1

Chapter 1: Introduction

1.1 General

Public–Private Partnership describes a government service or private business

venture which is funded and operated through a partnership of government and one or

more private sector companies. These schemes are sometimes referred to as PPP, P3 or

P3.

1.1.1 Public Private Partnership : The Concept:

The term private in PPP encompasses all non-government agencies such as the

corporate sector, voluntary organizations, self-help groups, partnership firms,

individuals and community based organization. It involves triangular relationships

between the State, Private Sector, and those who receive the services. In one sense PPP

is the arrangement between the Government or State Sector and the Private Sector

where Private Sector can take over, on contractual basis the services and functions,

traditionally provided by the State. It refers to long-term, contractual partnerships

between the public and private sector agencies, specifically targeted towards financing,

designing, implementing, and operating infrastructure facilities and services that were

traditionally provided by the public sector. These collaborative ventures are built

around the expertise and capacity of the project partners and are based on a contractual

agreement, which ensures appropriate and mutually agreed allocation of resources,

risks and returns.

The Department of Economic Affairs (DEA) defines PPPs as:

“PPP means an arrangement between a government or statutory entity or

government owned entity on one side and a private sector entity on the other, for the

provision of public assets and/ or related services for public benefit, through

investments being made by and/or management undertaken by the private sector

entity for a specified time period, where there is a substantial risk sharing with the

private sector and the private sector receives performance linked payments that

conform (or are benchmarked) to specified, pre-determined and measurable

performance standards”.

Typically, a PPP project involves a public sector agency and a private sector

consortium which comprises contractors, maintenance companies, private investors,

2

and consulting firms. The consortium often forms a special company or a ‘special

purpose vehicle (SPV)’. The SPV signs a contract with the government and with the

subcontractor to build the facility and then maintain it.

In some types of PPP, the cost of using the service is borne exclusively by the

users of the service and not by the taxpayer. In other types (notably the private finance

initiative), capital investment is made by the private sector on the strength of a contract

with government to provide agreed services and the cost of providing the service is

borne wholly or in part by the government. Government contributions to a PPP may

also be in kind (notably the transfer of existing assets). In projects that are aimed at

creating public goods like in the infrastructure sector, the government may provide a

capital subsidy in the form of a one-time grant, so as to make it more attractive to the

private investors. In some other cases, the government may support the project by

providing revenue subsidies, including tax breaks or by providing guaranteed annual

revenues for a fixed period.

1.1.2 Various forms of Public Private Partnership:

To enable the flow of private funds and resources into public infrastructure and

services, the PPP is operationalized through a contractual relationship between a public

body (the conceding authority) and a private company (the concessionaire). This

partnership could take many contractual forms, which progressively vary with

increasing risk, responsibility and financing for the private sector. The most common

partnerships are:

I. Service Contract: The Public authority (govt.) contracts out the provision of

specific services to a private provider (company) for a specific time period

(generally less than 5 years) in return for a management fee. However, the

government agency retains the overall responsibility for the operation and

maintenance of the system except for the particular contracted services and it

bears all the commercial risks.

II. Management Contract: This is somewhat similar to the service contract, but

differs in a way that it permits the private operator to take day-to-day decisions

and holds him responsible for operating and maintaining the system, but it does

not make private partner responsible for any capital risks.

3

III. Lease: Under this type of PPP, the government enters into a long term lease

agreement with a private company or builder to develop and operate an

expanded facility with its (private company’s) own fund. In this type of

arrangement, the private entity pays a lease rental to the government, and is

entitled to keep the revenue to recover its investment plus a reasonable return

during the lease period and assumes the operational risks.

IV. Concession (BOOT, BOT): A private entity is awarded a concession or franchise

by government to finance, build, own and operate a facility. In return, the

franchisee gets the right to collect user fee for a specified period, the ownership

of the facility is transferred to government.

V. BOT (Toll) and BOT (Annuity) Models:

a. BOT (Toll) Model :

o In a BOT (Toll) Model, the concessionaire (private sector) is required to

meet the upfront/construction cost and the expenditure on annual

maintenance.

o The Concessionaire recovers the entire upfront/construction cost along

with the interest and a return on investment out of the future toll

collection.

o The viability of the project greatly depends on the traffic (i.e., toll).

However, with a view to bridge the gap between the investment required

and the gains arising out of it, i.e., to increase the viability of the projects,

capital grant is also provided.

b. BOT (Annuity) Model:

o In an BOT (Annuity) Model, the Concessionaire (private sector) is

required to meet the entire upfront/construction cost (no grant is paid by

the client) and the expenditure on annual maintenance

o The Concessionaire recovers the entire investment and a pre-determined

cost of return out of the annuities payable by the client every year.

o The selection is made based on the least annuity quoted by the bidders

(the concession period being fixed).

o The client (Government) retains the risk with respect to traffic (toll),

since the client collects the toll.

In India, Planning commission has recommended BOT (Toll) model as first choice.

4

1.2 PPP in Highways: An Overview

1.2.1 Size of the Initiatives:

With an extensive road network of 3.3 million kilometres, India is the second

largest in the world. Indian roads carry about 61% of the freight and 85% of the

passenger traffic. All the highways and expressways together constitute about 66,000

kilometres (only 2% of all roads), whereas they carry 40% of the road traffic. To further

the existing infrastructure, Indian Government annually spends about Rs.18000 crores

(USD 3.704 billion).

1.2.2. Target

o Developing 1000 km of expressways

o Developing 8,737 km of roads, including 3,846 km of national highways, in the North

East

o Four-laning 20, 000 km of national highways

o Four-laning 6,736 km on North-South and East-West corridors

o Six-laning 6,500 km of the Golden Quadrilateral and selected national highways

o Widening 20,000 km of national highways to two lanes

1.2.3 Approach

o National Highways Authority of India (NHAI) is the apex Government body for

implementing the NHDP. All contracts whether for construction or BOT are awarded

through competitive bidding

o Private sector participation is increasing, and is through construction contracts and

Build-Operate-Transfer (BOT) for some stretches based on either the lowest

annuity or the lowest lump sum payment from the Government

o BOT contracts permit tolling on those stretches of the NHDP

o A large component of highways is to be developed through public-private

partnerships and several high traffic stretches already awarded to private

companies on a BOT basis.

1.2.4 Policy

o 100% FDI under the automatic route is permitted for all road development projects

o 100% income tax exemption for a period of 10 years

o Grants / Viability gap Funding for marginal projects by NHAI.

o Formulation of Model Concession Agreement

5

1.2.5. Outlook

o Annual growth projected at 12-15% for passenger traffic, and 15-18% for cargo

traffic

o Over $50-60 billion investment is required over the next 5 years to improve road

infrastructure

An annual growth of 12-15% for passenger traffic has been projected

6

Chapter 2: Literature Review

Planning Commission, Government of India (2004), Public-Private-Partnership (PPP)

provides an opportunity for private sector participation in financing, designing,

construction and operation & maintenance of public sector programmes and projects.

The time has come to forge a greater interface between the public and the private sector

in a wide range of activities in the country. The overwhelming response of voluntary

organizations in the aftermath of the earthquake in Gujarat was an outstanding example

of public-private-partnership (PPP). The subsequent ‘reconstruction’ involving

expenditure of around US $ 2 billion was also implemented through the PPP mode. The

Government of Gujarat succeeded in constructing community school buildings, private

health centres and private housing more cost-effectively through public-private-

partnership.

Association of voluntary organizations and non-profit service agencies in

implementation of government programmes in India is a decade old practice. Various

schemes in the social sector are implemented by the State Governments in collaboration

with VOs/NGOs and the local community. The Government of India has been extending

the requisite grants-in-aid for its Centrally Sponsored Schemes, which are routed

through the State Governments. The public-private-partnership (PPP) brings in greater

professionalism to bear on this association through introducing meaningful concepts.

There is, nevertheless, scope of further expanding its coverage and also involve the

private corporate sector in this endeavour. This may sometimes require legal and

regulatory reforms in select sectors. Any amendment/reform in legislation is, however,

possible when the essential features of PPP are well understood.

One of the persuasive arguments in favour of PPP is the promise of better quality

of service through clear customer focus. It is also argued that introduction of PPP would

reverse the years of chronic under-investment through mobilizing public and private

capital. Although experience, in this regard, shows that it did not open the floodgates to

private sector participation. Perhaps, there is a need for greater public participation in

PPP projects through ‘risk sharing’ to assure the private sector of the necessary

‘comfort’ they may look for.

Participation of the private sector in rural development is encouraged. The

private sector can choose the project. The projects when implemented would help the

7

rural poor to derive benefits of rural development. Maintenance of rural roads in three

districts of Maharashtra is being done by the sugar co-operatives under PPP. The

Department is examining the possibility of expanding PPP, for maintenance of rural

roads and the computerization and maintenance of land records (sale and purchase

deeds).

A closer look at the poor performance of public utilities and social services, in

general, also shows that the disease lies in the ‘monopoly’ characteristic of such

activities. Since there is no alternative to the existing (in-house) service providers, the

citizens are left with no option other than that of “take it or leave it”. The executives/

bureaucracy (low & high) may thus take the liberty to indulge in lethargy, corruption

and high handedness. It has, therefore, been commented that the important distinction

is not public versus private rather it is monopoly versus competition. In this respect, PPP

may be looked at as a measure towards administrative reforms.

The realisation of the significance of PPP in the development of the country is a

big step of the Government of India. The report laid a lot of emphasis on the application

of the tool of PPP in the fields of education, healthcare, family welfare, agriculture, rural

& urban development etc. It presses on significant goals and their implementation with

the use of the PPP mechanism and also highlights future goals.

India Infrastructure Report (2008) mentioned that Roads and Highways are the biggest

of India’s PPP infrastructure projects. Indeed, among all other sectors, roads have

elicited maximum interest and optimism among private players for PPP. Even the

government has outlined some policy initiatives in order to attract private investments

in road infrastructure projects. As per NHAI, some of these incentives are as follows:

o Government will carry out all preparatory work (like land acquisition and utility

removal etc.)

o NHAI/Government of India will provide capital grant of up to 40 per cent of

project cost (on case to case basis)

o 100 per cent tax exemption for ten years

o Concession period allowed up to thirty years

o In BOT projects, the entrepreneur is allowed to collect and retain tolls.

o Duty free import of specified modern high capacity equipment for highway

construction.

8

As per the NHAI, over the next ten years (up to 2018), about 32,000 km of national

and 25,000 km of state highways need to be widened, at a cost of Rs 1700 billion;

highway maintenance will require over Rs 950 billion. NHAI is also repairing the four-

laning of 10,000 km of national highways outside the NHDP. The current thinking

suggests that most sections would be toll-based BOT, with less viable routes awarded

through cash contracts or annuities. Public support will be capped at 40 per cent of

project cost (25 per cent during construction and 15 per cent over the concession

period). The future of companies in this business thus appears bright. Project execution

skills and scalability will, however, be very critical in differentiating successful

companies from the rest.

It is well established that private developers deliver greater value for money at

the construction stage. Under these circumstances, ‘shadow toll’ may prove to be a good

model. This approach was initially adopted in the UK, where government award

concessions to build-operate and maintain toll-free highways and then compensate the

investors based on roadway usage and/or availability of those facilities. Shadow toll

roads are currently operating in the UK, Finland, Spain, and Portugal.

In a country like India where railways functions as the artery for goods and

public transport system, It was initially difficult to allocate whole sum funds for a rather

unimportant sector of roadways, In the form of PPP the government of India and the

states were able to get appropriate Initial capital for building such huge infrastructure

and the guarantee for the returns for the investments made in the same.

Problems in PPP arise from the improper implementation, in policy, there is as

such no guideline which leads to confusion and problems but political hindrance and

influence do lead to the loss of efficiency and poor quality of the project and the time of

completion of the entire project. In case of BOT the user is required to pay toll to use the

utility, it becomes difficult to get returns for the idle and structure for community uses.

In NHAI Report, 2010, it was said that the National Highways Authority of India (NHAI)

is mandated to implement the National Highways Development Project (NHDP). Most of

the projects have been developed or are under development on Public Private

Partnership (PPP) basis through Build Operate and Transfer (BOT)-Annuity and BOT-

Toll mode (these have been explained in detail in later section of the brochure).

Typically, in an annuity project, the project IRR is expected to be 12-14% and equity IRR

9

would be 14 -16%. For toll projects, where the concessionaire assumes the traffic risk,

the project IRR is expected to be around 14-16% and equity IRR around 18-20% The

NHDP is being implemented under several phases:

Phase I mainly involves widening (to 4 lanes) and upgrading of 7,498 km of the national

highway network and has four component packages (linking of metropolitan cities, NS

and EW corridor, Port Connectivity, Other important roads) .

Phase-II involves widening and improvement of the NS-EW corridors (not covered

under Phase-I) covering a distance of 6,647 km, besides providing connectivity to major

ports on the east and west coasts of India and some other projects. This includes 6,161

km of NS-EW corridors and 486 km of other highways. The total length of the NS-EW

network under Phases I & II is about 7,200 km.

Phase-III involves upgradation of 12,109 km (mainly 4- laning) of high density national

highways, through the Build, Operate & Transfer (BOT) mode at a cost of INR 80,626

Crore (USD billion).

Phase IV With a view to providing balanced and equitable distribution of the

improved/widened highways network throughout the country, NHDP-IV envisages

upgrading of 20,000 km of such highways into 2-lane highways, at an indicative cost of

INR 27,800 Crore (USD 5.6 billion).

Phase-V, under this 6-laning of the 4-lane highways comprising the GQ and certain other

high density stretches, will be implemented on BOT basis at an estimated cost of INR

41,210 Crore (USD 8.2 billion). These corridors have been 4-laned as part of the GQ in

Phase-I of NHDP. Implementation of initial set of projects has already commenced and

the entire package is expected to be completed by 2012. Of the 6,500 km proposed

under NHDP-V, about 5,700 km would be taken up in the GQ and the balance 800 km

would be selected on the basis of predefined eligibility criteria.

Phase VI: With the growing importance of urban canters of India, particularly those

located within a few hundred kilometres of each other, expressways would be both

viable and beneficial. The Government has approved 1,000 km of expressways to be

developed on a BOT basis, at an indicative cost of INR 16,680 Crore (USD 3.3 billion).

These expressways would be constructed on new alignments.

Phase VII: The development of ring roads, bypasses, grade separators and service roads

are considered necessary for full utilisation of highway capacity as well as for enhanced

10

safety and efficiency. For this, a programme for development of such features at an

indicative cost of INR 16,680 Crore has been approved by the Government.

Hence we see that the early success of Public-Private-Partnerships (PPP) in the

NHDP, arguably, set the tone for similar initiatives in other infrastructure sectors and

has provided the single largest opportunity for private financing and management of

infrastructure services. More than 60% of the estimated investment requirement is

expected to be privately financed.

NHAI projects, with higher traffic volumes, have also been bid out on the basis of

Negative Grant (upfront payment payable by successful bidder to NHAI). However,

under the revised MCA, projects under BOT/ DBFOT framework have also been

awarded on a revenue share basis, where the bidder offering the highest revenue share

(subject to technical qualification) is awarded the project.

Vijay raj Kumar Charles (2009) emphasizes the importance of good infrastructure in

boosting the economic status of a nation. The best way to go about achieving the same is

by enhanced private section participation. Mobilizing funds through greater co-

operation of privates sector will lead to greater development and fewer risks on account

of shared assets.

The author aims at seeking the reason behind varied presence of PPPs in

different states by delving into policy, regulation, availability of resources, exposure to

land and finances etc. Some of the conducive factors are low political risk, hassle free

implementation of policies, a trimmed and efficient bureaucracy, and infrastructure,

availability of power, low corruption and proper legal framework.

In the last 10 years, Indian states have made considerable innovation with

different structures to attract private participation in delivering infrastructure services.

According to the value of projects, the state of Karnataka tops the list with 92 projects at

an estimated value of `34795 Crore, followed by NHAI, Maharashtra, Ministry of Civil

Aviation, Sikkim, and Gujarat. Sector wise analysis indicates that, Road sector dominates

the list with maximum number of PPP Projects, 264 (67%), followed by urban

development, Ports, energy sector, Airport projects, and tourism projects 6, and 3

projects in Railways.

The Indian state governments have tried to create an environment that will be

attractive to investors and fair to customers. The approaches in structuring the

11

framework is divided among: combining dedicated institutions with cross-cutting

legislation; establishing and using cross-sectoral PPP advisory units to help line

departments in the absence of overarching legislation and relying on line departments

and sectoral agencies to build capacities.

Category-I, The states of Andhra Pradesh, Gujarat, Karnataka etc. have developed

enabling legislation and established dedicated cross sectoral institutions. These states

have constituted specialized agencies and passed legislations to promote PPPs in

infrastructure. (Example: Gujarat infrastructure Development Board, The Andhra

Pradesh Infrastructure Authority).

Category-II, A second category of states, such as Rajasthan, Uttaranchal, Kerala and

West Bengal have developed cross-sectoral facilitation entities, but have not passed

comprehensive legislation.

Category-III, Finally, a third category of states, including MP, Maharashtra and Tamil

Nadu, have relied on sectoral and line agencies to develop and implement PPPs.

Initially in M.P., the Public works Department (PMMWD) and then the specially

created MP Road Development Corporation (MPRDC) have acted as the agency for

development of road projects on BOT basis in the state. In the process of developing

projects, MPRDC has developed policy, guidance materials and skills for facilitating

PPPs in Road sector.

It can be said that there is no clear link between policies in a state or frameworks

with high number of PPPs. However, it can be safely assumed that states need to be

proactive in order to attract greater interest from private sectors. Those states which

have made their political intent clear by introducing laws are reaping benefits. The cost

of corruption is a major deterrent to PPPs. A lumbering bureaucracy will not be able to

efficiently process forms and the corrupt officials will only hinder true progress.

Companies need assurance that they will not have to spend countless, unproductive

hours greasing greedy hands. States that are already in possession of good

infrastructure facilities and which can guarantee continuous power supply are

considered ‘hot spots’ for investors. They will prefer such locations for a project over a

comparatively backward place. Poor transportation facilities may also prove to be a

‘deal breaker’. Availability and enforcement of Legal and Institutional frameworks that

12

are conducive for PPP investment are is no doubt important factors, for the investors

while deciding about investment in PPP projects. Since the government is responsible

for providing land, it is not an important factor. The estimated net-cost benefit should

be as high as possible.

There is still a long way for Indian states to go to realize their full potential when

it comes to PPPs, but the several innovative procedures already in use are making

strong headways. However, it is imperative for us to get our basics right and keep the

nation’s development above our own. There is lots of work still to be done.

S. Vasudevan (2003) emphasizes on the infrastructure policy of Karnataka for public–

private partnership. IDeCK (Infrastructure Development Corporation of Karnataka)

created policies and measures that are incentive compatible and have economic and

market logic, and that drew little administrative energies. The principal objective of the

policy was to encourage private sector participation in infrastructure development. The

policies included power(including power generation, transmission, distribution, and

power trading services), integrated transport and logistics(roads, bridges, railway

systems, ports, airports etc.), urban and municipal infrastructure(water supply and

sewerage systems, solid waste and garbage disposal facilities), industrial

infrastructure(industrial parks, Special Economic/Free Trade Zones, Export Promotion

Zones, industrial estates, and industrial townships) and infrastructure related to

tourism and agriculture.

The private sector was expected to play a key role in providing value for money

(VFM) by enhanced quality of services to users, reduction in and gradual elimination of

pricing constraints, enabling public funds to be earmarked for socially justifiable

projects, financial innovation and development of cost-effective solutions and savings in

costs by innovative designs, timely project implementation, and higher efficiencies in

operations.

The principle for the creation of an appropriate institutional and regulatory

framework was necessary. These included efficient use of existing assets and optimal

allocation of additional resources, equitable contractual structures i.e. that the

government would enter into suitable contractual arrangements with private

developers for development and management of both existing (O&M contracts, leases,

sale or divestment) and new assets (BOT, BOOT, etc.). It also included the transparent

13

process of procurement which would ensure that private services are procured in a fair

and transparent manner.

A single or two-stage process could be used for awarding contracts on the basis

of an open competitive bidding process depending on the complexity of the project. The

selection criteria used would be among quantifiable technical criteria, lowest present

value of financial support from GoK/subsidy, highest share (or present value) of

revenue, lowest present value of payments by GoK, highest upfront payment (or present

value of upfront payments), highest present value of future payments, lowest

concession period, lowest present value of user fees or highest premium (or present

value of) on equity shares offered.

The government has realized that fiscal incentives are perhaps necessary but not

a sufficient condition for successful private sector participation. A key priority of

government is the progressive elimination of subsidies and cross-subsidies so that

prices for services are commensurate with the real costs of provision. The draft

infrastructure policy developed by iDeCK for the Government of Karnataka provides an

‘umbrella’ framework for development/restructuring of various sectoral policies to

bring about purposeful reform in issues of governance that would allow greater private

participation in infrastructure projects. Further, it also provides a basis on which the

government would develop medium and long term strategies and implementation plans

for each of the infrastructure sectors clearly setting out the role for the private sector, in

both the management of existing assets and creation of new assets.

Though the Karnataka government has a long way ahead but these steps seem to

play an important role for infrastructure development. In order to meet the objective of

growth and equity, the government should build a strong PPP which is possible by the

true will of the government along with the participation of private sector in

infrastructure. The governments concern for making this possible can be seen by the

various policy incentives like providing an ‘umbrella’ framework for making the painful

and laborious governmental procedure fast , setting up a competitive and transparent

platform for allocation of projects to the private sectors, giving subsidies and tax

relaxation to them etc. Also the private sector is keen and excited to make such projects

reach their objectives, due to extent of profit involved in it.

14

Alfen Wilhelm (2006) considers economics in construction as a specific management

doctrine that intends to cover the interfaces between the pure technical and economic

as well as the various other aspects influencing the constantly changing business

environment of the real estate and infrastructure markets.

Alfen in 2004 analysed the possibilities of procurement of Federal highways as

Public Private Partnerships. Useful advice had been given to the public authorities on

three different levels, short-term, mid-term and long term. A short-term

recommendation had been the later successful establishment of the German A- and F-

models and the founding of the VIFG (Verkehrs Infrastruktur Finanzierungs

Gesellschaft), in the mid-term perspective the assignment of the duties planning,

financing and managing to the VIFG and in the long term the creation of sub-networks,

which can be applied by a concession model.

He, in 2005 studied the possibility of privatisation of the federal highways. The

formal, the functional and the material privatisation had been analysed. One major

conclusion was that the functional privatisation has a high potential concerning federal

highways. Among other things the following results appeared:

o Producing the possibility to apply route and sub-network concessions.

o Complete change from tax financing to user financing.

o Creation of sub-networks and apply as sub-network concessions

In this specific field there has been a lot of research in the last years, which can

be separated into three fields: privatisation, alternative procurement modes and user

financed schemes of federal highways.

Estimated future and current market needs:

Devising new schemes of public-private partnership seems to be an effective way

to overcome public balance constraints. Deregulation and privatisation were expected

to improve managerial efficiency, reduce the financial drain of public enterprises on the

public purse, offer a better solution to market failure problems (such as natural

monopoly) and introduce competition to sectors that are no longer understood to

constitute monopolies. Hence a continuing policy and promotion of PPP is needed to

form a stable PPP market. Otherwise economic up and downs will create an instable and

inefficient market. The public sector should think of PPP from a more sustainable

perspective, that if they want to have PPP as an alternative procurement method during

15

times of fiscal constraints there is also a need to support PPP during times of economic

growth.

Current and Future Research Needs:

Concerning the field of alternative procurement modes for transport

infrastructure a lot of research has been done in the recent years. Current research led

us to the conclusion to divide procurement modes into sector wise regulation and

provision, sector wise financing and project realisation. As a first step, the scope of our

work is to gain an explicit description and determination of different types of

procurement. In addition, we intend to use the framework to also be able to develop,

customize, manage and evaluate projects following different procurement concepts.

The main emphasis he laid was to give advice in three different levels: short

term, midterm, long term. The structure of this above given research project

distinguishes an operationalisation model and an industry framework. The operational

model is focusing project specific questions regarding planning, financing,

implementation and operation. It was his intention to break the understanding of

infrastructure further down in this structured research approach by introducing a four

stages approach that consists of the understanding of the cultural framework-, country-

specific-, sector-specific- and project-specific-characteristics. Safety incentives linked to

performance based indicators in PPP contracts have not been implemented very often

up to now. The functional privatisation has a high potential concerning federal

highways. He wanted to change the method from tax financing to user financing. He

thought of creating sub-networks and wanted to apply sub network concessions so that

it could ensure future development of public private partnership. He wanted the

research to continue in three different fields which are namely privatisation, alternative

procurement, and user financed schemes. It introduces competition to sectors that are

no longer understood to constitute monopolies.

Anant singh et al. (2009) emphasizes on some interesting queries arise in the minds of

the people, such as

o Why have some projects attracted private investment while others have not?

o Why only a few states have attracted PPPs, while some others have completely failed

to do so?

o Is PPP a viable and desirable public policy for development of infrastructure in poor

16

states?

o What are the lessons emerging from the Indian experience with PPPs so far?

It will be seemingly fair to mention the views of Mr. Anant, Delhi school of

economics, in this context as his views give us a good insight into the matter.

The success of the on-going eleventh five-year plan for infrastructure critically

depends on private investment. The private sector is expected to finance more than

eighty percent of the ambitious National Highways Development Project (NHDP),

undertaken to develop highways and expressways across the country. We examine the

performance of the Public Private Partnerships (PPPs) Programme of the Government

of India, for development of national highways and expressways. We study various

issues In India; the PPPs on national highways are sponsored by the National Highways

Authority of India (NHAI) on behalf of the Ministry of Roads Transport and Highways,

Government of India.

The state governments have a crucial role to play in the implementation of the

PPP contracts. Under a PPP the public as well as the private sectors can contribute

towards the provisions of public goods or services, such as roads, railways, ports,

airports, etc. The government can provide land for the project site, regulatory

clearances, and a concession right to the contractor/concessionaire. The private sector,

on the other hand, is expected to invest funds during the construction and maintenance

phases of infrastructure projects.

The first policy framework for PPPs was introduced in 1997 as decision of the

Cabinet of the Central Government. The highway PPP policy essentially provided for

two kinds of contracts – BOT toll contracts and BOT annuity contracts. The national

highways are owned by the Government of India. The national highway Act has been

amended in 1995 with a view to attract private investment in road development,

maintenance and operation. With this amendment, private investment in infrastructure

via PPPs has become a possibility.

The contractual clause for the PPP has several desirable and efficiency enhancing

attributes. Provisions for suspension and termination of the contract avoid moral

hazard during the implementation phase. The clauses encourage the concessionaire to

complete the project sooner and avoid time overrun by also encouraging the use of

better technology.

17

Under NHDP, national highways are being upgraded. The program has to be

implemented in seven phases; Phase I-VII. While Phases I, II, III, V, VI and VII are to be

executed by the NHAI, the Phase IV will be executed by the parent Ministry of Shipping,

Roads Transport and Highways. Work has started only on Phases I, II, III and V. As on

July 31, 2009 a total of 405 road projects have been undertaken for up gradation. Some

of these projects have been undertaken on PPP basis. Since the first PPP project, the

number of PPPs has been ever increasing over the years.

National highways covered under Phases I, II, III and V span across most states in

the union of India. Though the NHAI has tried giving the up gradation work on PPP

scheme in all states, some states have attracted more PPPs than others.

Tamil Nadu, Andhra Pradesh and Maharashtra are the favourite states; together

these states account for as much as 45% of all PPPs in the country. States like Assam,

Jharkhand, Bihar, Orissa and Kerala. On the other hand ,However , to assess the relative

success of states merely in terms of the number of PPPs is not plausible Since, the

number of PPPs in a state does not necessarily reflect the financial stakes involved in

PPP projects in that state.

In this paper, the author States with higher per capita income have attracted

more PPPs than the poorer states. Road projects located in richer states have shown

higher probability of attracting private investment than those located in the poorer

ones. Other things remaining the same, projects located on national highways

connecting richer states and those located closer to mega cities have exhibited higher

probability of becoming PPPs. Similarly, keeping all other things constant states with

better governance index and projects located in them have higher probability of

attracting private investment. The likelihood of private investment increases in direct

proportion to the per-capita SGDP. Private sector is likely to invest only in projects if

they are located very close to some big city. For example, states like Rajasthan can hope

to attract PPPs on major national highways passing through the state that connect Delhi

and Haryana in the North with Gujarat and Maharashtra in the South.

L. Weidner et al. (2003) emphasized the formulation of the technical assistance (TA) for

preparing a public-private partnership (PPP) expressway project in Sri Lanka. As the

18

current load on the roads is already very high and with the development it is likely to

rise at an enormous rate, thus there is a greater need for this project.

The Asian Development Bank held discussions with responsible Officials of the

concerned agencies, including the Ministry of Policy Development and Implementation;

Ministry of Enterprise Development, Industrial Policy, and Investment Promotion

(MOED IP&IP); Ministry of Finance; Ministry of Highways (MOH), Board of Investment

(BOI); and Bureau of Infrastructure Investment (BII) for the same. Subsequent to the

Fact-Finding Mission, the Government decided to single source from its own funds

consulting services from PricewaterhouseCoopers (Pvt.) Ltd, India in association with

PricewaterhouseCoopers Private Limited, Sri Lanka (PWC), and Snowy Mountains

Engineering Corporation International PTY Limited (SMEC), to assist in the

development of the Colombo-Katunayake Expressway (CKE) on a PPP basis.

Roads account for about 92% of freight and passenger traffic in Sri Lanka and

play a critical role in the country’s development. The road network spans 83,880

kilometres (km). The network is divided into three categories: (i) the primary system of

about 11,650 km of national highways (classes A and B) serving interprovincial and

long-distance traffic; (ii) the secondary system, consisting of 13,880 km of provincial

roads (classes C, D, and E) serving intra-provincial traffic; and (iii) the tertiary systems,

comprising 58,350 km of local roads. Despite the extensive road network, its quality and

capacity is not sufficient to meet the present and expected future demand for passenger

and freight transport services. Most roads were built more than 50 years ago and

current traffic levels exceed the design capacity of many roads. This has resulted in high

traffic accident rates and overall traffic congestion. Road maintenance, rehabilitation,

and new construction have not kept pace with the rapid growth in demand for

transport. Financial boost to the project has been provided by Asian Development Bank.

Asian Development Bank has provided nine loans for the road sector, totalling $400

million, and 18 Technical Assistance, totalling $8.55 million. Among multilateral funding

agencies, ADB is currently the largest multilateral agency to the road sector in Sri Lanka

and is coordinating its support with other external agencies.

As per author the consultants will identify, review, and analyze the existing

policy, regulatory, and institutional frameworks for private sector involvement in the

financing, constructing, operating and maintaining expressways. In addition to this, they

will evaluate the constraints to the existing frameworks' abilities to enhance public

19

sector financing capacity, and attract private sector participation according to policy

objectives, this is the action methodology.

The total cost of the Technical Assistance is estimated at $1.0 million equivalent,

comprising $736,000 in foreign exchange and $264,000 equivalent in local currency

costs. ADB will provide $800,000 comprising $736,000 in foreign exchange costs and

$64,000 equivalent of local currency cost.

For proper implementation of the project a project steering committee (PSC),

subject to ADB’s approval, will be established for the Technical Assistance. The PSC will

provide overall policy guidance to the consultants and ensure the quality of the study. In

particular, the PSC will oversee the development of the model concession agreement

and set up a technical subcommittee for this purpose, with representatives from

relevant stakeholders, including lenders. The PSC will be co-chaired by the Ministry of

Finance, Ministry of Transport, Highways and Civil Aviation and Ministry of Policy

Development and Implementation.

Shunso Tsukada (2005) has stated comparison between Public sector and Public

sector’s working methodology and discussed the pros and cons of both construction

techniques. Also author has presented procurement analysis, finance details and credit

enhancement measures, apart from various bids cases.

Facing massive infrastructure needs, the private finance initiative (PFI) has

gained renewed attention from the development community. PFIs are more prevalent in

developing countries than in developed countries. This is due in part to the more severe

budgetary constraints developing countries are facing, and also due to the fact that main

cost elements such as labour, materials and land are still low in price in developing

countries. Strong skepticism still exists about the applicability of the PFI approach to

developing countries, particularly in Asia. This is largely due to the following intrinsic

difficulties associated with highway development:

o Risks associated with land acquisition and construction.

o Lumpy initial capital investments and the resultant long gestation period.

o Difficulties in traffic forecast and associated uncertainties in future revenue flow.

The strongest benefit of the BOT scheme (if structured correctly as indicated in a

“viability gap funding” or VGF scheme) lies in closing a hidden loophole in public sector

procurement. A major problem with public sector procurement derives from the fact

20

that the contract will usually be won by the lowest bidder. Tactics that experienced

bidders often employ is to bid low (often lower than cost price) and win the contract,

and then claim for the higher costs incurred later, by requesting compensation for

variations to contracts. As per past trend works which have been accomplished by

public sector the cost of projects have been cut down to a marginal extent but there are

drawbacks which add up to this marginal cost saving. They do not render cost of

Operation and Maintenance. It is almost impossible to compare real world performance

of these two systems viz. Public and Private, on the basis of specific cases. In this regard,

an analysis was conducted in 2007 by PricewaterhouseCoopers of India (PwC)

following a request from the Highway Authority of India (NHAI). The size of the sample

in the survey by PricewaterhouseCooper was 150, including 135 EPC contracts, 8 BOT

contracts and 7 annuity concessions. The average length of the highways covered by

each EPC contract was 31km. The major findings of this analysis are as below.

o The performance of BOT is far superior to other forms of contract in terms of cost

effectiveness and delivery time. At the time of the completion, construction costs

were 30% lower than EPC and 57% lower than annuity schemes. BOT construction

was completed one month earlier than the original schedule, in sharp contrast to the

average 16-month delays in EPC contract and 3-month delays in annuity contracts.

The above findings provide a clear justification for the GOI to move to BOT-PPP

schemes, away from the traditional item rate contracts using public sector financing.

As per him PFIs cover a wide spectrum of private sector participation, including:

(i) service contracts; (ii) management contract; (iii) leasing; (iv) concessions; and (v)

privatization, the second generation PPPs primarily focus on concessions, particularly

BOT schemes. The author also posited unsolicited bids, this occasionally happens in

case where private sector companies come up with a completely new project concept

which can bring major benefits to the communities through innovation.

On the financial status of the PPP associated projects author has described both

finance schemes viz, corporate finance scheme and project finance. Corporate finance is

a traditional way of financing investment is under which sponsors will borrow the

money from banks by offering the creditworthiness of the sponsoring companies as a

security for the payment of the entire debt and under project finance project company

(which is generally formed by sponsors) mobilizes necessary funds by pledging to

lenders the future revenue flow to be generated by the assets created by the project.

21

The later finance scheme is adopted generally when investment is more than $50

million (as per NHDP).

The BOT and annuity concession schemes mobilize funds through borrowing

from financial institutions, and through other financing methods including issuance of

bonds. This often requires a variety of credit enhancement measures or risk mitigation

measures so as to alleviate the concerns of financiers. The author quoted following

measures viz, Minimum revenue guarantee, Foreign exchange risk guarantee, Partial

credit guarantee, Political risk guarantee.

There has been a discussion over monoline and multiline services. For large

infrastructure projects such as those over $500 million, bonds are the most efficient

way of mobilizing the necessary funds for investment. However, if the project is BOT-

based, the cost of the bond would be very high because of the difficulties of recourse

and resultant low credit rating. However, if all the risks are covered by a reputable

guarantor, the credit rating will be upgraded and the cost of issuing the bond will be

immensely reduced. An innovative mechanism which has recently emerged is a

guarantee by financial insurance companies. Since this insurance is applied only to the

bond, this insurance service is often called a “monoline service” as opposed to

“multiline” insurance services which cover a variety of business activities.

The revenue generation from the PPP projects, so called PPP concessions is Tolls,

Capital grants, annuities and financial viability gap fund. Another important parameter

in deciding the selection of contractor is the length of concession period. To overcome

the problem of fixed length of concession period a system of least present value of

revenue (LPVR) was developed.

A key lesson of the program is that the government has to be aware of the

contractor driven nature of the BOT program. It should be noted that the BOT concept

was originally devised by the construction industry at the time when excess capacity of

the construction industry existed. The government should design the BOT scheme in

such a manner to ensure that the assets created by BOT contractors are properly

operated and maintained. To enhance the creditworthiness of projects, the Government

should introduce a minimum revenue guarantee and also an exchange rate guarantee.

As the competition becomes intense, the tolls proposed by bidders will become lower

and lower but, at the same time consideration should be taken to decide a floor level of

tolls so that bids do not go below cost of project. There is a need to estimate properly

22

the negative impact of the competing roads. Also there is a need to check the

renegotiation of the cost of project by the private sector.

In order to create an immediate and visible impact on the ever-worsening traffic

congestion, the government should adopt a rather unusual selection criterion, the

shortest concession period instead of the conventional lowest toll criterion. As far as

finance is concerned, steps should be taken to increase the foreign investments in PPP

projects. Even though there is a risk factor involved, the agencies must show faith in the

lenders as if the project is completed successfully it is worth investing in the PPP

projects. Lack of planning can result in major failure, costing the nation an enormous

amount. However, if they are planned well, PPP schemes can bring benefits especially to

the developing countries like India.

23

Chapter 3. Case Study of Dewas-Bhopal Corridor

A case study of Dewas-Bhopal Corridor, built on BOT (Toll) basis has been done to

analyse the Public Private Partnership in highways project. And the SWOT analysis is

done of the same .Brief overview of the Project is summarised below:

Dewas-Bhopal Corridor

3.1 Project Summary:

3.1.1 The Site:

The road project is situated between Bhopal and Dewas. The Bhopal-

Dewas section of NH-86/SH-18 starts from Lalghati chowk in Bhopal city. The entire

length of 142.60 km consists of following sections:

i. Bhopal-Sehore existing four lane section (km 6/8 to 26/4) = 19.6 km

ii. Existing Sehore Bypass two lane section (ch 0.0 to 16+100) = 16.1 km

iii. Existing two lane road from end of Sehore bypass to Dewas Bypass junction (ch.

16+100 to ch. 123+100) = 106.9 km

Under the proposal, Bhopal – Sehore existing four lane section is proposed to be

strengthened and raised. The existing carriageway is proposed to be widened from 2

lanes to 4 lane width with 2.5m wide hard shoulder and 1.0m wide earthen shoulder

alongside. The new 2 lane carriageway is proposed alongside the existing carriageway

separated by a 4.5 to 10.5 m wide median. This section of state highway traverses

through a flat terrain of mostly agricultural belt except about 9.0 kms hilly stretch at

Dodi ghat.

24

An aerial view of the Dewas-Bhopal Corridor (New)

3.1.2 Technical Aspects:

Right-of-Way:

The existing ROW of the project road varies widely between 20m to 30 m.

land acquisition process to acquire additional land to have 50m ROW has been done.

Geometrics:

It is observed that the project highway predominantly has a straight

alignment and traverses through plain terrain. It is essential to provide improvement

proposals to the substandard geometric at various locations on the project roads.

Road condition survey and Pavement Composition:

As per the pavement condition data gathered from test pit investigations,

the total thickness of existing pavement varies from 170mm to 720mm. The pavement

mainly comprises of WBM base course over subgrade, overlaid by mainly thin layers of

bituminous macadam and mix seal surfacing/semi dense bituminous carpet or

bituminous concrete. The bituminous course layer’s thickness varies between 70mm to

380mm, while that of WBM between 100m to 350mm and GSB between 0 to 300mm.

Cross drainage works:

There are four major bridges on the project highway. There are

total 18 minor bridge and culverts on the project road.

25

3.2 The Concession Agreement:

The Concession Agreement for the four laning of Dewas-Bhopal corridor on BOT-

basis was signed on 30th June, 2007, between Madhya Pradesh Road Development

Corporation Ltd. (State Government Agency) and the private consortium which includes

M/s Dewas Bhopal Corridor Pvt. Ltd., M/s Chetak Enterprises Pvt. Ltd., and M/s BSBK

Pvt. Ltd. The agreement includes the detailed design, engineering, financing,

procurement, construction, operation and maintenance of the Project Highway under

BOT-basis.

The Total Project cost is the lowest of the following:

a. A sum of Rs. 426.64 Crores as on Toll Date.

b. Actual capital cost of the Project upon completion of the Project Highway as

certified by the Auditors; or

c. Total project cost as set forth in Financing Documents.

Grant of concession:

The Concessionaire is allotted certain privileges to enable them to

complete their obligations in a hindrance free manner. However, they are granted only

for the concession period and are subject to fulfilment of certain conditions. Some of the

ones the Concessionaire entitled to are:

1. Access to the site

2. Investigation of site in detail as per scope of work

3. Managing toll after completion of construction work

4. Bear and pay all costs, expenses and charges in connection with the performance

of the obligations

Conditions Precedent:

The rights and obligations of the Parties are subject to the satisfaction in full of

certain conditions set in advance.

The MPRDC shall:

1. Procure Right of Way for the Concessionaire

2. Procure approval of Railway authorities to build bridges etc. over existing tracks

3. Procure all applicable permits relating to environment

26

Security:

The Concessionaire will give the MPRDC a sum of Rs. 2133 lakhs for due and

faithful performance of obligations. Failure to provide performance security will lead to

appropriation of bid security. They are given extra time to rectify faults.

Maintenance Security-The Concessionaire will give Rs. 4.27 Crore for faithful

performance of its obligations during the tolling period.

Obligations and Undertakings:

Concessionaire:

1. Make necessary applications to govt. agencies

2. Notify MPRDC forthwith the occurrence of Financial Closure

3. Submit true copies of all agreements and drafts of all amendments

4. Not to permit any change in ownership

5. Take prior consent for making changes

6. Give prior notice to MPRDC for any alterations

7. Clear the working area of machinery, debris etc. when work is done there

8. Procure required rights and licenses

9. Ensure smooth running of project including proper safety

The Concessionaire will exercise the rights and take care of the site at their own

cost. They have certain obligations before the construction. They need to submit

detailed plans which may be rectified by an independent organization. Perform all

deeds. Select a representative for handling with the government agencies.

The Concessionaire shall prepare and submit drawings promptly. They should have

all necessary details. During construction, a review of the Detailed Project Report

should be carried out and detailed engineering should be carried out. The existing lanes

should also be maintained. They should be freed from potholes.

The MPRDC is obliged to

1. Hand over physical possession of the project site

2. Permit its peaceful use

3. Provide reasonable support and assistance to Concessionaire

There need to be warranties undertaken by Concessionaire that it is fully capable of and

will do quality work meeting all specifications. All laws should be adhered to as shall the

27

agreement’s salient points. There is also a disclaimer that the Concessionaire accepts all

inherent risks.

If the concessionaire fails to achieve any project mile stone, concessionaire will

be charged at 10000/- per day until the same is achieved

If the delay is in project completion and the concessionaire is not able to

convince MPRDC that the circumstances were beyond his control then the

concessionaire shall pay the damages to MPRDC

Monitoring and supervision during operation:

The concessionaire shall take periodic inspection (at least once in a month but

once in a week during monsoon) to determine the condition of the Highway as

performance maintenance manual and shall submit Maintenance Report to MPRDC and

Independent Consultant. The Independent Consultant also shall review the Maintenance

Report and inspect the Highway once in a Fortnight and make the O & M Inspection

Report and send it to MPRDC. The concessionaire should within 30 days from receipt of

O & M Inspection Report send a report to MPRDC remedying all the deficiencies or

defects as stated by the Independent Consultant (if any). The Independent Consultant

may ask Concessionaire to undertake some tests as per Specifications and Standards.

Under such situations Concessionaire must submit test results to MPRDC and

Independent Consultant.

The Concessionaire shall ensure safe conditions for the users and in the event of

accidents, vehicle breakdowns, etc. setting up of traffic cones and lights and removal of

debris should be done with delay.

The Concessionaire shall furnish Monthly Fee Statement, within 7 days during

Toll Period. The MPRDC shall recover 1% of the toll from the ESCROW Account, for each

accounting year.

Safety requirement:

The responsibility of the Concessionaire is limited to removal of the debris or

other vehicle which may endanger or interrupt smooth traffic flow ion Highway. He

should ensure that any interruption in the traffic is remedied without delay. An

Independent monitors the safety and if he encounters any breach, he should report it

within 24 hours to MPRDC. All the cost and expenses arising out of safety requirements

are borne by the Concessionaire.

28

Breach may lead the Concessionaire to the award of penalty points and a total of

5 penalties in any continuous period of 365 days shall constitute a Material Breach of

the Agreement.

Independent consultant:

MPRDC appoints the Independent Consultant by a transparent bidding process.

The appointed authority may be a Consulting Engineering Firm of body of Corporate

being consultants. The Independent Consultant is initially appointed for a period of30

months which may later be extended to 3 years after expiry of aforesaid appointment.

The Independent Consultant must report (at least once in a month) to MPRDC.

The remuneration, cost and expenses shall be borne by the Concessionaire

during Construction Period, up to 1.3% of the project construction cost. This cost is to

be paid in 4 instalments. Also during Toll Period, the supervising cost is borne by

Concessionaire equal to Rs. 15000 per crores of Total Project Cost per year. This cost is

to be paid in 6 instalments.

Financing arrangements financial closure:

The concessionaire shall provide a copy of Financing Package to MPRDC. If

anything in this agreement contained is contrary, financial closure must be attained

within 180 days.

Grant/subsidy:

MPRDC agrees to pay to the Concessionaire Grant/Subsidy as cash support

equal to the Bid of Bidder and accepted by MPRDC namely Rs. 81 crores. Out of the

grant for project up to 20% of Total Project Cost is provided by Government of India,

rest is disbursed by MPRDC.

First tranche of 20% id released when the Concessionaire has contributed his

equity as per proposed financing package. MPRDC is given 7 days to process

disbursement request. If MPRDC fails to disburse any tranche within 30 days of

acceptance of request, it has to pay an interest @ SBAR plus 2 percent.

29

Revenue shortfall loan:

If the Realizable fees in any Accounting Year during the Concession Period shall

fall below the Subsistence Revenue Level, MPRDC agrees to allow the Concessionaire to

avail accommodation for such shortfall, by the way of loan from Bank. Any balance of

maintenance fund of the Concessionaire or any sums received or likely to be received by

the Concessionaire through claims or payments by MPRDC shall first be deducted and

only the balance amount should be availed as Revenue Shortfall Loan.

In order to get the loan under such circumstances the Concessionaire should

submit a detailed account of event and its impact on total revenues, as soon as possible.

Within 15 days of close of accounting year in which the shortfall is observed, the

Concessionaire shall provide a certificate from the Statutory Auditors certifying

Subsistence Revenue Level, Realisable Fees and the Revenue Shortfall requirement after

deducting the reserves of the Concessionaire.

The Revenue Shortfall Loan and the interest shall be repaid by the

Concessionaire before termination of Concession Period, in sum equal to 50% of net

cash flow.

Escrow account:

The Concessionaire should open an account within 30 days of this agreement in

which all the funds constituting the Financing Package for meeting Total Cost shall be

credited. MPRDC possess rights to make deductions and appropriations from this

account.

Escrow Account, during Concession period is funded by:

o Deposits by GOI, MPRDC as grants/subsidy.

o Instalments of the loans by lenders as performance disbursement schedule

approved by lenders.

o All fees, after incomes and receivables.

o All termination payments.

o All proceeds received from insurance claims.

30

Insurance:

Insurance during the construction period:

Insurance under construction period may sum up to a maximum in accordance

with financing documents, applicable laws. Such insurance covers the entire cost of the

[project as per MPRDC.

Insurance during Toll Period:

Not later than 4 months prior to the anticipated completion of the project

Highway, the Concessionaire should obtain and maintain no cost to MPRDC during Toll

Period in respect of the project highway and the usage of the insurance lies in Financing

Documents, Applicable Laws.

Accounts and audit:

The Concessionaire shall maintain full accounts of all fees including Realisable

fees and other revenues collected by it from and on account of use of the Project

Highway and of the O&M Expenses and other costs paid out of the Escrow Account and

shall provide copies of the said accounts duly audited and certified by the

Concessionaire’s Auditors within 180 days of the close of each Accounting Year to which

they pertain during subsistence of this agreement.

Force Majeure:

A Force Majeure event shall mean occurrence in India of any or all of Non Political

Event, Indirect Political Event as defined in the clauses respectively in the report which

prevent the Party claiming Force Majeure (the “Affected Party”) from performing its

obligations under this agreement and which act or event is:

(i) Beyond the reasonable control and not arising out of the fault of the affected

party,

(ii) The Affected Party has been unable to overcome such act or event by the

exercise of due diligence and reasonable efforts, skill and care, including

through expenditure of reasonable sums of money, and

(iii) Has a Material Adverse Effect on the Project.

The clauses pertaining to ‘Effect of Force Majeure Event after Financial Closure’,

‘Allocation of Costs during subsistence of Force Majeure’ and conditions for termination

of the agreement .

31

It is also stated that upon termination of the agreement by MPRDC on account of

Force Majeure Event, shall if it deems fit, subject to the rights of the lenders under the

substitution agreement, substitute another concessionaire to take over the debts and

subordinate debts of the Project and maintain the facilities for the balance concession

period.

Suspension and Termination:

The clauses relating to the following categories are discussed under this chapter:

a) Material Breach and Suspension - If the concessionaire shall be in the material

breach of this agreement, MPRDC shall be entitled to its other rights and

remedies under this agreement, including its right of termination hereunder, to

suspend all or any of the rights of the concessionaire under this agreement

including the concessionaire’s right to collect and appropriate all Fees and other

revenues from the Project Highway and exercise the rights of the concessionaire

under this agreement itself or any other person to exercise the same during such

suspension.

b) Compensation for Breach of Agreement – The clause lays down the terms of

compensation both for MPRDC as well as the Concessionaire in case of breach of

agreement by any or both parties.

c) Termination – It is divided into the following sub-clauses:

• Termination for the Concessionaire event of default

• Termination for MPRDC event of default

• Other rights and obligations of the MPRDC

Liability and indemnity:

The concessionaire shall be entirely responsible for and bear the cost of and shall

indemnify, hold MPRDC not liable and defend all proceedings, actions, and third party

claims for loss, damage and expense arising out of the design, engineering, construction,

procurement, operation, and maintenance of the Project Highway.

The concessionaire shall fully indemnify, defend, hold MPRDC not liable

including its officers, servants agents and subsidiaries, from and against any loss and

damages arising out of or with respect to (a) failure of the concessionaire to comply

with applicable laws and applicable permits, (b) payment of taxes or (c) non-payment of

amounts due as a result of materials or services furnished to the concessionaire.

32

In defence of their claim, the Indemnified Party shall have the right, but not the

obligation, to contest, defend and litigate any claim, action, suit or proceeding by any

third party alleged or asserted against such party in respect of, resulting from, related to

or arising out of any matter for which it is entitled to be indemnified and their

reasonable costs and expenses shall be indemnified by the Indemnified Party.

Dispute Resolution:

In case of dispute, difference or controversy in relation to the agreement

between the parties, the dispute shall be resolved amicably in accordance with the

conciliation procedure. The parties may call upon an independent consultant and arrive

at a settlement and failing this either party may refer to the Steering Group constituted

by MPRDC and the chairman of the Board or directors of the concessionaire and a

representative of GoMP. If the dispute is still not resolved then it shall be finally decided

by reference to Arbitration by a Board of Arbitrators. The decision relating to any

dispute shall be final and binding on the parties as from the date they are made.

The concessionaire shall make available for inspection during normal business

hours on all working days copies of all records and reports to MPRDC a and when

required.

Redressal of public grievances:

The concessionaire shall maintain a public relations office adjacent to each Toll

Plaza and keep it open to public access. It should maintain a register/suggestion box for

complaints/suggestions. The complaint shall also be numbered with date and complaint

number so that it may be referred for future correspondence. The action taken by the

concessionaire should be noted and a reply should be send to the complainant. After

each month, the concessionaire shall send to MPRDC a photocopy of the Complaints

Register.

Miscellaneous:

i. Video recording

The concessionaire shall provide a video recording with date and time to MPRDC

every quarter, covering the construction of the Project Highway in that quarter. During

the toll period the concessionaire shall prepare the video recording once in a calendar

year.

33

ii. Survival

Termination of the agreement shall not relieve the concessionaire or MPRDC of

any obligations which expressly or by implication survives termination and it shall not

relieve either party of any obligations or liabilities for loss or damage to the other Party

arising out of such termination.

iii. Notices

Any notice or other communication between parties shall be done by a letter

delivered by hand to the address of the person in charge in the case of the

concessionaire whereas in the case of MPDRC, the letter delivered by hand shall be

addressed to the chairman, MPRDC. The copies of all notices should be sent by facsimile

and shall also be sent to the MPRDC representative.

iv. Advertisement on site

The concessionaire shall not undertake or permit any form of commercial

advertising, display or hoarding at any place if such advertising shall be visible to the

users while driving on highway thus distracting them. This restriction shall not apply to

the toll plaza, rest areas, bus shelters and telephone booths located on the project

highway if the advertisement does not distract the users.

v. Severability

If for any reason, any provision of this agreement is or becomes invalid, illegal or

unenforceable or is declared by any court as same then the validity, legality or

enforceability of the remaining provisions shall not be affected in any manner, and the

parties will negotiate with a view to agreeing one or more provisions which may be

substituted for such invalid, unenforceable or illegal provisions.

vi. No partnership

Nothing contained in this agreement shall be construed or interpreted as

constituting a partnership between the parties. Neither party shall have any authority to

bind the other in any manner whatsoever.

vii. language

All notices required to be given by one party to the other party and all other

communications, documentation and proceedings which are in any way relevant to this

agreement shall be in writing and in English language.

34

3.3 SWOT Analysis:

From the point of view of Public Private Partnership in Highway projects, this project is

one of the bricks in the building of mutual participation of Government and Private

Sectors to achieve developmental goals which are beneficial for them as well as the

general public. To analyse the pros and cons of the project under PPP, SWOT Analysis of

the Bhopal-Dewas corridor (built on BOT-basis) as under.

Strength:

o Involvement of the Private sector leads to greater efficiency, this can be seen from

the fact that the concession agreement for the project is signed on June 30, 2007, the

construction started on January 1, 2008 and it was completed on December 31,

2009. That means, approximately 0.2 KM of road was constructed per day.

o Since the corridor is under the control of concessionaire for the next 30 years, hence

the responsibility of its operation and maintenance is only of the concessionaire and

the government is exempted from the burden of extra staff and machinery required

for the same.

o The initial grant given by the government to the concessionaire provided a boost to

the morale of the concessionaire and also made him more responsible for the

project.

Weakness:

o The Concessionaire is a consortium of 4 companies and there’s a huge susceptibility

to mutual contention.

o A sudden increment in traffic inflow rate will tremendously benefit the private

entity and adversely affect the public partner.

o Lack of proper legal framework and institutionalized standard approach.

Opportunities:

o The successful completion of the project shall ensure many more such endeavours in

the future.

35

o Highway development projects in India require a huge investment of 6 lakh crores

INR. Successful projects like these are necessary to attract the much needed

investment.

o The gap between inception and implementation of public services is finally bridged

by the tool of PPP.

Threats:

o Lack of cohesive approach at government level owing to lot of red-tapism etc. in the

government machinery.

o Corruption in the form of extortion and other such illegitimate actions may creep in

the system in the long run.

o The possibility of the formation of any type of nexus between contracting parties

and political agents will lead to loss of faith in the PPP and prove detrimental to its

true character.

36

Chapter 4. Conclusions

The Methodology of Public Private Partnership in highways is based on capitalizing the

private sector’s strength and minimising shortcomings of public sector in the execution

of work.

PPP enhances efficiency of work to a higher limit. Certain minimum standards

and norms have been setup by the agency which is being updated from time to time to

meliorate the level of work. Likewise coin, PPP has its own pros and cons. One of the

pros is the low risk involvement on part of public sector but it is opposite in case of

private sector. As work is performed by private sector and the sole responsibility from

the beginning to completion of project is shared by one party or a group of companies,

the execution is better as compared to that performed by public sector, because there is

involvement of money of individuals in the project.

In concise notes all the menaces are put in the sack of private sector and all the

credits are credited to public sector. But the success from the principle of PPP is

creditable as outcomes of result are far better. As per records available not only to the

quality of the pavements have improved drastically, but the life-span or so called the

service period of highways has also increased considerably. Even though, the pros of

PPP in highways outweighs its cons but still the shortcomings should be notified and the

rectification of the same will surely further enhance the efficiency of PPP projects.

The interest of private sector is certainly a vital component in successful

execution of PPP projects. This interest has been given a boost in terms of perks

awarded to agencies showing interest as well as participation in the PPP projects.

Policies of PPP accounts for contents ranging from every minute detail to

completion of all the vital steps in execution in maintenance part of project. All the

inadequacies have been set aside in the formulation of PPP policies. There has been

conceptualisation of tender policy, operation, maintenance and finally transfer of assets

to the government. Various authorities are appointed for inspection and audits to the

work place for testing the execution of work and justifying whether norms and

standards have been enforced or not.

Among the shortcomings, very few aspects have come into notice. The

entailment of such strict provisions may create a setback and exasperation in the mind

of private sector, in case better prospects are available to them at other places. Also the

exaltation to the developers must be given a hike in terms of better facilities to them.

37

After scrutinising the details of PPP, it can be concluded that PPP is a powerful

tool in approaching future and can serve better among all the available methodologies.

But at the end, it’s one’s wit which certainly serves a final decision making about any

and every available scheme.

38

Chapter 5. References

1. The world bank, report on “India : Building capacities for Public- Private –

Partnership”, Energy and Infrastructure Unit and Finance and Private Sector

Development Unit, South Asia region, June 2006, p. 13.

2. Savas E.S., Privatisation and Public - Private – Partnerships, Affiliated- east west

press. Pvt. Ltd., New Delhi, 2001.

3. Noorjahan Bava. “Public Interest and Public Policy”, in R.B Jain, (Ed.), public

services in a democratic context, New Delhi, Indian Institute of Public

Administration, 1983, pp. 166-178.

4. India: Addressing Constraints to Infrastructure Financing (Washington DC), World

Bank. 2005.

5. Dissertation on "Financing of National Highways in India” by A. P. Bahadur, Chief

Engineer, Department of Road Transport and Highways, Ministry of Shipping,

Road Transport & Highways.

6. R. Thandvan and Kalaichdvi Sivaraman “Public- Private – Partnership within

Policy Framework”, the Indian journal of public administration, Vol. LIV, No. 1,

January-March, 2008, p. 21.

7. Presentation on Public - Private – Partnerships in Highway, Punjab, India by

Kulvinder Singh Rao, Deputy Project director, Punjab roads & Bridges

development Board.

8. Guidelines for Investment in Road Sector Government of India Ministry of Road

Transport and Highways.

9. Dissertation on “Global Experiences of Public Private Partnership for Highway”

Development by Shunso Tsukada.

39

10. Report on "Technical Assistance To The Democratic Socialist Republic Of Sri Lanka

For Preparing A Public-Private Partnership Expressway Project”, September 2003

by L. Weidner, private sector development specialist, South Asia Transport and

Communications Division (project team leader); S.W Handayani; and D.

Utami.

11. PPP Toolkit for "Public Private Partnership in India" by Ministry of Finance,

Government of India. Source website : http://www.pppinindia.com/

12. Department of Road Transport and Highways, Ministry of Shipping, Road

Transport and Highways (http://morth.nic.in), National Highways

Authority of India (http://www.nhai.org)

13. CDDRL Working Papers on "Distribution of Highways Public Private Partnerships

in India: Key Legal and Economic Determinants" September 2009, TCA Anant &

Ram Singh, Delhi School of Economics, University of Delhi, source website:

http://cddrl.stanford.edu.

14. Workshop Report, December 2006 on "Facilitating Public–Private Partnership for

Accelerated Infrastructure Development in India”, Regional Workshops of Chief

Secretaries on Public–Private Partnership, Department of Economic Affairs

(DEA) & Ministry of Finance, Government of India.

15. Journal on “Partnerships for Urban Infrastructure Development in Delhi”, Ashok

Kumar (2003), ITPI Journal, Vol. 20.4, No. 26–45.