Public Private Partnerships in Infrastructure

In his excellent piece on the aviation sector and infrastructure contracting in India, Gulzar has discussed the roadblocks that have appeared in public private partnerships (PPP) in the airport sector.

 

Even under the best of circumstances, PPPs in infrastructure projects are not easily successful for a variety of reasons. For example, NHAI conducts traffic surveys on its highways for a limited period of time and projects future traffic based on assumptions regarding rate of traffic growth. When bids are called based on these projections, the PPP partner has no additional information other than the survey to base the bid upon. It has been seen that in a significant number of cases the projections are way off mark. Since bidders offer a revenue share to NHAI based on survey conducted by it, inadequate future traffic causes financial stress for the concessionaire and they are not in a position to service their debt obligation. This usually results in non-payment of revenue share and poor maintenance of the assets. There have been many cases of assets being sold at low prices resulting in difficulties not only to the concessionaire, but also to the lending institutions and investors.

 

Given the excessive oversight and environment of suspicion that prevails in the country, the management of NHAI is willing to renegotiate the concession agreements based on present reality. The dispute continues till the partner is unable to run the show anymore. Even when a renegotiation clause is introduced into the concession agreement, officials are usually unwilling to take reality into account, probably due to the fact that the concessionaire provides factual information required for re-negotiation. And in all cases NHAI stops traffic monitoring once the project is handed over to the concessionaire.

 

In view of increasing litigation, some governmental organisations have taken to the practice of stating that the survey conducted by them may not be relied upon to offer a bid. This appears perverse, as the owner of the asset is unwilling to do thorough homework and desires that in the short period provided to offer bids, the concessionaire would conduct a survey and offer a bid. Such practices skew the possibility of a placing workable bid. It raises a deeper question about the intellectual integrity of the bid process as the owner is unwilling to even venture to project traffic. The process gives a go-bye to the basic principle of assigning risk that is, the agency which is best placed to handle risk should be assigned the task of handling it.

 

The Adani Group has cited the force majeure arising from Covid 19 to inform the Airports Authority of India (AAI) that it cannot take over three (Lucknow, Mangalore, and Ahmedabad) of the six airports it had won in February 2019. The Group has not taken over the remaining three airports at Jaipur, Trivandrum, and Mangalore since they are already stuck in litigation. In simple terms, we have now come the full circle on airport bids. Gulzar had blogged earlier cautioning about the wisdom of handing over all projects to one developer and had suggested, to limit optimistic and excessively aggressive bids by developers. There can be nothing said against this argument. As a method of spreading risk, AAI should have taken necessary precautions to ensure that one player did not corner all bids by aggressive bidding.

 

There is a point of view that the company's decision to step back from the airports appears to have little to do with the merits of the original bid but a devilish strategy to grab a large chunk of the business space and then plan actual investments, renegotiating as required. The covid pandemic has resulted in huge business losses and layoffs in the airline sector as well as in established airports. I feel that a new player facing difficulties of this magnitude would be certainly put to ruination. One would expect a bidder to absorb losses but not to the extent of leading to closure.

 

There are things to be said on both sides of the argument. As owner of the assets, the Airports authority of India had a purpose in calling for private partners to run the airports. Having set out, AAI should be willing to deal with circumstances along the way. Bureaucratic inertia and fear of being incriminated at a later date (when circumstances are different) usually prevents any relook or examination, whatever may be. I feel that the issue should be looked at from business/financial perspective without moralistic issues clouding judgment.

 

 

Gulzar has rightly stated as below:

            Much as we may loath admitting, it cannot be denied that there may be           a need to exercise caution and discretion while pursuing white-collar    crimes of a large company in an important market segment and with      deep financial market exposures. Its collateral damage consequences           need to be weighed appropriately. In a context where none of the major        stakeholders are immune from these allegations, a high-profile      investigation can end up spooking the system and freezing them up.

 

 No individual or company should be allowed to make super profits or collect rents. However, we should be ready to re-examine issues, if assumptions made before the bid have gone wrong.