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Life Is A Two-Way Street

Barring roads, it's a long trip for the others

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Life Is A Two-Way Street
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In all debates over India's burgeoning economy, PPP is of late the trisyllabic mantra often invoked to address the mess that is infrastructure. But it would be unfair to suggest that PPP, or public-private partnership, in infrastructure is just a catch phrase. On the contrary, there has been a consistent effort at fine-tuning policy and a demonstrable urgency shown at the ground level, especially in the last five years. While the government has provided the momentum and expectations are high, the onground reality shows that the learning curve is very steep. As they say, a lot remains to be done.

The statistics speak for themselves. The department of economic affair's first nationwide survey of 221 PPP infrastructure projects being carried out with an estimated investment of $25 billion reveals that road projects account for nearly 36 per cent of the value (and 78 per cent in terms of number). Among all the traditional domains of partnership—roads, power, railways, ports, airports and telecom—it is only in roads that PPPs have been making good headway. Next is power—it has shown reasonable progress of late. Airports is a fledgling area, making small yet significant strides.

The government's logic for banking on collaboration is a no-brainer: infrastructure projects have long gestation periods and, in most cases, requirements fall short of the budgetary allocations. "The investment outlay for the 11th Plan period envisages that 44 per cent would be placed under the partnership model. It means huge opportunities for the private sector," says S.S. Kohli, CMD, India Infrastructure Finance Co Ltd, a government vehicle to facilitate financing of viable infrastructure projects. Looked at another way, it's also a huge challenge if one goes by overall investment need of $492 billion for infrastructure in the plan period. After all, there are only $25 billion of PPP projects in the pipeline.

Consider roads, the 'classic public good'. Road projects undertaken on a BOT (build-operate-transfer) basis—where companies build the highways, collect toll and transfer them back to the government after the concession period—are being completed well ahead of time. "We have completed three road projects—the Jaipur-Kishengarh highway, Belgaum-Maharashtra road and the Nellore bypass—on a PPP mode six months ahead of time. And, this, adhering to all quality parameters," says Brahm Datt, secretary, ministry of road, shipping and highways. "We expect several other current projects to also finish three to six months before the scheduled completion date," he adds.

As things stand, 7,962 km of national highways under the National Highways Development Project have been completed out of a total 14,500 km of highways that have been contracted thus far. The NHAI has expanded the scope to include an additional 40,000-km of state highways—and shifted from a model of the highest negative grant (from the government) to a revenue-share arrangement. This year, the NHAI plans to award another 10,000 km of highway projects under the new model concession agreement. "The quantum of NHAI share in the toll revenue quoted by the bidders is extremely encouraging," says Datt. With a toll policy in the works, it's not surprising then that a slew of private companies are making the best of the liberalised road sector.

Of course, the bottlenecks call for attention. In 2002, the Delhi-Gurgaon Expressway was hailed as a successful PPP model. But six years later, the government ended up paying the operator thrice as much on account of delays even as lack of planning at the project stage, unanticipated design changes and land acquisition from multiple owners took their toll. In the case of GVK's Jaipur-Kishengarh road, the project had numerous encroachments and environmental clearance issues. The company had to relocate over 600 religious structures across the 90-km stretch.

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Clog in the corridor: The Delhi-Gurgaon Expressway

Clearly, land acquisitions appear to be the biggest problem for a time-bound implementation of road projects. The risks borne by the government and private partners are not defined. While the responsibility of the land acquisition and getting various clearances lies with the government, it is the private operator who has to bear the brunt in case of delays. "Sometimes, land acquisition can't be done as the state government is not in favour of the centrally funded project," says an IDFC official. "Thus, the partnership has to include the state."

The power sector too has moved away from being an 'undisputed monopoly' of the government, but it's early days yet. Nevertheless, private players are bringing in investments in power generation, which will need around $150 billion over the next five years. For instance, Venugopal Dhoot, chairman of Videocon Industries, is setting up thermal power projects aggregating 5,000 MW in Gujarat, West Bengal and Chhattisgarh. "This amply indicates that if bottlenecks are removed for infrastructure sector, the volumes of such investment could multiply manifold," says Dhoot.

According to Arvind Mahajan, executive director, KPMG, the government is just about setting the stage for robust partnerships in power. "The government is partnering through requisite preparatory groundwork for land acquisition, resettlement of people, environmental clearances and also by bringing in Power Finance Corporation. In a sense, the government is incubating the UMPP (ultra mega power projects) for the private sector to bid," he says. There is a sense of urgency on the part of private companies to make the partnerships sustainable, going by the brisk allocation of the coal-based UMPPs with a capacity of 4,000 MW or above. While Tata Power Company Ltd has been quick to snap up the Mundra project in Gujarat, Reliance Power grabbed Sasan in Madhya Pradesh and Krishnapatnam in Andhra Pradesh in August '07.

But the bald truth is that for all the reforms in the Electricity Act 2003 (amended in '07), it has not resulted in the required generation of power. The growth of power generation in April-December '07 was lower than the targeted 7.2 per cent growth rate with a slowdown in all three segments—thermal, hydro and nuclear generation. No wonder, the deficit in power supply was as high as 14.8 per cent. Action in generation is substantially confined to thermal power, grossly neglecting a high-potential area like hydro—and this hasn't surprised experts. Notes Ravi Wig, a power sector analyst: "Share of hydro power in the total generation should be around 40 per cent but it is only 26 per cent." Though a bulk of the action is taking place in thermal power with big-ticket investments, the real issue here is about fuel scarcity—a big barrier for all players.

The PPP experiment with airports is rather nascent. The Bangalore International Airport is almost ready to take off. The country's second PPP airport after the one off Kochi, it has been constructed by a Siemens-led consortium. The Hyderabad International Airport built by GMR-led consortium has just been inaugurated. The two international airports have been built with a total investment of about Rs 4,000 crore. The government has awarded the contracts for renovating Delhi and Mumbai airports, and is considering private investment in 25 other city airports.

But questions being raised about the Bangalore and Hyderabad airports may get asked in the context of other PPP airports in the future too. The issues relate to the charge of user fee, closure of old airports in the two cities, connectivity problems, and also the capacity of the Bangalore airport to handle the growing volume of traffic with just one runway. But the surprising element about these questions is they have been raised late in the day: the concession pacts for the two airports were, after all, signed a few years ago.

One of the important terms of condition for both new airports in Bangalore and Hyderabad is shutting down of the old airports. But now there is pressure on the government to go back on the contractual promises. If the government does budge, then it could be detrimental to the PPP model. PILs have been filed in both Bangalore and Hyderabad against the closure of the HAL and Begumpet airports respectively. Although the Hyderabad airport does not levy a user fee, the Bangalore one proposes to levy a user fee of Rs 675 on each embarking domestic passenger and Rs 955 from each international passenger. Also, with the privatisation of airports, there is the looming threat of job losses.

These are tricky issues for the government, because they have a direct bearing on the public and, importantly, electoral politics. How it will negotiate and move ahead will be a test case to ensure if we have actually stepped into the PPP era.

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