Home » PPP and risk allocation mechanism in roads

PPP and risk allocation mechanism in roads

PPP and risk allocation mechanism in roads

While roads remain a gotta-love-it sector, with record projects awarded and some spectacular success stories, the sector was the biggest laggard in last year's completed projects. Kumar Ramesh analyses.

The extensive road network in India, the second largest in the world, has been the successful playground for a Public Private Partnership (PPP) mode of execution. The National Highways Development Program (NHDP), a major initiative by the government, acknowledges the applicability of PPPs in roads. NHDP has been a major driving force behind its success. The Indian government is convinced about the benefits of private sectors participation, and the advantages of the Build Operate and Transfer (BOT) model in driving the adoption of various fun­ding patterns focused on attracting the private sector. The roads sector has elicited the maximum attention and optimism among private players. The Indian Government initiated several fiscal and structural refo­rms to encourage the participation of the private sector in road projects. The various PPP application models have brought efficiency gains in implementation of projects. BOT Contracts, where the responsibility of construction (typically greenfield) and operations lies with the private partner while ownership is retained by the public sector, is the most preferred application model in the roads sector. Despite the high revenue risk for the private partner, the BOT (Toll)/Design-Build-Finance-Operate-Transfer (DBFOT) is the com­mon form of concession, especially for NHDP pro­jects that are commercially viable, with high revenue potential. BOT (Annuity) was earlier used in national highway projects; but now, though the revenue risk is low for the private partner, it is only adopted in socially significant projects where the revenue potential is limited.

The Government's fiscal initiatives, such as Income tax exemptions under Section 80 IA, concession per­iods of upto 30 years, duty-free import of specified mod­ern high capacity equipment for highway const­ruction, and Viability Gap Funding (in cases that are com­mercially unviable but of social interest) in the form of capital grants of up to 40 percent of project cost, are encouraging the growth of NHAI projects.

There are several fiscal constraints that are likely to hinder the growth in road development, if they are not addressed by the government. Some of the constraints that prevail, despite the tangible measures taken by the government, include:

  • Delay in financial closures due to banks/financial institutions not taking up the project because of the risks in revenues projected by the concessionaires.
  • High cost of debt service that leads to inability of concessionaires to raise cheap long term debt.
  • Poor domestic bond market for long term debt instruments
  • No scientific risk allocation methodology between the public and private sectors. There is lack of sci­entific structuring of PPP projects, especially in the road sector. This is being done in other countries as part of their Value for Money (VfM) exercise

Strong investments in construction of new roads have translated into
limited investment in operation and maintenance (O&M). Since
maintenance is a non-plan activity, government cuts the O&M budget
when there is a resource crunch, leading to poor quality of roads. This has widened the gap bet­ween the requirements and allocation of funds for roads maintenance.

The author is Industry Manager, South Asia, Middle East & North Africa, Environment & Building Technologies, Frost & Sullivan.

Comments

Leave a Reply

Your email address will not be published.