The Hindu Business Line : Public-private partnership

ONE of the foremost priorities of the Government is to develop infrastructure — both physical and social. A Cabinet Committee to monitor infrastructure development has reportedly been set up under the chairmanship of the Prime Minister, Dr Manmohan Singh, himself. And the Planning Commission has been assigned the task of ensuring movement in the different core sectors.

An instrument being considered in this regard is the concept of public-private partnership (PPP). The idea is to utilise the commercial discipline, innovation and efficiency of the private sector in the provision of goods and services that were traditionally provided by, and seen as a function of, the public sector. This essentially involves a shift in the role of the public sector from supplying to buying services, with private firms designing, constructing, financing, operating and maintaining the infrastructure and the public sector paying for the services. Clearly, such an approach requires a change in the mindset and the beginning, so far, has been slow. It will be illustrative, therefore, to see how far this approach has been successful in one of the sectors in which it has been tried — the roads sector via the National Highways Development Project (NHDP).

The provision of major roads and highways has always been in the public domain. To begin with, all functions relating to road services, such as financing, design, construction, engineering supervision, operation and maintenance, were performed by the public sector. For this purpose States set up large public works departments equipped with manpower and machinery. While Government funded all activities, the department was the designer, the contractor and the engineer all rolled into one. Recently, however, some of these functions have been outsourced but the responsibility continues to be with the department.

When in October 1998, the then Prime Minister announced the taking up of the North-South corridors, subsequently converted into the NHDP with the addition of the Golden Quadrilateral, the National Highways Authority of India (NHAI) — the agency entrusted with the implementation — was just a nascent organisation. To expect such an organisation, with limited manpower to undertake the unprecedented task of construction of more than 14,000 km of four-laned national highways with an investment of Rs 65,000 crore was simply impossible.

While the Government created the basis for raising the funds for the programme and for facilitating approvals as also for empowering the NHAI, the recruitment of personnel on the scale to undertake the task in the traditional departmental way was not possible. This forced the NHAI to look at innovative ways implementing the programme.

To begin with, it was decided that all functions except of the management would be outsourced. Thus, design was given to design consultants, construction to construction firms, and construction supervision to consulting engineering firms. Standard FIDIC (Federation Internationale Des Ingenieurs-Conseils) contract documents were used under which the responsibilities of the three parties — the client, the contractor and the engineer — were stipulated.

Under the FIDIC, the role of the engineer is an independent one to be discharged in the interest of completion of work. This includes allowing an increase in the cost of the project up to certain limits beyond which he has to seek the concurrence of the client.

It was expected that with such an arrangement, decision-making would be largely confined to the project level and the NHAI would be able to manage the programme with nominal staff of its own. However, it is seen that the risks involved in the delays caused by the contractor or the price variations allowed by the engineer had to be borne by the NHAI, the client, and in some cases this could have substantial impact. This resulted in the client associating itself closely with contract administration which in some cases only added to the problem and circumscribed the role of the engineer.

Consequently, it was felt that some formats of the PPP be devised to help effectively pass the construction risk and the subsequent O&M risk to the private sector. Since it had been decided to toll all four-laned sections of national highways, the first PPP format adopted was the Build-Operate-Transfer (toll-based) model, where the private operator would construct and maintain the highway for a fixed period and recover his investment through tolls.

As the Government was fixing the toll rates and it was difficult to predict traffic, it was decided to provide a grant up to 40 per cent of the capital cost to make projects viable. Nevertheless, the traffic risk was something that not many operators were comfortable with and, therefore, only a few projects could be taken under this format. Thus, in order to encourage greater private participation, it was decided to keep the traffic risk with the NHAI which would collect the toll but pay the operator a fixed amount annually. The construction and maintenance risks would continue to be with the operator. Under the first phase of the NHDP, nearly 6,500 km of national highways were taken up of which nearly 1,000 km were on BOT basis. Reports indicate that these projects are progressing much better than the conventional contracts.

Furthermore, these projects have significantly added to the NHAI's management capability since apart from zeroing in on the BOT operator, little else is required of the NHAI in the implementation of the project and its subsequent operation and maintenance. Clearly, therefore in the short-run the BOT projects under the NHAI have been very successful and point to this route in a much bigger way in the second phase of the NHDP involving the North-South and East-West corridors. Different variants of the BOT formats, such as combining the toll based and annuity concepts, can be tried to further transfer operational aspects to the private sector.

In undertaking a larger PPP programme it would have to be borne in mind that concession agreements are long-term contracts during the course of which changes can become necessary. Provision for dealing with such changes have, thus, to be incorporated into the concessions. The success of annuity has shown that sharing of risks is an essential element in seeking value for money and risks should be allocated to the party able to manage it at least cost.

Based on the NHDP experience, the PPP is a way to build infrastructure where private investors design, build, run, maintain and operate facilities such as highways under long-term contracts. By making payments contingent on facilities being operable through the contract period, the PPP contracts transfer investment risk to the private investor such as those arising from delays in construction projects, and ensure a life-cycle perspective on costs.

Thus, under a standard civil contract for a road, the contractor has an incentive to do the minimum necessary to meet contract conditions, whereas in a PPP contract, the developer's incentive is to construct a road to a standard that will minimise life-cycle costs. This incentive is reinforced by the fact that payments under the PPP depends on the developer complying with agreed maintenance and operation standards. Thus, the PPPs are likely to provide early project delivery and access to improved services along with the expectation of lower construction and operation costs and, perhaps, more efficient maintenance in the long run, than comparable public sector projects.

(The author is a former head of NHAI.)