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Highway projects hit the PPP roadblock

<p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">India has had the largest road implementation programme in the public private partnership (PPP) mode globally. But of all the projects undertaken till date, only 32 percent of the awarded ones, accounting for 21 percent of the total target length and 16 percent of the total cost, are fully complete. The data exclude partially completed projects.</span></span></span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">That said, 35 projects to develop 5,245 Km of road are yet to get the appointed date. In effect, construction work is yet to start on 14 percent of the projects and 24 percent of the road length involved, according to data by National Highways Authority of India (NHAI).</span></span></span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial"><strong>BOT contracts</strong></span></span></span><br /> <span style="color:rgb(105, 105, 105); font-family:arial; font-size:11px; line-height:1.6em">Till November 2013, NHAI had awarded a whopping 239 build-operate-transfer (BOT) contracts, covering 21,520 Km of highways. Of these, 32 percent projects are fully complete. The shift toward PPPs intensified, particularly in the UPA regime, when the Government tried to pass on almost the entire responsibility of building roads, including raising bank funds to the private sector. While the Government spent more money than the private sector on building roads till 2010-11, it was the private sector that spent more after 2010-11.</span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">The ratio of public sector spending to that of the private sector dropped to 0.75 in 2012-13 from 1.5 in 2009-10, according to the Road Transport and Highways Ministry data.&nbsp;</span></span></span><span style="color:rgb(105, 105, 105); font-family:arial; font-size:11px; line-height:1.6em">However, having started the largest PPP programme, the Government should now look at assessing the entire cost of taking up road projects in this mode. One of the premises for adopting PPP was that this mode could be used to build roads at lower costs by banking on the efficiency of the private sector.</span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">International Transport Forum, a global think tank, says the full financing costs of PPPs should include transaction costs, consulting fees, and even renegotiation costs. Such costs for a PPP are likely to be higher than for public procurement, it points out in its latest report.</span></span></span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">Public borrowing is cheaper than private, and bank loans to PPPs need to be covered by costly insurance and hedging instruments. Also, equity finance requires more returns than loans, and PPPs have high transaction costs, such as legal and consulting fees.</span></span></span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial"><strong>Unpreparedness</strong></span></span></span><br /> <span style="color:rgb(105, 105, 105); font-family:arial; font-size:11px; line-height:1.6em">The PPP experience in the road sector of India has witnessed many of these trends. There were overoptimistic bids that further got messy with the Government&rsquo;s own unpreparedness in meeting its obligations, acquiring land on time.&nbsp;</span><span style="color:rgb(105, 105, 105); font-family:arial; font-size:11px; line-height:1.6em">These delays have added to the costs and for over a year now, several Government agencies have been trying to renegotiate the stressed projects, further pushing up the public costs of PPP projects.</span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">In 2012-13, as GDP growth slowed and funding costs increased, there was a 17 percent drop in total investments on roads against last year, driven by a 23 percent drop in private sector spending.&nbsp;</span></span></span><span style="color:rgb(105, 105, 105); font-family:arial; font-size:11px; line-height:1.6em">Road construction activity shrunk because the UPA Government had decided early on that it did not want to spend on highway construction.</span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">With indications that 2013-14 could face a similar situation, isn&rsquo;t it reason enough for the Government to move away from PPPs and start spending money on building highways?</span></span></span></p> <p style="text-align:justify"><span style="color:#696969"><span style="font-size:11px"><span style="font-family:arial">Source-On Request</span></span></span></p>