Govt considers easier terms for its PPP contracts with private firms

Faced with a strong pitch from officials of the railways, roads and shipping ministries, the Finance Ministry is considering whether contracts signed with private companies for upwards of several decades can be reopened after a sometime.

The officials wanted to know if contract terms can be renewed between a government agency and a firm for public-private partnership (PPP), without running afoul of the vigilance agencies or courts. The agenda, if applied, will only be for future projects, said a source.

India is undertaking its largest works for infrastructure creation, spending more than $125 billion as of 2023. Central and state governments are expanding funding support for projects, but will need the private sector’s support.

The challenge is in encouraging the private sector to invest in infrastructure. Any changes in contract terms do not need the Parliament’s approval and would be in tune with user-friendly terms the central government is bringing in for arbitration, including asking state-owned entities not to chase litigation on projects as a matter of habit.

The model should be “build them using government money and once it’s a cash flow-yielding asset, hand them over to the private sector to operate them,” Shailesh Pathak, secretary general of Ficci and former chief executive officer (CEO) of L&T Infrastructure Development Projects, has said.

It is an idea that has not proved adequate though various ministries using the disinvestment route have in the past few years offloaded stakes in companies including New Delhi and Mumbai airports. Special purpose investment vehicles like ReITS and InVITs have been created for investors to pick up stakes in assets like roads without the bother of entering management roles. The problem is such investments require huge money.

That is why influential voices want the government to fix India’s contracts process. “The tendering process for awarding construction contracts by the government is broken and needs to be fixed urgently to reduce cost overruns to the tune of trillions of rupees,” said Anil M Naik when he was leaving as the chairman of Larsen & Toubro (L&T), India’s largest construction and engineering conglomerate.

“Many a time less qualified companies win projects just by quoting the lowest figure, but they fail to complete them in time. This needs to change in the national interest,” Naik told ‘Business Standard’.

The government is constrained in building infrastructure, said a senior Finance Ministry official. “The risks are that many projects could face uneven economic prospects as technology and the global climate emergency exert twin pressures on them,” the official said. It is often impossible to factor in such risks as force majeure clauses in the contract.

This is in addition to the usual risk of overenthusiastic projections about returns that promoters sometimes make about projects. Reliance Infra, winner of the Delhi Airport Metro project, had forecasted traffic of 42,500 compared with actual numbers of 17,000, the Rajya Sabha was told in 2012. Reliance Infra and Delhi Metro are fighting over the project in the courts.

PPP disputes had almost wrecked the state-run banking sector. “Partly as a consequence of the expanded use of public private partnerships as a matter of public policy, a substantial portion of credit went to infrastructure from 2010 to 2018,” said Rakesh Mohan and Partha Ray in a paper for Centre for Social and Economic Progress in 2022. The result was that while the infrastructure sector accounted for 14.86 per cent of the total advances made by banks up to 2015, the sector’s share in restructured standard advances the banks had to make was a humongous 40.45 per cent.

This also happens because “a vital aspect of the infrastructure sector’s contribution to the NPA [non-performing asset] problem has been its high level of debt, which is characteristic of infrastructure financing” (Mohan & Ray).The non-performing ratio of banks climbed to double digits by 2019, effectively meaning that of every Rs 100 lent by them a tenth won’t return.

Given this background the Finance Ministry is cautious even as the ministries have joined the chorus of making the contracts more flexible. The Ministry of Ports, Shipping and Waterways has shown data that results were impressive when its flagship port, the Jawaharlal Nehru Port Authority, handed out 10 container terminals on PPP basis. It has the best performance indicators among all major ports. “The PPP model has brought in efficiencies ordinarily associated with the private sector, which along with mechanization and increased connectivity, has helped the JNPA improve its productivity and performance parameters,” said a Parliamentary Standing Committee’s report in July.

Riding on this success, the ministry has identified 31 port projects involving mechanisation and modernisation to be developed on PPP basis with an estimated capital cost of Rs 12,828 crore. To woo investors, the ministry revised the model concession agreement in 2021. Since these projects have a timeline of 30 to 45 years, the prospective investors are keen to write in the contracts, clauses for renegotiation of those as new developments occur. The same problem has also been flagged by the railway ministry. Because of the sensitivity of the issue, none of the parties involved in the discussions were willing to be quoted on record.

“The key demand is that from the commercial operation date (COD), the time to relook at the contract should not be more than five years,” said a government official aware of the developments.

Given the long gestation period of most infrastructure/ PPP, renegotiations to address altered project realities are a challenge. Further, given that most PPP bids are designed to discover the lowest possible bid, the technical criteria is usually extensive and inflexible and discourages any innovation. Although limited contractual provisions are available in concession agreements – for example change of scope provisions or traffic linked adjustments to concession periods – there are often disagreements which lead to disputes. 

Comprehensive review and renegotiation of long-term contracts and/ or willingness to consider more innovative ways of PPP contracting is the need of the hour, said Deepto Roy, partner, infrastructure and projects, at Shardul Amarchand Mangaldas.

This could, however, mean less interest from the banks to finance these projects, he added. A reopened contract could be a big risk, said the executive of a state-owned bank.