Public-Private Partnerships Need To Be Revived
With rapidly rising middle-class consumption, the overall growth in GDP and with urbanization growing rapidly there is an urgent need for expanding our infrastructure.
Construction projects can be executed with great efficiency in a fully public-funded mode. But, with an attendant paucity of public funds due to competing for social goals, it is also necessary to ramp up the private component for infrastructure spending by more effective deployment of Public-Private-Partnerships through the BOT model. Besides, there are overall lifecycle efficiency gains to be garnered from private sector design, construction, operation and maintenance of complex projects.
Currently, the disinterest of the private sector in undertaking big projects is most evident in the highways sector. In the last two years, not a single national highways project has been awarded in a DBFOT mode – in which the private party contributes to the construction risk completely after raising funds from the market, maintains the project for the life of the concession period and then collects the toll and the revenue.
To be successful PPPs have to have a fine sharing of risk and be a win-win proposition. One of the key reasons why BOT projects have not all been success stories is the imbalance in the distribution of risk between the private and the public parties. For instance, even if the land was not procured as per timelines and other statutory clearances not obtained because of which the concessionaire could not complete the project as per the predetermined timelines then this would be a case of concessionaire default and upon termination, he would lose all that he had spent. Many times the Total Project Cost or TPC of the private party is substantially more than that estimated by the government body which again creates problems in both raising debt and during the possibility of termination. There are increasing instances of competing roads created by a State body which poses a direct commercial hazard for the existing road. Recently, the government has relaxed the axle load parameters because of which the same truck can carry heavier loads thereby reducing the number of trips required, thereby having a deleterious impact on the committed toll receipts. There is also the issue of spikes in the rates of cement, steel and bitumen that are not always suitably factored in a BOT project
Recently the government has allowed a TOT project to be auctioned by it even one year after it attains commercial operation (COD). In a similar way even for BOT projects, this two-year lock-in should be brought down to one year so that there is a greater rotation of funds.
Currently, even hybrid annuity projects in which the government provides 40% funding upfront have been facing viability issues – when the remaining 60% funds are paid in instalments at bank rate plus 300 bps, although the bank rate has come down by 135 bps from 6.75 to 5.40 – the corresponding lending rates of the banks have not come down proportionately. Further, many projects commissioned in the pre-GST regime but are now being undertaken in a GST regime. There is a challenge of reconciliation and release of blocked funds. Overall, finding funds to finance PPP projects is the biggest hurdle.
The Government should, therefore, undertake to resolve the various perceptional and practical bottlenecks to ensure the vibrant espousal of the PPP mode.
