PPP in Roads and Highways: A reality Check

Continuing with its exclusive series of conferences on the Road sector, Infraline Energy organized its Third annual Conference on Public Private Partnerships (PPP) in Roads and Highways on December 16, 2013 in New Delhi. The underlying objective for organizing this conference was to bring numerous stakeholders in roads and highways sector landscape together to brainstorm on many complex issues adversely impacting the sector and for jointly evolving workable solutions for consideration by policy makers. The Conference was well received and this paper captures the key messages and key recommendations/ action points which emerged from this one day Conference.

Hon’ble Shri Oscar Fernandes, Union Minister for Transport, Roads and Highways, delivered the inaugural address. The distinguished gathering included top policy makers from GOI Ministries and Cabinet Secretariat, many project developers, investors and representatives of industrial associations who had serious interactive deliberations on various aspects related to the experience with the implementation of PPP model in the Roads and Highways sector and what is the need of time to build and restore investors confidence in this sector.

The Conference covered  an overview of the sector,  sector status and key challenges, risks profiles and their mitigation strategies, technological advancement, policy and regulatory reforms needed,  new and innovative financing mix for the projects, and need for  devising comprehensive framework for future growth of this crucial national infrastructure.

The Key Messages

v  Road sector is crucial for the growth of the economy. The development of Roads is directly related to the development of the nation as it helps in connecting farm lands  and centers of economic activities to the mainstream of the market, employment generation, poverty alleviation and ultimately to the economic prosperity and social well being  of the nation

v  As per an ESCAP study “one million rupees spent on road construction leads to 7 times reduction in poverty than similar amount spent on other poverty alleviation programs”.

v  India needs world class roads and highways infrastructure for achieving and sustaining economic prosperity

v  Transport sector contributes to 6 percent to country’s GDP and share of roads sector alone is around 70 percent of it

v  During Twelfth plan, out of total estimated investment of around INR 4.8 Lakh crore in infrastructure space a provision of INR 3.2 Lakh Crore has been made for NHDP phases. Private sector is expected to assume major responsibilities and GOI is anticipating around 50-60 percent contribution from it

v  The year 2011-12 was a golden period for PPP projects. During that period around 8000 km of road contracts were awarded which led to increasing the targets to 9500 km for 2012-13 however this was not successful due to lack of interest manifested by lack of bidders, ongoing financial crunch, non viability of projects under the offered terms, experiences from the operating projects, and delay in achieving financial closures for the concessionaire

v  PPP model has not delivered as a) Public component has not come up to the expectation and b) the appetite of big companies to take mega projects appears limited. The spirit of partnership in PPP is rather missing. There is some conflicting role of Government due to its Sovereign Position and as Commercial Partner

v  The experience of private sector with PPP in Roadways at present is not very healthy one. The project developers have been confronting many challenges like Land Acquisition, Environment, Forest and Wildlife Clearances, poor performance of contractors, lack of project management skills, non availability of Labor and project financing.

v  As out of 151 highway projects, 101 projects were delayed on account of land acquisition problems and delay in statutory clearances. GOI is thus largely responsible for such situation as time over runs, policy changes (Land Acquisition Bill etc) would push up the project costs significantly thus depressing the projects viability.

v  One of the major contributory factors is the provisions contained in Land Acquisition Bill which has made all processes more cumbersome. Additionally economic slowdown and aggressive bidding have also led to the non completion of few projects on time

v  It emerged following deliberations that the PPP projects could be made viable if it can sustain 40 percent Viability Gap Funding (VGF) and it has to be 4-6 Lane to recover the cost

v  Delays lead to time and cost over runs as inputs become more expensive it was therefore suggested that the raw material prices should be indexed to the Producer Price Index

v  It was felt that bidding should only be permitted within a ‘’Range’ and, as per the international practices, bids beyond the range should be rejected.

v  The sector is facing projects financing crunch because of the non viability of the road projects also resulting from. Issues like overestimation of Traffic, taxation like capital gain tax, exit norms of the main contractors, the replacement of good contractors (A Class) to Sub contractors  (C class) leading to bad quality of roads,  etc.

v  There are huge number of ongoing disputes, involving 1600 arbitration cases amounting to INR 11,100 Crore investments, 1100 cases being examined by tribunals and 500 cases pending in courts.

v  It was highlighted that some 500 top listed companies are sitting on the cash pile of Rs 9 Lakh Crores and top 40 PSUs have Rs 2.5 Lakh Crores at their end. Appropriate policy reforms and enhancement of bank ability of road sector could attract deployment of such funds

v  For fast tracking statutory approvals of infrastructure projects worth above INR 1000 crore a Project Monitoring Group, formed under Additional Secretary Cabinet Secretariat, has been expediting required approvals and coordination among stakeholders in a transparent on line process

v  The experience and limitations faced by commuters using toll roads also came up for discussions. It emerged that adoption of Electronic Toll Collection techniques and latest software to forecast and monitor traffic on the roads would bring in many operational efficiencies. Globally 80 percent of Toll collection takes place electronically and 20 percent manually but in India it is other way around

v  India lacks high quality companies/contractors for the road sector and generally too many bidders chase few project bidding with doubt able capabilities. This makes the whole process time consuming and inefficient

The Road Ahead- Key Recommendations

v  The government should act as a facilitator and not as the regulator given the stage of development of Indian road sector and the emerging needs to expand this sector in a more time bound manner. It should provide favorable environment and stable policies to attract higher investments in Road sector

v  There is a need for more comprehensive risk mapping and risk sharing among parties. Certain risks like statutory approvals, land acquisition can be best handled by Government/its nominee. The Demand risk can be addressed by awarding the project on least PV of tolling basis. Finally Government must bring in some predictability or the road map for the sector

v  Proactive Stakeholder engagement should be promoted and private concessionaires should be treated more as partner rather than equity investor

v  Project Monitoring Group Cabinet Secretariat threshold limit should be reduced to include smaller projects as well. As bulk of the problems facing road projects relate the State Governments, some innovative approach is needed to make Sate Government partners in such projects as they are the largest beneficiaries of such infrastructure

v  India lacks good contractors needed for the sector and project management skills are found to be weak. Imparting training on project implementation management could be a positive step

v  UMPP model of Ministry of Power where the responsibility of clearances lies with the government should be replicated for Roads sector as well

v  There should be proper utilization of Long term debt funds to maintain liquidity in the sector

v  Model Concession Agreements should be re-framed and made flexible to the changing situations

v  There should be easier and transparent exit norms for the concessionaire who completes the projects

v   Innovative approach should be adopted by regulators like Guaranteed returns, risk sharing, fiscal support, tax holidays 

   

                              

          Infraline Energy Roads Research Team