A road block

| Updated on May 27, 2013 Published on May 27, 2013

Highway projects are exposed to risks of a kind that would have made the PPP model of building infrastructure a non-starter.

Not a single public private partnership (PPP) bid for building highways was received last year. Not just that: Many projects awarded in 2011-12 and 2010-11 on a PPP basis have yet to take off. Not surprisingly, the Ministry has quietly dumped the much-touted PPP model. It will now hand out engineering procurement construction contracts (EPCs). This is the traditional way whereby the capital is fully supplied by the Government and the work is done by paid contractors. Since the funding of EPCs comes out of tax revenues, the issues that surround risk capital in PPP projects vanish. Not having to worry about returns and keeping investors happy, the projects can start and eventually be completed. Of course, the roads are of somewhat uncertain quality but it is better to have some road than none at all. There is a necessary pre-condition that must be fulfilled for EPCs to deliver quality: absence of ministerial corruption. With a general election only a year away, can we be sure of this? The UPA’s record warrants suspicion.

That caveat having been entered, it must be mentioned that, globally, in the last two decades, only around 10 per cent of road length has been built by private risk capital. An important reason for this, in spite of the high profile publicity that has surrounded such projects, is that they had two negative characteristics. They earned higher returns than the government bond rate and investors insisted that, despite this, the government bear the lion’s share of the risk. This has meant that PPPs have mainly been restricted to showcase projects on which traffic volumes are guaranteed. So India need not be crestfallen that yet another ‘reform’ experiment has failed. Anyway, given all the obstacles, the idea was never going to take off on the scale that the Planning Commission had envisaged, namely, that PPP projects would account for around a quarter of the total investment needed by 2020. But the various types of risk – political, social, economic and criminal -- in India have proved to be simply too high. Ironically, one of the major risks was created by the Commission itself via its proposed system of contracting. The complicated structuring of the contract, with mutually contradictory clauses, was bad enough; compounding that was the requirement of a Planning Commission approval built into the process. This not only resulted in dis-empowering the nodal ministry, but also delayed financial closure. The intentions were no doubt honourable but ground realities also need to be kept in view.

What next? The Central Government, in spite of its aversion to Narendra Modi, can take a leaf out of his book on the management of projects. Gujarat’s state highways system has seen a massive expansion in the last ten years and in quality terms they are perhaps the best in the country. Modi’s modus operandi has been based on the Chinese model and is simplicity itself: empowerment and accountability at every level of the decision making and execution process – punishment otherwise.

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Published on May 27, 2013
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