The Great Indian Asset Monetisation Dream: Infrastructure Investment Trusts

The Indian government in recent years has introduced a spate of initiatives with the sole objective of improving India’s infrastructure. Some of the initiatives introduced are the National Infrastructure Pipeline,[1] National Monetisation Pipeline,[2] PM Gati Shakti – National Master Plan for Multimodal Connectivity,[3] Bharatmala Pariyojana,[4] the increased impetus on the use of electric vehicles, and robust electric vehicle charging infrastructure,[5] just to name a few.

Although all of the above schemes are equally important, one key initiative that will unlock the potential of others is the National Monetisation Plan, which involves the monetisation of India’s public infrastructure assets, so as to fund various other infrastructure initiatives. As of April 2022, the government has generated INR 96,000 crores under the scheme, exceeding the target of INR 88,000 Crore set for FY22.[6]

India has over 58,97,671 kilometres of the road network,[7] with 12 major ports and 212 non-major ports,[8] total trackage of 1,26,366 kilometres of railways,[9] a total of 136 airports under the ownership of the Airports Authority of India,[10] and a total of 20,236 kilometres of navigable inland waterways.[11] This is besides the length of water and sewerage networks owned by several state governments, and other existing public utilities that constitute public infrastructure owned by the government or the Public Sector Undertakings (“PSUs”). Hence, it is pertinent that these public infrastructures at the disposal of the Indian government are optimally monetised. According to a recent announcement by the Government of India, a total of INR 6 trillion in public assets are sought to be monetised by leasing the assets to private operators for a fixed term, unlocking a value of INR 111 trillion.[12]

 

Asset Monetization: The Apprehensions and Options

Most countries are sceptical about fully privatising their public infrastructure assets, although this is not necessarily unheard of in the past.[13] Asset monetisation in the context of the infrastructure sector in India involves the limited offer of public infrastructure to institutional investors and other private sector investors, through certain structured mechanisms in order to generate more value from the same assets.[14] Some mechanisms include the Toll Operate Transfer (“TOT”) model, which awards concessions for completed road projects to entities that have experience running toll roads. Here the concessionaire (a private entity) shall win the right to operate and maintain the road and collect toll from the roads for a particular period in consideration of a lump sum amount paid to the government or the PSU. The government shall, in turn, use this money to fund other infrastructure projects.

Another model for monetizing public infrastructure assets is the use of infrastructure investment trusts (“InvITs”) and real estate investment trusts (“REITs”), in which the underlying infrastructure or real estate assets are transferred to a trust, which then operates similarly to a mutual fund, attracting investors while securitizing the proceeds from the underlying infrastructure or real estate assets. For the purpose of this article, we shall focus on InvITs.

 

InvITs: Structure, Advantages and Risks

 
 
InvITs:  Structure, Advantages, and Risks
InvITs:
Structure, Advantages, and Risks

 

 

Advantages of InvITs

 
  • Long, stable and predictable cash flows: The SEBI (Infrastructure Investment Trust) Regulations, 2014 (“InvIT Regulations”) and its attendant notifications mandate that 90% of the cash flows from the underlying infrastructure assets shall be distributed to the investors of the InvIT Net Distributable Cash Flows (“NDCFs”). Some of the concession agreements governing the underlying infrastructure assets have long concession periods of 15 to 20 years, sometimes even 50 or 60 years. If the InvIT is well managed, then there would be an assured 50 to 60 years of stable and predictable cash flows, depending on the tenure of the underlying concession agreement.
  • Infusion of Public Funds: Traditionally infrastructure projects have only attracted funding from syndicated banks, investments from developers, and the government. With this unique model, not only are institutional investors allowed an opportunity to invest money into these projects, but the general public can also own a stake in the development of the infrastructure sector by holding units in InvITs.
  • The professionalisation of Infrastructure Management: The InvIT Regulations mandate a minimum number of years of experience in handling certain volumes of transactions or projects for the key stakeholders of an InvIT, such as the Sponsor, the Trustee, the Investment Manager, the Project Manager, and even the auditors.
  • High-Quality Underlying Assets: The InvIT regulations have very specific norms on what kind of infrastructure assets can be rolled over into the InvIT framework. The regulations specify that only those projects that have started generating revenues after completion of construction or achieved commercial operations date (“COD”) or at the pre-COD stage of the project with almost 80% of the construction work complete, or those projects that have received all requisite approvals and certifications (non-PPP projects), can be rolled over into the InvIT framework.
  • Special Tax Recognition: The Finance Act, 2014, added a new definition of “Business Trust,” which applies to InvITs and REITs, under which these types of entities enjoy certain benefits. The most recent amendment in the Finance Act of 2020 included unlisted InvITs and REITs under the umbrella of business trusts. Prior to the above amendment, only listed InvITs and REITs enjoyed this recognition. Some of these advantages include the pass-through mechanism, wherein any dividends earned from an InvIT are not taxed at the InvIT level, but in the hands of the unit holder. Similarly, interests from debt provided to the underlying infrastructure assets are also taxed only at the level of the unitholders, thus avoiding double taxation. There is also a push by Niti Aayog to introduce Section 54EC capital gains exemption status under the Income Tax Act, 1961, to InvIT units,[15] similar to the bonds issued by the National Highway Authority of India, Power Finance Corporation Limited, Indian Railways Finance Corporation Limited, and Rural Electrification Corporation Limited.

 

Risks of InvITs

 
  • Regulatory Risks: The concept of InvITs is very unique to India, and therefore SEBI’s InvIT Regulations are one of a kind in the world. Since the introduction of the InvIT Regulations in 2014, there have been regular changes to the laws so as to make them effective for on-the-ground rollouts of InvITs. Some risks connected with these changes still need to be accounted for.
  • Credit Rating Risks: Many credit rating agencies have difficulty appropriately valuing the returns that can be generated from the underlying infrastructure assets. Since the disaster of IL&FS, there have been several attempts to introduce different rating methodologies that apply uniquely to the infrastructure sector, as opposed to the standard rating processes that are used for manufacturing and other service industries. In fact, vide its July 2021 circular, SEBI introduced the “expected loss” model for rating infrastructure assets. As this is an evolving sector, considerable revisions can be expected in the methodology of rating infrastructure assets, which can pose a potential risk.
  • Operational Risks: The pandemic has been the biggest disruptor of the infrastructure sector in recent times. Similar force majeure incidents, along with other risks associated with the operation of assets, such as erratic usage of the operating assets, for example, inadequate traffic in a road project or increased operational costs due to lack of availability of raw materials in solar-powered power generation and transmission plant leading to increased operational costs in the subsequent supply-chain and many similar issues can decrease the value provided by the underlying infrastructure assets.
 

InvITs in India – The Scenario Thus Far

India is witnessing a boom in the number of InvITs that are getting established. Currently, there are 18 InvITs registered with the SEBI. With increased impetus provided to the National Monetisation Pipeline, the NHAI has offered 3 additional road projects totalling 247 kms to its InvIT, attracting international pension funds such as the Canada Pension Plan Investment Board and the Ontario Teacher’s Pension Plan Board as anchor investors.[16] The profitable returns provided by the initially established InvITs, such as the India Grid Trust and IRB InvIT, touched 56% and 83% in 2021.[17] Therefore, it is not surprising that there is an increased interest in investing in infrastructure development by such pension funds and sovereign funds. For example, the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan each took 25% equity in the INR 6,000 crore issue of NHAI’s InvIT as anchor investors.[18] Similarly, the private InvIT, IRB Infrastructure Trust, recently completed INR 243 crores worth of fund raising with IRB holding 51% and the Singapore-based sovereign fund GIC holding 49% in the InvIT.[19] Other InvITs looking to raise funds include the Canadian pension fund CDPQ-owned Indian Highways Concessions Trust[20] and Tata Powers intending to reduce debt from its renewable energies business by hiving off the same into an InvIT.[21] The railways sector, similarly, has a mandate to monetise its assets via the InvIT route.[22]

All of these are indicative of increased activity in the infrastructure funding space via InvITs. The Government of India’s push for increased asset monetisation, combined with the regulatory body, SEBI’s proactive approach to reducing the risks associated with investments in InvITs, is providing more assurances to foreign investors. However, the returns provided by the initially established InvITs in the country have proven to be a decisive attraction factor for investors.

Refernces:

[1] https://dea.gov.in/sites/default/files/Report%20of%20the%20Task%20Force%20National%20Infrastructure%20Pipeline%20%28NIP%29%20-%20volume-i_1.pdf

[2] https://www.niti.gov.in/national-monetisation-pipeline

[3] https://www.india.gov.in/spotlight/pm-gati-shakti-national-master-plan-multi-modal-connectivity

[4] https://www.india.gov.in/spotlight/bharatmala-pariyojana-stepping-stone-towards-new-india

[5] https://www.niti.gov.in/e-mobility-national-mission-transformative-mobility-and-battery-storage

[6] https://economictimes.indiatimes.com/news/economy/policy/asset-monetisation-government-beats-fy22-target-with-rs-96000-crore/articleshow/90807193.cms

[7] See generally, Morth’s Basic Road Statistics of India, 2016-17, available at https://morth.nic.in/sites/default/files/Basic%20_Road_Statics_of_India.pdf, Last visited on July 15, 2022

[8] See generally https://www.statista.com/statistics/686447/india-total-number-of-ports/, Last visited on July 15, 2022

[9] See generally the website of Indian Railways Civil Engineering Portal, https://ircep.gov.in/AboutUs.html, Last visited on July 15, 2022

[10]

See generally https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1779817, Last visited on July 15, 2022

[11] See generally https://iwai.nic.in/waterways/new-waterways/106-new-waterways, Last visited on July 15, 2022

[12] See https://www.ideasforindia.in/topics/macroeconomics/india-s-asset-monetisation-plan.html#:~:text=In%20August%202021%2C%20Government%20of,used%20for%20new%20infrastructure%20investment. Last visited on July 15, 2022

[13] The Australian model of the Asset Recycling Initiative which involved the sale of public assets for funding public infrastructure projects was one such endeavour. See https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview201415/InfrastructureGrowth. Last visited on July 19, 2022.

[14] See https://www.business-standard.com/about/what-is-asset-monetisation#collapse . Last visited on July 19, 2022

[15] See generally https://www.business-standard.com/article/economy-policy/niti-aayog-suggests-tax-incentives-for-investment-in-invits-121083000870_1.html. Last visited on July 22, 2022.

[16] See https://www.business-standard.com/article/current-affairs/nhai-offers-three-additional-roads-to-its-invit-totalling-247-km-122060300921_1.html

[17] See https://economictimes.indiatimes.com/markets/stocks/news/with-invits-get-returns-of-8-10-and-good-diversification/articleshow/85468305.cms

[18] See https://www.business-standard.com/article/markets/cppib-and-ontario-teachers-pension-plan-bag-nhai-s-maiden-invit-121110301236_1.html and https://www.business-standard.com/article/current-affairs/nhai-offers-three-additional-roads-to-its-invit-totalling-247-km-122060300921_1.html. Last visited on July 20, 2022.

[19] See https://www.business-standard.com/article/companies/private-invit-irb-infrastructure-trust-completes-rs-243-crore-fundraising-122042200552_1.html. Last visited on July 20, 2022.

[20] See https://www.business-standard.com/article/companies/indian-highway-concessions-looks-to-raise-rs-910-cr-via-private-placement-122061300932_1.html. Last visited on July 20, 2022.

[21] See https://www.business-standard.com/article/companies/tata-power-s-plan-to-reduce-debt-through-invit-gets-delayed-122041200035_1.html. Last visited on July 20, 2022

[22] See https://www.business-standard.com/article/economy-policy/centre-may-noty-be-able-to-monetise-railways-rs-18-000-cr-assets-via-invit-122070600307_1.html. Last visited on July 20, 2022.

Image Credits: Photo by Fivesouls Faisol

The Government of India’s push for increased asset monetisation, combined with the regulatory body, SEBI’s proactive approach to reducing the risks associated with investments in InvITs, is providing more assurances to foreign investors. However, the returns provided by the initially established InvITs in the country have proven to be a decisive attraction factor for investors.

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Critical Challenges in the Logistics Sector and a Way Forward

The Indian logistics sector has been on a path of steady and robust growth for the past few years, owing to the rising retail and manufacturing ecosystem in the country. According to the notification[1] of the Ministry of Finance, logistics infrastructure includes “Multimodal Logistics Park comprising Inland Container Depot (ICD) with minimum investment of Rs 50 crore and minimum area of 10 acre“. The importance of the logistics industry is not only paramount to maintain the economic ecosystem of the country, but also balance the national and international trade.

Introduction to the Logistics Sector

In practicality, the industry has broadened to include transportation and warehousing, protective packaging, material handling, order processing, marketing, customer service, distribution, value-added services, payment collection, packaging, documentation, customer brokerage facilities, kitting, repair management and reconfiguration and also reverse logistics. Ergo, all activities in the logistics supply chain.

Illustration I: Basic Logistics Supply Chain Process


 

The Importance of the Logistics Sector and the Role of Logistics Lawyers

 

As per the data published by Indian Investment Grid[2], an initiative of the Ministry of Commerce and Industry, the Indian logistics sector was valued at USD 160 billion in 2019, and by the end of 2022, it is expected to be valued at USD 215 Billion.. As per the World Bank’s Logistics Performance Index, India’s rank has escalated from 54 in 2014 to 44 in 2018. .

Further, in 2021 India’s logistics sector was valued at $160 billion that employed over 22 million people directly. It is expected to grow at a CAGR of 10 per cent to $215 billion by 2022.[3] Consequently, the logistics industry provides an overall positive scope and opportunity to the Indian economy as well as India’s infrastructure sector.

Since the logistics industry is vast, the role of logistics lawyers and infrastructure lawyers too is dynamic in nature. It ranges from carrying out due diligence, feasibility studies, regulatory approvals, drafting important project and transaction documents, contract management, risk management, regulatory-commercial-financial advice to dispute resolution and handling and advising in litigation.

 

Challenges in the Logistics Sector

 

One of the foremost challenges that the logistics sector faces today arise due to poor infrastructure. Physical infrastructure impacts transportation which facilitates logistics. The country faces challenges in port and roadways infrastructure which directly impacts the transportation of goods. Fuel costs and policy changes directly impact the logistics sector, since the higher the costs of fuel, the higher are the transportation and freight costs which would directly impact the logistic companies and businesses to stay afloat. The economic and socio-political changes in policy would also result in inflation of prices, and in turn, affect costs and disrupt the supply chain. Although the logistics industry has shifted to a more technological friendly environment over the past few years, the industry still faces challenges in safeguarding the documentation, which would be paramount in substantiating claims at the time of arbitrations and litigations. Lack of accurate data at the time of documentation along with several manual processes further aggravate this problem.

The ongoing pandemic has led to several policy changes such as perpetual and partial lockdowns which have directly affected the workers and the labourers of the nation, resulting in delay and/or stoppage of work. This is one of the causes of time overruns and an important cause of disruption in the supply chain. Furthermore, other challenges in the logistic sector involve several compliances that need to be followed in a timely manner, along with maintaining import and export licensing. Other legal issues involve insurance policies, bank guarantees and traversing through taxation compliances and implications.

Some of the challenges faced by the logistics sector are displayed below:

Illustration II: Challenges in the Logistics Infrastructure Industry in India

A vast majority of India’s trade is facilitated by the shipping industry. Furthermore, it is also known that the Government intends to encourage public-private partnerships in the shipping sector and help the local shipping industry with financing ship acquisitions [4]. Therefore, the shipping logistics sector has a promising outlook in the Indian economic ecosystem in the coming future

Commercial disputes in shipping logistics are adjudicated under civil courts with pecuniary jurisdiction and high courts with admiralty jurisdiction. Furthermore, there are established special commercial courts under the Commercial Courts Act, 2015 which deal with subject matters of commercial logistics disputes ranging from admiralty and maritime disputes,  issues related to the sale of goods, and those related to import-export, carriage of goods etc. However, prior to approaching the courts, mediation is mandated. Procedurally, along with the pre-institution mediation and settlement, the Commercial Courts Act, 2015 brings along a firm and time-bound approach into the maritime and logistics legal procedures. In the case of M/s SCG Contracts India Pvt. Ltd v. K.S. Chamankar Infrastructure Pvt. Ltd. & Ors[5], the importance of the timely process was asserted wherein the Supreme Court held that interim applications for rejection of statement of claims or plaint will not pause the 120-day deadline process. Certain challenges in litigations and disputes also relate to jurisdiction, cause of action and limitation barred suits.

The Indian Carriage of Goods by Sea Act, 1925 applies to outward cargo i.e., ships carrying cargo from India to foreign ports. The Multimodal Transportation of Goods Act, 1993 applies to multimodal transportation of cargo from one place in India to a place outside India using more than two means of transport. For cargo claims, the Indian Bills of Lading Act, 1856 is applicable. The Specific Relief Act, of 1963 deals with the specific performance of contracts from an equitable remedy standpoint. Other contractual obligations, disputes and damages arising out of breach of contract would be dealt with by the Indian Contract Act, 1872.

As per a report released by RedCore, the Indian Road Logistics market is said to reach about 330 billion by the year 2025[6]. The Ministry of Road Transport and Highways (“MORTH”) and the National Highways Authority of India (“NHAI”) are entrusted with the task of formulating and administering policies on road transport and freight. Whereas, the Carriage by Road Act, 2007 provides for the regulation of common carriers of goods by road. The Carriage by Road Rules, 2011, stipulates conditions for the grant of registration which applicants must comply with. Some of the challenges that the road transport sector faces are lack of road infrastructure, poor network connectivity and unorganized players with high levels of competition.

 

Case Study: The Ever Given, the Cargo Ship Stuck in the Suez

 

It is known that in the year 2020, more than 50 ships per day on average passed through the 190-km-long waterway of the Suez Canal, which accounted for around 12% of international trade. One of the ships during the time was ‘The Ever Given’. It is estimated that about 90 % of the world’s trade is transported by sea. Ever Given was stuck in the Suez Canal for a period of 6 days. It is estimated that more than $9 billion worth of goods pass through the 190 km waterway each day, amounting to around $400 million per hour. Therefore 6 days of the Ever Given being stuck in the Suez Canal caused cascading havoc to global trade and the logistics supply chain. 

Another instance of how the Ever Given stuck in the Suez affected the global logistics supply chain is the hindrance of trade between Asian and European nations in the following year. It is a known fact that waterways are one of the important mediums for transportation and trade between Asia and Europe. Cotton is regularly supplied from India to Europe by the Suez Canal, similar to the movement of petroleum along the Suez from the Middle East. This directly impacted the supply chain as it resulted in problems with warehousing.

 

A Way Forward for the Logistics Sector

 

As it is noted by the above case study, not having sufficient means of warehousing results in a higher possibility of facing challenges resulting in the disruption of the logistics supply chain. Force Majeure events such as the pandemic have unveiled the need for more warehouses to combat this situation. Furthermore, the GST regime of the Indian Government in recent years has brought about a positive impact to the logistics industry by enabling quicker transportation due to the uniform rate of taxes in all states of India and unhindered transit of goods by the abolition of entry levies. The need of the hour is to develop adequate warehousing infrastructure in the fringe areas of major metropolitan trade hubs of the country and in high commerce corridors. To combat other legal challenges, it is suggested that there should be an organized inventory of all logistics and supply chain documentation for the purpose of claim substantiation which will be necessary at the time of arbitrations and bilateral disputes. Furthermore, moving forward to a technology-driven documentation approach would highly impact the logistic sector by avoiding transit delays and untimely deliveries caused due to improper documentation.

References:

 

[1] Ministry of Finance, Department of Economic Affairs, Notification.No.13/1/2017-INF dated 26th April 2021

[2] Invest in logistics sector in India, National Infrastructure Pipeline, India Investment Grid, https://indiainvestmentgrid.gov.in/sectors/logistics (last visited Nov 25, 2021

[3] https://www.thehindubusinessline.com/opinion/impact-of-logistics-industry-on-economic-growth-amidst-a-pandemic/article36139749.ece

[4]  [4] https://www.thehindubusinessline.com/economy/logistics/budget-gives-a-leg-up-to-ship-leasing-from-international-financial-services-centre/article64962397.ece

[5] M/s SCG Contracts India Pvt. Ltd v. K.S. Chamankar Infrastructure Pvt. Ltd. & Ors. C.A. No. 1638 of 2019

[6] https://www.pgurus.com/indias-road-logistics-market-to-see-a-surge-expected-to-reach-330-bn-by-2025/

 

Image Credits: Image by fancycrave1 from Pixabay 

The need of the hour is to develop adequate warehousing infrastructure in the fringe areas of major metropolitan trade hubs of the country and in high commerce corridors. To combat other legal challenges, it is suggested that there should be an organized inventory of all logistics and supply chain documentation for the purpose of claim substantiation which will be necessary at the time of arbitrations and bilateral disputes. 

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Budget 2022: Ushering a Golden Era in the Indian Infrastructure Landscape

This Budget seeks to lay the foundation and give a blueprint to steer the economy over the AmritKaal of the next 25 years – from India at 75 to India at 100. It continues to build on the vision drawn in the Budget of 2021-22. Its fundamental tenets, which included transparency of financial statement and fiscal position, reflect the government’s intent, strengths, and challenges. This continues to guide us. – Smt. Nirmala Sitaraman

The Union Budget of 2022-2023 that estimates India’s economic growth at 9.2% amidst the Omicron wave entered with a strong statement into the AmritKaal, that ushers India@100 with its goal at a macroeconomic level growth. It focusses to promote public and private investments, development backed by technology, digital economy, fintech, energy and climate action. Building on the Budget of 2021-2022, this Budget of 2022-2023 acknowledges strengthening of health infrastructure, Productivity Linked Incentive for achieving the vision of AtmaNirbhar Bharat, commencement of activities of the National Bank for Financing Infrastructure and Development (NaBFID) and National Asset Reconstruction Company and continues to provide a blueprint for India@100 along with a multi-modal approach guided by PM GatiShakti.

PM GatiShakti

Propelled by seven engines, namely, Roads, Railways, Airports, Ports, Mass Transport, Waterways, and Logistics Infrastructure and supported by Energy Transmission, IT Communication, Bulk Water & Sewerage, Social Infrastructure, Clean Energy and Public Private Partnership (PPP), PM GatiShakti is aimed to steer sustainable development, economic transformation, seamless multimodal connectivity and logistics efficiency comprising the State Government infrastructure and National Infrastructure Pipeline.  

Roads: Expansion of National Highways network by 25,000 km in 2022-23 along with mobilization of 20,000 crore

Seamless Multimodal Movement and Logistics: Unified Logistics Interface Platform (ULIP) for data exchange to improve the logistics scenario in India by adopting a unified and integrated view of the Indian logistics value chain. Further boost has been facilitated through implementation of Multimodal Logistics Parks at four locations through PPP mode.

Railways: Introduction of 400 new Vande Bharat trains, 100 PM Gati Shakti cargo terminals in the next three years, bringing 2,000 km of network under the indigenous world class technology Kavach, along with redevelopment and modernization of the stations, integration of Postal and Railways networks, aiding local business and supply chain through ‘One Station-One Product’ concept are a few measures to ensure next generation of energy efficient trains, better passenger experience and seamless movement.

Connectivity: Multimodal connectivity between mass urban transport and railway stations is envisaged. Innovative solutions such as National Ropeways Development Programme on PPP mode has found a place in the Budget wherein 8 ropeway projects for a length of 60 km will be awarded.

Inclusive Development

Financing startups for agriculture and rural enterprise through a fund with blended capital raised under the co-investment model, facilitated through NABARD has been provided. River linking projects and finalization of Detailed Project Report for linking of 5 rivers has also been contemplated.

Extension of Emergency Credit Line Guarantee Scheme up to March 2023 and expansion of its guarantee cover by 50,000 crores to total cover of 5 lakh crores in order to aid the MSME sector with additional credit has been put forward. 

Infusion of funds in the Credit Guarantee Trust for Micro and Small Enterprises scheme and an outlay of 6,000 crore in the Raising and Accelerating MSME Performance (RAMP) programme shall assist in additional credit, employment opportunities and infusing competitiveness, efficiency and resilience in the MSME sector. Allocation of 48,000 crores for affordable housing covering 80 lakh houses along with reduction of time required for approvals related to land and construction is a step to ensure housing for all.

Under the Prime Minister’s Development Initiative for North-East, PM-DevINE, scheme, an initial allocation of 1,500 crore has been presented for funding infrastructure and social development projects such as roads and ropeways. The Budget also proposes construction of village infrastructure, tourist centres, road connectivity and provisioning of decentralized renewable energy.

Productivity Enhancement & Investment, Sunrise Opportunities, Energy Transition, and Climate Action

Bosting ease of doing business, expanding the scope of single window portal for all green clearances, urban development especially of 2 and 3 tier cities, modernization of building byelaws, implementation of Town Planning Schemes (TPS), and Transit Oriented Development (TOD) are a few other measures proposed by the Budget. 

In order to promote clean and sustainable mobility emphasis on clean tech and governance solutions, special mobility zones with zero fossil-fuel policy, and EV vehicles is given.

Impetus has been given to government procurement by introducing reforms such as use of transparent quality criteria, payment of 75 per cent of running bills within 10 days, settlement  through conciliation, end-to-end online e-Bill System, and use of surety bonds instead of bank guarantee. 

The Budget has also used PPP as the mode for laying optical fibre in all villages to enable access to affordable broadband and mobile service especially since 5G mobile services shall be rolled out. 

Amendments to the Insolvency and Bankruptcy Code to enhance the efficacy of the resolution process and introducing a new legislation to replace the Special Economic Zones Act in to ensure optimal usage of available infrastructure and competitiveness is of the exports are a few suggested legislative reforms. 

Allocation of 19,500 crore in the Solar sector, introducing four pilot projects for coal gasification and conversion of coal into required chemicals, transition to circular economy and carbon neutral economy are steps in the direction of combating climate change.

Financing of Investments

Promotion of green infrastructure through issue of sovereign Green Bonds, setting up of International Arbitration Centre in the GIFT City, inclusion of 107 Data Centres and Energy Storage Systems within the umbrella of Infrastructure, promotion of thematic funds for blended finance with 20% Government share are a few measures introduced by the Budget to embolden its objective of financing of investments. The financial viability of the Infrastructure projects has by adopting global best practices, innovative ways of financing, and balanced risk allocation has been proposed.

CapEx Coupled with Infrastructure Spearheads Budget 2022

The Budget ensures capacity building for Infrastructure projects. It aims to provide seamless connectivity, logistics synergy and convenience for the commuters along with reducing congestion and promoting tourism. The Budget promotes innovative ways of financing, reduces logistics cost and time and aims to improve international competitiveness.

Along with its proposed reforms and allocation of funds, it can be said that the Infrastructure coupled with capital expenditure will be spearheading the Budget. We hope to see contracts awarded to EPC Contractors and PPP Projects for rail development. Expansion of expressway through EPC/PPP model will undoubtably usher concession to private players and EPC Contractors. Overall, the Infrastructure development through PPP mode has been propagated by the Budget right from village infrastructure, urban planning, projects in the Northeast region to Solar projects and green infrastructure projects.

Moreover, reforms in legislation and policies such as the procurement policy is a stride towards economic development and building the nation. Finally the Budget also provides for issuance of Surety Bond to the Developers/Contractors in the place of Performance Bank Guarantee (PBG) which will ease the financial burden of the Concessionaire/Developer/Contractors in obtaining the said PBG from the Banks by depositing of 100% Margin Money.

Image Credits: Photo by Ivan Bandura on Unsplash

Building on the Budget of 2021-2022, this Budget of 2022-2023 acknowledges strengthening of health infrastructure, Productivity Linked Incentive for achieving the vision of AtmaNirbhar Bharat, commencement of activities of the National Bank for Financing Infrastructure and Development (NaBFID) and National Asset Reconstruction Company and continues to provide a blueprint for India@100 along with a multi-modal approach guided by PM GatiShakti.

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Public Procurement Reforms: Light at the End of the Tunnel

The imperatives of a growing and liberalized economy impel objectivity and transparency in the decision-making process. A substantial amount is spent by the Government in procuring several goods and services in order to discharge the duties and responsibilities of the assigned work. This drives the need for uniform, systematic, efficient, and cost-effective solutions in accordance with the applicable rules and regulations. The need of the hour propelled the release of guidelines for reforms in public procurement and project management, General Instructions on Procurement and Project Management, by the Ministry of Finance (hereinafter referred to as the “Procurement Guidelines”). 

Incorporating innovative rules to facilitate faster, efficient, and transparent execution of projects remains the predominant objective of the Procurement Guidelines. The Procurement Guidelines attempt to empower executing agencies to make prompt and efficient decisions in accordance with public interest, probity, and fairness. Since the challenge lies in executing the projects within the stipulated time and cost without compromising on the quality, the role of these Procurement Guidelines is paramount

 

Overview of the Procurement and Project Management Guidelines

 

The Procurement Guidelines stipulate a presentation of the findings of the project feasibility study or the preliminary project report to the designated competent authority to provide an assessment of the overall situation and risk mitigation methods. These discussions may also become a part of the Detailed Project Report (DPR) wherein the field units of the public authority shall be a part of the DPR preparation process. The involvement of field units of the public authority is essential in the endeavour for appropriate solutions since these field units are custodians of legacy data of a particular geographical region.

The Procurement Guidelines provide that the availability of minimum necessary encumbrance free land should be ensured before awarding the contract. Ascertaining the same will be done on a case-to-case basis or based on the general guidelines issued by the concerned authority. The Procurement Guidelines prescribe expedition of the process for obtaining statutory and other clearances and monitoring of the progress in obtaining clearances by the public authority. Avoidance of delay in execution of work and deviation in quantities of items of work is prevented by ensuring the availability of approved architectural and structural drawings prior to the invitation of tenders. A pre-notice inviting tender conference is proposed to obtain industry inputs. The empanelment of contractors in a fair, equitable and online manner for specific goods and services that are required regularly is also prescribed.

Several reforms have been set forth in the tender document which is salient in governing the relationship between the parties. The need for clarity in clauses that do not give scope for multiple interpretations has been proposed with emphasis on provisions pertaining to milestones, approvals, price variation, quality assurance plan, technical eligibility, and financial eligibility criteria. The contractors shall receive payment at every stage in proportion to the quantum of work done. The Procurement Guidelines have initiated payment of interest in case of delayed payments of bills submitted by the contractor backed by an online system for monitoring to identify and avoid unwarranted delays. Moreover, the efficiency of procurement is enhanced by making online tendering a default method for bidding projects.

Technology backed solutions have been proposed for periodic review of the projects. Use of project management systems for recording delays on a real-time basis, capturing the progress, quality of work, site records and photographs including geotagging have been proposed. The need to clearly define the role of Project Management in the contract has been stressed upon.

In cases of a single bid in the tender, certain conditions have been stipulated to prevent the cost of rebidding and banish the notion of rebidding being a safe course of action since rebidding leads to further costs and delays. As far as the procurement was advertised with sufficient time to submit the bids, qualification criteria were not unduly restrictive and reasonable prices in comparison to market values have been quoted, single bids are considered valid.

A graded authority structure has been proposed to grant an extension of time. Framing of methods such as single or limited tenders for part completed contracts wherein 20% of the work has been billed by the contractor who has abandoned the project has been introduced. This will reduce the inconveniences, loss of amenities, time and cost due to half-completed work. The Procurement Guidelines mandate EPC contracts to mention broad technical specifications with the freedom to the contractor to optimize the design. The incorporation of conditions in the tender documents for procurement of consultancy services and fixed budget-based selection has also been presented.

Quality cum Cost Based Selection (QCBS) for procurement of works and non-consultancy services where the value of procurement does not exceed Rs. 10 crores and has been declared as a Quality Oriented Procurement, is set forth as an alternative method of procurement. In the case of QCBS, the maximum weightage given to non-financial parameters should not exceed 30%. Weightage for timely completion of similar projects in the past may also be considered in the tender documents along with fulfilment of mandatory criteria for evaluation of bid and joint ventures may be allowed subject to adequate safeguards.

Acknowledging the adverse implications of litigation on timelines and overall project cost in form of heavy damages or additional interest cost, the Procurement Guidelines demand a critical review of the award by a special board or committee. This board or committee should consider legal merits, probability of success, costs and must be satisfied that an appeal is likely to be more beneficial. An appeal should be recommended only upon application of mind on the facts and circumstances of the case and analyzing the chances of success. The Procurement Guidelines stipulate compliance to Rule 227A of the General Financial Rules, 2017 (GFRs) according to which the Department/Ministry that has challenged the arbitral award has to pay 75% of the arbitral award including interest to the contractor or concessionaire against a bank guarantee. The payment should be made into the designated escrow account. Personal accountability shall arise in case of non-compliance to Rule 227A of GFRs to the extent of additional interest in the event the final court order is not in favour of the procuring entity.

 

A Step in the Right Direction

Transparency should trickle down into public procurement in order to facilitate competition, fairness and elimination of arbitrariness in the system. The Procurement Guidelines stipulate several appreciative reforms. The release of payment to the contractor in commensuration of the completed work will provide liquidity to the cash-strapped contractors. Review of work at various stages of contracts leads to an assessment of delay in execution of work by the concerned stakeholder and serves as a record in case of a dispute. Right of way for projects remains a major concern since minimum necessary encumbrance free land shall be determined on a case-to-case basis or general guidelines which may lead to further delays owing to peculiarities or absence of guidelines. Despite conditions being laid down to deal with situations of a single bid, the same may not promote a competitive bid. Alternative solutions such as the Swiss Challenge method may be used in order to prevent monopoly. It is pertinent to note that the L1 approach as the chief criterion to award the project has been eliminated thereby emphasizing the quality of work. While releasing 75% of the award for projects stuck in disputes is a welcome step, a proper mechanism to realize the advantages of the same must be established without which the contractor would be burdened with poorly negotiated bank guarantees and be required to open an escrow account in case of EPC projects. Nevertheless, a robust system instils confidence in the prospective tenderers to formulate competitive tenders. Undoubtedly, the concentrated efforts are a step in the direction of economic development, removal of unwarranted roadblocks and addressing the plaguing problems in public projects.P

Image Credits: Photo by Ivan Bandura on Unsplash

Transparency should trickle down into public procurement in order to facilitate competition, fairness and elimination of arbitrariness in the system. The Guidelines stipulate several appreciative reforms. The release of payment to the contractor in commensuration of the completed work will provide liquidity to the cash-strapped contractors. Review of work at various stages of contracts leads to an assessment of delay in execution of work by the concerned stakeholder and serves as a record in case of dispute.

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Government Incentives for Infrastructure Development

India is emerging to become a global leader in investing in world-class infrastructure projects, in view of concrete plans set out in the 2021 Budget. With unwavering growth in the Indian stock market witnessed by indexes touching unprecedented highs, the Indian infrastructure sector is filled with signs of optimism as the country reels out from the effects of the pandemic. Current trends suggest a boost in infrastructure spending that shall also facilitate infusion of overseas capita for investments in other sectors and an availability of credit for infrastructure projects.

The government’s National Infrastructure Plan for 2019 to 2025 has already supported more than 9000 projects having a total project cost surpassing USD 1949 billion.[1] The National Infrastructure Pipeline is a live database of infrastructure projects and provides attractive investment opportunities in projects worth more than INR 100 crores in sectors including Transport, Logistics, Energy, Water and Sanitation, Communication, Social and Commercial Infrastructure.[2]

 

Apart from this, opportunities are available through the government’s ‘India Investment Grid’ (IIG) for investing in stressed assets to allow the purchase of viable stressed assets which have the potential for being turned around.[3] IIG also facilitates Corporate Social Responsibility opportunities for businesses to invest in infrastructure building in the education, healthcare sectors and for poverty alleviation as part of their CSR spending.[4]

These investment opportunities are coupled with a bold move towards introducing National Bank for Financing Infrastructure and Development Act, 2021. The long-overdue initiative establishes a government-owned Development Finance Institution (DFI) for extending long-term affordable debt financing to infrastructure projects. The DFI is set to receive initial funding from the government and is projected to have a lending capability of a minimum of INR 5 trillion by 2024-25. The appointment of the veteran banker, Mr. K V Kamath as the chairperson of the newly set up INR 20,000 crore DFI- National Bank for Financing Infrastructure and Development, falls in alignment with the developmental and financial objectives of DFI.

The INR 40, 000 crore National Investment and Infrastructure Fund (NIIF) anchored by the Government of India in 2015 is also gaining momentum through its funds namely, Master Fund, Fund of Funds and Strategic Opportunities Fund each with a designated purpose.

 

Impetus has been given to the domestic manufacturing ecosystem through the Atmanirbhar Bharat initiative, especially to Micro, Small and Medium Enterprises (MSMEs) aiming to facilitate local manufacturing. As a further boost to the initiative, the government intends to achieve a turnover of US$ 25 billion including export of US$ 5 billion in aerospace and defense goods and services by 2025[5]. An increase in the capital expenditure will augment the procurement of weapons, aircraft, warships, and other military hardware. Posing as a lucrative market for defense companies, India gives orders worth US$ 100 billion a year for defense procurement.[6] Therefore, the Finance Ministry has permitted Foreign Direct Investment (FDI) in the defense for sector up to 74 percent under the automatic route leading to access of modern technology, strategic partnerships between foreign manufactures and defense equipment manufacturers in India. It also promotes active utilization of the Technology of Funds scheme that supports MSMEs in catering to the requirements of technological development in the defense sector.  

 

With a capital infusion of INR 1,000 crores to Solar Energy Corporation of India, there is a likely surge in large-scale solar installations, grid-connected projects, solar plants, and solar parks along with a phased manufacturing plan for solar cells, solar panels, and domestic production of solar inverters and solar lanterns.

 

The Government of India has also earmarked areas including highways, railways, power grids, and airports to monetize public infrastructure for financing new public projects. Statutory authorities have already begun setting up infrastructure investment trusts (InvIT) which will hold the public infrastructure assets for national as well as international institutional investors. Another avenue under consideration for obtaining public investment into infrastructure projects is issuance of tax-efficient zero-coupon bonds by infrastructure debt funds.

 

Major tenders worth more than INR 20 billion are expected to be issued in the coming financial year for public-private partnership in the management and operations of ports.

 

The logistics sector serves national trade, international trade, MSMEs, and start-ups. The launch of INR 100 crore Gati Shakti National Master Plan for Multi-Modal Connectivity has heralded new possibilities. This digital platform will incorporate the infrastructure schemes of various Ministries and State Governments like Bharatmala, Sagarmala, inland waterways, dry/land ports, UDAN etc; Economic Zones like textile clusters, pharmaceutical clusters, defense corridors, electronic parks, industrial corridors, fishing clusters, Agri zones will be covered to improve connectivity and make Indian businesses more competitive[7]. The National Logistics Policy is expected to promote seamless movement of goods through a focus on digitization, process re-engineering, multi-modal transport, EXIM trade, etc.[8] It is designed to streamline rules and address supply-side constraints, leading to lower logistics costs, the boost of trade, enhancement of Logistics Performance Index and greater competitiveness for Indian products worldwide.

 

In the power sector, apart from an INR 3 trillion outlay planned over the coming five years for revamping the power distribution scheme by providing distribution companies with financial assistance for developing a smart-metering infrastructure, the government is also in the advanced stages of launching a National Hydrogen Mission which may provide an opportunity for corporations in the power sector to engage in the export of green hydrogen and green ammonia while also meeting the domestic demand.

 

These dynamic initiatives clubbed with the use of India’s IT capabilities by creating monitoring mechanisms such as a dashboard to track the progress of publicly monetized infrastructure projects have created attractive opportunities for infrastructure companies to mobilize their assets into the establishment of new development projects.

 

Fox Mandal’s Infrastructure, Project Finance, and Energy Teams deliver unmatched expert services in wide-ranging areas of public infrastructure, inclusive of but not limited to ; transaction assistance for infrastructure projects, services of review, compliance, submitting tender documents, structuring and reviewing concession agreements, incorporation of Special Purpose Vehicles (SPVs), procuring relevant licenses and approvals, regulatory clearance facilitation, dispute resolution, strategy planning, and infrastructure contract bidding management.

 

As a commendation for the services rendered by Fox Mandal, the Firm featured in 2021 Legal 500 Rankings for its Projects & Energy Practice vertical.  

 

References: 

[1] https://indiainvestmentgrid.gov.in/national-infrastructure-pipeline

[2] https://indiainvestmentgrid.gov.in/opportunities/nip-projects/transport and https://indiainvestmentgrid.gov.in/national-infrastructure-pipeline

[3] https://indiainvestmentgrid.gov.in/opportunities/stressed-assets/transport?subSector=112%2C37%2C110%2C108%2C109%2C107%2C106%2C111%2C113

[4] https://indiainvestmentgrid.gov.in/opportunities/csr-projects?sector=29%2C10&subSector=97%2C99%2C157%2C94%2C100%2C93%2C102%2C105%2C96%2C95%2C103%2C104%2C98%2C112%2C37%2C110%2C108%2C109%2C107%2C106%2C111%2C113

[5] https://www.investindia.gov.in/sector/defence-manufacturing

[6] https://www.business-standard.com/article/economy-policy/higher-fdi-in-defence-sector-to-attract-mncs-give-make-in-india-a-boost-120051900698_1.html

[7] https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1763638

[8] https://www.thehindubusinessline.com/opinion/logistics-and-supply-chain-trends-for-2021/article36366467.ece

 

Image Credits: 

Photo by David Rodrigo on Unsplash

These dynamic initiatives clubbed with the use of India’s IT capabilities by creating monitoring mechanisms such as a dashboard to track the progress of publicly monetized infrastructure projects have created attractive opportunities for infrastructure companies to mobilize their assets into the establishment of new development projects.

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Anatomy of Risks in PPP Projects in India and How to Mitigate Them?

The infrastructure space has always been a capital-intensive sector. Particularly for a developing country such as India, the unique financing and project implementation models that Public-Private Partnerships (“PPP”) represent is considerable for enabling the construction of large-scale public infrastructure projects with significant long-term economic value and ensuring necessary infrastructure development is undertaken in the country.

However, considering the long timelines, involvement of multiple stakeholders, and significant capital expenditure in infrastructure projects, there are significant risks associated with them that are likely to emerge at any phase of the project. So far, in India, PPP seems to be the only viable model for the implementation of public infrastructure projects in an otherwise cash-strapped economy.

In this article, we will briefly discuss the broad phases of any PPP project, associated risks and the suggested risk mitigation measures.

Phases of a PPP Project

The broad phases of a PPP project are as below:

Phases of PPP ProjectEach of these phases is critical for ensuring the long-term success of viable PPP projects. In brief, the following activities are undertaken in each of these phases.

  1. Phase 1 (PPP Bidding Phase): Subsequent to the requisite feasibility studies by the government, the potential PPP project is given the go-ahead, commencing the bidding phase. As a first step to the bidding process, the authority issues an Expression of Interest (“EOI”) and/or a Request for Quote (“RFQ”) and/or a Request for Proposal (“RFP”), followed by the preparation of a Concession Agreement (“CA”). The highest bidder is chosen, the project is awarded to the successful bidder and the CA is executed thereafter. Post the issuance of the Letter of Award to the successful bidder, several procedures are to be followed, such as achieving financial closure, undertaking technical planning and design, obtaining necessary permits and approvals, and establishing a proper team for implementing the project.
  2. Phase 2 (PPP Development Phase): The next phase is the construction phase, where the project is implemented. After the construction of the facilities is completed, the authority inspects. If the inspection is satisfactory, it declares the project ready for operation and sets the commercial operation date (“COD”).
  3. Phase 3 (PPP Operation & Maintenance): Following the COD declaration, this phase designates a project in operation, which includes maintenance during the operation phase.

 

Risks and Their Mitigation Mechanisms

The most common and significant risks in PPP are:

  1. Delays in land acquisition or rights of way – This is one of the most critical risks in every PPP project. When the land acquisition processes fail, timely access to sites and other subsequent formalities stand compromised leading to unwarranted delays in the development project.
  2. Delays in obtaining relevant approvals/permits – Prior to large scale construction projects being commenced, there is a requirement to obtain different types of permits and approvals for commencing such activities, such as environmental clearance, permits for moving civic activities to other locations, etc.
  3. Design Risk – Usually means a faulty design that does not meet predetermined parameters of the facility, requiring changes, resulting in time and cost overruns.
  4. Inflation Risk – Inflation leads to an overall increase in the price of raw materials, transportation costs and general costs of services. This is aggravated by undue delays in projects translating to an increase in the overall project cost.
  5. Revenue/Demand Risk – This is where the forecasted revenue for the project and/or the potential that can be generated has been improperly projected or based on outdated data, thereby affecting the viability of the project.
  6. Construction/Completion Risk/Time and Cost Overruns Risk – One of the major risks in PPP project that causes delays in achieving COD is delays in construction and eventual completion.
  7. Financial Risk – Difficulty in raising project finances or raising very expensive financing that may not be feasible in the long run. Read a detailed analysis of the Project Cost in Infrastructure Projects
  8. Operational Risk – Inefficiencies in operating costs, lead to higher operating costs, arresting leakage of revenue.
  9. Political/Regulatory Risk – Changes in political and/or regulatory regimes that result in project devaluation, lower revenues or faulty project implementation.
  10. Performance/Default/Termination Risk – When the private contractor or consortium is responsible for investing funds in the project’s execution and becomes insolvent or undertakes faulty construction and erection of facilities due to lack of expertise on the part of the private contractor.
  11. Asset Value/Technology Obsolescence Risk – Occurs when the technology is not a proven one or when the asset value decreases significantly owing to policy or regulatory changes.
  12. Social and Environmental Risks – The project affects the local environment in the region of construction or has a significantly adverse collateral impact on the local population in the region, thereby creating obstacles in the implementation of the project or increasing time and cost overruns.
  13. Absence of renegotiation clause in CA – This is one of the oldest demands of many concessionaires in any PPP project in India, which is yet to be addressed by the authorities. As CA is valid for a longer duration, sometimes lasting 30 years, no concessionaire is in a position to perceive risk which may affect the project during the length of the entire concession period. The authorities should provide the necessary mechanisms for renegotiation of long-term PPP contracts.

Now we shall examine a few case studies that would demonstrate any combination of the above set of risk factors.

Case Study 1: Delhi – Gurgaon Expressway[1]

The National Highways Authority of India (“NHAI”) was entrusted with the task of executing the golden quadrilateral project wherein the four metro cities were sought to be connected. The Delhi-Gurgaon Expressway stretch of the golden quadrilateral project was to be executed via the Build, Operate and Transfer (“BOT”) method and was awarded to a consortium of Jaiprakash Industries Ltd. and DS Constructions Ltd. Right from the start, there were several issues with the execution of the project. They’re discussed as below.

  1. Land acquisition – NHAI was responsible for granting the right of way to the concessionaire, which was delayed significantly, leading to a delay in developing and a consequential delay in commissioning the project.

Mitigation mechanism: NHAI should not bid out any project until 90 % of the land is acquired and subsequent possession is taken over.

  1. Approvals – The obtaining of permits/approvals is another important risk to be addressed. NHAI shall assist the bidder in facilitating the said approval within the stipulated time as envisaged in the CA.

Mitigation mechanism: To speed-up the process, the government could have constituted a single authority that the concessionaire could approach to expeditiously obtain all the required permits/approvals.

  1. Design & Social Risk – Such large-scale projects possess the capability of displacing and affecting multiple lives and families.

Mitigation mechanism: Large-scale public consultations involving affected families and relevant government agencies should have been conducted prior to the commencement of the project, to mitigate their concerns and ascertain viable steps forward.

  1. Technology Risk – NHAI generally relied on older traffic studies to predict the volume of traffic to arrive at bid numbers. This was a gross underestimation of the eventual flow of traffic, leading to an improper estimation of traffic numbers.

Mitigation mechanism: NHAI should use the latest technology and traffic studies to finalise the bid numbers.

Case Study 2: Vadodara Halol Toll Road[2]

The Vadodara Halol Toll Road was one of the first projects involving the widening of state highways and commenced under the aegis of the Government of Gujarat. The Infrastructure Leasing and Financial Services (“IL&FS”) was roped in by the Government of Gujarat to develop the road project. A special purpose vehicle (“SPV”) was incorporated for this purpose and the project was developed using the Build, Own, Operate and Transfer (“BOOT”) model. Considering that the World Bank was one of the investors in this project, high standards of execution and implementation were followed, and this project turned out to be an example of best practises followed to mitigate various types of risks. The same is discussed below, along with a few mitigation strategies where appropriate.

  1. Environmental and Social Risk: One of the significant plus points of this project was the extensive environmental and social impact assessment that was undertaken during the project development phase itself. As per initial reports, around 300 families would have been affected by the initial plan of the project. However, intense public consultations were held at the development stage of the project and bypasses and various alternatives were introduced and the number of affected households was eventually reduced to 10. The project also complied with the environmental and social norms by creating wetlands, reducing emissions, constructing pedestrian subways, planting 550 trees across the sides of the roads, creating noise barriers at sensitive receptors and deepening the waterbodies in some villages along the project site.
  2. Policy Risk: The drop in revenues because of eventual changes in government policies certainly affected the concessionaire’s ability to recover their investment from the project.

Mitigation mechanism: Robust consultations and even ongoing consultations with several government departments and agencies to ensure government incentives to increase road traffic in this area might have been useful in mitigating this policy risk and enabling the project to recoup its initial investments.

  1. Financial Innovation / Risk: This is one of the first projects where innovative financing mechanisms were adopted such as the use of Deep Discount Bonds with the option of take-out financing, cumulative convertible preference shares and long-term loans from IL&FS. The project created several such examples of innovative financing, which were eventually replicated in other projects in the infrastructure industry.

Conclusion

In light of the discussed range of risks that one may encounter during the entire lifecycle of PPP projects and their potential impact; it is pertinent that the authorities approach every PPP project in every sector as a partnership and weighs the inputs of all the relevant stakeholders. If the government proactively strategizes to remove the unidirectional nature of PPP CAs in India, and both the private partner and the authorities work in resonance, the current risks plaguing the PPP project will be resolved, resulting in an active involvement and interest from the private sector in participating in PPP projects in India.

References:

[1] See “Case Study 8: Delhi Gurgaon Expressway” in Public Private Partnerships in India – A Compendium of Case Studies, available at https://www.pppinindia.gov.in/toolkit/pdf/case_studies.pdf. Last visited on November 1, 2021

[2] See “Case Study 6: Vadodara Halol Toll Road” in Public Private Partnerships in India – A Compendium of Case Studies, available at https://www.pppinindia.gov.in/toolkit/pdf/case_studies.pdf. Last visited on November 1, 2021

Image Credits:

Photo by Lance Anderson on Unsplash

Considering the long timelines, involvement of multiple stakeholders, and significant capital expenditure in infrastructure projects, there are significant risks associated with them that are likely to emerge at any phase of the project. So far, in India, PPP seems to be the only viable model for the implementation of public infrastructure projects in an otherwise cash-strapped economy.

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