 "PPPs turning around, at least in roads sector")
Public-private partnership (PPP) projects are back in flavour after a brief interlude of a few years when many projects got struck due to contractual difficulties. PPPs are once again becoming the favourite mode of infrastructure investment, particularly in the roads sector.
According to senior officials, of around 600 road projects being implemented by the National Highways Authority of India (NHAI), around 250 are under PPP mode. In 2011-12, about 70 per cent of infrastructure projects were under PPP mode. The PPPs, in fact, became the default option for large road projects.
But difficulties in land acquisition, environment clearances and low equity base of concessionaires led to delays and litigation. As a result, PPPs were being seen as a flawed model in the Indian context.
While this perception slowed down PPPs for a while, the fact that public investment wasn’t enough to fund rapid expansion of basic infrastructure kept them relevant. “The option of going for full public funding is always available. But PPPs are useful when there is a shortage of public funds. Also, the priority for the government is towards social sector,” a senior government official said. What seems to have made PPPs relevant again, at least in the roads sector, is the change in model agreements which determine the terms of business between the government and the concessionaire. From a build-operate-transfer (BOT) model, most road projects are now being executed under the hybrid model.
Under the hybrid model, 40 per cent of the project cost is borne by the government, while the remaining 60 per cent comes from the private party. Earlier, BOTs were a default option for PPPs, putting entire risk, like rise or fall in traffic in case of roads, on concessionaire. This led to failure of many projects.
According to senior officials, of around 600 road projects being implemented by the National Highways Authority of India (NHAI), around 250 are under PPP mode. In 2011-12, about 70 per cent of infrastructure projects were under PPP mode. The PPPs, in fact, became the default option for large road projects.
But difficulties in land acquisition, environment clearances and low equity base of concessionaires led to delays and litigation. As a result, PPPs were being seen as a flawed model in the Indian context.
While this perception slowed down PPPs for a while, the fact that public investment wasn’t enough to fund rapid expansion of basic infrastructure kept them relevant. “The option of going for full public funding is always available. But PPPs are useful when there is a shortage of public funds. Also, the priority for the government is towards social sector,” a senior government official said. What seems to have made PPPs relevant again, at least in the roads sector, is the change in model agreements which determine the terms of business between the government and the concessionaire. From a build-operate-transfer (BOT) model, most road projects are now being executed under the hybrid model.
Under the hybrid model, 40 per cent of the project cost is borne by the government, while the remaining 60 per cent comes from the private party. Earlier, BOTs were a default option for PPPs, putting entire risk, like rise or fall in traffic in case of roads, on concessionaire. This led to failure of many projects.
However, under the current model, not only does the traffic risk lie with the government, the concessionaire also gets to make reasonable profit. In the annuity model, the risk of failure lies with the government, which enables the private party to invest more freely.
The numbers speak for themselves — of the 1,300 PPP projects in the country, most of them in the roads sector, just 62 projects are stuck now. Even for these stuck projects, design flaws, incompetent promoters or over-leveraged parent companies are primarily to be blamed. Only in a few cases, land acquisition and poor agreements have delayed the projects.
Another sector where PPPs are preferred now is ports. The BOT model, which has somewhat failed in the roads sector, is functioning well for ports. Around 30 port projects are being executed under the PPP mode. As returns are high and capacity is less, there is no traffic risk. Therefore, the BOT model is working efficiently in the ports sector.
Power is another sector where PPPs were tried but didn’t work as expected, mainly because of poorly-drafted bidding documents. Officials said in the old bidding documents, the fuel risk and the inflation risk were with the developer. So, when coal prices started rising, projects failed. The deal with this, the coal ministry is preparing new standard bidding documents, under which the five Ultra-Mega Power Projects (UMPPs) will be bid again.
In railways, except the recent plans for re-development of stations, no major PPP projects have taken off.
“In PPPs, the core is the bid document and it should be framed and designed in such a manner that is balanced both for the government and the private party. If there is slight imbalance in favour of one, mistrust creeps in, which ultimately leads to failure of projects,” a senior government official said.
He said PPPs provide better utilisation of scarce public funds and hence should not be disregarded. A new area in which PPPs are getting popular is social and civic sector. A lot of pilot projects under the guidance of Department of Economic Affairs on waste-to-energy, water, sanitation, cold chain management and health care are being run to test the efficacy of PPPs in social sector.
