Implementation is the key

Published: January 6, 2016 12:03:44 AM

The Kelkar panel’s report is timely and action-oriented

The Kelkar committee recommends responses to key institutional, financial and regulatory challenges across the PPP project cycle. Whilst the report is timely and action oriented, it is important that we continue to look forward on how to drive the recommendations and pre-empt some of the impediments.

Widening of the financing pool is the need of the hour and innovative financing schemes like Investment trusts with pooled assets are a step in the right direction. Such Investment trusts have caught the imagination of the institutional investors including pension funds. Pooling of assets also ensures the minimum ticket size criterion of the institutional investors is met. However the issue of cross default and due-diligence on assets across different locations will mean that investors will continue to seek higher risk premiums or remain wary of such investment vehicles.

The issue of asset-liability mismatch continues to plague the lending sector. Take-out financing has played its part but there is clearly a need to do more. The need for long dated bond issuances which can typically match the concession terms still remains a goal to be achieved. It is imperative that India achieves full capital account convertibility, which will ensure more long term funds flow into the infrastructure sector.

Renegotiation of contracts has been discussed in the context of developer initiated scenarios and to avoid stress situations. A futuristic view requires the government and the private sector should be given an opportunity to renegotiate the concession agreements to take advantage of market opportunities. A case in point being the Delfluent water treatment plant in Netherlands, in which both the parties can initiate a renegotiation. If a modification results in savings, then the proceeds are distributed on an agreed gain-share principle. The government’s motivation to renegotiate a contract should go beyond the scepticism approach of checking whether the bidder is making excessive profits!!

The report advocates the use of shadow bid model to evaluate the actual bids in the road sector. The report also acknowledges that procuring authorities have been unable to conduct a prudent risk assessment on a project basis. If the risk allocation is not well understood, it will be hard for the government to do justice to the shadow bid model. No two projects are same and gathering information on a shadow bid in-house can be a challenge.

Given the private sector’s capability to understand the project risk assessment and under capacity in government procuring units, it may not be appropriate to fully abandon the ‘Swiss Challenge’ approach. The projects under ‘Swiss Challenge’ are an indicator of where commercial opportunities lie. Rather, the private sector should be incentivised to step up and share ideas with the government.

The point of road projects failing due to demand risk seems to be well placed and the phenomenon has been observed worldwide. In Australia approximately 8 out of 10 Road PPPs have failed because the traffic projections were overestimated. The resounding message is that the demand risk within a roads project should not be transferred to the private sector. In India the risk comes back to the government as 70% of the debt funding happens through a state owned lender. India should clearly rely more on BOT annuity based model rather than BOT Toll.

Setting up 3P India will create a much-needed infra advisory body/think tank for PPP. The operationalisation of this unit is critical. The entity should have sufficient resources, representation from the private sector and complete autonomy. The structuring of the unit should draw on the lessons from units such as Partnership UK or P3 Canada.

There is an urgent need for introducing Ease of Doing Business (EODB) in PPP. EODB will ensure that there is more electronic interaction between developer and government. This will ensure less corruption and higher confidence of the private sector. Innovative means will have to be thought through to involve states with higher incentives e.g. higher VGF (viability gap funding) support.

By Abhaya K Agarwal

The author is Partner Infrastructure and PPP, Ernst & Young LLP, India

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