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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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Being COVID Sanguine: Some Silver Linings to the Pandemic

Given the devastating effects the COVID 19 pandemic has had on the world in general and India in particular, you’re probably wondering about the title of this blog. Don’t get me wrong- I am in no way trying to diminish the massive damage to life, livelihoods and health that the pandemic has brought upon millions of people in India and around the world. Had I seen a similar title even 4 months ago, I too would probably have experienced thoughts similar to what you felt. 

So what has changed in a matter of a few weeks? There has been a major drop in the number of cases around the country; instances of serious infections requiring ICU care have also declined. The vaccination drive is going from strength to strength, with as many as 10 million people being vaccinated across India on a single day.

But the biggest change is in my own perspective. Earlier, I always saw only the negative and the bleak, but now I am beginning to see some positives. And that’s what prompted me to write this piece. Here are five specific areas in which I see positives.

Our people exhibited phenomenal resolve and resilience

The second wave (March-June 2021) was especially brutal on India. Our healthcare infrastructure was stretched beyond breaking point. Oxygen was in short supply, as were critical drugs. Medical experts were trying to firm up treatment protocols. Although vaccinations had begun for some people, the Cowin portal was glitchy and even vaccine supply chains were far from streamlined.

But we saw hundreds of self-help groups come up on platforms like Whatsapp and Telegram. Volunteers would man them 24×7 to ensure that across India, patients and their families got access to critical resources including food, oxygen cylinders and medicines. These supplemented (and often replaced) government measures. Technology was used to the fullest, to ensure that people knew where vaccine doses were available, so they could quickly register.

The pandemic has powered a surge of innovations

Almost every day, there were/are media reports around some innovative activity in India. Some emanate from the government sector: for example, in many cities, stadia and large school buildings were converted into makeshift hospitals or Covid Care Centres.

There are many examples of innovation emerging from private enterprise too. For example, given the large quantities of PPE waste being generated, someone came up with a way to convert used PPE kits (which would otherwise have to be incinerated or buried safely in landfills) into briquettes that can be used for constructing low-cost housing.

Around the country, different teams developed prototypes of low-cost oxygenators and ventilators. This will be a source of great benefit to the country because it reduces dependence on imports. And as we have seen, geopolitical triggers or maritime issues (like the ship getting stuck in the Suez Canal) can wreak havoc with global supplies.

Recently, I read about a woman-led team in Hyderabad inventing a fabric that has anti-virus and anti-bacterial properties. Imagine the wide range of applications at home, in workplaces and public spaces for such a versatile invention.

 

Public-Private Partnership (PPP) redefined

The notion of Public-Private Partnerships too has changed in the last 18 months or so. Whether this is a direct result of the pandemic or more the outcome of policy changes is perhaps hard to separate. But India as a nation is seeing much higher levels of collaboration between government laboratories and infrastructure and the private sector. DRDO collaborating with start-ups for developing drones that can be used for vaccine delivery is one example. Another is ISRO encouraging startups and even students to design satellites. A third is ICMR collaborating with Bharat Biotec in the development of Covaxin, India’s first indigenous Covid vaccine.

Passions are changing into professions, creating employment opportunities

On the one hand, the pandemic has killed many livelihoods. But with many people looking at new, home-based business ventures- and using digital channels to market themselves and deliver their products (and in some cases, services too), one can hope that they will be able to scale and over time, some job losses can be offset. Examples include food delivery, baking, making pickles etc.  Of course, India still needs contact-based industries, such as construction and manufacturing, to pick up and get back on track.

Attempts to harness the creative talent of our youth

This may not be directly linked to the pandemic, but I believe that greater participation will result because of the restrictions imposed by it. The government is looking for innovative ideas from our youth. The Bureau of Police Research and Development (BPR&D) and The All India Council for Technical Education (AICTE) recently announced Manthan 21, a “hackathon” aimed at getting our country’s youth to come up with innovative solutions to address the challenges faced by our intelligence and security agencies. Specific areas have been identified. (more details are available here: https://manthan.mic.gov.in/about-intellithon.php).

 

Experts say that the world around us has changed for ever, and there’s a “new normal” in the wake of the pandemic. There is no doubt about that. But hybrid working models or other changes visible in the organized sector (especially in larger firms and companies) are not the only changes to our world resulting from the pandemic. The impact of the less visible changes described above too will be felt by India and the world in the years ahead.

 

The second wave (March-June 2021) was especially brutal on India. But we saw hundreds of self-help groups come up on platforms like Whatsapp and Telegram. Volunteers would man them 24×7 to ensure that across India, patients and their families got access to critical resources including food, oxygen cylinders and medicines. 

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