Bye bye PPP PDF Print E-mail
Wednesday, 29 May 2013 00:00
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Projects increasingly being given on cost-plus basis


While the PMO has asked the Planning Commission to come up with a framework for dispute resolution in PPPs, it is important to keep in mind the shift taking place from PPP in the classic sense that, instead of the risk being taken by the private entrepreneur, it is being transferred to the buyer. Reliance Power, for instance, had a 600-MW plant in Butibori in Maharashtra which was the quintessential private sector project—the company had got the land from the government and won the bid to set up a power plant to supply to industry in the area at a fixed price. With industry not buying the electricity produced, group firm Reliance Infrastructure applied to the Maharashtra electricity regulator to be allowed to buy electricity from Reliance Power at a regulated or cost-plus rate—the price risk will now be borne by Reliance Infrastructure’s customers. In Uttar Pradesh, as FE reported, the Lanco-owned 1,200-MW Anpara C was based on a bid where Lanco would supply power at R1.91 per unit. With the Uttar Pradesh power companies not buying electricity at even these rates, the project was terminated and the state now plans to take over the plant—its tariffs will now be regulated by the regulator based on actual costs and so will likely rise. Needless to say, the price risk will be borne by consumers across the state.

In the highways sector, while 2012 ended with the National Highways Authority of India (NHAI) giving out 33 projects for 4,624 km on PPP bids and, instead of NHAI paying out R3,400 crore on an NPV basis as viability gap funding—as it expected—it got bids with the winning concessionaires offering to pay NHAI R19,000 crore on an NPV basis. Over the last 5 months, however, with economic conditions worsening and traffic projections made earlier looking unrealistic now, developers are looking at renegotiating the projects. As a result, new road projects, increasingly, are being given out on a engineering, procurement and construction (EPC) basis with, once again, the project risk being transferred away from the developers.

Given this reality, the government needs to come up with a solution. EPC or cost-plus type of solutions are not the most efficient way to build infrastructure. EPC projects take longer to build and encourage a lot more government interference—witness the problems in the RIL KG-D6 gas blocks, with government permission required for each purchase. In which case, the government’s options are to look at renegotiating existing PPPs or letting developers walk away. While it can be no one’s case that a change in market conditions is a force majeure event, perhaps a market fluctuation beyond a certain limit can be seen as a trigger for certain concessions or for a renegotiation.


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