As part of the New Metro Policy, 2017, the Government of India has made the public-private partnership (PPP) component mandatory for states to avail of central assistance for new metro projects. Metro projects are capital-intensive and their demand is continuously increasing. The involvement of the private sector brings in technology and innovation, which will result in improving operational efficiency. Further, private players are being incentivised to deliver projects on time and within budget. Commercial viability and procurement of land are some of the constraints faced in metro projects.
Need for PPP projects
Faced with constraints in acquiring public resources and recognising the importance of investment in infrastructure to help economies grow, governments are increasingly turning to the private sector as an additional source of finance to meet the funding gap.
Some other reasons for governments to use the PPP model are introducing private sector technology and innovation to provide better public services through improved operational efficiency, incentivising the private sector to deliver projects on time and within budget, and providing budgetary certainty for the government by setting present and future costs of infrastructure projects over time. Also, PPPs can be utilised as a way of developing local private sector capabilities in areas such as civil works, electrical works, facilities management, security services, cleaning services and maintenance services. They supplement limited public sector capacities to meet the growing demand for infrastructure development. Further, PPP projects help in extracting long-term value for money through appropriate risk transfer to the private sector over the project life – from design and construction to the operation phase.
Potential risks for PPPs
As in any other infrastructure project, risk is inherent in all PPP projects and in fact higher than in government-owned projects. The development, bidding and ongoing costs in PPP projects are likely to be greater than those for traditional government procurement processes. Also, there is a cost attached to debt which contributes to the higher project cost. The private sector can make it easier to get finance, but it will only be available where the operating cash flows of the project are expected to provide a return on investment. Thus, the higher cost of PPP projects has to be borne either by customers or the government through subsidies. Furthermore, private firms (and their lenders) will be cautious about accepting major risks beyond their control, such as exchange rate risks/risk of existing assets. Private firms want an assurance on increasing tariffs/fair regulation, etc.
It is also very important for parties to realise that due to the long-term nature of these projects and their associated complexity, it is difficult to identify all possible contingencies during project development and events and issues may arise that were not anticipated in documents or by parties at the time of the contract. In this context, it may be worthwhile to ponder over whether the parties in a PPP contract should be allowed to renegotiate the contract to accommodate the ground realities during the course of project implementation.
Some takeaways from the implementation of the Hyderabad Metro project
Projections provided in the detailed project report proved to be unreliable. Part of the reason could be miscalculation on the timing and amount of support available/required from local authorities for a modal shift. On the cost side, there were no benchmarks available for operations and maintenance costs.
Banks rely on projections provided by the bidder for their credit assessment. As a result, banks tend to seek support from the promoter for achieving financial closure. Banks were further constrained by the fact that the concession agreement does not provide them the right to create encumbrance over project assets. As a result, the original intent of PPP projects to have non-recourse financing made available for such projects does not get fructified.
Due to the large number of litigations/agitations faced by the government during land acquisition the appointed date for the project was delayed significantly.
Construction and operation
All approvals are in the scope of the private party – environmental, fire, police, municipal authorities, railways, etc. Frequent conflicts of interest between various government authorities delay approvals. During the agitation for the Andhra Pradesh state bifurcation, construction was put on hold in some areas, while the government requested to rework the alignment. Further, the introduction of to rework and services tax led to a change-in-law circumstance for the project.
To add to this, the pandemic forced the concessionaire to shut operations for six months and only limited operations were allowed for more than a year.
Rebalancing the PPP model
In this context, there is a need for a model concession where the private player bears risks related to operations and commits unlimited amount of capital. On the other hand, the government is committed to delivering various statutory approvals on time and providing fixed return on equity or fixed annuity payment to the private party, based on the expended capital. This will help in balancing risk on both sides.
Some recommendations for future PPP projects
- Bidders may be allowed to suggest modifications to the contract/concession agreement. Then, the government may evaluate bids based on the combination of suggested modifications and qualification of the lowest bidder.
- To facilitate course correction at regular intervals, periodic assessment of the project progress is required. At the same time, there is a need to establish a transparent, objective framework for renegotiation/amendment of the terms of concession agreements to reflect new project realities in a time-bound manner.
- A process to facilitate longer-tenor financing through provision of sovereign guarantee may be explored. Perhaps, this can be structured even as a secondary layer of support, but linked to the actual project cost.
- Developers may be provided with a single window through a government agency/regulator for time-bound statutory approvals involving central, state and local governments. Such an agency may be fully empowered to take decisions pertaining to the project by coordinating with the central government, state governments, municipal bodies, local bodies, railways, revenue officials, public sector undertakings, police departments, and other representatives with whom interface is required.
- The Metro Act needs some amendments too. There should be a formula-based fare revision to provide transparent visibility for future revenues.
- Standardisation of certain key equipment used in metro systems, such as signalling, traction and rolling stock, is needed to ensure spare parts availability within India. This will make all metro systems in India interoperable to the extent possible and help catalyse local manufacturing capabilities for next-generation technologies.
- There should be a better mechanism to provide incentives for performance than key performance indicator/indigenous sourcing during the operational phase.
- Finally, a smooth transfer of shareholding to the infrastructure investment trust should be allowed. This will help attract long-term private capital from pension funds, insurance companies and foreign investors.
Based on inputs from a presentation by Rahul Nilosey, Chief Financial Officer, L&T Metro (Hyderabad), at a recent India Infrastructure conference