Bajrang Kumar Choudhary, Managing Director, Bharat Road Network Ltd dives into the details of what went wrong in PPP and how the infrastructure sector can be put back into the growth track.

India is today standing at the cusp of a major economic transformation aiming to accelerate its growth to 9 per cent CAGR over the next few decades. This requires a massive infrastructure ramp up to commensurate with the growing economic activities. As physical infrastructure is the key driver for country’s economic growth, it is imperative to continue the focus on creating policies that would ensure time-bound creation of world class infrastructure.

As per the industry estimates, India needs around Rs 31 trillion (US$ 454.83 billion) to be spent on infrastructure development over the next five years, with almost 70 per cent of funds needed for power, roads and urban infrastructure segments. Infrastructure creation at such a gigantic scale requires a wide range of resources, expertise and skills, together with the necessary funding, either from public or private sources. While there is no dearth of construction capabilities in the country, it is critical to generate adequate depth in the financial market and amplify the asset management skillset to operate and manage infrastructure assets for long-term survival. Considering the fiscal constraints of the country, the scope for expanding public investment is very limited to cater to the investment requirement of such massive scale and size. Hence, the role of private sector will always be critical for the success of the infrastructure development plan for the next few years.

To facilitate the increased private participation, the Public-Private Partnership (PPP) must be nurtured and developed, both for attracting investment in infrastructure and leverage on the asset management skillset of the private sector. Although the overall success of PPP in infrastructure is irrefutable, especially in roads but the slump in the sector over the past few years has definitely raised some eyebrows over the efficacy of the model. It is thus imperative to review what went wrong and how the sector can really be put back into the growth track.

Reinstate the spirit of partnership in PPP
The focus of PPP is on life-cycle approach for development of a project, involving asset creation and maintenance over its life-cycle. The whole idea of PPP revolves around the spirit of partnership between public authority and private players which can only be enhanced through increased cooperation. It is thus important that pubic authorities recognise the contribution of private players and reorient their existing approach of client–authority relationship to true partnership approach.

Judicious mix of project delivery mechanism
The initial success of PPP in infrastructure, especially in roads and highways, created such a euphoria among policymakers that authority virtually stopped awarding projects in cash contract. This resulted in severe stress in the order book of the EPC contractors and they were forced to join the PPP space as infrastructure developer. This forced change in business model of contractors neither augured well for the industry or the contractors who got engaged in an aggressive bidding competition. Once signs of stress started showing up in PPP space due to overall slump in economic activity, resulting liquidity crunch, spiralling interest rates and execution challenges due to land acquisition issues, they started struggling with their overstretched balance sheet. This triggered a vicious circle of inordinate project delays, cost overrun, default in interest repayment leading to project turning NPA and eventually being terminated.

To avoid repeating such mistakes and speed up project delivery mechanism, a judicious mix of PPP and EPC projects based on the individual merits of the projects is needed. While public funding for EPC projects would keep the contractors engaged with a robust order book, private capital in PPP would give major fillip to infra creation at the required scale and size.

Develop favourable ecosystem for infra developers
Creating a favourable ecosystem for serious infrastructure developer to enter the market is very crucial to revitalise the PPP. Such an ecosystem would enable individual stakeholders to capitalise on their individual skillsets without forcing them to realign their business model. If we look at this structure in consonance with the current mechanism, it requires authorities to move up on the value chain as an overall asset owner and facilitator. Individual infra developers may act as the bridge between the public asset and public authorities and would bring in their asset management skillset to attract best construction partner as well as institutional investors.

Revisit project qualification criteria for PPP projects
It is essential to reassess the merit of the existing system of evaluating technical score for bidding based on annual payment received for construction of PPP projects. As the existing system gives more weightage for construction capabilities, it doesn’t really embody the mechanism to evaluate asset operation and management skillset. Hence, it would be more fruitful if the technical score for any BOT or HAM projects is assessed based on the concession asset base of individual developers. This would essentially mean that only the infrastructure players with long term interest and appetite for value accretion through operational excellence would be entering the BOT space.

Risk reward mechanism
To make PPP framework more efficient and effective, there should be a risk reward mechanism in place for each of the stakeholders. This would eventually mean that even the Independent Engineers (IEs), who are currently appointed to supervise the PPP projects, should be suitably rewarded for the success of the project. Currently, IE has the ability to influence the progress of the project despite having limited stake in the project. Once IE fees get linked to the success of the project, there would be more accountability and cooperative approach towards the success of the project.

Dispute redressal mechanism
A long-term contract between two parties for 20-25 years may once in a while lead to dispute and could be resolved with help from an independent third-party arbitrator. It is therefore necessary to develop a robust dispute redressal mechanism in place to sort out issues arising out of the concession agreement. An impartial and quicker dispute redressal mechanism would ensure speedier settlement of claims through a time-bound, efficient and effective arbitration process.

A system works best when all the constituents work to the best of their abilities. We may no longer need to tweak project delivery mode from EPC to BOT (Toll) to BOT (HAM), once we agree to realign ourselves with the objective of the infrastructure creation, streamline the execution mechanism and create the framework for individual stakeholders to perform as per the competencies.

Authored by:

Bajrang Kumar Choudhary,
Managing Director,
Bharat Road Network Ltd