What ails India's PPP model and why it doesn't bode well for Modi government's infrastructure push

About two years ago, the first train of Jaipur Metro was prepped for its first test drive. Sachin Doharey remembers the occasion vividly. He was a bundle of nerves.

He had to drive the train, roll it out rather — the prescribed speed limit was a leisurely three km per hour — from a depot to three stations away as a scrum of engineers fussed over signals, track-fitness, lights, coaches etc. Last month, a nearly 10 km stretch of the Metro was opened to the public. Doharey no longer drives trains. He was promoted as controller of the Mansarovar station recently.

Ten kilometres away from that station is the office of Nihal Chand Goel, chairman and managing director of Jaipur Metro Rail Corporation, widely acknowledged as the man behind the project in the pink city. Goel is still nervous as Doharey was two years ago. The Jaipur Metro is about to expand to its second phase, covering 24 km, but it still doesn’t have a private player as partner. Finding a partner under the public private partnership model is crucial. The first phase of the project cost `3,150 crore and the Rajasthan government funded the entire expense. It cannot afford to do it again — the cost of the second phase is pegged at `10,400 crore.

Goel reached out to leading players in India’s public private partnership (PPP) market but the response was tepid. He has since been forced to scout for companies abroad.

“In the current PPP market, we may not get a domestic partner to execute Phase 2 of Jaipur Metro. Informally L&T (the company that is building Hyderabad Metro rail on PPP) has said no,” said Goel. He is sanguine about roping in a foreign partner though. “Negotiations are on with companies from Singapore, Malaysia and China.”

Strange but True

The Jaipur Metro’s inability to land a domestic private partner is bizarre in a country billed as the world’s largest PPP market, with 900-odd projects under various stages of execution.

Of an investment of Rs 100 in infrastructure between 2007 and 2012, as much as Rs 36 came from private companies compared with Rs 22 in 2002-2007, according to a PPP report jointly authored by Federation of Indian Chambers of Commerce and Industry (FICCI) and consultancy firm Ernst & Young in 2012.

The bump-up in investments during that period was remarkable given that the private sector investment in infrastructure prior to 1997 was few and far between. “I would say 1997 to 2012 was the first phase of Indian PPP. We became the world’s biggest PPP market then,” said Vinayak Chatterjee, chairman, Feedback Infrastructure Services, a consultancy.

The halcyon period seems long ago now. The PPP tale has since taken a harsh twist. In the last three years or so, the PPP model across sectors has been beset with troubles, raising fundamental questions on the existing framework.

Examples are legion: ADAG-led Rs 5,800 crore airport metro link in Delhi, GMR’s Rs 7,700 crore Kishangarh-Udaipur-Ahmedabad highway project, Emaar-MGF’s Commonwealth Games Village project (where the government was forced to extend a bailout), and Gammon’s `1,400 crore container terminal project in Mumbai port have all collapsed.

A not-so-vibrant PPP market does not bode well for the Narendra Modi-led NDA government which plans big-ticket infrastructure projects including roads, Railways and smart cities. In February, finance minister Arun Jaitley said the government would invest Rs 70,000 crore more in infrastructure in 2015-16 compared with the previous year, acknowledging a weak PPP market.

The ominous signs are already palpable. In 2014-15, for example, there was no bidder in as many as 16 PPP road projects advertised by the National Highway Authority of India (NHAI).

For its part, the NDA government read the signs by February 2015. In his Budget speech, Jaitley summed up the sombre mood. “With private investment in infrastructure via the public private partnership (PPP) model still weak, public investment needs to step in, to catalyse investment.”

Downturn in PPP

The existing PPP model is hobbled by a lack of flexibility in contractual arrangements. Court cases that drag on forever means enforcing contracts face delays.

Then there is aggressive bidding and manipulation in project costs by private players.

As if these weren’t enough, the PPP model has been further choked by the dying appetite of infrastructure powerhouses such as GMR, GVK, L&T, Reliance ADAG, Lanco, Gammon etc. These companies built airports, metros, roads, ports etc. under the PPP model, but nearly all are swamped by rising debts.

Vinayak Chatterjee said the PPP slide can be arrested. “It is time to emphasise on the 4 ‘R’s — risk allocation, regulation, renegotiation and resource-raising,” he said.

But at least one action is easier said than done. For private players, the problems in raising resources got compounded further in recent years as public sector banks turned frugal with lending. After all, debt, not equity, is always the bigger component in private sector investments in infrastructure.

And banks have a reason to view the PPP model with suspicion. Take the example of Hyderabad Metro Rail, which once completed will be the largest PPP metro project in the world. If the real estate component of `2,243 crore is factored in, as shown in its financial closure documents, the total project cost of Hyderabad Metro Rail would be `16,375 crore. Of this, Rs 1,458 crore came in the form of viability gap funding, a grant from the central government.

Of the rest, only Rs 3,439 crore was the concessionaire L&T’s equity as against the massive Rs 11,478 crore debt by a consortium of 10 PSU banks led by State Bank of India. In other words, hypothetically speaking, if this project gets stuck, public sector banks, and not the private player, will suffer the most.

“For banks, the biggest problem is lack of security (or guarantee) in PPP projects. There should be some provisions in PPP contracts under which the government department concerned should be able to take over the project in case the private party falters,” said M Narendra who served as chairman and managing director of state-run Indian Overseas Bank between 2010 and 2014.

As PPPs turn sour, Narendra Modi-led NDA government at the Centre is forced to roll out more projects through the engineering, procurement and construction (EPC) route. In 2014-15, only 700 km of highways were awarded under PPP mode as against 2,400 km under EPC mode, evidence that PPP is taking a backseat.

For the current fiscal year, NHAI is planning to roll out as many as 31 EPC projects as against 10 in PPP. The NHAI may also bid out 17 projects in what is called a hybrid model, a mix of EPC and BOT (a form of PPP) in which the government will support 40 per cent of the cost of a project.

The very creation of this hybrid model is the result of lack of investors’ appetite for PPP. Experts frown on this shift. “Can highway building be sustained by EPC alone? PPP in itself has never been at fault.

The problem is in its implementation” said Gajendra Haldea, former adviser to deputy chairman of Planning Commission and author of Model Concession Agreements for PPP projects.

An official in the ministry of road transport and highways said the current EPC thrust is at best a tactical retreat for the NDA government. Jaitley in his 2014 budget demonstrated the government’s intent when he announced setting up of an institution called 3P with a corpus of Rs 500 crore to support PPPs. But the institution has not come up as yet.

All eyes are now on the government-appointed Vijay Kelkar panel that is expected to address the current woes that the PPP model is going through.

Kelkar has his work cut out — devise a solution to get the model off its deathbed and turn it into its sprightly self once again.