Thursday, June 26, 2014

A turn away from PPPs in road sector

This sums up the sad state of India's infrastructure sector woes,
In 2012-13, of the 7,464-km build-operate-transfer (BOT) target, only 1,115.75 km were actually awarded. Similarly, in 2013-14, of the targeted 5,000 km through the public-private partnership(PPP) mode, only 287 km were awarded through three projects, as the bids did not find takers among private-sector players. Another 2,500 km of projects were awarded under the EPC modeFor the 2014-15 financial year, the target was to award 3,000-3,500 km of road projects through the BOT route and another 5,000 km through the engineering, procurement and construction (EPC) route... At present, completion of road projects worth Rs 83,000 Cr are pending. Since 2009, only three projects have been completed, adding only 315 km to the country's existing highway network. This is despite a record 147 projects (a combined value of Rs 1.47 lakh Cr) being awarded under the public-private-partnership (PPP) mode.
Now, in order to kick-start new projects, the new government proposes to set up a transport corporation with a corpus of Rs 1 lakh Cr, with 26% stake of Japanese investors at an assured return of 9%, to finance road projects on an EPC mode. The government in turn proposes to raise its share of the corpus by securitizing its annual toll revenues of Rs 5000 Cr.

This constitutes an important shift in policy by the government. It is an acknowledgement of the difficulties associated with bidding out such road projects on PPP and a resultant shift to public procurement on an EPC mode. Once the construction is completed, the roads would then be entrusted to private partners as long-term O&M concessions.

In other words, the government would bear a major share of the construction risk, and rightly so. These risks are considerable given the land acquisition and environmental clearances associated with such works. Once the road is commissioned, the initial traffic estimates would give a much better idea of the possible toll revenues. It makes possible for potential bidders to give their quotes with much greater certainty, thereby attracting more optimally priced bids and minimizing the likelihood of re-negotiations.

This course of action is exactly what this blog has been consistently advocating, for this and other reasons. While the theoretical case for an DBO/DBFO/BOT PPP contract looks very strong, the risks associated with them are too large to be captured in even the most complete contract. This course-correction is a step in the right direction, though it comes after a series of failures which could have been easily avoided.      

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