How to clean up the PPP mess

In his first interaction with the media after taking over as the Union Minister for Road Transport, Highways and Shipping, Nitin Gadkari said one of his priorities would be to tap the Ganga’s potential for moving goods and passengers.

Indeed, it is an admirable thing to begin with, given the country’s untapped potential of inland waterways as a low-cost and eco-friendly mode of transport. Also, it is in line with the BJP’s manifesto, which promised to clean up all the major rivers in the country.

However, an equally important and urgent task before the minister is to clean up the mess that the UPA-II has left behind in public private partnership (PPP) projects in the road and port sectors.

The ambitious National Highways Development Project has hit not one but several roadblocks over the past couple of years, leaving a huge gap between targets and achievements.

Many similar projects have remained incomplete for various reasons. Private developers who bid aggressively for a large number of projects got stuck, with banks refusing to lend further.

Disputes, litigation and the usual blame game followed, and, as a result, what started off with enthusiasm and overwhelming response from private investors stalled halfway.

The situation in the port sector is no different, though the projects pending there are fewer in number.

Like the highways, PPP port projects also started off well, but along the way discriminatory tariff regulations and delays in decision-making by port officials and their bosses in New Delhi, made life miserable for most private investors.

Here, too, disputes and litigation followed, and port expansion plans got stalled. Several cases are still pending in various courts across the country against the tariff regulator’s orders cutting port charges.

What went wrong with PPP projects? As Ajay Saxena, PPP expert from the Asian Development Bank, puts it, there is something basically wrong with the way PPP projects are awarded.

Currently, there is no PPP policy as such. There is only a model concession agreement. The projects are awarded to the bidder offering highest premium or revenue-share. There is no scope for negotiation on the price bid.

This leads to aggressive bidding and finally the revenue calculations go awry.

This is exactly what had happened in the case of highways projects. Private developers who were eager to bag more projects, made aggressive (revenue) bidding based on traffic projections made on the assumption that GDP growth would be 7-9 per cent.

Encouraged by the developers’ response, the National Highways Authority of India (NHAI) went on awarding more and more projects without taking into account their risk-profile.

When the actual economic growth turned out to be below 5 per cent, the traffic estimates went haywire and private investors found themselves virtually on the road.

Port projects also got delayed or stalled because of aggressive bidding. A classic case is the fourth container terminal at Jawaharlal Nehru Port. PSA International of Singapore had bagged the project in 2011, agreeing to share 52 per cent of the revenues with the Government.

After the project was awarded, the bidder refused to sign the concession agreement, forcing the port trust to withdraw the letter of award. Two years later, the same project was re-tendered and the same company was given the project but at a much lower revenue share of 35.75 per cent.

In the process, not only was the project delayed by more than two years, its cost too had gone up by ₹1,500 crore.

The case of the highways is a lot more serious than ports. At stake are huge investments.

The immediate task, as pointed out by SK Agarwal of SBP Caps, a leading fund arranger for infrastructure projects, will be to restore the confidence of all stakeholders to help get the stalled projects back on track.

This could be done first by resolving the pending issues and settling claims. It would be possible only if all stakeholders agree to take a hair-cut, as suggested by Kishore Gandhi, Chief Credit Officer, India Rating and Research.

On the policy front, a review of the existing PPP structure with a view to put in place a mechanism to prevent unrealistic aggressive bidding, could help save future projects.

Officials should be in a position to award projects based on the realistic assessment of the price bid without the risk of being questioned in the future.

Simultaneously, there should be an easy exit option, for PPP project developers.

Equally important is to create long-term sources of funding for highways projects. Currently banks provide funds for five to ten years while the project’s financial viability is based on cash flow of more than 20 years, points out Nripesh Kumar, Director, PWC India.

In the port sector, resolving the PPP issues effectively requires a change in the management structure of the government ports which are run by boards of trustees. The best way to do it is to corporatise all government ports — a decision taken by the Government a decade ago. If this is done half the battle will be won.

The next step should be to go for the landlord model where the Government will only own the land and waterfront; the port will be run by private parties. Currently, the Government also competes with private operators at ports.

Finally, do away with tariff regulation which is only helping shipping lines, not other port users like exporters and importers.

Building roads and highways is not something new for Gadkari. He has many successful projects such as the Mumbai-Pune Expressway to his credit.

Yet, he may need to devote a lot of time to clean up the PPP mess in the highways and ports sectors.