1. Bridging the public-private divide

Bridging the public-private divide

The Kelkar panel has made vital suggestions to help the PPP model work better

By: | Published: January 6, 2016 12:04 AM

Given how the government is strapped for cash the private sector needs to play a big role in the build-out of India’s infrastructure, expected to cost a trillion dollars, at the very least. A PPP model—public private partnership—is ideal to roll out infra projects since the government can facilitate both the acquisition of land as also the environment and forest clearances both of which are critical for any venture to take off.

Delays in acquiring land and clearances have led to projects becoming unviable and, in some instances, promoters walking out.  There is today a whole host of PPP projects that are stalled; since the cash flows of promoters are choked they have delayed repayments to bankers. In sum, not only has precious capital been blocked, the environment has been vitiated by disputes. A substitution of concessionaires has been possible in very few cases.

Which is why revisiting the PPP model was always warranted. Before the new model is rolled out, however, legacy issues need to be sorted out. The government had proposed an Infrastructure PPP Adjudicatory Tribunal (IPAT), which the Kelkar committee, tasked with reviewing the PPP model, believes could be a good platform through which to resolve legacy issues. To be sure, it can be a starting point with some umbrella guidelines being framed to deal with stressed projects.

But there’s little doubt the Model Concession Agreements (MCA) need a re-look: the panel has suggested a “generic risk monitoring and evaluation framework must encompass all aspects across the project development and implementation life cycle”. It calls on stakeholders to allocate risk optimally. Developers have argued the guidelines aren’t framed well-enough resulting in disputes; they claim they are forced to settle for lower amounts than they deserve because they want to end the litigation and free up capital, while the government argues they are gaming the system, resorting to predatory bidding and inflating claims. Clearly PPPs cannot prosper in such an environment and there’s need for a dispute resolution mechanism.

The Kelkar committee has recommended several changes to the MCA, among them one which says the tendering process should not commence until at least 80% of the land has been acquired. This is sensible since too many projects have been delayed because land wasn’t acquired. The committee has also advocated a dispute resolution mechanism that is flexible enough to allow for restructuring within the commercial and financial boundaries of the project. More importantly, given how projects stretch over 20-30 years, it wants enough of a cushion for developers to protect them from events that are beyond their control. It feels they must be guarded from “obsolescing bargain” by which the government authority has the upper hand once the project is completed. This can be achieved by building in safeguards ab initio into the contract. These are important given how commodity cycles can be unpredictable; the sharp rise in the price of imported coal, for instance, turned out to be a nightmare for power producers like Tata Power and Adani Power.

Gr

The committee believes that independent regulators for each sector are necessary. Though water-tight contracting is critical, that may not be such a bad thing since each sector does need close attention when things go wrong.
To help free up capital, the committee has recommended easier norms for equity to be sold off and monetising assets. That apart, it feels creating pools of assets that carry lower risk would help attract investors. The committee also feels that lenders, who are probably the worst sufferers when a project fails to take off, should decide that a default is grave enough to warrant the concessionaire being substituted. Lenders might also be comfortable with the suggestion that a revenue-share model be adopted by NHAI and the concessionaire for roads projects with long gestation projects.

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