Tuesday, March 29, 2011
By Kapil Bajaj
The Centre is the primary promoter of PPPs and expects the states to emulate it in policy and institutional framework.
It provides funds to the central and state authorities to hire consultants for PPP project development and has been engaged in ‘capacity building’ of the states and local bodies to help them take up PPPs. The Centre has also engaged credit-rating agencies for pre-bid grading of PPP projects.
Over the last 5-6 years, the Centre has worked on developing a system for promoting, evaluating and approving its own PPP projects and providing support to the PPPs of the states.
(The system for PPPs has evolved separately from the system for the approval of central-sector projects as well as the rules that govern traditional procurement.)
From August 2004 to July 2009, the Committee on Infrastructure (CoI), with the Prime Minister as chairman and 10 other members, including his cabinet colleagues and deputy chair of the planning commission, was the highest decision making body in PPP policy and monitoring of projects.
The CoI was serviced by the ‘secretariat for infrastructure’ in the Planning Commission.
In July 2009, the Centre set up the Cabinet Committee on Infrastructure (CCI), which replaced CoI as the highest decision making body in PPP matters.
The establishment of CCI took away the three-member representation that the plan panel enjoyed in the CoI. The new body, which has 12 Cabinet members in addition to the PM, gives only a ‘special invitee’ status to the deputy chair of the plan panel. (Like the Cabinet and all its committees, CCI is serviced by the Cabinet Secretariat.)
The ‘secretariat for infrastructure’ in the plan panel, however, continues to operate and provide vital policy, appraisal, analysis and support services to the PPPs.
The CCI decides whether or not to grant final clearance to infrastructure-related proposals costing more than Rs 150 crore.
The CCI also decides measures to enhance investment in infrastructure and lays down performance targets for various sectors.
In November 2005, the Centre notified the procedure for approval of PPP projects and set up PPP Approval Committee (PPPAC), hosted by department of economic affairs (DEA) in the ministry of finance (MoF).
Set up on the lines of Public Investment Board (PIB), the PPPAC is chaired by the secretary of the DEA-MoF and has membership of secretaries of the plan panel, DEA-MoF, department of legal affairs (the ministry of law), and the ministry sponsoring the PPP project. The PPPAC secretariat is the ‘PPP Cell’ in DEA-MoF.
Simultaneously, a PPP approval unit (PPPAU) was set up in the plan panel, which prepares ‘appraisal note’ for the PPPAC, providing suggestions for improving the terms of concession agreements.
The PPPAC evaluates PPPs worth Rs 100 crore or more; the projects cleared by PPPAC go for final clearance by CCI (in case of project cost of Rs 150 or more) and other authorities (in case of lesser project cost).
The Centre started viability gap funding (VGF) scheme in 2006 to provide grant of 20 per cent of the total project cost to PPPs that “are justified by economic returns but do not pass the standard thresholds of financial returns.”
An inter-ministerial empowered committee (EC) evaluates projects for VGF. Up to June 2010, the Centre’s VGF commitment was Rs 51,629 crore for 159 central and state projects with total investment of Rs 1,77,365 crore.
Set up in 2006, India Infrastructure Finance Company (IIFCL) raises funds from the market on the strength of central government guarantees.
IIFCL provides 20 percent of project cost both through direct lending to project companies and by refinancing lending institutions. Up to June 2010, IIFCL had sanctioned Rs 21,000 crore for 125 PPPs.
The plan panel has a scheme for providing consultants for PPPs. The MoF manages India Infrastructure Project Development Fund to provide loans for meeting project development expenses, including engaging consultants.
The government has also prequalified about a dozen ‘transaction advisors’ that the project authorities can engage.
Among the fiscal incentives available are 100 per cent exemption on income tax to eligible projects for 10 years and duty-free imports of equipment.
For faster appraisal and approval of PPPs, the Centre has developed model concession agreements (MCAs) and other bid documents for award of contracts. The MCAs include those for national and state highways, port terminals, airports, and urban rail transit systems. Model bid documents include request for qualification (RFQ) for PPPs and request for proposal (RFP) for PPPs.
A two-stage competitive bidding for award of contracts has been laid down. RFQ is the pre-qualification stage and RFP is the stage when the financial bids of prequalified bidders are evaluated and winning bidder is selected.
The Centre has been publishing policy documents, reports and manuals on PPPs, such as financing plan for ports, Delhi-Mumbai and Delhi-Howrah freight corridors, measures for operationalising open access in the power sector, an approach to regulation in infrastructure, and the manual of specifications and standards for two-laning of highways, etc.
Over the years, the Centre has set up regulators in the power, telecom, ports and civil aviation sectors in pursuit of its PPP policy and amended/enacted laws to facilitate PPPs.
At the state level, about 24 state/UT governments have set up PPP cells; some states have also passed laws enabling PPPs in provision of infrastructure.
PPP conception, evaluation and approval
A broad categorization has been made between central-sector PPPs costing Rs 100 crore or more and those that cost less than that threshold.
(A) The following procedure is followed for PPPs that cost Rs 100 crore or more.
1. Project identification: The sponsoring ministry/PSU identifies the PPP project, undertakes preparation of feasibility studies, project agreements, etc. It’s free to hire legal, financial and technical consultants.
2. Inter-ministerial consultations: The sponsoring ministry may discuss the project in an inter-ministerial consultative committee, whose comments may be incorporated into the proposal for consideration of PPPAC. The PPPAC may also seek the participation of other ministries/departments.
3. ‘In principle’ approval of PPPAC
(a) The sponsoring ministry submits its proposal to the PPPAC secretariat (PPP Cell) and a term-sheet containing the features of the proposed project agreements.
(b) The PPPAC meets within three weeks to consider the proposal.
(c) If the project is based on the MCA, ‘in principle’ clearance is not necessary. In such cases, PPPAC approval may be obtained before inviting the financial bids (RFPs) as detailed below.
4. Pre-qualification of bidders: After the ‘in principle’ clearance of PPPAC, the sponsoring ministry may invite RFQ to be followed by short-listing of pre-qualified bidders.
5. Drawing up project documents: The documents to be prepared include the concession agreement and other associated agreements.
6. Appraisal/approval of PPPAC
(a) Invitation to submit financial bids (RFP) should include a copy of all the agreements that are proposed to be entered into with the successful bidder. The sponsoring ministry needs to get the draft RFP cleared by the PPPAC before inviting the financial bids.
(b) The proposal for seeking PPPAC clearance is to be sent to the PPPAC secretariat along with copies of all draft project agreements and the project report.
(c) The plan panel forwards its ‘appraisal note’ to the PPPAC secretariat. The ministry of law and any other ministry involved will also forward comments to the PPPAC secretariat within the stipulated time period. The PPPAC secretariat will forward all the comments to the sponsoring ministry for submitting a written response to each of the comments.
(d) The concession agreement and supporting documents, along with the PPPAC memo, will be submitted for consideration of PPPAC. The PPPAC will take a view on the ‘appraisal note’ and on the comments of different ministries, along with the response from the sponsoring ministry.
(e) The PPPAC either recommends the proposal for approval of the ‘competent authority’ (with or without modifications) or request the sponsoring ministry to make necessary changes.
(f) Once cleared by the PPPAC, the project is put up to the ‘competent authority’ for final approval.
7. Invitation of bids (RFP): Financial bids are invited after final approval of the ‘competent authority’, but can also be invited after PPPAC clearance. (For Rs 75 crore-Rs 150 crore project cost, the ‘competent authority’ is the minister in charge of the sponsoring ministry and the minister of finance. For a project costing Rs 150 crore or more, the competent authority is the CCI.)
(B) The evaluation and approval of PPPs that cost less than Rs 100 crore is as follows.
Type of proposal
All PPP projects of central ministries and PSUs
Less than Rs 25 crore
The sponsoring ministry or department
Secretary of the ministry or department
From Rs 25 crore to Rs 100 crore
Standing finance committee or SFC*
Minister in charge
*The SFC consists of the sponsoring ministry’s secretary in the chair and the financial adviser and a joint secretary as members; also included is a representative of the department of legal affairs of the ministry of law.
PPPs are fundamentally changing public procurement by allowing the private sector to exercise greater control over, and often ownership of, public assets, such as land, roads and airports.
By Kapil Bajaj
Public-private partnerships (PPPs) usually refer to an ever-widening range of the ways in which ‘public procurement’ (or ‘government procurement’) can take place with the participation of the private sector.
The government uses public funds to provide many goods, services and infrastructure to the citizens. The publicly-funded goods, services and infrastructure may include food for the needy, passport services, education, hospitals, roads, bridges, airports, ports, electricity generation and distribution, petrol pumps, water supply, waste water treatment plants, etc.
Since the government cannot produce or provide everything on its own, it is a big procurer or purchaser of products and services from the market.
For example, it lets contracts to construct roads worth billions of rupee (or dollars) to builders operating in the market. It may award a contract to a private company to develop software for providing an online passport service or award a contract to a private caterer to run a canteen at a railway station for a fixed term.
These examples represent the age-old methods of public procurement, which usually involve ‘inviting tenders’ (i.e. calling for bids or offers from willing suppliers) to build a road or develop a software package or provide canteen services, evaluating the technical and financial abilities of the bidders, and then awarding the job to the bidder that can provide the best value for public money – usually the one who has offered to do the job at the lowest price.
A contract is then signed between the government/public authority and the private party (winning bidder), formalizing their agreement over the job to be done, quality standards, the price, the time-frame, penalties, and other terms and conditions.
(A contract used commonly in traditional procurement for getting a public facility constructed is ‘item rate contract,’ which requires the bidders to quote rates for individual items of work on the basis of a schedule of quantities furnished by the public partner. The design and drawings are usually provided by the public partner. The contractor bears little risk in these contracts except escalation in the rates of items. Another contract used in traditional procurement is ‘lump sum contract,’ which requires the bidders to quote a lump sum figure for completing the works in accordance with the designs and specifications of the public partner.)
Traditional public procurement, therefore, has always been a ‘public-private partnership’ or PPP; it is the coming together of a public authority and a private supplier in a contractual relationship with the objective of providing a part or whole of a public good, service or infrastructure.
(The term ‘partnership’ in PPP must not be confused with a ‘partnership firm.’ A PPP is not in the nature of a partnership firm.)
Since most of the public infrastructure, goods and services are provided with inputs from the private sector, they all involve PPPs.
(Aside from the usual examples of public procurement, a business whose shareholding is divided between a public authority and a private company is a ‘PPP’, more specifically described as a ‘joint venture’. A formal relationship between a government body and a voluntary, non-profit organization to provide a service to the citizens is also a PPP.)
Then how are modern-day PPPs different from the age-old PPPs that represent the traditional methods of public procurement?
The answer lies in the nature and scope of contractual relationships that public authorities and private partners are now entering into. The modern-day PPP relationships allow the private partner to play a much bigger role in the provision of a public good or service, over a much lengthier time-frame (up to 20-30 years), than is envisaged in traditional public procurement.
More importantly, the new and emerging PPPs allow the private partners to exercise greater control over -- and sometimes ownership of -- public assets (e.g. land and natural resources) than what the traditional PPP contracts permitted.
Private control or ownership of public assets has fundamentally changed the nature of PPPs as they have been known for long, particularly by introducing commercial principles in the provision of public services.
Also, the new PPPs have been allowing more direct dealings between the private service provider and the citizens/customers than has been the case in traditional PPPs.
The traditional PPPs restrict the role of the private partner to performing the job specified in the contract, even as the government partner continues to control and own all public assets used in the job.
Generally, the traditional way also means that public services are provided either free or at prices (‘user charges’) that are regulated by government orders; they also allow very limited amount of direct dealings between the private service provider and citizens/customers.
The newfangled PPPs usually allow the government/public partner to concede to the private partner the right to provide a service or infrastructure as well as to collect charges from the users, such as tolls from road users.
Here too, the user charges are regulated, but the private partner is allowed full cost recovery and a rate of return on his investment.
Since the new PPPs are used in risky infrastructure projects and rely on a large proportion of borrowed funds, the private partner(s) often forms a separate company, called ‘special purpose vehicle (SPV)’, to execute the project and insulate the parent firm from the risks of the venture.
It is the SPV that signs the contract (or concession agreement) with the government. If the project were to fail, only the SPV would incur the losses and be liable to pay off the loans, not the parent firm(s).
(Large infrastructure projects can have debt-equity ratios of up to 90:10, which means as much as 90 per cent of the funding could come from borrowings and only 10 per cent from the pockets of the concessionaire. It is also important to note that funds borrowed by private entities are invariably much more expensive than funds that a government can arrange because lenders perceive more risks in lending to the former.)
The SPV may also engage subcontractors to build the facility, maintain it, and collect user charges over the period of the concession.
The public partner may provide some financial support to the SPV by subscribing to some of the equity capital of that special company. The government may also provide some amount of grant to make a PPP project ‘commercially viable’.
The government may also bind itself to repaying the loans partially or fully if the contract were to be terminated prematurely.
The government may also guarantee a minimum revenue to the private partner in order to mitigate ‘demand risk’ (fluctuation in the number of users of, say, a road), but may also provide for revenue sharing if the demand exceeds a certain threshold.
In addition, the government provides various tax incentives to the PPPs. The various forms of government involvement in a PPP project is obviously a big attraction for the lenders.
The new PPPs are supposed to transfer some amount of risks inherent in a project from the public partner to the private partner. A private partner willing to assume more risks also negotiates a higher rate of return in the contract.
Thus, an important thing to look for in any PPP project is how fairly risks and rewards have been allocated between the government and the private partner.
In traditional public procurement or older PPPs, in contrast, the public partner bears almost all the risks; the risk borne by the private partner is limited to the extent of performing the job laid down in the contract.
Described below are three kinds of the new PPP modes that have been used in India.
1. The lease contracts provide a means for the private partner to purchase the income streams generated by publicly owned assets in exchange for a fixed lease payment to the public authority and the obligation to operate and maintain the assets. Lease contracts transfer commercial risk to the private sector partner, as its ability to derive a profit is linked with its ability to reduce operating costs, while still meeting designated service levels.
2. The BOT contract requires the private partner (‘concessionaire’) to design and build an asset (say, a road), operate and maintain it, and eventually transfer it back to the government partner at the end of the specified term, which can last for 20-30 years.
A project is financed by either the public partner or the private partner. In India, the private partner is required to finance the project and is either paid a rent for the use of the facility or allowed to collect user charges.
3. Build-own-operate-transfer (BOOT) concession is a variation of the BOT model except that the private partner also ‘owns’ the facility and finances the project, thus assuming risks relating to planning, design, construction and operation of the project.
(It is important to realise that ‘ownership’ even in BOOT concessions in India does not mean an unfettered property right; it’s usually limited to that of exclusive operation and thereafter transfer of the facility to the private partner.)
Thus, from a simple outsourcing of a job that traditional procurement has been, PPPs of the present times have evolved into complex legal contracts, allowing deeper private involvement that may cover financing, designing, constructing, owning and operating a facility. The number and kinds of PPP that can exist are limited only by one’s imagination.
Worldwide, the advocates of public-private partnerships have cited limited budgetary funding available for public services and infrastructure as the reason why governments should increasingly promote PPPs.
Thus, PPPs are being promoted on the promise that they will help governments “leverage” their scarce budgetary resources to attract larger private investments into providing, expanding and improving public services and infrastructure.
Another promise is that PPPs will infuse private sector expertise and efficiency into public services and infrastructure.
Taking Delhi-Gurgaon expressway project as an example…
…This article introduces a lay person to the public-private partnership (PPP) policy of the central government and how it is affecting public interest.
It draws on a parliamentary panel’s enquiry and large amount of reportage on Delhi-Gurgaon expressway project to show that National Highways Authority of India (NHAI) and its private partner have left no stone unturned to damage public interest.
This article gives a lay person an insight into the nature of the entire PPP policy and why the government and the ‘experts’ keep telling you that PPP is the only way to health, wealth and happiness.
By Kapil Bajaj
Bina Verma (33), who lives in Gurgaon (Haryana) and travels to west Delhi five days a week for her college lectureship job, acquired ‘smart tag’ last May to avoid having to stop at the toll plaza on Delhi-Gurgaon expressway, the 28 km ‘access-controlled’ stretch on National Highway-8.
She pays Rs 600 to buy the right to drive, without having to stop, across the 32-lane toll plaza at Delhi-Gurgaon border for a maximum of 60 trips over a maximum of 30 days.
It’s not always an uninterrupted drive though; it may take her “up to 10 minutes” on some trips to make her way through the traffic slowing before the toll plaza to get to the lane reserved for smart tag users and pass. “There is no lane discipline,” she complains.
Rakesh Giri (30), a Delhi-based marketing executive who is a frequent, not daily, user of Delhi-Gurgaon expressway, says he prefers paying Rs 20 per trip to using the smart tag. His monthly payments for using the expressway are usually in the range of Rs 320-480. He must stop at the toll plaza on the border and cannot avoid the snarl-ups that sometimes happen at peak hours and consume “10-20 minutes”.
On days when he drives up to Manesar or beyond, Giri pays another Rs 25 at ‘km 42’ toll plaza, which takes his one-way expense on the road to Rs 45. (The expressway has three toll collection points.)
Verma and Giri are thankful for the convenience and saving of time that Delhi-Gurgaon expressway has afforded them, compared to the traffic jams they endured before January 2008 when the stretch opened to the public after a delay of three and a half years.
They do, however, begrudge the valuable time they lose at the toll plaza.
As for the price they must pay for using the road, they do not really have a choice; the toll road is the only practical route to and from Gurgaon for both of them.
“If you leave out the congested route that will take me from west Delhi to Gurgaon via Dwarka, I am left with only the toll road,” says Giri.
Verma says simply: “It’s something that I have learnt to pay because I don’t have a choice.”
Asked if they believe the toll charges to be reasonable, both shrug their shoulders, indicating that they do not have the necessary information.
Verma and Giri certainly need to be better informed about a project whose costs will ultimately be borne by road users and taxpayers.
They also need to start wondering if it would have been possible for the government to get the Delhi-Gurgaon expressway built without imposing any tolls on the users or imposing much less financial burden than is the case currently.
(Since the taxpayers have for many years been paying the cess on transport fuel to help the government build national highways, why must they also have to pay tolls for using roads? Does the society gain anything – financially or in terms of efficiency, quality and safety – by building privately operated pay-for-use roads as is usually claimed?)
The following are some of the highlights of the Delhi-Gurgaon expressway project, based on a report of the Committee on Public Undertakings (2009-10) that was presented to the Lok Sabha in December 2009.
The committee considered the audit of the project conducted by the Comptroller and Auditor General (CAG) and testimonies of the officials of the Ministry of Road Transport and Highways (MoRTH) and National Highways Authority of India (NHAI).
1. The Rs 555 crore Delhi-Gurgaon expressway project was awarded in January 2002 to a consortium of two private companies, Jaiprakash Industries Ltd and DS Construction Ltd, which incorporated Jaypee-DSC Ventures Ltd (‘concessionaire’) to execute the project.
The project was to be executed on build-operate-transfer (BOT) basis, which meant the concessionaire would finance, build and maintain the road; it would also collect tolls to recoup its investment and make a profit.
The concession period was 20 years, which meant the concessionaire would maintain the road and collect tolls, revisable every year in line with inflation, until the year 2023.
2. In the year 2000, when phase-I of National Highways Development Programme (NHDP) to which Delhi-Gurgaon expressway belongs, got the Cabinet approval, the government had begun to favour greater private-sector participation in road projects through ‘public-private partnerships’ (PPPs).
Unlike traditional public procurement where private participation is limited to construction, PPPs usually allow private participation in financing, construction, operation and maintenance of road projects.
PPPs also marked a policy shift towards greater commercialization of road projects, which meant that motorists would need to pay tolls for using a road. (See the article headlined ‘PPPs in plain English’ for an understanding of PPPs.)
3. There were then no government guidelines (or NHAI’s internal guidelines) as to how best to execute a highways project – through traditional procurement (old style contracting) or one of the new PPP modes that allow greater private participation.
The NHAI first approved the project to be executed through ‘special purpose vehicle (SPV) mode’ and then changed that to ‘build-operate-transfer (toll) or BOT-toll mode’ “despite the fact that its financial consultant (SBI Caps) had initially found BOT-toll mode to be unviable.”
Justifying the change of mode, the government stated through the NHAI that BOT-toll would bring more private investment and allow it to spread its limited budgetary funds to more road projects in less time.
(The term ‘SPV mode’ and its contrasting with ‘BOT-toll mode’ can be quite confusing because both the modes will usually require building-operating-transferring a project and collecting tolls from users. In NHAI’s terminology, ‘SPV mode’ means the government will be the primary investor in the project even though private investors will also be welcome and ‘BOT-toll’ means a private company will be the primary investor.)
4. NHAI stated the government ‘policy’ thus: first consider BOT-toll failing which BOT-annuity failing which SPV or EPC. (EPC is a way of traditional procurement in which the contractor’s role limited to ‘engineering, procurement of materials and construction.’)
The policy, which continues to this day, meant that traditional procurement modes were ruled out even before NHAI evaluated their costs and benefits in relation to the PPP modes. Similarly, no comparative evaluation of the costs was done between the PPP modes.
Describing this policy as beset with “serious lacunae,” the Committee on Public Undertakings (CPU) recommended that “the mode of execution should be based on case-to-case basis instead of a common guideline for all projects and the NHAI be invariably made accountable in respect of project related deficiencies irrespective of the mode of execution.”
5. BOT-annuity, by which the government would have collected the tolls and the concessionaire would have been entitled to receive fixed payments every six months, was similarly shunned without a comparative study.
The CPU said it found it “inconceivable as to how a high traffic density stretch like Delhi-Gurgaon was not opted for execution on BOT-annuity despite the fact that toll collection is of the order of Rs 208 crore in just 20 months of the opening of the project.” (Such has been the traffic density that the concessionaire “will break even in three years, despite the fact that it has incurred 73 per cent of cost over-run and is running two years behind schedule,” predicted a report in Business Standard of November 6th, 2007.)
The government’s reasoning that BOT-annuity would have saddled it with the “traffic risk” (fluctuation in toll collection) was termed “unconvincing” by the CPU.
“Had the government carried out a comparative study of the toll and annuity modes, the unjustified enrichment of the concessionaire could have been avoided,” the CPU said.
6. Interestingly, it was a project which was won on the basis of ‘negative grant,’ i.e. the winning bidder offered to pay NHAI Rs 61 crore for being awarded the contract instead of asking for government grant. (The government provides grant up to 40 per cent of total project cost to bridge the ‘viability gap’ of a highways PPP.)
NHAI, however, fully nullified that gain by incurring Rs 146.62 crore of costs in introducing ‘change in scope’ works after the finalization of the detailed project report (DPR). That has also been blamed for contributing to a 42-month delay in project completion.
The CPU noted that the DPR, which NHAI commissioned RITES to prepare, was deficient on many counts, such as insufficient number of foot over-bridges and underpasses. The cost of all of these additional works is being borne by the public exchequer.
7. To make the project financially attractive for the bidders, NHAI assumed traffic density in “the worst-case scenario.” It also relied on an old traffic study rather than heeding the advice of its financial consultant (SBI Caps) to conduct a fresh study before inviting bids.
“Though this project was expected to be a very high traffic density corridor, strangely the toll rates were fixed on the basis of worst case scenario in bidding documents on the pretext of generating sufficient bidding interest in the project,” the CPU noted.
The worst-case scenario meant that the tolls were set at a much higher level than would have been the case if an accurate traffic estimate had been available.
It also meant that NHAI lost the opportunity of getting a higher ‘negative grant’ from the bidders.
8. While 14 years would have been enough for the concessionaire to recoup its investments and generate a reasonable rate of return (20 per cent), NHAI allowed a concession period of 20 years, pointed out the CAG and noted by the CPU.
The CAG estimated that the concessionaire would gain Rs 187.77 crore over the extra six years at the cost of road users.
“The committee is convinced that no homework was done by NHAI to assess the correctness of the 20 years concession period worked out by the financial consultant,” the CPU said.
9. The concessionaire’s honesty in generating traffic reports and sharing revenue with NHAI became suspect when an ‘independent auditor,’ appointed with considerable delay by NHAI, pointed out a “difference of Rs 2.16 crore” in the financial records and toll collection reports.
The CPU “took a serious note” of the matter that the NHAI had neglected inexplicably. (Upon the daily traffic exceeding 1,30,000 passenger car units or PCUs, the concessionaire is required to share the toll revenue equally with the NHAI. A Times of India report of January 16th, 2010 said NHAI had imposed a fine of Rs one crore on the concessionaire, which included the fine for the “delay” in paying the share of the revenue that belonged to the authority – clearly a response to the CPU’s criticism.)
10. “No road safety audit was carried out in respect of Delhi-Gurgaon project either at the planning stage or at the DPR stage,” the CPU noted, citing a report of the Central Road Research Institute, submitted in 2008. Safety of the non-motorised traffic and pedestrians was neglected.
Only four subways and two foot over-bridges have been provided on the entire corridor, which are inadequate by any standard.
“Over 100 people lost their lives in accidents in a relatively short period of time, primarily due to inadequate safety norms and utter callousness on the part of the authorities,” the CPU noted.
The concessionaire has failed to deploy even a handful of personnel who would manage traffic, enforce lane discipline and ensure safety of the road-users.
That, as also the fact that the expressway lacks public toilets, rest areas, fuelling and service facilities, constitutes a breach of its contractual obligation by the concessionaire.
11. NHAI allowed the ‘independent consultant’ (who acts on behalf of NHAI to monitor the entire project) to issue a completion certificate to the concessionaire even before several items of work were complete.
No penalties were imposed on the concessionaire and NHAI simply blamed the “blatant lapse” on the independent consultant, the CPU observed.
(Since then NHAI seems to have responded to the CPU’s strictures. The January 16, 2010 report of the Times of India said Rs one crore of fine had been imposed on the concessionaire for its failure to complete the minor works within the given timeframe and for delaying revenue sharing.)
12. According to NHAI’s statement to the CPU, the ‘chartered accountant balance sheet of the concessionaire’ showed the final project cost to be Rs 1170.26 crore, which is a 110 per cent escalation over the original project cost of Rs 555 crore.
13. The CPU cited “avoidable confusion and chaos at toll plazas and undue traffic holdups there” which negate the very concept of a high-speed expressway.
In recommending better monitoring of toll plazas, the CPU referred to “illegal and unscrupulous methods of toll collection” (more on that in subsequent paras).
It “strongly recommended that the government should find a way of providing some relief to the commuters either by sharing the toll or making it toll-free once the concessionaire has recovered his investment.”
14. Finally, the CPU wondered who was ultimately responsible for monitoring the project and its failings, such as the large number of fatal accidents.
“NHAI has washed its hands off its responsibilities by submitting that monitoring is the responsibility of the independent consultant. Thereafter the government has washed its hands off by submitting that it is for NHAI to enforce the agreement.”
There is much more to the financial and social costs of Delhi-Gurgaon expressway project than what the CPU covered. Here is a summary of a few of those costs, starting with the most startling.
(a) According to the concession agreement, the concessionaire cannot charge drivers of vehicles that it registers as “local personal traffic” (such as Bina Verma’s car) anything more than “50 percent of the applicable fees for the specific category of vehicles”.
Here is how the concessionaire has been violating this clause with impunity, cheating the registered local commuters every day, and making money in illegally collected tolls.
The concessionaire registers “local personal traffic” for 50 per cent discount only through the SmartExpress plan, which allows a registered vehicle a maximum of 60 crossings of the toll plaza at Delhi-Gurgaon border over a period of 30 days (counted from the date of registration or top-up) for a fee of Rs 600 paid in advance. (The ‘applicable fee’ for a personal car is Rs 20 per trip, adding up to Rs 1200 for 60 crossings.)
But Verma, whose car has been registered by the concessionaire as “local personal traffic” through the SmartExpress plan, has usually been crossing the Delhi-Gurgaon toll plaza only 22 days a month, i.e. 44 times. (She goes to work from Monday through Friday and only rarely uses the expressway for any other purpose.)
She should be charged Rs 440 for her 44 trips, at 50 per cent discount on Rs 20 per trip, and the balance (Rs 160 corresponding to unutilized trips) should be either carried forward to the next 30-day period or refunded.
The concessionaire has, however, devised the SmartExpress plan to appropriate the unspent amount after every 30-day period unless Verma renews her subscription with Rs 600 within that period to accumulate more unwanted trips.
The trips that she accumulates also don’t get carried forward. The plan is thus a clear violation of the concession agreement that says that the concessionaire shall deal with local traffic “so as not to cause any inconvenience or cost or loss to the operator of such a vehicle”.
The concession agreement also mentions “refunds”. (“It shall issue appropriate passes or make refunds in a manner that minimizes the inconvenience to local traffic consistent with the concessionaire’s need to prevent any leakage of fees.”)
If the concessionaire has defined “local personal traffic” -- as indeed it has by giving such commuters no option other than the SmartExpress plan (See the ‘terms and conditions’ on concessionaire’s website at http://dgexpressway.com/pdfs/terms_n_conditions.pdf) -- as a personal vehicle crossing the toll plaza at least 60 times in 30 days, then Verma’s car should not continue to have been registered as ‘local personal traffic’ and she should not have been ‘enjoying’ a supposedly concessional fare.
Verma, in that case, should be paying Rs 880 for her 44 trips a month rather than Rs 600. But she pays Rs 600 under a special plan flowing from the concession agreement, which means her trips have been officially recognized as “local personal traffic”.
If, on the other hand, the concessionaire attempts to disclaim its own notification and argues that it has not defined “local personal traffic” in specific terms and therefore anyone is free to register their vehicle on the SmartExpress plan, then it will have admitted to breaching its contractual obligation of giving a differential and advantageous treatment to the local commuters.
Since subscribing to the SmartExpress plan neither gives them the full price advantage that they deserve nor any advantage over other motorists because of “lane indiscipline” at toll plazas, even the regular commuters like to pay cash, i.e. full amount, another factor contributing to what the CPU described as “unjustified enrichment” of the concessionaire.
That only a small proportion of motorists subscribe to the smart tag is borne out by media reports and substantially explains the congestion at toll plazas (which, in turn, has its own costs, such as loss of productive time and fuel).
The “local commercial traffic”, which must be given a monthly discount of 66 per cent of applicable fee, is being cheated similarly by the concessionaire.
The concession agreement defines local traffic only as vehicles (personal or commercial) registered with the concessionaire and “plying routinely” on the highway without crossing more than one of the toll plazas.
Mischievously, the concessionaire, who is required to “formulate, publish and implement” an appropriate scheme for charging local traffic, has put in place a system that cheats the local commuters.
Not only has the local traffic not been defined in a fair, transparent, and public-spirited manner, but the system of charging local traffic that the concessionaire filed with NHAI has never been made public by either of the two partners!
Reached by this writer, VK Rajawat, the NHAI general manager in charge of the expressway, said: “The concessionaire has not defined the local traffic in a way other than that defined in the concession agreement.”
After several phone calls and text messages, Rajawat promised to send this writer a copy of the system for charging local traffic, filed by the concessionaire, but never did.
Signed in April 2002, the concession agreement itself was hidden from public eyes until Dwarka Forum, an association of local residents, compelled NHAI to upload it on its website in February 2010 through a yearlong battle using the Right to Information (RTI) Act.
(b) An investigation into the project, conducted by the director general of investigation and registration (DGIR) of Monopolies and Restrictive Trade Practices Commission (MRTPC) found: “It is evident that the traffic analysis submitted by the concessionaire to NHAI and RITES (independent consultant) was highly under-projected and ... the toll fees (which should be charged) in 2020 are being charged now, for each category of vehicles.”
“Thus by submitting unprojected/misprojected figures of volume of traffic, the concessionaire has adopted a method which amounts to unfair trade practice,” the DGIR found in its probe as reported by PTI in August 2009.
“Evidently, NHAI influenced the notified toll charges (in a manner that resulted) in undue gains to the concessionaire at the cost of public at large,” the DGIR added.
DGIR pointed out another disturbing feature of the project: the no-competition clause, according to which the government cannot build a road competing with the Delhi-Gurgaon expressway without meeting some very difficult conditions.
The concession agreement stipulates that the governments at the Centre or Delhi or Haryana cannot operate a “competing road facility” before the traffic at the expressway reaches 1,70,000 PCUs per day or the expiry of 20-years concession period, whichever is earlier.
If the government does get a competing road built and operated, the concession period of the expressway will have to be increased by half the number of years between the commissioning of the former and the end of the latter.
The competing road will have to be priced 133 per cent of the fees charged for the use of Delhi-Gurgaon expressway.
DGIR’s case against the concessionaire and NHAI has since been transferred from MRTPC, which was wound up in 2009, to the Competition Appellate Tribunal, set up under the Competition Act, 2002.
Since the no-competition clause finds its origin in the government-approved ‘model concession agreement’ for PPPs in national highways, the entire policy of turning over the operation of public roads – a naturally monopolistic activity -- to private management and then fortifying those monopolies has come under a cloud.
(c) From January 2008, when it opened to the public, to June 2009, the expressway saw 1694 accidents of which 1594 were of serious nature leading to 100 deaths, KS Anand, a Delhi-based businessman, was informed in response to an RTI query.
Anand’s son died on the expressway in March 2009 after his car rammed into a stationary water tanker whose presence on the high-speed road was directly attributable to the criminal neglect of the concessionaire.
“The concessionaire never bothered to make available any medical assistance as required by the concession agreement and despite a large number of serious accidents,” Anand told this writer.
None of the SOS telephones installed on the road worked, he added.
A large number of people who lost their lives were from nearby villages in Gurgaon, who trying to cross the high-speed road that does not have enough crossover facilities.
Asked why NHAI allowed the expressway to open without compelling the concessionaire to fulfill its obligation of providing fencing, foot over-bridges, underpasses, and medical facilities, the authority replied to Anand that the completion certificate was issued by the independent consultant only after it was satisfied with the provisions.
Anand has filed a PIL at Punjab and Haryana high court, charging the concessionaire, NHAI and the ministry of road transport and highways with negligence.
Dwarka Forum too has been struggling for many months to get itself heard on serious safety hazards, including absence of a flyover, which will help ease traffic moving out of Dwarka sub-city, and service lanes on a long stretch of the expressway.
“The concessionaire and NHAI have zero interest in taking responsibility for their actions. We have even written to the department of public grievances of the central government and the prime minister, without any relief,” CK Rejimon, President of Dwarka Forum, told this writer.
The Delhi-Gurgaon expressway is thus a classic example of how a PPP and the web of contractual relationships that it creates are used by both public and private partners to evade their responsibility and accountability to the citizens.
(e) A report in the Economic Times of August 27, 2010, said NHAI had written on August 6, 2010, to the concessionaire, threatening to terminate the concession agreement if the latter did not provide satisfactory answers to “dozen-odd points of confrontation.” The points include the concessionaire’s traffic count being less than that estimated by the independent consultant and the concessionaire not depositing “all proceeds” into the escrow account, as prescribed in the agreement.
According to the newspaper, NHAI had alleged, citing a Central Vigilance Commission report, that during construction, thickness of the pavement was reduced from the stipulated standard without seeking NHAI’s permission; the cost of construction thus saved was not passed on to NHAI even though the bid was made on the basis of pavement thickness.
NHAI also complained that the concessionaire had “failed to ensure safe, smooth and uninterrupted flow of traffic,” which had resulted in the loss of lives and given a bad name to the authority.
The letter is thus a clear admission by NHAI of the project’s abject failures on various counts and continuing financial improprieties.
(f) While general commuters have been left to the tender mercies of the private monopoly over a public road, the concession agreement exempts the following “types of vehicles” from payment of tolls.
“Official vehicles transporting and accompanying the president of India, the vice-president, the prime minister, central ministers, governors, lieutenant governors, chief ministers, presiding officers of central and state legislatures having jurisdictions, ministers of state government, judges of the supreme court and high courts having jurisdiction, secretaries and commissioner of state government, foreign dignitaries on state visit to India, heads of foreign missions stationed in India using cars with CD symbol, executive magistrates, officers of the ministry of road transport and highways and NHAI, and central and state forces in uniform, including police.”
So much for the Constitutional principle of equality of all citizens!
If private management of a public facility is really the epitome of efficiency and quality, then why the advocates of this policy – those in the government, including the ministry of road transport and highways – exempt themselves from payment of tolls and waiting at the toll plazas?
From the highlights of the Delhi-Gurgaon expressway project, the following are a few of the insights for Verma, Giri and other road users.
(a) The expressway might as well have been built the traditional way as a free-of-charge road if the government had not followed, in the name of ‘policy,’ the bizarre thumb rule that says “first consider BOT-toll failing which BOT-annuity failing which SPV or EPC”. This thumb rule hardly gives a chance to traditional procurement, let alone making a comparison of the lifecycle costs of the project in various modes.
(b) The road users might as well have been paying much less in tolls than they have been paying since January 2008 if NHAI had not relied on the “worst case” traffic estimate.
(c) The regular commuters should not have been paying a rupee more than 50 per cent of the ‘applicable fees,’ as per the concession agreement. Why NHAI and the government have been allowing the concessionaire to cheat the road users is the question that the public must ask and the ‘public partners’ must answer.
(d) Cost savings and efficiency that the PPP policy promises are hardly evident in the way the expressway project has been executed and is being operated. There was a 42-months’ delay from the scheduled completion date of June 2004 and 110 per cent cost escalation.
(e) As for ‘improved service’, another promise of the PPP policy, road users can decide for themselves, but NHAI itself believes that the concessionaire “failed to ensure safe, smooth and uninterrupted flow of traffic.”
Many of the financial and social costs of Delhi-Gurgaon expressway project exemplify the way the Centre has been implementing its PPP policy in development of infrastructure.
The PPP policy for national highways, for instance, gives private partners encumbrance-free land, “facilitation” in environment clearances and getting permits, income tax exemptions for 10 years, grant up to 40 percent of project cost, up to 30 per cent equity by NHAI, 100 per cent FDI up to Rs 1,500 crore, easier external commercial borrowings, custom duty exemption on import of equipment, the right to collect and retain tolls, concession periods of up to 30 years, repayment of 90 per cent of senior debt if the contract gets terminated prematurely, and several other benefits.
The PPPs have also been implemented without taking into account their enormous social costs. The PPP policy creates very complex contractual relationships that have far greater scope for corruption and avoidance of accountability to the citizens than in traditional public procurement.
Delhi Gurgaon expressway project and public choice theory
Why do road users like Bina Verma and Rakesh Giri seem somewhat indifferent to the significant costs that they have to bear on account of the bungling and corruption in the conception, execution and operation of Delhi-Gurgaon expressway project as detailed in this article?
Why don’t they question and protest against all that is wrong with the project and perhaps also the policy that engendered this project?
Public choice theory, developed, among others, by Scottish economist Duncan Black and American economists James M. Buchanan, Gordon Tullock and Kenneth Arrow, has an interesting explanation.
Public choice theory takes a cynical view of three ‘maximizing groups’: elected officials who seek to maximize their votes, civil servants who seek to maximize their salaries (and hence their positions in the hierarchy), and voters who seek to maximize their own utility. No one cares about the larger public interest!
(A caveat: It bears repeating and emphasizing that this is a theoretical view of the behavior of the three groups that is commonly used to explain bad policies. It’s not an accurate view of the behavior of the three groups; elected and unelected officials and voters are also known to behave honourably and in public interest. One must guard against using public choice theory to justify a bad situation arising out of a bad policy.)
The gainers from a project like Delhi-Gurgaon Expressway are developers who get monopoly rights over a money spinning road. They are a wealthy group with significant measure of influence over politicians and a voice that’s noticed and reported by the media.
The losers are the entire group of citizens (generally all Indian taxpayers and specifically the users of the expressway). Although they are more numerous than developers, and although their total loss is large, each individual citizen suffers only a small loss.
For example, let us assume that there are five lakh frequent users of the expressway who are together being charged Rs 7.50 crore wrongly and in excess every month.
Their individual loss every month would be only Rs 150. They have more important things to worry about than Rs 150 they pay in excess every month, and so do not protest, or arrange a collective voice of protest, against the project (nor do they contemplate voting against the government that favours bad projects like Delhi-Gurgaon expressway).
As long as the average citizens are unconcerned about, and often unaware of, the losses they suffer, the vote-maximising politicians will ignore the interests of the many and support the interests of the few.
The politicians will consider finding some solution for the wrongs of the project (or changing the policy that brought about the project) only when the cost of the project becomes so large that the ordinary citizens begin to count the cost (such as the large number of fatal accidents).
What is required for policy change, according to public choice theory, is that those who lose become sufficiently aware of their losses for this awareness to affect their behavior as socially and politically active citizens.
The ability of elected officials and civil servants to ignore the public interest is strengthened by a phenomenon called ‘rational ignorance’.
Many policy issues are extremely complex. A good example is the public-private partnership (PPP) policy, which involves a great many actors/agencies from the government and the private sector and very complex contractual relationships, such as voluminous concession agreements.
Much time and effort is required for a layperson even to attempt to understand the myriad issues arising out of the PPP policy.
Yet one person’s vote has little influence on which party gets elected or on what they really do about the issue in question once elected. So the costs are large, the benefits small.
Thus a majority of rational, self-interested voters will remain innocent of the complexities involved in many policy issues.
Who will be the informed minority? The answer is those who stand to gain or lose a lot from the policy, those with a strong sense of moral obligation, and those policy junkies who just like this sort of thing!
(The articles on Delhi-Gurgaon expressway were first published as cover story in Governance Now fortnightly magazine, Oct.1-15, 2010 issue.)
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