Road rows take toll on PPP projects

Written by Raj Kumar Ray | New Delhi | Updated: Jan 12 2013, 08:47am hrs
Indias ambition of ramping up infrastructure through public-private partnership may take a hit if the trend of road builders walking out of projects (such as GMR), citing delays in government clearances and land acquisitions, is allowed to continue.

The recent row between companies and the National Highways Authority of India assumes importance as the 400-odd road contracts awarded so far account for 53.4% of the total 758 PPP contracts inked by government departments. These road projects involve a total investment of R1.76 lakh crore of the total R3.83 lakh crore for all PPPs, finance ministry data shows.

Sources in the government say there are many more such road projects that have been halted due to disputes.

Apart from roads, finance ministry list shows 61 PPPs in ports worth R81,038 crore while energy sector has 56 such contracts (R67,245 crore), 152 in urban development (R29,475 crore), five in airports (R19,111 crore) and four in railways (R1,570 crore).

While the PPP wave have swept the infrastructure space in the past 5-6 years, making India one of the role models globally for such a mode of development, GMRs termination of a 16-month concession agreement with NHAI for the 555-km long Kishangarh-Udaipur-Ahmedabad highway project, and GVKs threat to pull out of the 330-km Shivpuri-Dewas project have led to doubts over the viability of such contracts.

Although the road transport ministry and NHAI are weighing various options, including barring GMR group from bidding in upcoming projects for a few years, it does not resolve companies problems, which range from getting environmental and forest clearances, land acquisition and arranging long-term funds.

The main problem with road projects is land acquisition. Environmental and forest clearances are also delaying the projects. The delay in these projects is a major risk for lenders, said SK Goel, chairman of India Infrastructure Finance Company, which funds long-term projects.

From the builders perspective, he said The main reason for pulling out of a stalled project is selling the existing venture and invest the money in new projects. Companies are not exiting projects where they are making money.

With the conflict between NHAI and builders coming out in the open, Fitch on Friday pared its outlook on Indian construction companies to negative for 2013 from stable in FY12.

This is due to continuing challenges in order execution, which have resulted in stretched working capital. Liquidity as well as leverage has been adversely affected in many construction companies that have ventured into build-operate-transfer (BOT) projects due to the challenges in raising equity to fund these projects, it said.

While order books continue to be strong, the rating agency pointed out that execution has not picked up due to various issues. Delays are seen in the commencement of execution of new projects due to delays in obtaining clearances from the government. Ongoing projects are exposed to delays due to inadequate funding and disagreements over contractual terms, leading to delays in the clearance of bills from officials. Land acquisition issues delay both commencement of new projects as well as completion of ongoing projects, it added.

While problems in road projects have come to the fore, PPPs in other sectors have run into problems GMR had to renegotiate its agreement for the Delhi airport and was forced to half airport development fee to R100 for the domestic terminal and R600 for the international terminal while prolonging the concession period.

The countrys largest PPP project the R21,000-crore elevated rail corridor in Mumbai has hit a roadblock even before the plan could take off as the mandatory state support agreement (SSA) was yet to be signed between the railways and the government of Maharashtra despite Prime Minister Manmohan Singh insisting on completing the process by December 21. Companies like L&T, Gammon Infra and GMR Infra have shown interest in the project.

The slow progress or halting of infrastructure projects have hurt the capital goods sector and overall industrial and economic growth. Capital goods output fell during April-November, dragging IIP growth to just 1% year-on-year during April-November 2012 from 3.8% in the same period of 2011.

The government has in the recent past announced some major reforms, but there are some more that need to be announced quickly to boost business confidence. Also, what is needed now is that the government should quickly resolve ground-level problems through bodies such as the Cabinet Committee on Investment to stimulate economic activity in the country, said Naina Lal Kidwai, president of FICCI.

Incidentally, a majority of PPPs have been awarded in southern and western states Karnataka has 104 PPPs valued at R44,659 crore, Andhra Pradesh has 96 PPPs worth R66,918 crore, Tamil Nadu has 43 PPPs worth R18,629 crore, Kerala has 32 PPPs worth R22,282 crore, Maharashtra has 78 PPPs valued at R45,592 crore and Gujarat has 63 PPPs worth R39,637 crore. Infrastructure development through PPPs has helped these states to post economic growth rates much higher than the national average of 6.5% in 2011-12 and 8.4% in 2010-11.