Changes in PPP norms behind tardy progress of road projects

Changes in regulations governing public-private-partnership contracts have been one of the key reasons for the tardy progress...

Changes in regulations governing public-private-partnership PPP contracts have been one of the key reasons for the tardy progress in the award and construction of road projects under the UPA regime. Morgan Stanley Research has said that the NHAI has made several changes to the old model concession agreement MCA under directions from the Planning Commission,creating uncertainty among private investors and developers,thus making the contracting process tardy.

Uncertainty over concession period has been a major deterrent in calculation of the return on investment and cash flows in projects. According to the previous system,NHAI awarded contracts in two parts two lanes to four-laning and a further award for four-laning to six-laning. However,in the new MCA,if the traffic crosses a stated limit in the eighth or ninth year for an 18-year contract,then the existing developer is given the option of taking up six-laning of the project. If the developer declines,the concession period is cut down from 18 years to 12 years creating confusion in capex,cash flow and rate of return on investment calculations.

There is also the risk that six years of toll collection after the six laning in the 12th year might not be enough to earn a decent internal rate of return IRR on the incremental capex, the report states.

Secondly,if the traffic for an awarded stretch in any year exceeds 20 per cent of the projected traffic,the entire excess amount has to be paid to the NHAI. Under the previous MCA,only a certain percentage about 40 per cent of the excess toll collected had to be shared with it. The report,however,suggests that any excess returns should be controlled through competition in a free-market mechanism.

The report states further that the recent success of power sector privatisation based on the same concept lowest bidder wins the contract,no matter what the return clearly reiterates that it remains the best model to encourage PPP.

However,the report points out a few positives especially with regard to the land acquisition policy. Earlier,projects were awarded and then land was acquired but under the new MCA,NHAI is supposed to acquire 80 per cent of the land before the awarding of the contract. While NHAI has not gone the full distance,we believe that for the last round of bids,it sent out RFQs Request for Qualifications only after securing 50 per cent of the land, it states.