Political risk is an omnipresent phenomenon in any infrastructure project designed on the PPP format, writes R. N. Joshi in ‘Public Private Partnership in Infrastructure’ ( >www.visionbooksindia.com ). A toll road is more so open to such a risk, he adds, because the project runs through many areas owned and controlled by different governments and state agencies, such as the centre and the states, local bodies and municipalities, with all of them eager to demonstrate control over their respective parcels of land.
Cautionary tales
An example mentioned in the book is of Brazil, where when tolls were introduced during the peak harvest season, the governor forced the concessionaire to charge only 50 per cent of the original tariff. “In addition to such an intervention, political risk can be in the form of direct or creeping expropriation, introduction of new law affecting the project economics and the preclusion of contract disputes to be resolved reasonably,” Joshi notes.
A cautionary tale of what happens when the government does not fulfil its part of the contract is from Thailand, where a concession was awarded to Don Muang Tollway Public Company Ltd, for a construction of a 15.4 km road connecting the airport with another toll road. “One clause in the concession agreement obligated the government to remove existing flyovers on the parallel road, which competed with the toll road and construct new flyovers to allow radial movement.”
With the government neither delivering on its promises, nor allowing the company to increase toll rates until the completion of the new flyovers, the company could achieve less than a third of the forecast revenues, and so was edging close to bankruptcy. The government had to intervene and provide significant compensation in exchange for 40 per cent stake in the company facilitating refinancing of the loan, informs the book.
Parallel routes
An insightful example of how the investor lost out is from Mexico, which launched an extensive toll road programme in 1985. “The programme aimed at attracting private investment. It also laid down certain conditions. One such condition was the requirement of providing a free alternatively parallel route,” the author narrates.
For starters, parallel roads have always been a bone of contention between the public authority and the private concessionaire, with the former viewing the same as a necessity to provide access of free mobility to the poor and general users, and the latter considering the idea to be a distraction from the new toll road’s effectiveness culminating in non-viability of the project.
In the Mexican story, for example, while traffic predictions had indicated a contribution of 20 to 45 per cent of truck traffic for the toll road, the actual figure turned out to be a mere 5 per cent. The twist to the tale was the finding of an investigation that there was ‘a black market in toll receipts.’ How did it work?
“The truckers continued to use free parallel roads but produced fake receipts to the employers to get reimbursements.”
Guaranteed return contracts
Some investors may be happy to be guaranteed a predetermined percentage of return on the project cost, but the author instructs that such contracts are not preferred unless there are compelling reasons. Such as, an urgent need to construct a military establishment, a project involving a new technology known to one or very few contractors, projects in remote areas, or where the scope of the work cannot be confirmed upfront.
“In exceptional cases, where the award of such a project is inevitable, certain safeguards must be taken before the award, so as to insulate the project cost from becoming a bottomless pit,” warns Joshi.
In this context, an example from closer home is that of the Noida Toll Bridge, one of the first initiatives of concession paradigm adopted in India in 1997, with the concessionaire guaranteed with 20 per cent return on the total project cost.
According to a provision in the concession agreement, the concessionaire can extend the concession period till the shortfall of return is made good. “The directors currently estimate that the concession period will be in excess of 70 years, as a result of the shortfalls in the recovery,” reads a snatch from a study about the project. Conceding that the Noida Toll Bridge is seen as a successful venture and one of the first BOOT (build-own-operate-transfer) projects in India, Joshi feels that such guaranteed return models should be discouraged for otherwise commercially viable projects, now that the country is no longer in the infancy stage as regards PPP.
Commercial exploitation
Since infrastructure projects are highly capital intensive, and since revenues are subject to various economic and political risks, it is not uncommon for the government to grant the rights to develop a certain proportion of project-affiliated properties on commercial lines. For example, the concessionaire of a highway project may be given the right to commercially develop roadside properties.
The author refers to the case of Delhi Metro Rail Corporation, where the Government mandated that 3 per cent of the project cost would be generated by the corporation from the rights granted to commercially develop various parcels of land given by various government agencies at concessional rates. The number is, however, one-fifth of what the Hong Kong MRTS (Mass Rapid Transit System) was provided; it was given the development rights of properties which have the effect of generating 15 per cent of the cost of the project.
Currently, Hong Kong Metro generates almost a third of its total income from property rental, Joshi states. “Hong Kong Metro today is one of the very few mass transit systems which are making profits and keeping the fare structure relatively low.”
New name for an old game
Though PPP may be a recent abbreviation, participation of private sector in infrastructure has a long history, the author traces. He cites from the UN Guidelines on PPP that in ancient times, many public works (such as harbours and public markets), and collective infrastructure (e.g. public baths) were conceded. “Book 50 of the Digeste (public and private law book published in AD 530) is entirely dedicated to public works. It shows clearly the existence of concession law and of a law governing public estate licensees.”
During Roman times the procurement of public infrastructure facilities using the ‘master contractor model’ was popular, the author narrates. “In 1299 the English Crown financed the development of a silver mine in Devon through an off-balance sheet loan from a leading Italian merchant assuming much of the operational and market risks. During this period in France construction of new fortified towns and occupation of new lands were initiated with the help of private participation… Von Thurn und Taxies concession in Spain was the longest concession, which lasted for four centuries…”
Educative reference.
