Application of PPP Model in Highway Projects in India, Identification of Bottlenecks & their Remedial measures

Introduction to PPP Model 

• PPP stands for Public Private Partnership.• It is an arrangement between Government or Statutory entity of

Government on one side and a Private sector entity on the other side for the provision of public assets or public services through investments made or management undertaken by the private sector entity, for a specified period of time.

• In PPP, there is well defined allocation of risk between the Private sector and the Public entity.

• The private entity receives performance linked payments that conform to specified and pre-determined performance standards, measured by the public entity or its representative.

• PPP is the most cost-effective way to create the infrastructure and delivery of public services.

• Under PPP, each party draws its own benefit, proportionate to its interest.

PPP Strengths and Effectiveness

• Robust and dynamic structure.• Government in an enabler role.• Government ownership is high.• Governance structure ensures consumer and public interests and they are

safeguarded. • Commercial interest protected.• Domicile risks to parties that are well equipped to deal with them. • Transparent and well-conceived contracts. • Documentation recognizes rights and responsibilities of all project-related

parties.• Concerns of all stakeholders addressed. • Involves participation of a large number of institutions i.e government,

politicians, banks, financial institutions, investors, contractors, consumers, NGOs etc.

Origin & Evolution of PPP Model in World Perspective

• PPP has been a form of public tasks implementation widely used in the countries of Western Europe.

• in 1438, the French nobleman Luis de Bernam was granted a river concession to charge the fees for goods being transported on the Rhine.

• Another Concession was granted in 1792 to the brothers Perrier for water distribution in Paris.

• In 1992, the UK began to implement Private Finance Initiative (PFI), a comprehensive program of the government, which had to cover the state-owned enterprises.

• The contracts for construction and infrastructure management in countries such as Germany, Italy, Spain, Portugal, Netherlands, Scandinavian countries, Ireland, Greece, Czech Republic, Bulgaria, Romania, and Hungary reached hundreds of millions of Euros by the end of 20th century.

Origin & Evolution of PPP Model in India

• India had a few notable PPPs as early as in the 19th century.• The Great Indian Peninsular Railway Company started

operating rail service between Mumbai and Thane in 1853.• The Bombay Tramway Company was running tramway

services in Mumbai in 1874.• The power generation and distribution companies in Mumbai

and Kolkata in the early 20th century are some of the earliest examples of PPP in India.

• In 1991, Indian Government announced new economic policy to develop industrial and infrastructure sectors which gave more emphasis on private participation.

Why PPP Model was necessitated by Government of India?

• Massive deficit in infrastructure services.• Deficient infrastructure was found a binding

constraint for the development of nation.• Government emphasis on spending to develop

Infrastructure of Global standard.• Capacity building at the state and central level.• Sustained accelerated development can only be

achieved through a quantum growth in the infrastructure sector.

Implementation Strategy of PPP Model in Highway Sector

• A good road network is a critical infrastructure requirement for rapid growth as it provides connectivity to remote areas and their access to markets.

• The PPP model has been acknowledged as a successful tool not only in the worldwide but also in India for the development of road network.

• Majority of the on-going highways development projects have been taken up under this model under various NHDP Phases.

• With a view to attract private investment in road development, maintenance and operation, National Highways Act (NH Act) 1956 was amended in June 1995 to facilitate private participation in highway infrastructure projects.

Origin & Evolution of National Highways Authority of India

• The National Highways Authority of India (NHAI) was constituted by an Act

of Parliament, namely the National Highways Authority of India Act, 1988.• NHAI has been made responsible for development, maintenance and

management of National Highways vested or entrusted to it by the Central Government and for matters connected or incidental thereto.

• The vision of central government behind to create NHAI was to develop the network of National Highways in the country at par to the global standards and to meet user’s expectations in time bound and cost effective manner.

• NHAI has to advise the Central Government on matters relating to highways. It has also to assist on such terms and conditions as may be mutually agreed upon, by any State Government in the formulation and implementation of schemes for highway development.

Origin & Evolution of National Highways Authority of India(Contd.)  

• NHAI is mandated to implement National Highways Development Project (NHDP) which is India’s largest ever Highways Project in a phased manner.

• The National Highways have a total length of 72,000 (approx) km to serve as the arterial network of the country. Although National Highways constitute only about 2 per cent of the road network, but it carries 40 % of the total road traffic.

• Rapid expansion of passenger and freight traffic makes it imperative to improve the road network in the country.

• Government of India launched major initiatives to upgrade and strengthen National Highways through various phases of National Highways Development Project (NHDP).

Origin & Evolution of National Highways Authority of India(Contd.)

• The highway projects taken up by NHAI under different NHDP phases are:-• NHDP Phase I : It was approved by the Government in December 2000 at

an estimated cost of Rs.30,300 Crores and comprises mostly of Golden Quadrilateral (5,846 km) and NS-EW Corridor (981km), Port connectivity (356 km) and others (315 km).

• NHDP Phase II : It was approved in December 2003 at an estimated cost of Rs.34,339 Crores and comprises mostly of NS- EW Corridor (6,161 km) and other National Highways of 486 km length.

• NHDP Phase-III: GoI approved up-gradation and 4 laning of 4,815 km of NHs on BOT basis at an estimated cost of Rs.33,069 Crores under NHDP Phase IIIA in April,2007. Govt. also approved up- gradation and 4 laning of 7294 km at an estimated cost of Rs.47,557 Crores under NHDP Phase IIIB.

 

Origin & Evolution of National Highways Authority of India(Contd.)

• NHDP Phase-IV: In 2008, Govt. of India approved the up-gradation/strengthening of 5000 km of single/intermediate/two lane NHs to two lane with paved shoulder under NHDP Phase-IV on BOT (Toll) and BOT (Annuity) basis.

• NHDP Phase V: Government of India approved Six laning of 6,500 km of existing 4 lane highways under NHDP Phase V (on DBFOT basis) on 5.10.2006 at an estimated cost of Rs.41, 210 Crores. Six laning of 6,500 km includes 5,700 km of GQ and about 800 km of other stretches.

• NHDP Phase VI: Government of India approved for the construction of 1000 km of expressways at an estimated cost of Rs.16680 Crores in November 2006.

• NHDP Phase VII: Government approved implementation of NHDP Phase VII which envisages construction of approximately 700 km of Stand Alone Ring Roads/Bypasses, Grade Separators, and Flyovers at an estimated cost of Rs.16680 Crores in December, 2007.

Financing of the NHAI Projects

• Through budgetary allocations from the Government of India.

• Cess, collected on Diesel & Petrol.• Loan assistance from international

funding agencies i.e World Bank, ADB & JBIC.

• Market Borrowing by issuing Securities/Bonds.

• Private Sector Participation by launching PPP Model.

Models of PPP adopted by NHAI

• DBFOT/BOT(Toll)A. PremiumB. VGF( Viability Gap Fund)• BOT(Annuity)• Special Purpose Vehicle (SPV) for Port

Connectivity Projects.• Operation, Maintenance &Transfer(OMT).

Stages in Project Development and Implementation on PPP Mode

• Project Identification and preparatory activities.

• Project development and due diligence. • Implementation arrangement and pre-

procurement. • Procurement and Project Construction. • Contract Management. • Dispute Resolution Mechanism.

Stakeholders of Projects

• General Public at large. • All Concessionaires of road projects. • All Contractors of road projects. • All Supervision Consultants / DPR Consultants. • All toll collecting agencies. • Other Vendors / Service Providers (viz. housekeeping,

security, catering, printing agencies etc.) • State Governments. • Financial Institutions. • All recognized unions / associations of road.

NHAI & Concessionaire Risks

• Construction Risk • O & M Risk • Financial Risk• Traffic Risk • Land Acquisition Risk• Approvals/ Clearances Risk• Force Majeure Risk

Critical Success Factors of Highway Projects

• Private sector capability• Payment on termination• Project Size• Penalty clause in MCA• Competitive procurement• State support• Political support• Encumbrance free land• Exit clause• Change of scope

• Transparency• Technical feasibility• Financial feasibility• Project structure• Good governance• Public support• Financial market• Legal framework• Appropriate risk allocation• Dispute resolution

mechanism.

Bottlenecks in the Implementation of Projects

• Regulatory environment• Lack of institutional capacity• Financing availability• Delay in land acquisition• Delay in obtaining approval of

GAD/CRS of ROB/RUB.• Lack of coordination between

Central Govt. & concerned State Govt.

• Intentional delay by the Concessionaires.

• Poor quality of planning and engineering design

• Tendering of unviable PPP projects

• Contracts in use are inappropriate• Centralized & slow pre-tendering

approval process.• Ineffective dispute resolution

process. �• Performance management is

weak • Weak risk management skills � �• Lack of best-in-class procurement

practices

Remedial Measures to make PPP model successful

• Risk should be allocated equitably between the government and private companies to prevent from disputes, delays and re-negotiations.

• MCA (Model Concession Agreement) needs to be re-designed taking into account the Indian context & successful project execution perspective.

• Concerned state Governments may be made responsible for timely acquisition of project land and for providing necessary clearances on their parts.

• The provisions of new Land Acquisition Act should be made clearer since, the State Government officials interpret the law in their own way. This has caused undue delay in the preparation of 3(G) Award.

• The prescribed provision of the new Land Acquisition Law should be suitably conveyed to the land losers by the District administration to avoid unnecessary post acquisition disputes.

• Railway Board has also very important role in timely execution of projects. Therefore, the Board may also be made responsible for timely approval of GADs of ROB/RUB and subsequent design & CRS sanction

Remedial Measures to make PPP model successful(Contd.)

• MoEF (Ministry of Environment & Forest) used to take more time in providing forest & environmental clearances, which needs to be squeezed for timely fixing the appointed date of projects.

• The role of concessionaire & financial institution needs to be redefined to reduce post award disputes.

• The credentials of participating Contractors / Concessionaires should also be critically examined before declaring successful in RFQ stage.

• Criteria of awarding contracts need to be redesigned by the central Government based on the past experiences during the execution of contracts.

• There should be absolutely zero political influence in awarding the contracts & their implementation.

• Align the economic interest of all stakeholders.

Remedial Measures to make PPP model successful(Contd.)

• Induct the private sector as partners.• Provide Capital grant and other forms of financial

support to developers.• Provide Revenue guarantee to the developers.• Foreign exchange risk should be minimized by the

Government.• Tax incentives may be provided to developers.• Protection of developers against reduction of

tariffs or shortening of concession period.• Loan guarantee for the project to developer.

 

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