At a recent conference on “Revitalising Public-Private Partnerships [PPPs] in Infrastructure”, organised by India Infrastructure, the National Highways Authority of India’s (NHAI) Raghav Chandra, spoke about the learning from the PPP experience in the past and the future prospects of attracting private investment in the road sector. Excerpts…
PPPs are the best means of delivering non-core services and creating physical assets that require a high degree of competence and a competitive advantage in design and innovation, both of which are available with the private sector. However, a suitable risk-sharing mechanism is essential to attract private players into a sector.
A yardstick for measuring whether a PPP project is required is to assess whether the government requires long-term strategic control over the facility. One can also look at factors such as the initial investment required and whether the funds are available with the government, the possibility of recouping the financial outlay through user charges and the availability of opportunities for efficiency gains in construction and/or operation. These are some of the factors that should be considered by the implementing agencies while choosing a PPP project.
Under the engineering, procurement and construction (EPC) model there exists a four-year defect liability clause which binds the contractor and ensures that the project is maintained for a period of four years, unlike in the PPP model. The government has introduced the new hybrid annuity model (HAM), which lies somewhere between the PPP and EPC models in terms of structure and allows the risk to be shared between NHAI and the concessionaire.
Earlier, in a traditional build-operate-transfer model, the risk was entirely with the promoter. Under HAM, the construction as well as the operations and maintenance (O&M) risks remain with the promoter, while the traffic and toll risk remains entirely with NHAI. Under HAM, 40 per cent of the project cost and the O&M cost for maintaining the project for a period of 15 years is paid upfront to the concessionaire, in five tranches of 8 per cent each, upon reaching specified project milestones. The remaining 60 per cent has to be obtained through private sources or through bank financing and this is repaid over a period of 15 years through fixed annuities.
What distinguishes HAM in terms of being an improvement over the earlier models is the fact that 40 per cent of the cost of the project is paid to the concessionaire, thereby mitigating some risks, which NHAI takes upon itself.
The experience so far
At present, NHAI has over 255 ongoing national highway projects. The highway sector has stimulated economic growth across all infrastructure sectors. For instance, cement and steel sales have gone up by 5 per cent each and bitumen consumption has gone up by 35 per cent. NHAI’s overall spending has gone up by 50 per cent over the previous year. Further, some machinery suppliers and equipment manufacturers have reported that equipment procurement has become difficult as it has either been sold or has already been booked.
In the highway sector, there have been broadly three eras of development. Before 2005, construction was carried out largely on a non-PPP basis and therefore most of the construction on the Golden Quadrilateral in the East-West corridor was done on the traditional “item rate contract” basis or the EPC model. Between 2005 and 2014, about 75 per cent of the projects were taken up on a PPP basis. However, 2015 onwards, there was a move to an even mix of projects in the PPP and EPC modes.
However, there have been uncertainties in PPP projects in the past. In the period 2010-12, there was very aggressive bidding for a number of NHAI projects. In fact, 23 of them were terminated as some of these projects had “exuberant” bids which were untenable. The total envelope of premium offered by private players (rather than the grant needed to make the project viable) was around Rs 930 billion. In some cases, the total premium offered was one and a half times the cost of the project. In this scenario, some concessionaires endured and succeeded, while others failed.
Nevertheless, bidders have now become far more cautious. While some of the larger companies are still staying out of the bidding process, NHAI has witnessed reasonably competitive bidding from a lot of mid-sized companies and the bids are not unreasonable. With respect to hybrid annuity projects, since the total cost of the project is already clearly defined, the bids are definitely more rational and reasonable. To tackle the previously languishing projects, the government has devised several schemes for the infusion of funds and the rehabilitation of such projects. For instance, three projects that have been languishing since 2011 will see an infusion of Rs 11 billion.
The earlier toll model had a flaw that in case a project was not completed the payment was not released, even if a substantial part of the work had been done. HAM has a provision for the termination of the payment stream even during the construction period. There was no such provision in the model concession agreement. NHAI has so far awarded 18 projects spanning 750-800 km under HAM for a total value of about Rs 135 billion and these projects are in the process of attaining financial closure. Three of the projects have been piloted by India Infrastructure Finance Company Limited and these are likely to achieve financial closure soon. Several other projects are also moving forward and banks are taking positive and fairly aggressive measures to lend to HAM-based projects.
A project requires an appropriate bid to succeed. But there is also a lot of managerial efficiency involved. There are a number of build-operate-transfer projects which have languished in the past because promoters have not been able to give them the kind of due diligence required to complete them on time. This has resulted in cost overruns or the late completion of projects. Further, there have been difficulties in assessing the actual traffic count versus the count estimated, inaccurate forecast of the number of users as well as incorrect evaluations of the overall revenue and the cost of borrowing. Moreover, the economic scenario and the actual O&M cost have also been wrongly assessed and the residual value of the project at the end of the concession period wrongly estimated. This has resulted in projects being abandoned.
The road ahead
In light of the above issues, a suitable PPP model needs to consider the structuring of the project, the quality of the bid documents, the quality of risk balancing, the commitment of NHAI, the choice of the concessionaire and the flexibility to renegotiate (as mentioned in the Kelkar Committee report). More specifically, the financial resource deficit can be one of the benchmarks for deciding whether one should go in for a PPP model or not. The technological or design innovation vacuum which may be present should also be considered. Potential concessionaires also need to have suitable market credibility. NHAI should be committed to assisting the concessionaire in overcoming regulatory hurdles from the first stage to the last. Time should not be an overwhelming constraint for awarding a project on a PPP basis. For projects that need to be completed swiftly, PPP models should not be considered. Projects such the Delhi-Jaipur highway, which were undertaken in the PPP mode, had to suffer since the concessionaires defaulted and could not bring in the right managerial efficiency. Existing interim options and steep revenue upsides linked to superior performance make a lot of difference.
NHAI is undertaking the construction of the Eastern Peripheral Expressway and is hoping to finish it by August 2017, ahead of the mandated deadline of July 2018. All aspects of the project from automatic traffic management systems to landscaping are being taken into account. The project has been divided into six packages on an EPC basis and the contractors are working to their full capacity. Work on the bridges which are to be set up across the Yamuna river has started and there is a focus on timely completion of the project.
The national highway segment will continue to offer substantial opportunity in the coming years. Overall, about 30,000 km of road projects are on the anvil, including expressways that link cities, interchanges and connectivity corridors across economic and industrial cities. Going forward, PPP projects have to be assessed on a case-to-case basis and stakeholders need to do away with a one-size-fits-all approach.