The concession document needs a re-look

Written by Shobhana Subramanian | Updated: Jun 13 2014, 06:05am hrs
The Hyderabad metro rail, among the largest elevated tracks in the world, is on course to be commissioned in 2017. The creation of Telangana state has posed some problems especially with regard to passenger estimates for the city of Hyderabad. However, VB Gadgil, chief executive & MD, L&T Metro Rail (Hyderabad), is confident the metro will be up and running on time. In a conversation with Shobhana Subramanian, Gadgil expresses concerns about the structure of concession agreements that are drawn up between governments and developers, pointing out that a renegotiation clause must be built in. Excerpts:

What are your thoughts on the PPP model

The model is viable, provided some corrective measures are built in. For instance, there should be preparedness on both sides and the project should not be started in a hurry. There needs to be a reasonable time given for the land to be acquired and the detailed project report should be as current as possible. If the project is implemented after a gap, the plan becomes old, not having taken into account certain new developments and the developer is in trouble. In an urban environment there are several agencies working with one anotherwater, electricity, seweragewe need one agency to coordinate.

We also need to accept that there is a basic difference in the way the government and the private sector think for historical reasonsone is driven by commercial considerations, the other is not. The spirit of partnership needs to be stronger. For instance, even today, the concession agreement that is drawn up is more in the nature of a contract rather than a partnership agreement. Many of the older clauses are somewhat one-sided. Further, concessions these days are very long25-30 years. So, if you want someone to take a gamble over such a long period, there must be some flexibility built in to address unforeseeable developments that are beyond the control of the concessionaire and the government and which could affect the fundamentals of the project. Today, there is only a dispute resolution mechanism, there is no renegotiation clause if the fundamentals change and this needs to be adequately addressed.

So, a renegotiation clause is needed

If we are to look ahead for 30 years, we need some protection, otherwise developers will shy away from projects. What we need is not just a dispute resolution mechanism, we need to pencil in solutions for any changes in fundamentalsthese cannot be left to subjectivity. The ownership of risk and delivery of the project should rest with one person on either side. Although we talk of one-window clearance, that doesnt seem to be happening. There are also clauses that simply commit to assisting, there is no commitment to delivering, and it is hard for a partnership to function that way. We need to spell out the remedies for any abnormal changes. India is going through a difficult time and decisions are being delayed, which affects the project. The concession document needs a re-look.

If this is fixed, the PPP model should work

PPPs work better when the concession periods are shorter and in less dense urban areas. But it becomes difficult for a concessionaire if he is held to a strict timeline when there are cases to be resolved in court. The agreement is not always equitable and there are instances when the government gets away by doing something whereas the private developer doesnt.

Also, due to changes in the law, there are some mid-term course corrections that make the situation complicated. In Mumbai, for instance, there is a problem and the matter is in court. In fact, the substratum of the agreement itself is changing due to changes in the law. In such a situation, how do you expect us to perform

Is there a problem because of the two Actsthe Metro Act and the Tramways Act

Both the Acts have their pluses and minuses. The Tramways Act is under the jurisdiction of the state government while the Metro Act is a central Act, so the controlling authorities are different. The basic problem is that the Metro Act doesnt recognise the PPP model at all possibly because they thought the projects would be implemented by the government. As far as fares are concerned, we are given to understand the first fare will be fixed by the concessionaire. Two Acts cannot coexist, there is ambiguity and it is not healthy in a partnership to resort to litigationthe project is bound to suffer. Officially, we are governed by the Tramways Act, we havent shifted to the other Act.

How do developers deal with cost escalations as has happened in the Mumbai Metro

There should be a dispassionate scrutiny of any event. The dispute resolution clauses are fine on paper but our experience is that it takes years before you get a final result. If we cant solve it at the local level, we resort to arbitration, then approach the lower court, thereafter multiple courts. Finally, even if one of the parties gets a result, it is probably too late. There is a formula to deal with inflationeven if the fare structure is decided beforehandthere is a formula related to WPI. But if there are some abnormal events that result in a cost increase, then how do we address that We may make some assumptions but the state of the economy is beyond our control. The more these cases become public, the more developers will shy away from projects. If we want the PPP model to succeed, all stakeholders need to discuss these issues and come up with an equitable and viable solution.

What would you like to see incorporated into the agreement

We need to factor in changes in the rupee-dollar parity, interest rates, general trend of inflation. Our assumptions are based on past data but when something goes wrongthe sharp depreciation of the rupee in the last three years, for instancewe need to be compensated. It may be difficult to insert some renegotiation clauses now into the contract; the contract conditions cannot be changed because someone may contest that.

Should there be a regulator for metros

I am not sure how effective a regulator can be given that there are multiple agencies scrutinising technical specifications and there are conflicts and contradictions. We need system-specific guidelines so that no disputes arise.

What is the update on the Hyderabad Metro

In terms of costs, if the existing conditions prevail, the cost will be R2,000 crore higher than the original estimate of R14,000 crore. We will not be compensated with any additional Viability Gap Funding (VGF) from the central government; the maximum amount is R1,458 crore, the basis on which we won the contract. We are 100% owners of the project, the government has a golden share which gives them one director on the board.

Since 50% of our revenues are to be earned from fares, we are hoping our estimates will turn out to be correct in Hyderabad, now that there are two states. If growth is sluggish, we will need to worry about that. When we did the ridership analysis, our estimate was that there would be 1.6 million passengers initially on three lines and two million in 10 years. However, for a metro project to become successful, the last-mile connectivitytravel to and from the stationneeds to be in place.

You are also allowed to develop land and earn revenues from that, isnt it

Yes, that is true. Around 40-45% of our revenues are to come from real estate. But although we have the rights to develop land and rent it outwe can construct approximately 18.5 million sq ft of areathe revenues from this stream too will depend on the growth of the city. There are hundreds of developers and the appetite for real estate needs to keep pace with the supply. Also, 5% of our revenues will come from advertising.