From cleaning the Ganga to developing railway tracks and bullet trains, touching reliance on PPP
Given the speed at which government departments function, and their bankrupt state, the new found emphasis on public private partnerships (PPP)—for the cleaning up of the Ganga, for constructing new railway lines for a bankrupt carrier, model railway stations, and a lot more—is not surprising. Indeed, it is reassuring since, if a new railway track has to be constructed by the private sector, it suggests the tariff setting will have to be rational—since most private firms will need to be given a 16% return on equity, presumably the tariffs will eventually need to reflect this; how else will the railways pay the private firm?
That is the theory, the reality can be quite different, as India has seen over the past few years. PPP cannot be the answer to everything, indeed it is very complex and can be heart-breaking; if the lessons of National Highways Authority of India (NHAI) are anything to go by, there seems to be a bit of a blowback in this critical PPP area.
There are, to begin with, very serious issues of gold-plating that need to be dealt with. In the case of Reliance Industries Limited’s (RIL) KG-D6 oil basin, the allegations of massive gold-plating of costs have not only jeopardised the project, they are threatening to derail India’s entire gas exploration programme. That there has, so far, been no outcry over giving international prices to local producers of crude oil—oil minister Dharmendra Pradhan has said this cannot be done for gas—is surely due to the perception that RIL has diddled the government of funds. As a result of the gas prices not rising, even the public sector ONGC is not going to be able to explore for more gas in the offshore blocks with it.
Dealing with this means, in the case of the petroleum sector, moving away from the current cost-recovery model to a revenue-share one. Even this, however, is not the end of the matter since there are allegations of contract-manipulation even here. In the case of the GMR airport in Delhi, the problem revolved around what was considered to be revenue as the group had won the bid by promising to share 46% of topline with the Airports Authority of India (AAI). As part of the deal, GMR was given 250 acres of land to develop commercial realty, to offset some of its costs. While asking for interest-free deposits on the advance rentals on the properties, however, the GMR Group argued these could not be shared with AAI as they were not revenues, they were liabilities. While GMR argued this was a part of the financing plan submitted by it, AAI felt it was not and effectively lowered its revenue streams by large amounts.
If you get over this issue, there is the question of whether the private sector has the ability to take on the kind of risks associated with such large projects that are fraught will all manner of problems. In the case of road projects, we have had the GMR and GVK groups walk out when environmental clearances have not been given for more than a year. While difficult to prove, many believe firms are using all excuses to back out of contracts that made financial sense when the economy looked as if it were going to grow at 10% instead of the 5% or so right now.
In the case of several ultra-mega power projects, sharp increases in costs of imported coal completely changed the dynamics of the projects and, after a protracted battle at the central electricity regulatory commission (CERC)—which ruled in favour of hiking tariffs as these were critical to keep the projects going—the matter remains stuck in courts.
While it is possible to argue the private power players were being favoured in the UMPP case—after all, they had signed contracts—how do you take care of the uncertainties such as those generated in the case of the electricity distribution companies in the capital? Thanks to the regulator not raising tariffs in keeping with the increase in costs, the three private distribution companies are owed around R27,000 crore crore and, as a result, are not in a position to pay suppliers who are threatening to cut off supplies. Given that, unlike the government-owned state electricity boards, these firms are not eligible for loans under the financial restructuring plan, the chances of more such electricity distribution PPPs are pretty much zero.
Whatever the reason, and no matter who is right or who is wrong, private players are just not able to manage the complexities/uncertainties that public sector players can as their cost increases are agreed to without anyone suspecting their motives. In which case, if PPP is going to be the preferred mode of investment during the Modi government’s tenure, there has to be a mechanism to deal with such problems. An independent regulator is seen as the obvious solution, but as the CERC example shows, this is not going anywhere either.
In the absence of a resolution to the problem of apportioning risk, the NHAI appears to be getting fed up, and wants to be given more powers to arrive at settlements with road producers. And, of late, the solutions being talked of, even partially blessed by roads minister Nitin Gadkari, is to simply have more funds with NHAI—a fund with Japanese investments is being talked of—so that PPP can be junked in favour of the old EPC cost-plus works contracts. While NHAI’s impatience is understandable, allowing re-opening of the model concession agreement (MCA) on a case-to-case basis opens up the floodgates for nepotism. Which is why, when asked to deal with the problem of several stuck projects, the Rangarajan panel simply stuck to a clause in the MCA, and allowed loans to projects instead of slashing their premiums, which is what most promoters wanted.
PPP is a complex game, even if desirable, and requires a lot of thinking, and re-thinking, on how risks and rewards are to be allocated. Promising projects, such as a diamond quadrilateral, based on PPP is easy enough to do; what is now required is to take another look at PPP and see how it can be made to deliver. Once the Budget is over, that will be the Modi government’s big challenge.