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Kelkar Committee on PPP in Infra Projects Submits Recommendations

... Business Standard:

A committee reviewing public-private partnership (PPP) in has suggested the revival of a defunct proposal to establish to support projects. It has also called for a rational allocation of risks among various stakeholders in a project, and moving away from the one-size-fits-all approach to PPP model concession agreements (MCAs).

The panel, headed by former finance secretary Vijay Kelkar, recommended setting up independent regulators for PPP projects in various sectors and pushed for amendment to the Prevention of Act to clarify the difference between cases of graft and genuine errors in decision-making. It added the government should encourage development of airports, ports and railways through PPP, by ensuring easier funding for projects with long gestation periods.

“PPPs are an important policy instrument that will enable India to compress time in its journey towards economic growth. A successful and growing stream of PPPs in infrastructure will go a long way in accelerating the country’s development process,” said the report, which was made public by the finance ministry on Monday.

“Every stakeholder, without exception, has strongly emphasised the urgent need for a dedicated institute for PPPs, as was announced in the previous budget. The committee strongly endorses the 3PI, which can function as a centre of excellence, enable research, and review and roll out activities to build capacity,” the panel said.

Finance Minister Arun Jaitley had announced the setting up of 3PI in his maiden budget for 2014-15 with a corpus of Rs 500 crore. The proposal remains on paper. For future PPP contracts, the panel suggested proper assessment of managing risk and that there should be a renegotiation framework in the bid document itself. “The adoption of the MCA has meant that project-specific risks are rarely addressed by project implementation authorities in this one-size-fits-all approach. A rational allocation of risks can only be undertaken in sector- and project-specific contexts,” the panel said in its report, which was submitted to Jaitley on November 19.

“It is the committee’s view that MCAs for each sector be reviewed to capture the interests of all participating stakeholders — users, project proponents, concessionaires, lenders and markets,” it said.

Jaitley and other senior Cabinet ministers have emphasised the need to amend the graft law. However, stormy monsoon and winter sessions of Parliament have put paid to any movement on that front.

“The finance ministry should allow banks and financial institutions to issue zero-coupon bonds, which will also help to achieve soft landing for user charges in the infrastructure sector,” the report said.

Other suggestions include restrictions on the number of banks in a consortium, building up of risk assessment and appraisal capabilities by banks, and specific guidelines to lenders for encashment of bank guarantees. It also suggested there should be a provision for monetisation of viable projects that had stable revenue flows after engineering, procurement and construction delivery.

Roads:Increase concession period for BOT projects
  • Introduce hybrid models, viable gap funding, part annuity, operation and maintenance grants, etc for non-BOT projects
  • Relax exit norms
  • Dispose pending cases between developers and NHAI
  • Shift to electronic tolling in time-bound manner
Ports: Move from pre-TAMP (tariff authority for major ports) to current-TAMP
  • Strengthen and accelerate environmental clearance
  • Provide support infrastructure (including land, reliable access to utilities, dredging, rail, roads) to developer
Railways: Take up simpler projects first to build credibility
  • Such projects can be brownfield — monetisation of existing stations — or, greenfield —development of new stations
  • Set up regulatory authority to settle technical issues such as track-access charges
Power: Not many power projects are under PPP. But the sector has a far-reaching impact on infrastructure PPPs
  • Immediately address power sector finances as they are hurting bank loans
Airports: Prepare a policy that addresses the expected growth parameters of the sector and promotes PPPs
  • Concession agreement should stipulate important commercial parameters like return on equity, treatment of land for non-commercial purposes
  • Develop brownfield and greenfield airports with defined structure, revenue sharing mechanisms

The report also said the private sector must be protected against the loss of bargaining power over long time spans. It noted that there was an urgent need to evolve a suitable mechanism to restart stuck PPP projects, taking lessons from the highways sector, where such projects have resumed.

“There is an urgent need to evolve a suitable mechanism that evaluates and addresses actionable stress. Sector-specific institutional frameworks should be developed to address these stalled infrastructure projects,” it said.

“The committee recognises the need for a quick, equitable, efficient and enforceable dispute-resolution mechanism for PPP projects. It is suggested that PPP contracts have clearly articulated dispute-resolution structures that provide flexibility to restructure within the commercial and financial boundaries of the project,” it said.

The report stated that the PPP structure should not be adopted for small projects. It also said there was a need to attract viable long-term investors and to explore options for sourcing cheap long-term capital.

“The success of deploying PPP as an additional policy instrument for creating infrastructure in India will depend on the change in attitudes and mindsets of all the authorities, including public agencies partnering the private sector, government departments supervising the PPPs, and auditing and legislative institutions providing oversight of the PPPs,” it said.

Having burnt its fingers in PPP projects, private investment is yet to revive in the economy, which grew at 7.3 per cent in 2014-15 and is expected to expand just 7-7.5 per cent this financial year.

Experts have welcomed the recommendations and sought timely implementation from the government. Vinayak Chatterjee, Chairman, Feedback Infra said, “I welcome the suggestions. What we need to see now is how these suggestions are implemented and how truly independent sector regulators are set up. More than 50 per cent of PPP projects come up for renegotiation. So we would like to see whether there is formation of an independent body, like a renegotiation commission, which can oversee the renegotiation of model concession agreements across sectors. We also have to see how 3P India can be made into an umbrella body for PPP projects at central and state level”.

Some points of criticism by CAG in its various PPP reports and the possible solutions by Kelkar committee
  • Delays in majority of projects due to time taken in finalization of tenders, security clearances, concession agreement and tender process
  • Delays in obtaining environmental clearance
  • Delays in handing over of project sites and back up area
  • Urgent need to focus on strengthening the systems to speed up the overall environmental clearance process
  • More institutions  are required to  be given authorization for conducting Coastal Regulation Zone demarcation
  • Need to provide support  infrastructure facilities including land, utilities,  dredging, rail and road  evacuation infrastructure through enforceable obligations
  • Inconsistency in adopting carrying capacity/tollable traffic as yardstick for determining the Concession Period by NHAI resulted in fixing higher concession period and higher toll burden on road users
  • Projects were approved despite the known late realization of minimum threshold traffic
  • The Total Project Cost (TPC) worked out by the concessionaires was higher as compared to TPC worked out by the NHAI. In 25 projects, TPC worked out by  concessionaire was higher by 50%
  • In  the  case  of  BOT toll  projects,  focus  on  projects  with  longer concession period. NHAI, concessionaire can opt for revenue  share on a case to case basis
  • In case of projects that are not viable on BOT toll basis, options to fund through hybrid models, grant of VGF, part annuity, O&M grants, and debt instruments, maybe explored.
  • The concessioning authority may undertake detailed project development activities including demand assessment, soliciting stakeholder views on project structure and financial viability analysis to estimate a shadow bid, which could be used to compare actual bids received

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