Citing no interest of private players in highway sector to take projects under public-private-partnership (PPP) mode, the NDA government will now roll out projects on cash contract or engineering, procurement and construction (EPC) mode at least for 2-3 years.
Under this mode, government bears the construction cost and developer exits the project after building the stretches. So, the developers have no risk in executing such projects unlike the PPP ones.
Announcing this on Monday, road transport minister Nitin Gadkari said that his ministry is trying to arrange finances to take up projects on government funding or EPC mode. “Taking up more projects on public-private-partnership (PPP) is not feasible.
We have to go ahead with EPC projects for at least next two years,” he added while blaming the issues “created by the previous government”.
At present, while 160 highway projects are under imple
mentation on PPP mode entailing an investment of Rs 1.6 lakh crore, there is no progress in case of 65 projects.Out of these 65 projects, 28 have been terminated and fate of another big project is likely to be decided very soon.
The CEO of a major highway construction company told TOI, “As such we have not take any project on PPP mode in the past three years. At present, none is interested considering the risk and prevailing market condition. We are struggling to complete the already bagged projects.” Sensing that government has to create a huge corpus to pay for projects on cash contracts spanning over 2-3 years, Gadkari said that his ministry is going to set up a corporation that will deal with financing of such projects.
Gadkari on Monday said that he has already written to the Prime Minister and finance minister for getting portions of huge amount PF lying with the labour ministry as loan to the corporation.
The favoured PPP route ran like a common thread in Mr. Jaitley’s speech when he touched upon sectors such as urban renewal, urban transportation, real estate and gas pipelines.
To revive manufacturing and infrastructure to raise resources for developmental needs
Pointing out that public private partnership (PPP) has delivered iconic infrastructure like airports and highways, Union Finance Minister Arun Jaitley on Thursday maintained a steady focus on PPP in his maiden Budget for 2014-15, announcing a number of steps to fast-track such projects in several areas.
In his Budget speech, Mr. Jaitley proposed setting up of an institution, called 3P India, with a corpus of Rs. 500 crore to provide support to mainstreaming PPPs.
The stamp of ‘Modinomics’ could not be missed in favouring the PPP route for development as the BJP’s manifesto and Prime Minister Narendra Modi rooted for it to help create world-class infrastructure in the country.
However, Mr. Modi during his tenure as Gujarat Chief Minister had added another ‘P’ (People) to it to signify people’s involvement in such project and the 4P concept was successfully tried in the Vadodara Halot Toll Road project.
The favoured PPP route ran like a common thread in Mr. Jaitley’s speech when he touched upon sectors such as urban renewal, urban transportation, real estate and gas pipelines.
“The task before me today is very challenging because we need to revive growth, particularly in manufacturing and infrastructure to raise adequate resources for our developmental needs,” Mr. Jaitley said.
Largest PPP marketThe Finance Minister said India had emerged as the largest PPP market in the world with over 900 projects in various stages of development. Iconic infrastructure like airports, ports and highways, delivered through PPPs, are seen as models for development globally, he said.
Sounding a note of caution, Mr. Jaitley said: “But we have also seen the weaknesses of PPP framework, the rigidities in contractual arrangements, the need to develop more nuanced and sophisticated models of contracting and develop quick dispute redressal mechanism.”
He reiterated the government’s commitment towards improving infrastructure in all sectors including roads, port, airports, railways, urban, rural and industrial infrastructure besides ensuring adequate flow of funds and financing of projects.
Mr. Jaitley proposed to develop an additional 15,000 km of gas pipeline systems in the country using appropriate PPP models.
“This will help increase the usage of gas, domestic as well as imported, which in the long-term will be beneficial in reducing dependence on any one energy source,’’ Mr. Jaitley said.
Govt allocates Rs 37,880 cr for NHAI; sets a target of constructing 8,500 km of highways.
The road sector got a major boost on Thursday as the government announced it would invest Rs 37,880 crore for the National Highways Authority of India (NHAI) and set a target of constructing 8,500 km of highways in the current financial year.
In his budget speech, Finance Minister Arun Jaitley said steps would be taken to encourage the private sector to partner with the government in executing big-ticket infrastructure projects. As a key step, he said, an institution called 3P India would be set up with a corpus of Rs 500 crore to help execute public private partnership (PPP) projects. For project preparation, NHAI would set aside Rs 500 crore, he said.
Setting an ambitious target of constructing 8,500 km of highways this fiscal, Jaitley said of the Rs 37,880 crore to be invested for highways, Rs 3,000 crore would be spent in the Northeast alone. He announced initiation of work on select expressways in parallel to the development of industrial corridors.
Jaitley said India has emerged as the largest PPP market in the world with over 900 projects in various stages of development. PPPs have delivered some iconic infrastructure like airports, ports and highways, which are seen as models for development globally. But considering the weaknesses of the PPP framework and rigidities in contractual arrangements, there is a need to develop more nuanced and sophisticated models of contracting and develop quick dispute redressal mechanism.
Stating that the Pradhan Mantri Gram Sadak Yojana, which began under the tenure of NDA-1, “had a massive impact” in improving access for the rural population, Jaitley said, “It is time to reaffirm our commitment to a better and more energetic PMGSY under the dynamic leadership of Prime Minister Narendra Modi. I propose to provide a sum of Rs 14,389 crore.”
After a dismal show in 2012-13, the Union Road Transport Ministry had scaled down its projects award target by nearly half to 5,000 km 2013-14. It could award less than 2,000 km projects in 2013-14. In 2012-13, the ministry was barely able to award 15 per cent of the targeted 9,500 km of highways on account of a number of factors, including delay in clearances and equity crunch by developers.
“The road sector constitutes a very important artery of communication in the country. The sector had taken shape from 1998-2004 under NDA-I. The sector again needs huge amount of investment along with debottlenecking from maze of clearances,” Jaitley said.
Arguing that metro projects have helped in de-congesting cities, he said Rs 100 crore has been earmarked in the budget for metro projects in Lucknow and Ahmedabad.
A National Industrial Corridor Authority, to be headquartered in Pune, would be set up with a corpus of Rs 100 crore to coordinate the development of the industrial corridors, with smart cities linked to transport connectivity, he said.
Saying development of ports is critical to trade, he said 16 new port projects are proposed this year. He announced allocation of Rs 11,635 crore for development of outer harbour project in Tuticorin for phase I.
Jaitley announced a new scheme to develop airports through PPP and hiked allocation for the Civil Aviation sector by over 11.4 per cent to Rs 9,474 crore.
Govt not to award BOT projects to pvt firms this year
The road transport & highways ministry, after failing to get an encouraging response from the private sector, has decided to shelve its plan to bid out highway projects on a ‘build, operate and transfer’ (BOT) basis, at least for this financial year. The ministry will now award 5,000 km of road projects under the ‘engineering procurement and construction’ (EPC) model, signalling an end to the country’s ambitious plan to partner with private companies in the roads sector.
The ministry, looking to award 2,800 km of projects, worth Rs 27,000 crore, through the BOT route during the first six months of the financial year, had also planned to conduct roadshows abroad to attract foreign investments in the sector. But, in the wake of a slowdown in the economy and a lack of funding, private companies chose not to bid for these projects.
The government had embarked on a massive public-private partnership (PPP) regime over the past decade and awarded to private companies a number of projects, some of which have now run into financial problems. “We have no plans of awarding BOT projects this year and we hope the environment will be better next financial year. But that does not mean an end to BOT projects. As of now, we are looking to award 5,000 km of road projects through the EPC route,” Road Secretary Vijay Chhibber told Business Standard. He, however, did not give details of the number of projects to be awarded.
According to industry estimates, the government will now have to spend about Rs 40,000 crore to develop roads through EPC. Unlike the BOT model, the government funds the entire project under EPC and a developer undertakes the necessary construction work. BOT requires a private-sector developer to raise and invest money for the construction of roads at its own risk, while the National Highways Authority of India (NHAI) acquires land for the project. Given an economic slowdown, the government could not award close to 20 projects during the current financial year under BOT.
“We had set a target of 9,000 km for the year; we need to keep the projects moving. We decided to move on to the EPC route as the BOT projects were struggling. There is also a proposal to embark on roadshows abroad to attract investments; we will tap a number of countries,” another road ministry official said.
A number of road projects, including the Delhi-Gurgaon and Delhi-Jaipur expressways, that were awarded during a privatisation drive, have led to problems between the government and concessionaires, raising serious concerns over the BOT model. In addition, the private companies have also been seeking the government’s intervention to get rescheduled the premium they owe NHAI. Calculated on the basis of future flow of traffic, a premium is the amount a developer pays NHAI as it believes the returns through toll from the project would be higher.
The finance ministry is now awaiting recommendations of a C Rangarajan-headed committee, set up to decide on the quantum of premium to be rescheduled. The government is also considering a proposal to set up by next year a road regulator to address a host of issues faced by private road developers.
Industry experts and officials say the absence of a single-window clearance is one of the main reasons for investors to stay away from the country’s BOT projects. Often, projects take close to five years before work finally starts. This is mainly because of land acquisition hurdles and delays in environmental clearances. This year, the road ministry had to scrap seven projects, worth Rs 3,000 crore, due to land acquisition issues in Kerala and Goa.
Experts also point out that the consultants appointed by NHAI are also to be blamed for a number of BOT projects being affected. According to officials, while the Delhi-Jaipur expressway was being planned, the consultants engaged by NHAI proposed that 80 bypasses be constructed, though the actual need was of 124.
“Consultants should be made answerable to the government. They do not provide a complete picture and the concessionaire struggles because of that. As far as EPC projects are concerned, the government came up with the idea of PPP route since they could not fund all projects. Now, they are going back to the EPC mode and, in the current economic scenario and the fiscal deficit facing the government, we are not sure how they will be able to fund the projects”, said M Murali, director-general, National Highway Builders Federation.
SUMMARY- EPC route was adopted for projects that received or were expected to receive poor response in PPP bid
The column “Toll time for UPA” (FE, September 25, goo.gl/3yr40K) highlighted a few issues and included a commentary on the reported reluctance on the part of NHAI to follow the government policy of building highways through PPP. Here, I aim to clarify the issues raised in the column (in bold).NHAI is not keen on following government policy of building projects through PPP but wants to go back to the bad old cash contracts wherein NHAI engineers decide whether a road has been built properly and then release payments.
NHAI has awarded more than 150 projects on PPP since FY10 under the model concession agreement (MCA) and most of these are in various stages of implementation. However, since FY13, a large number of projects under PPP mode did not receive any response from the bidders. Seventeen projects on BOT (toll) and three projects on BOT (annuity) did not receive any response even though these projects were put to bid at least once, and even five times in some cases. The reason for poor or no response to the bids for BOT (toll) road projects is acute shortage of equity and over-leveraged and deeply stressed balance sheets of the prospective developers. Private equity funds and other players are not willing to fund the equity requirements of new or under-construction PPP projects. For want of suitable empowerment, NHAI is not able to proactively manage the concession agreements even in situations where the underlying conditions have undergone a drastic change. Even if NHAI gets bids in few BOT (toll) projects, it is likely to be sub-optimal. In such a stark backdrop, NHAI had proposed that all projects, where there has either been or there is likely to be poor or no response, should be taken up under EPC mode. However, NHAI is not against PPP and is still inviting bids on BOT (toll) basis in appropriate cases.
The contention that NHAI is planning to go back to the old EPC contract on item rate basis is misplaced. NHAI has adopted the EPC mode whereby the design and construction responsibility is assigned to the contractor for a lump-sum price and the monitoring and supervision is to be undertaken through a qualified firm selected through a transparent process as per the new EPC guidelines. In fact, India’s PPP success story is almost entirely attributable to NHAI which carried out over 240 highway projects through PPP mode.
Instead of junking privatisation process, NHAI can moot for higher VGF.
As per the MCA, VGF is limited to 40% of the TPC which is roughly equal to 50% of civil cost. Any further increase in VGF will undermine the private partnership in the project. There is a need for a judicious mix of PPP and EPC projects on the basis of viability and optimally roll out of projects available on shelf.
NHAI engineers’ insistence on more over-bridges instead of underpasses raises the cost as it does not make sense to make a 4/6 lane road go over an existing 2-lane structure.
The myth that NHAI is insisting on sub-optimal solutions, providing overpasses (wherein the crossroad will go over the highway) instead of underpasses is not based on technical considerations but seems to be based on the experience of green-field motorways abroad without taking into account ground realities from an Indian perspective.
NHAI’s proposal for stopping toll collection during construction period of 4/6 lane projects shall increase financial stress to the developers.
Our proposal is based on experience, public perception and future perspective. During construction, many road diversions are created, resulting in a constraint of carriageway, hampering smooth flow of traffic. Taking advantage of the present MCA, the concessionaires, under the pretext of NHAI’s default on account of non-availability of land in isolated pockets, do not carry out the work with due diligence even on the available fronts. It was observed in most of the four- to six-lane projects that the concessionaire does not get any bonus from additional revenue for early completion of the project as toll collection commences from the date of commencement of construction.
NHAI need not counter-sign every loan refinancing, which is the crux of its dispute with IDFC on the Delhi-Gurgaon Expressway, as long as the amount it pays on termination of a project remains unchanged and the agreement to get a part of the upside toll once traffic on a road exceeds a certain target.
Breach of trust, hoodwinking concession agreements cannot be good business practice. However, the matter is sub-judice. As per the concession agreement, the concessionaire shall not make any modification to any of the project agreements without prior written consent of NHAI where the modification has or may have the effect of increasing or imposing any financial liability or obligation on NHAI in any manner. One cannot jump to any conclusion at this juncture.
Impressed with China’s highways infrastructure and superior standards for construction and maintenance, a bilateral pact on cooperation in the road transportation sector is set to be signed between the two countries during PM Manmohan Singh’s visit to China next week.
At 65,000 km China has world’s second largest network of expressways. So far, however, China has a limited presence in India’s highway sector. Only six Chinese companies, under joint ventures with Indian firms, are involved in building highways. All six companies have participated and won the bids for the projects.
The broad area where India wants to seek cooperation includes management of road infrastructure technology, standards for highway construction and maintenance, road safety intervention strategies aimed at reducing death and injuries resulting from road accidents, etc. India also wants to know more on how China has dealt with contractual issues and financing of highways build in public private partnership mode.
(There is scope for more models to build highways.)
The Highway Ministry would like provisions in the public-private partnership contracts that allow re-negotiations. For this, it wants the model concession agreement to be amended.
A model concession agreement is the contract between highway developers and National Highways Authority of India (NHAI), which spells out the rights and responsibilities of each party.
The Ministry batted for a flexible concession agreement, which permits the NHAI Board to decide on such issues, since the Board has representation from Secretaries of Highways Ministry, Planning Commission and Expenditure Ministry.
“Public-Private Partnerships (PPPs) are long-term partnerships spread over 20-25 years. No economist can predict correct growth rates for periods beyond three or four years. You don’t know what externalities will crop up in the eco-system of a road project,” said Rohit Singh, Joint Secretary-Highways, speaking at a PHDCCI seminar here on Wednesday.
“There is a distinct need for re-negotiation. Unfortunately, the model concession agreement has a rigid framework, even though it has its strengths. Even for small changes, we have to go to the Cabinet. That takes time and justification at various levels,” said Singh.
This stance comes in the backdrop of Cabinet finalising the modalities of a proposal to permit re-scheduling of premium payments for highway developers, which is basically a type of contract renegotiation. Premium is what developers pay to Government for bagging the rights to build and maintain a highway stretch and collect toll from its users.
INNOVATIVE PPP MODELS
Singh also said there is scope to have more PPP models to build highways, depending on the kind of climate.
For instance, there could a hybrid model, where developers get some payment from Government every year and can also collect toll from a highway stretch. In the present annuity model, this is not permitted. Another option could be making concession period a bid parameter.
Singh also said the private sector has not risen to the occasion.
“They bid aggressively looking at short-term profits instead of a long-term partnerships,” he added.
Referring to the private sector taking more debt from banks than Government approved level, Singh said, “We could have specified a certain total project cost. They go to banks to take significantly more than that. I am not saying everybody does it. But there are examples where PPP projects have been implemented with zero equity from the private partner. There is a need to have sincerity on both sides,” Singh said.
NEW DELHI: The highway ministry has rebuffed the National Highway Authority of India’s (NHAI) suggestion to dump the public-private partnership (PPP) model in favour of the engineering, procurement and construction (EPC) mode.The ministry has asked NHAI to proceed according to earlier plan of building 3,000 km through PPP instead of junking the model at the first sign of trouble, an official of road, transport & highways ministry said.It has also asked NHAI to refer matters to its board before pitching any proposal to the government.According to sources, the ministry is unhappy with unilateral proposals sent by NHAI chairman RP Singh, including stopping toll in ongoing projects like the Gurgaon-Jaipur project or wanting deferral of premium to be extended across all premium projects, among others.”Just because PPP projects have not taken off in the recent past doesn’t mean we junk the model and switch over to cash-contracts. We need to innovate and try all options before taking such a step.
We’re considering options like combining annuity and toll, which would make it lucrative to investors and limit our pay-out burden,” said the official.
The highway sector, largely regarded as India’s PPP success story, took a hit in 2012-13 during which the ministry was able to award only 1,116 km of projects. Private investment too came down by 23.5% from the 2011-12 levels.
Overall, private investment has increased from Rs 1,462 crore in 2004-05 to Rs 25,999 crore in 2011-12. In terms of road length awarded, it has gone up from 1,304 km to 6,644 km during the same period.
It is these figures, the ministry says, which prove that a brief period of lull does not negate the success the sector has seen in terms of PPP.
NHAI has also pitching for suspension of toll in the six laning of Gurgaon-Jaipur project where the concessionaire has been missing deadlines repeatedly. The ministry sent a letter to NHAI on Tuesday expressing surprise and concern with ‘the manner in which references were being made to the government’.
“There is no effort at all to estimate the amount of ‘loss’ that would accrue if tolling is suspended. This would be a pre-requisite for any decision since at a later time the concessionaire is bound to raise claims against the decision to suspend toll operations,” said the letter which also suggested that “rather than having a public debate on such policy matter through the Press, your personal suggestions on these issues are placed before the board of NHAI for a considered view as the board has been constituted for this very purpose.”
Earlier this week, NHAI had written to the ministry asking the government to either take over the Delhi-Gurgaon expressway project or hand it over to the Haryana government.
The dispute between NHAI and the concessionaire is pending in Delhi High Court. The ministry has asked the authority to expedite the legal process.
After representations made by highway developers asking to be included in the premium deferral proposal, the NHAI asked the ministry to include 16 additional premium projects, apart from the 23 projects originally shortlisted, in the list.
However, road ministry officials pointed out that it was the NHAI board which had approved these 23 projects with premium amounting to Rs 1 lakh crore in the first place.
Across the infrastructure arena, defaulting PPP developers have remained relatively unscathed despite glaring contract breaches
When GMR wriggled out of a highway project for which it had paid a whopping Rs 636 Cr as premium, seeking a renegotiation of terms with NHAI last year, 2 notes of dissent from the Finance Ministry and the Planning Commission observed the following –
“Varying the payment schedule at this stage implies departure from a legally binding contract, an action that cannot be supported” – RS Gujaral, Finance Secretary
“Such whimsical changes in legally binding contracts is a poor reflection on the credibility of government and its agencies” – Sindhushree Khullar, Plan Panel Secretary
Gujaral’s note also expressed unease about this becoming a precedent for other contracts in similar distress.
His words must be ringing loud in the ears of road ministry officials today as the government sets to pick up the tab for a staggering Rs 1.5 lakh crore to bail out private developers, if a proposal mooted by the ministry goes through. A Business Standard report (read here) reveals that a total of 39 projects are likely be approved under this plan, which will entail rescheduling of premium payments to NHAI. Projects include ones bagged by marquee names like Larsen & Tubro, Ashoka Buildcon and IDFC among others.
Premium is the amount paid by a concessionaire to NHAI during the bidding of BOT (build-operate-transfer) projects which are expected to give very high returns. In the good times, when liquidity was abundant, corporate balance sheets were in the pink of health, India was growing at 9% and there was a slugfest among bidders for bagging lucrative contracts – private developers threw caution to the winds and paid hyper aggressive premiums for projects. They based their calculations on brash projections of future traffic growth, reflecting the audaciousness that’s often seen in a booming economy.
But as growth plummeted, that swagger evaporated, and traffic projections went out of whack (by as much as 45% on the down side in some cases according to Fitch) developers are being seen queuing up at the government’s doorstep for help, with the ministry more than willing to oblige, no matter that its own fiscal situation is more precarious than ever.
Think of what would have happened in a reverse scenario. Would the concessionaire have agreed to a revision of terms had profits zoomed higher than projected? Clearly not!
But the argument of the ministry seems to be that inaction will shake up the entire road sector and have a cascading impact on the rest of the economy, so this is the best way out of the mess. Experts agree.
“In this first phase of PPP in the last 15 years, there have been huge learnings for both the government and the private sector. While developers miscalculated projections, there were many things that the government did wrong as well, so I would argue for a one time reset and insist that policy be framed clearly and transparently” says Vinayak Chatterjee, Chairman of Feedback Infrastructure.
Government sources insist that it is a ‘one-time relief’ proposal indeed, and not a policy. But relief for some means a lost opportunity for others (companies that lost out on the bids because of undue aggression by winners) and an easy way out for the barrage of non-serious players who had entered this business to make a quick buck.
A more rigorous approach to this ‘reset’ could have entailed measuring the depth of stress of each developer minutely and granting only those genuinely unable to cough up the cash, a chance at premium renegotiation. But experts feel that would be impractical and also led to potential litigation for being discriminatory in nature.
Whatever be the satisfactory solution to this quagmire, what’s clear is that across the infrastructure arena, PPP projects have been battling similar issues – be it with the UMPPs (Ultra Mega Power Projects) in the power sector, or the entire gas pricing debate in the petroleum space. In each of the cases, whether it’s Adani and Tata with regards to higher compensatory tariffs for UMPPs, or Reliance Industries which would benefit from the Rangarajan formula – it is the developers who’ve gotten away relatively unscathed, despite a glaring divergence in what they’ve promised, and what they’ve actually been able to deliver. The government meanwhile, has been left with no choice but the renegotiate contract terms and conditions keeping the larger good of the economy in mind.
Having presumably learnt from these failures, the hope now is that phase II of PPP in India will be less thorny.
NEW DELHI: With few takers for road projects, the National Highways Authority of India (NHAI) wants the government to stop bidding out road projects through the public-private-partnership (PPP) route. Instead, the authority in a recent communication to the highways ministry has recommended that projects should be awarded in the form of cash contracts when the government finances the construction and maintenance for two years.
Citing that even the recent move of allowing developers to exit from already operational projects to release their equity has not solved the problem, NHAI chairman R P Singh has said in a letter, “We feel that there is no sense on going on bidding projects under PPP mode until market sentiment improves. Even if we get a bid, the same will be sub-optimal on account of lack of equity with the developers.”NHAI chief has said a large number of PPP projects both under toll and annuity — where government pays back the private players’ investment in installments — have not received any response recently. Singh said once highways are built on EPC (engineering, procurement, construction) mode, NHAI can take over tolling for the next two years since for that brief period the contractor is responsible to fix any defects on the road stretch. Subsequently, these can be bid out on operation and maintenance (OMT) contract where operators are allowed to charge lower toll for road upkeep and to earn marginal profit.
Pushing the EPC mode, Singh has said NHAI has been receiving bids for EPC projects and substantially below the total project cost (TPC). In case of PPP contracts both bidders and bankers have been alleging that TPC fixed by NHAI is underestimated.
To meet the fund requirement for EPC contracts, NHAI chief has said the ministry can allow it to raise higher amount through tax-free bonds and other instruments, besides restoration of the held back cess from fuel sale, which is at least Rs 7,000 crore.
There is, however, no decision on the proposal. On Monday, highways secretary Vijay Chhibber told a conference organized by Ficci that the issue is a matter of discussion between NHAI and the ministry. In his address he said that this year about 6,500 km is targeted for awarding through cash contracts.
The finance ministry said gloom for PPP projects was overdone. Economic affairs secretary Arvind Mayaram said about 50% of such projects are doing well. “Traditionally, we (were) used to paying the private sector to do a job in two-three years after which the relationship ends. Now, the issue is how to manage relationships in post award framework,” he said.