All eyes are now riveted on the 10-member panel led by Vijay Kelkar, economist and India’s former finance secretary, which has been tasked by the government with revisiting and revitalizing the PPP model of infrastructure development. Photo: Hindustan Times
India’s 12 state-owned ports and private investors have for long felt the model concession agreement being used to construct cargo handling projects with private funds needs refinement to make it attractive for private investments.
A concession agreement is a document that sets out the terms and conditions of a port contact.
The issue has now gained urgency with the Narendra Modi government finding it difficult to get bidders for planned cargo handling contracts spread across ports located at Visakhapatnam, New Mangalore, Kandla, Kochi and Chennai. New projects awarded have reduced to a trickle.
The need to fix the problems in the concession agreement has become more urgent, with the government embarking on the ambitious Sagarmala project that seeks to foster port-led development.
It is generally acknowledged that the current concession agreement lacks the flexibility to respond to market dynamics. That apart, the most important improvement required in the model agreement is to pin the government down on honouring its contractual obligations before construction, during construction and later during the operations phase of public-private partnership (PPP) projects.
During the pre-construction phase itself the port authority fails miserably by not giving the key environment clearance. There are many instances where the government has delayed granting the environment clearance—some as late as three years—before the private firm could start work on the project.
The private developer, though, has to tie up funds for the project within six months of signing the concession agreement.
During the construction phase, the port authority has to dredge the channel, lay power lines and build roads and rail lines. The timeline on these tasks is quite often not adhered to. Of course, the port authority is required to pay a penalty for non-fulfilment of these obligations. The penalty is a minuscule sum. There has not been a single case where the port authority has paid a penalty to the private developer for failure to meet the obligations on time. In any case, the penalty is not a sufficient disincentive.
So, while the private developer is expected to bring his investment early in the project implementation stage, the port authority takes its own sweet time to make its contribution.
A three- to five-year delay doubles the cost and changes the entire economics of the project.
Yet another lacuna in the concession document is the requirement for the private operator to guarantee certain minimum volumes in a year. Failure to load the contractually mandated minimum volumes can lead to termination of the contract.
When a private firm decides to undertake a project, it invests money, earns revenue and shares part of the revenue with the government. Cargo-specific terminals such as those loading iron ore, coal and containers are dependent on the global demand for exports and imports. What happens in a scenario where the government or courts impose a ban on production and export of a particular commodity such as the one seen in the past in the case of iron ore.
A few days ago, India’s power minister Piyush Goyal was quoted by the media as saying that all coal-based power plants will be phased out to give renewable energy a bigger thrust in India’s energy sector.
This means, ultimately, if all coal-based power plants are shut down, then the demand for coal will decline. And, if there is a guaranteed volume to be handled at a coal terminal, and the coal imports decline, how will the operator achieve the minimum guaranteed volumes written into the contract typically spanning 30 years? Why should the operator be penalized for the policies of the government of India, which had set the minimum cargo levels for the terminals in the contract?
The entire PPP market for ports in India is in a mess. The PPP document lacks the flexibility to deal with rapid changes in the global logistics industry. Given the uncertainty, it is no surprise that bidders have stayed away from turning up for port tenders for several months now.
Merely expecting the private firm to invest money without the government/port authority fulfilling its commitment can by no means be called a PPP project.
The project risks have to be shared between the government port and the private investors in a much better manner.
All eyes are now riveted on the 10-member panel led by Vijay Kelkar, economist and India’s former finance secretary, which has been tasked by the government with revisiting and revitalizing the PPP model of infrastructure development.
P. Manoj looks at trends in the shipping industry.