The Hindu Business Line : Public-private partnerships — Breaking new ground for State Highways

With governments facing budgetary and technical limitations in providing such vital infrastructure as roadways, sewerage, drainage, electricity, etc., public-private partnerships lead to faster implementation of projects at competitive cost and efficient risk allocation
for the parties involved.

An East Coast Road (ECR) toll plaza at Uthandi, near Chennai. Higher than expected traffic growth has ensured a steady revenue stream for the company.

A. Thillai Rajan
R. Siddharth
S.P. Mukund

At a CII conference on public-private partnerships (PPP) in State Highways held in May, the Prime Minister, Dr Manmohan Singh, while inviting public private participation for greater quality assurance in rapid infrastructure deployment in the country, particularly in the road sector, stressed the need for proper maintenance of existing road assets to support the burgeoning economic growth.

India boasts of one of the world’s most extensive road networks but its quality is not considered adequate as only 30 per cent of roads have a cement concrete or bituminous pavement. While 90 per cent of the State highways are paved, almost all have high degrees of road roughness and width of less than six metres, whereas a minimum 10.5 metres is the norm. These conditions have led to constraints in terms of capacity, efficiency, transportation time, road safety, and transport costs.

Usually, governments take great pride in the creation of new roads, while giving short-shift to maintenance of the existing networks because of improper resource allocation. A majority of Indian roads are either two-lane or single-lane and their maintenance has been a major challenge. The support of the Government in such activities is a necessity, and timely release of funds is needed to ensure efficient execution of these projects. In the recent past, Public Private Partnership (PPP) arrangements have been readily exploited for improving the delivery of infrastructure services.

What is a PPP?

A PPP is a partnership-type contractual arrangement between the government and a private sector party for delivery of a public infrastructure facility. With governments facing limitations in budgetary, technical and execution capabilities for providing such vital infrastructure as roadways, sewerage, drainage, electricity, etc., PPP not only allows the tapping of private funds, but also leads to faster implementation of projects at competitive cost and efficient risk allocation for the parties involved.

This partnership could take many contractual forms, which progressively vary with the levels of risk, responsibility and financing for the private sector. Some of the common partnership patterns, in the increasing order of degree of privatisation, include Build-Operate-Transfer (BOT), Build-Transfer-Operate (BTO), Build-Own-Operate-Transfer (BOOT) and Build-Own-Operate (BOO).

The ECR Project

The East Coast Road (ECR) was originally developed with the help of an Asian Development Bank (ADB) loan of $24.47 million during 1993-1998 by a process of interlinking and improving a series of small village roads that connected the fishing villages along the coast of Bay of Bengal.

The ADB assistance was helpful in converting what was once a set of rustic roads to a proper two-lane facility. But within two years of commissioning, the road suffered rapid deterioration in quality and service level. In fact, a survey on the pavement condition indicated that about 17 per cent of the road needed immediate remedial measures.

To address these issues, the Government of Tamil Nadu requested the Tamil Nadu Road Development Company (TNRDC), a company set up to catalyse PPP initiatives in the State, to take up the improvement and operations and maintenance of the road on a long-term basis. Today, the successful upgradation of the East Coast Road (ECR) between Chennai and Puducherry is a perfect example of the relevance of using PPP for road rehabilitation. The project was implemented at a cost of Rs 61crore under the Rehabilitate, Improve, Maintain, Operate and Transfer (RIMOT) format during 2001-2002 under a 30-year concession agreement with GoTN by TNRDC.

RIMOT, a kind of BOT, is an asset maintenance and preservation strategy meant to make existing road assets sustainable. This project also envisaged the overall improvement of the lives of the fishermen who live along the coast and the improvement of their local business. Known as the “Entertainment Highway”, today, the ECR has accelerated the growth of tourism, leisure, entertainment, and food businesses along its stretch and increased economic activity and employment opportunities.

Project Funding

The project funding was done using a specially-designed corporate finance structure with Rs 10 crore of the project cost funded as an equally shared equity subscription by Tamil Nadu Industrial Development Corporation (TIDCO), the investment arm of the Tamil Nadu government, and Infrastructure Leasing and Financial Services (IL&FS).

The remaining project cost of Rs 51 crore was initially debt funded by IL&FS. Since the road was already in place and traffic flow data was available, the partnership could efficiently manage various risks. Construction risk was largely mitigated with the private partner’s expertise in the latest engineering technology and traffic flow analysis, while the State government ensured speedy land acquisition for straightening and widening of the road.

Maintenance risk, on the other hand, was mitigated with well-drafted contractual agreements pertaining to road roughness index and incentivising the road contractor by awarding him the maintenance contract as well. IL&FS was able to easily raise debt funding for the project by credit rating the debt finance by Fitch Ratings. Tolling and collection risk were minimised by using integrated toll collection and audit mechanisms. Also, the traffic growth, which beat expectations, ensured a steady revenue stream for the company.

ECR Lessons

Today, the ECR model for rehabilitation of an existing road asset is acclaimed as a model framework by National Highways Authority of India (NHAI) for improving two-lane roads. First, the concept of a 10.5-metre two-lane road with paved shoulders of 1.75 m on both sides has been found an acceptable intermediate solution to four-laning of State roads. Such a road not only reduces accidents but is also an economically viable option for non-arterial roads supporting fairly heavy traffic. The paved shoulders are an indigenous solution to support slow-moving traffic on such roads. The traffic-carrying capacities of such roads have significantly improved by 30-40 per cent.

Second, the project showed that two-lane roads could be tolled where NHAI had been allowing only the tolling of four lane roads. The ECR project has inspired the central government to initiate the process of amending the policy to toll two lane roads as well.

A new four-lane road that costs upward of Rs 5.5 crore per km could cost as little as Rs 1.5 crore per km if it was modelled as a paved two-lane road facility.

With more than 82 per cent of State roads being single lanes, the ECR model showed the way for rapid upgrading of two-lane systems, both cost-effectively and with private participation. Such projects are also scalable. A similar model is being implemented for improving and maintaining over 1,053 km of key State roads in Rajasthan.

Last, unlike the special purpose vehicle (SPV) mode used for financing infrastructure projects, the ECR project’s specially designed corporate finance structure allowed TNRDC to explore other sources of revenue and allowed the management greater decisional flexibility. This showed it was possible for State governments to undertake similar scale projects under the corporate finance structure.

In this unusual PPP model, the private sector not just contributed funds but also brought in execution efficiency and management skills. Incentivising the private partner by providing an equity stake brought in greater involvement and ensured on-time delivery, thereby benefiting the government and the public at large.

The ECR project is yet to achieve financial break-even but can be termed successful in achieving the objective of bringing private-sector participation through PPP in road projects in the State.

(A. Thillai Rajan is on the faculty of the Department of Management Studies, IIT Madras, where the other two authors are MBA students. )

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