Editorial: Getting PPP right

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Published: June 1, 2015 12:25:07 AM

Hopefully, Kelkar panel will get the formula right

That the PPP (public-private partnership) model hasn’t thrown up the desired results is evident from its numerous failures; while the GVK group walked out of the Kishangarh-Udaipur-Ahmedabad highway, partners in the Mumbai metro project, Reliance Infra and Mumbai Metropolitan Region Development Authority, are in the courts, sparring over fares. And although the Delhi and Mumbai airports could be considered success stories, disagreement on user tariffs has resulted in disputes. What is needed is a completely new set of guidelines to fix the flaws; that is what a committee headed by Vijay Kelkar has been tasked with. Among others, it is expected to come up with a better risk-sharing mechanism and also design changes in the contract, considered to be somewhat rigid. While the general perception appears to be that the private sector didn’t keep its end of the bargain, it is reassuring that instead of passing the buck, the government acknowledges some of its shortcomings. Transport minister Nitin Gadkari, for instance, has pointed out that projects should never have been awarded to developers without all clearances in place; he has also highlighted the fact that projects were overly dependent on bank finance.

Since PPPs are critical for the infrastructure build-out—the government simply does not have the resources—it is important that the concerns of all stakeholders be addressed while framing the new guidelines. A plug-and-play approach, where the government ensures that all clearances are in place before the projects are bid out, is the best way out; this significantly reduces the risk of the project not getting completed; but private sector risk cannot be eliminated. The hybrid annuity model that is currently being followed for roads, however, is heavily skewed in favour of the concessionaire who does not need to either estimate the traffic nor collect the toll and resembles an EPC contract rather than a PPP venture.

To be sure, some level of comfort is called for—in railway projects, for example, the contracts are baking in a minimum traffic guarantee. However, what is critical, but missing in the existing set-up, is a platform for renegotiation. Given there will be unforeseen events—Andhra Pradesh being split into two states—both parties must have recourse to renegotiation. The change in the Indonesian law for exporting coal is also an event that could not have been predicted but it sent Tata Power’s calculations awry. For its part, the private sector must assess whether it has the ability to take on the risks associated with large projects; it cannot misuse the renegotiation facility. This time around, the strike rate needs to be better.

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