Kelkar panel suggests easier funding for PPP projects

Committee suggests ending one-size-fits-all approach in dealing with risks, proposes independent regulators

Ahigh-powered committee set up by the finance ministry to redraw the contours of the country’s public private partnership (PPP) model has recommended ending the one-size-fits-all approach in dealing with project-specific risks, and advocated independent regulators.

If the government signs off on the recommendations it would result in a major overhaul of the existing framework, designed primarily to incentivise private investment in infrastructure.

At present, a significant number of PPP projects have been stalled by legal disputes relating to financial issues. According to the Economic Survey 2014-15, at the end of December last year, the stock of stalled projects added up to Rs.8.8 trillion, or 7% of India’s gross domestic product.

Not only is this posing a drag by accentuating infrastructure bottlenecks, the stalled projects have also saddled the banking sector, especially public sector banks, with a large burden of bad loans.

The panel, headed by former finance secretary Vijay Kelkar, was mandated to prepare a blueprint for unravelling the logjam and kick-start investments in infrastructure.

The report of the committee on revisiting and revitalizing the PPP model was released on Monday. It was submitted to finance minister Arun Jaitley last month.

PPPs relate to public services delivery by private entities, and are awarded through a competitive bidding process. They are typically very high-value contracts, often with huge capital and operating costs, making it difficult for their developers to cope with any financial losses.

Given the long-term nature of PPPs, a “perfect” contract is rare as the situation is apt to change during a project’s lifetime. The emergence of risks not foreseen at the time of signing the agreement exposes such projects to potential distress, making them unviable for the developers and prompting demands for a renegotiation of the original terms.

The Kelkar committee said the final decision for a renegotiated concession agreement must be based on full disclosure of long-term costs, risks and potential benefits, a comparison with the financial position for the government at the time of signing the concession agreement and at the time of renegotiation.

For the highways sector, which is the most dispute-ridden, the committee recommended that all pending disputes including change of scope, delayed land handover, delayed commercial operation dates, termination, cost overruns, delayed payments, penalties and claims may be disposed of in a time-bound manner through an independent body with representatives from the National Highways Authority of India, developers, lenders and an independent chairman.

The committee observed that given the urgency of India’s demographic transition and the experience the country has already gathered in managing PPPs, the government must now tweak the model by incorporating lessons learnt so far and making it more sophisticated.

However, the committee advised against adopting PPP structures for very small projects, since the benefits may not be commensurate with the costs.

“Unsolicited Proposals (“Swiss Challenge”) may be actively discouraged as they bring information asymmetries into the procurement process and result in lack of transparency and fair and equal treatment of potential bidders in the procurement process,” it said.

This comes at a time when the cabinet has approved developing 400 railway stations next fiscal through the Swiss challenge formula under which a private entity identifies a project and approaches the government with a proposal to develop it. A rival investor can offer a counter-bid which the original bidder can match and win the project.

The committee also expressed its displeasure over government authorities treating PPPs as an off-balance sheet funding method for the government’s responsibility of providing reliable infrastructure services to its citizens.

“PPPs should not be used as the first delivery mechanism without checking its suitability for a particular project. States and other agencies should also not treat Central PPP VGF (viability gap funding) as a source of additional grants that can be accessed by adopting a PPP delivery mode for projects that are not suitable for such a long-term financing structure,” it said.

The committee also strongly rallied behind the proposal for 3P India, an infrastructure think-tank that Jaitley proposed in the budget last year and is yet to see light of day.

“A centre of excellence in PPPs, enabling research, activities to build capacity, more nuanced and sophisticated contracting models and developing a quick dispute redressal mechanism is overdue. Every stakeholder without exception had underlined the urgent need for setting up the 3P-I institute for PPPs. The Committee strongly endorses this,” it added.

The committee agreed with concerns expressed both by the government and private parties against demands for audits of PPP projects and revealing information through the Right To Information act.

“Conventional audit by authority of private partner’s books per standard procurement process risks delivery of poor quality of service and public assets,” the report contended, while advising that the boundaries of operation of various statutory bodies be clearly defined through an overarching mechanism.

The committee also recommended building a host of other institutions such as Infrastructure PPP Project Review Committee (IPRC), Infrastructure PPP Adjudication Tribunal (IPAT) and a national PPP policy. An IPRC is expected to evaluate and send its recommendations in a time-bound manner when stress is reported in any PPP project while an IPAT chaired by a judicial member (former judge of the Supreme Court or a high court chief justice) is expected to mediate on disputes among stakeholders in a PPP.

The committee also recommended that the government encourage banks and financial institutions to issue zero coupon bonds or deep discount bonds for sourcing long-term capital at a low cost for PPP projects.

“These will not only lower debt servicing costs in an initial phase of project but also enable the authorities to charge lower user charges in initial years,” it said.

Abhaya Agarwal, partner, infrastructure advisory, at the Indian arm of audit and consulting firm EY, said while the report makes valid suggestions, implementation will be key. “Renegotiation of PPP projects is not going to be easy because it will involve substantial financial outflow (from the government). The countries which have done so have backed it with funds with huge cash,” he said.

On the proposed 3P India, Agarwal said such an institution should not be set up under the government.

“It should be an autonomous body so that it can think like and act like the private sector,” he added.

Review role and need of port tariff regulator: Kelkar panel

The panel endorsed private cargo terminal operators’ demand to migrate to a new tariff-setting regime, but asked the govt to frame the terms for such a shift

The government must review the role and need of the Tariff Authority for Major Ports (TAMP), the rate regulator for 11 of the 12 ports owned by the Union government, according to an expert panel set up by the government to revisit and revitalize the public-private-partnership model in infrastructure.

The nine-member panel led by Vijay Kelkar, chairman of the New Delhi-based National Institute of Public Finance and Policy, endorsed private cargo terminal operators’ demand to migrate to a new tariff-setting regime, but asked the government to frame the terms for such a shift.

“The methodology and guidelines adopted for determining the ceiling tariff has been revised periodically by the Tariff Authority for Major Ports (TAMP) in 1998, 2005, 2008 and 2013. Frequent revisions have resulted in multiple business frameworks for similar nature of projects, depending on the period of their concession, which has led to concerns of developers who are evaluating and bidding for projects all the time. It is suggested that a path for moving from pre-TAMP to current TAMP method be provided,” the committee wrote in its report submitted to the government in November.

The report was put up on the finance ministry’s website on Monday.

The Kelkar panel’s suggestion comes when the shipping ministry and the port industry are discussing a potential migration of some 16 existing port contracts (10 of them private)—some operating from as far back as 1997—from a regulated set-up to a market-driven pricing regime announced in 2013 for projects put to bid since then.

On an average, the existing contracts have about 12 years or more left till the end of their term of 30 years.

A shipping ministry-mandated study by Deloitte Touche Tohmatsu India Pvt. Ltd has recommended modalities for migration, including setting a reserve price for re-bidding, the terms for granting the right of first refusal to the existing cargo handler and closure payment if a new entity wins the right to run the facility.

The most suitable option for the government would be to go for re-bidding of the projects for the market to determine suitable revenue share that can be expected from the respective projects in a deregulated scenario, according to the study by the consultancy firm.

This is in line with the shipping ministry’s view that the existing cargo handlers should share the higher revenue earned from migration to a deregulated regime as it will get the freedom to set rates. This right can be construed as a change in the initial bidding terms leading to a financial benefit for the existing operator, according to the ministry.

The private terminal operators, though, are not in favour of putting their facilities up for a re-bid.

To be sure, this is not the first time that an expert panel has suggested a review of the role of and need for TAMP to put the ports owned by the union government on par with those owned by state governments, which already have the freedom to set rates based on market forces.

A decision on this issue has been delayed due to conflicting stands taken by stakeholders.

The shipping ministry also lacked clarity on the process for winding down TAMP.

The Kelkar panel has favoured reorienting the model concession agreement (MCA) by adopting best practices including models followed in some minor ports (as in Gujarat) in terms of stipulating specified cargo handling capacity and qualitative parameters of facilities. A concession agreement sets out the terms of a port contract.

The concession agreement may also make the public authority responsible for providing support infrastructure facilities (including land, reliable access to utilities, dredging, rail and road evacuation infrastructure) through enforceable obligations.

It has also underlined the need for clarity regarding assessment of stamp duty on concession agreements in the ports sector. Currently, there is considerable ambiguity and uncertainty on whether the concession agreement is to be treated as an agreement, lease or licence.

In 2012, one of India’s biggest port tenders at Jawaharlal Nehru Port collapsed after the successful bidder declined to sign the concession agreement, saying it will not bear the stamp duty for registering the agreement.