; that the terms of the agreement between the private party and the state are cast in stone; and that any changes required can only attract charges of crony capitalism. So, even while economists find it extremely difficult to predict growth and inflation for the next quarter, assumptions on project cost, traffic, tariff, input costs, et al that go into preparing a winning bid, are expected to be inviolate and unchanging. The world moves on, but the concession agreement is frozen in time. Why? Because, simply put, it is the job of the private sector to forecast the future and take risk. That may indeed ring true for a wide range of market goods, where there is flexibility to morph, enter and exit. But for strait-jacketed, lumpy, fixed infra projects in regulated environments, the truth is that the task of forecasting for PPP bids gets highly complex often, just intelligent guesswork packaged professionally.
Sarkari PPP midwives are upset and anguished that there is suddenly a spate of PPP projects that have come up for renegotiation. GMR and GVK have walked out of recently-won mega-highway projects. The Gurgaon Expressway is in trouble. Delhi Airport Metro Express is under arbitration. Delhi Airport has been clamouring for resets. Adani Power and Tata Power are struggling to reset their economics on account of changes in input costs. Private container train operators on the Indian Railways are sulking. And telecom operators have been fighting pitched battles with the establishment.
In the Adani Power matter, the Central Electricity Regulatory Commission observed that it had a statutory responsibility to strike a balance between consumer interest and investor interest even after the award. While the view is laudable, there is no denying that such demands for renegotiation raise some fundamental questions:
One, bidders who lost out could take government bodies to court saying the incentives arising out of renegotiation were not extended to them at the bidding stage and, thus, they were unfairly edged out;
Two, the sanctity of a bid-out contract is violated and may encourage many more project developers to expect post-win renegotiation;
Three, there is a moral hazard in that private bidders know their losses will be wiped clean by subsequent government largesse while their profits do not have to be shared;
Four, distinguishing between projects that are unviable because of genuine unforeseen developments and projects that are unviable because the bidders bid at predatory prices or made commercial errors of judgement, are difficult to sift.
At the time of drawing up concession agreements, there is indeed an attempt to segregate risks between the public and private partners.
| COMMON ROADBLOCKS |
Public partner risks
Private partner risks |
- Revenue (traffic)
- Financing (interest rate and currency)
- Construction
- Other project costs
- Input costs
- Operations
- Change in regulations
- Unanticipated competitive projects
- Political interference at local levels
- Significant change in economic landscape, and macroeconomic shocks
*These risks ultimately affect the private partner more, with escalations in the project cost, etc
**Poor concession-design could affect either of the two parties
It needs to be recognised that most PPP concessions are inevitably incomplete contracts. Incomplete contracts have many causes. Human ingenuity can forecast only a limited set of possibilities. Then, there is the legal cost and burden of accounting for all possible contingencies in contracts. Whatever be the legal paperwork, there is an unanimous belief in the private sector that the manner in which risks are currently shared between the two partners in a PPP contract in India today is heavily skewed against the private sector. Where then is the so-called partnership?
World Bank Country Director for India Onno Ruhl says globally, most projects undertaken on the PPP basis often need to be renegotiated. He adds, I dont think anybody has the ability to write a contract for 20 to 30 years. But the challenge is to renegotiate in a transparent and equitable manner and the cost of non-adjustment could be very high.
An overview of more than 1,000 PPP concessions studied by the World Bank Institute in Latin America and Caribbean from 1985-2000 throw up these characteristics of PPP renegotiation:
- 41.5 per cent have undergone renegotiation;
- Out of the total concessions in the transport infrastructure sector, 55 per cent of the concessions underwent renegotiation;
- 85 per cent of renegotiation occurred within four years of concession awards, and 60 per cent occurred within three years;
- Renegotiation occurred mostly in concessions awarded through competitive bidding;
- In 61 per cent of cases, the concessionaire requested renegotiation.
To address the clear need for renegotiation, various bodies have been created in different emerging economies. There is the Infrastructure Concessions Regulatory Commission in Nigeria, the PPP Advisory Unit in Ghana, the PPP Centre in Philippines and the PPP Unit in South Africa. In the case of South Africa, for example, one of the key functions of the PPP Unit is approving material variations and amendments to executed PPP agreements.
Currently, India does not have defined and established legal and regulatory dispensation to address the issues relating to renegotiation and life-cycle management of PPP infrastructure assets. The 48 per cent expected from the private sector for the 12th Plans $1,126 trillion infra budget is in jeopardy, simply because, today, the private sector is unsure where to turn to in case a PPP concession requires renegotiation. At a recent meeting between Indias top infra CEOs and the Prime Ministers Office (PMO)/Planning Commission, the number one request was for the state to urgently consider a credible, independent and impartial body that would be fully empowered to give quick dispensations on renegotiation of contracts.
The government is clearly listening. On May 16, the PMO issued a statement saying, To speed up infrastructure development, the prime minister has asked the Planning Commission to draft legislation that would establish an institutional mechanism to resolve disputes in public contracts.
This is indeed welcome!
The author is the Chairman of Feedback Infrastructure
vinayak.chatterjee@feedbackinfra.com; Twitter: @Infra_VinayakCh
vinayak.chatterjee@feedbackinfra.com; Twitter: @Infra_VinayakCh