Public Private Partnership Projects In India Construction Essay

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Physical infrastructure is an essential part of growth of an economy and provides fundamental services that public need in their daily life. The contribution of infrastructure to economic development is well acknowledged both in scholastic and policy debates. Well developed physical infrastructure provides foremost monetary services economically, develops the competitiveness, enlarges imperative support to industrious sectors, creates high output and maintains strong economic growth. PPP has become a catchphrase in Indian infrastructure development.

India's climb in recent years is a most well-known improvement in the world economy. This vigorous augmentation has placed a rising stress on the physical infrastructure such as airports, roads power and ports which were carrying a momentous shortfall from the past. As a result the Indian government is committed to build world-class infrastructure for recuperating the excellence of life and improving competitiveness of the economy (Committee on Infrastructure Financing, 2007).

The funding needs of infrastructure are so huge that no amount of resource organisation within the public sector can meet this challenge. Recourse to private investment is thus foreseeable for maintaining the growth impetus. In addition, private participation is anticipated to steer competence gains and diminution in expenses. As such, the government looks upon PPPs for addressing some of these instants, and this has led to a paradigm move in favour of PPPs.

The government has instigated intensive measures for making an enabling policy and authoritarian environment that would draw the necessary levels of private investment. This incorporates well-designed PPP frameworks joined with fiscal and financial support. Currently, the use of PPPs for providing infrastructure services has approximately 11 years of experience in India, with the greater number of projects coming in the last 4-5 years (Geethanjali, 2010). 

This chapter reviews the various PPP schemes adopted by Indian Government for infrastructure development. In addition, this section looks at two case studies: Pipavav Railway Corporation and Hyderabad International Airport. From these experiences it is expected that some lessons can be extracted for the future PPP projects.

4.2 Government Policy on PPPs

4.2.1 Background

Indian Government is enthusiastically pursuing PPPs to viaduct the infrastructure deficit in the country. Several schemes have been taken during the last five years to encourage PPPs in sectors like highways, railways, airports, power and other urban infrastructure projects. Under the overall supervision of the commission of Infrastructure administered by the Prime Minister, the PPP agenda has been finalized and the functioning of the diverse schemes is being intimately supervised by the constituent Departments under this programme (Mahalingam, 2010).

To address different limitations in the PPP model, various initiatives have been adopted by the Indian Government to create a permitting framework for PPPs by discussing issues relating to authoritarian and policy environment. With time, more sectors have been opened to private and overseas funds. Levy of consumer charges is being promoted, authoritarian institutions are being set up and reinforced financial schemes are given to infrastructure projects. Consequently the government has come out with diverse schemes which are described below.

4.2.1.1 Viability Gap Funding (VGF)

The VGF Scheme provides fiscal support in the form of funding to infrastructure projects carried out on PPP mode; it is a funding at the phase of project construction. These funds are also one time deferred basis, and are firmly confined for the reason of creating the projects commercially workable. The ministry of finance supervises this scheme. This scheme confines its validity to infrastructure facility which includes airports, roads, seaports, railways, and other physical infrastructure projects. An additional precondition of the scheme is that the project provides the infrastructure service against the disbursement of preset user charge. Under this scheme the government's support does not surpass 20% of the total project outlay (Infrastructure section, 2005).

4.2.1.2 Indian Infrastructure Finance Company Limited (IIFCL)

The IIFCL scheme has been instigated with the particular mandate to take part as a catalytic function in the infrastructure sector by offering long-term funding to infrastructure projects in India. IIFCL takes in finances both from the domestic and exterior markets on the potency of the government assurance. IIFCL also finances those PPP projects, which turn out to be feasible after getting the VGF. IIFCL confine it's lending to merely projects executed i.e., funded, developed and operated for the project period by a public sector firm.

Under this scheme, the real lending is administered by assessment of the lead bank before financial closure. The lead bank is accountable for regular supervising and episodic assessment of project conformity with concurred targets and performance stages particularly with respect to payment of IIFCL funds (Department of Economic Affairs, 2008). For smooth performance, IIFCL enters into a three-party accord with the project company and the lead bank for every individual project.

4.2.1.3 Indian Infrastructure Project Development Fund (IIPDF)

IIPDF is corpus fund unit for the intention of providing fiscal support for project improvement activities. This has been formulated in the branch of economic affairs for supporting the improvement of bankable and reliable PPP projects that can be given to the private sector. IIPDF is the scheme for financing to cover a portion of the PPP transaction expenses, thus reducing the impingement of costs associated to procurement on their resources (Department of Economic Affairs 2007a).

IIPDF is not intended to operate as a source of provide funding for the sponsors but to support the sponsors with 75% of their project development costs. Therefore, IIPDF is to help out the project that intimately support the best ways in PPP project identification and preparation.

4.3 Pipavav Railway Corporation Case Study

4.3.1 Background

Pipavav Railway Corporation Limited (PRCL) is a 50:50 Joint Venture (JV) company between Gujarat Pipavav Port Ltd. (GPPL)and Ministry of Railways (MOR) .In 1992, it was decided extend the railway line and to develop the Port Pipavav as an all weather facility for handling bulk, liquid and container cargo. Subsequently a Special Project Vehicle (SPV) called PRCL was formed to carry out the project.

General cargo handling operations at the Port started in November 1996 followed by container handling operations in 1998. Currently, the container Terminal provides direct services to US East Coast, Europe, Far East and China. The port is being developed for handling 19 million tonnes of cargo per Annum including 13 million tonnes of containerized cargo. Port Pipavav is today identified as one of the major gateways on the West Coast of India (Mamuni, 2003).

The Project was being developed on Build Operate Transfer (BOT) basis and the concession period is 33 years. This new project represents integration for entire broad gauge rail connectivity between Indian Railways network and the Pipavav Port. This joint venture annunciated the PPP model of Railway projects in India.

Figure 4.1: Pipavav Rail Connectivity Map (Pipavav railway, 2007)

4.3.2 Project Profile

The entire length of project line is approximately 270 km. A metre gauge (MG) railway line existed between Rajula and Surendranagar Junction. This stretch was converted to broad gauge.

The broad gauge rail line was constructed fit for a maximum speed of 100 kmph. The project involved construction of 197 bridges: 31 major and 166 minor Bridges on the gauge conversion route and 2 major and 15 minor bridges on the New line section between Rajula and Pipavav. In the gauge conversion between Rajula and Surendranagar, the existing station buildings were used and two new stations were built, one each at Pipavav and Rajula. There are 36 Railway stations on the rail route from Pipavav and Surendranagar (Pipavav railway, 2007).

4.3.3 PRCL's Promoters and Contractual Structure

PRCL was promoted by the GPPL and Ministry of Railways (Govt. of India).

Ministry of Railways: Railways are a full-fledged Ministry with a Minister of Cabinet rank holding charge. Indian Railways (IR) is completely owned by the Government of India, managed by Railway Board. IR the fourth largest railway network in the world, has a route length of 64,500 km. IR has 1.6 million workers running over 8,000 passenger trains and 5,600 freight trains every day. It moves over 18 million passengers and 2.5 million tonnes of goods daily (Indian Railways, 2010).

Gujarat Pipavav Port Limited: Gujarat Pipavav Port Limited (GPPL) is one of the first private sector ports in India. It was incorporated in 1992, as a joint venture between Sea King Infrastructure Limited (SKIL) and Gujarat Maritime Board for developing and operating an all weather port for handling, liquid, bulk and container cargo at Pipavav, in the state of Gujarat.

The figure 4.2 shows the contractual structure and various agreements associated in the project

Figure 4.2: Contractual Structure of PRCL (Pradeep, 2006)

4.3.4 Funding Arrangements

The Project line has been funded through a mix of debt and equity. The Total project cost of INR. 3730 million was met by equity of INR.1960 million and a debt of INR.1730 million. The completion cost was lower at INR 3670 million. The debt equity proportion was approved at 2:1 but truly it was maintained at 0.86:1 (Pipavav railway, 2007). The means of finance are given in the table below:

Project Development Phase: The gauge conversion of the Rajula to Surendranagar MG line was a permitted work of the WR to be completed at railways cost. Nonetheless, it was not a priority line and thus yearly fund allocations were very scanty. In normal course, if the WR were to complete the conversion, it might take between 10-15 years. It was not matching with the port development plans and therefore the need for GPPL to contribute to the gauge conversion cost (National level infrastructure, 2005).

Construction Phase: The construction phase started on the date of signing the construction agreement on13th March 2002. Till then WR had been carrying out opening works on the erstwhile sanctioned Railway Gauge Conversion Project which predominantly related to the strengthening of structures and bridges for BG trains.

The following are some of the Innovative features which were used in the implementation of the project (Pradeep, 2006).

Procurement of all the material was done on lines followed by the private sector in getting finest prices without compromising on quality. This was censured by first technically qualifying the best contractor and then negotiating on prices. There was an arrangement of incentives to endorse timely supplies.

Staffing the line operations and maintenance functions was benchmarked to best practices and norms of manning. A detailed study was conducted to fix these norms. This resulted in cutting down manpower needs by half of what gets on IR system.

Maintenance was mechanized as far as feasible. Appropriate tools were given to the staff on line to do away with wasteful practices, such as manual drilling, as carriage of materials etc.

Multitasking of the employees was introduced to cut out wastage of time in sending varied persons for different small tasks like fixing telephone faults, Changing electric bulbs etc.

Road vehicles were deployed to rapidly transport maintenance materials and staff to sites instead of waiting for passenger trains.

4.3.6 Revenue Stream

Bulk traffic for PRCL primarily consists of fertilizers and coal. The MOR reports the commodity wise tariff rate for all railway lines across the country. The tariff rates are based on the telescopic rate as set by the railways whereby the rate is fixed as per the lead distance anticipated to be travelled by the cargo. The telescopic fares are attuned for the terminal loading and unloading charges and the net fare is allocated between the total lead distance and project distance(Anupam,2004).

4.3.7 Strengths of the Project

Both shareholders, namely, GPPL and MOR have gained considerably by the Joint Venture arrangement of implementation. The following are some of the successes and strengths which were identified from the project (The Energy and Resources Institute, 2009;

David, 2005).

Project was finished within one year of signing the construction agreement and there were no expenditure overruns.

Manpower needs were scaled down to 50% of railway norms and latest standards of maintenance practices were pioneered.

The project was finished in less than 2 years of contributing equity capital and started paying revenues to MOR as freight.

MOR was losing INR. 200 million per year on operating this too expensive branch line. Losses of three years would wipe out the Cumulative loss of INR. 600 million. Consequently, MOR recovered the whole contribution made for the project in less than three years.

MOR got an assurance of 6 Million Tonnes (MT) of traffic in the first three years and subsequently a assurance of 3MT every year. This would not have been achievable without the JV arrangement.

Land acquisition for new line was accelerated as it was done by WR as a bureau of Government of India. For a private sector, it would have taken much longer.

4.3.8 Weaknesses of the Project

There were problems encountered during the execution, most of which were new both to the private investor as well as to the Railways, as it was the first joint venture. The majority of obstacles related to the signing of agreements with Railways which involved postponements. Major delay was in the signing of construction agreement with the WR which took over one and half year (Raghuvansi, 2006).

This was the first big rail venture under private sector and most rail project contractors had committed supplies to IR. Being behind schedule for supplies to Indian Railway, they were not able to perpetrate timely deliveries to PRCL. The Problem was mainly vital for procuring rails of which there was only one supplier in the country, namely, Bhilai Steel Plant of SAIL (Steel Authority of India Ltd). Other than the deficiency of materials, there were other decisive issues such as non-availability of track machines for the newly laid track, railway wagons for transporting rails, etc.

The fixing of the components of fixed costs to be salaried to WR for Operating the line was the foremost concern. Each part of maintenance had to be evaluated and bench marked with the finest practices. There were troubles of redeploying superfluous staff. The procedure of redeployment was commenced early in 2001 and by 2004 it was probable to rearrange most of the extra staff (Prasanna, 2009). This manning rule and practice became a point of reference also for the future projects of WR.

4.3.9 Lessons Learned

The following points are the important lessons learned from the above case study.

There was severe delay in deciding the construction agreement with the WR. It took one and half year to get it signed.

The confirmation of Operations and Maintenance (O&M) agreement with the also took long.

There was a severe problem and delay in confirming the order for rails; first Railways concurred to supply, then withdrew the offer. Consequently, after 6 months of stoppage, Railways agreed to the deliver the rails from Bhilai steel plant.

The most serious disadvantage of the project was its incapability to get the projected traffic. Even assured traffic of 1,2and3 MT in the first three years correspondingly did not turn up. This created a problem of incapacity to service the debt.

The new administration of GPPL hesitated in honouring the assurances made by GPPL toward disbursement of traffic guarantees.

A foremost gap in equity funding happened since GPPL did not bring in the full equity in time.

The port development was delayed and even bulk traffic like fertilizers and coal could not be handled ensuing in reduced materialization of traffic.

4.4 Hyderabad International Airport Case Study

4.4.1 Background

Hyderabad International Airport Limited (HIAL) is a joint venture company sponsored by the GMR Group in partnership with Malaysia Airports Holdings Berhad (MAHB), Airports Authority of India (AAI) and Government of Andhra Pradesh. The Company was incorporated to finance, design, build and operate a world class airport at Hyderabad, India.

The airport has been designed to ultimately cater to about 40 million passengers per annum. The first phase of the airport was commenced in a record time of 31 months in March 2008 with a preliminary capacity of 12 million passengers per annum and 100,000 tons of shipment handling capacity per annum. The airport has the greatest taxiway and runway in the country with a length of 4260m (Hyderabad International Airport Ltd, 2005).

The airport is the second PPP Project in the Indian airport infrastructure. The project is bided out on Built Own Operate and Transfer (BOOT) model and the concession period for the project is 30 years. The Bidders were selected through International Competitive Bidding (ICB) basis.

 

This is the first venture in the country to have been rewarded the Leadership Energy and Environment Design, silver grading for its eco-friendly design. The total cost of the first phase of the project is INR 24780 million. This airport was opened to the commercial traffic in March 2008, provides world class service and infrastructure in concurrence with International Civil Aviation Organisation (ICAO) standards.

Figure 4.3: View of Hyderabad International Airport

4.4.2 Project Plan

The first phase consists of construction of a 105,300 square metres terminal building, designed to handle about 12 million passengers per annum. The terminal building contains 12 contact and 30 remote stands for aircraft parking. The other structures include Cargo Section, Air Traffic Control Tower (ATC), Technical Building, Cargo Section, Maintenance Repair and Overhaul (MRO), and services having a total area of about 35,000 square metres. The project was constructed on a total area of about 5,495 acres (Satish, 2005).

4.4.3 HIAL's Promoters and Contractual Structure

In the year 2003, a Special Project Vehicle (SPV) was launched by the Andhra Pradesh State Government and the Civil Aviation Ministry of India and the under the name of HIAL (Net Resources International, 2007). As the bid was won by GMR Group, MAHB, this project was fundamentally a Joint Venture (JV) between GMR Group (63%), MAHB (11%), AAI (13%) and the Government of Andhra Pradesh (13%).

GMR Group: GMR group is one of the best growing infrastructure groups in the country with interests in Airports, Highways, and Urban Infrastructure and Energy sectors. Employing the PPP model, the Group has productively implemented various infrastructure projects in India.

Malaysia Airports Holding Berhad: MAHB was incorporated in 1991 in the Malaysian Parliament. The foremost activities of the company include the operation, maintenance and management in addition to development of airports, with primary significance being placed on the operational competence, safety and security of passengers' cargo and aircraft operations.

The figure 4.4 shows the contractual structure and various organizations involved in project.

Figure 4.4: Contractual Structure of HIAL

4.4.4 Funding Arrangements

The total worth of the project for the first phase is INR 24780 million .The financial instruments used in this project that is the debt/equity ratio was kept at 84:16. The means of finance and percentage of share are given in the table below (PPP India database, 2008).

4.4.5 Implementation Process

For the initial phase construction, HIAL used international competitive tender method for EPC (Engineering Procurement Construction) tenders for awarding the various contracts. Responses were received from 34 companies from 11 countries. Ultimately in the selection of tenders, seven companies were succeeded for ALS works and six for PTB works. The total construction time is 30 months, of which 27 months is for construction and 3 months is for airport functioning trials and certification. The following are the three types of contract which were implemented in the project (Net Resources International, 2007).

Airside and Landside (ALS) Works Contract

The contract for the ALS works was awarded to M/S Larsen and Toubro (L&T) Limited. The range of works for this contract includes construction of runways, taxiways to handle wide bodied aircrafts. Besides, L&T also constructed roads, aviation hydrant system, security fence and gates, drainage system, cargo terminal building and various other buildings.

Passenger Terminal Buildings (PTB) Contract

The contract for the PTB works was awarded to the Hongkong based China State Construction Engineering (CSCE). The scope for the PTB works include the erection of the operational terminal building over 100,000 square metres in addition to construction of the building structures, Air Traffic Control Tower (ATC), all civil and finishing works and passenger boarding bridges.

Operations and Maintenance (O&M) Contract

Reliance Industries Limited (RIL) was given the contract to operate and maintain the open access of developing the fuel farm inside the HIAL.The Novotel Group and Accor Group were given the contract to operate and maintain a Five Star Business hotel to cater to the desires of the transit and business passengers.

4.4.6 Income Stream

HIAL's income is mainly generated from aeronautical or traffic related activities and non-aeronautical or commercial sources. As airports turn into hubs of commercial activity with a push on passenger comfort, non-aeronautical revenues add up to a high share of the total airport revenue. The targeted revenue share for HIAL considerably differs from the AAI and is in line with the global trend.

With the rising significance to non-aeronautical revenues, it seems that airport possession and operation will be most appropriate for private sector investment, because of its privileged efficiencies and facility direction as compared to that of the public sector. In the first year of the operations, the passenger handling capacity in the HIAL is almost two times

that of the older airport (Balaraman and Malhotra, 2008). With India becoming a central point in the world financial system at present and more and more Indians intriguing to the skies, there has been resilience in air traffic growth in recent years.

4.4.7 Strengths and Success factors

The following are some of the strengths and success factors which were identified from the project (Balaraman and Malhotra, 2008; Kurmanath, 2009; Vogt, 2009).

This project being the first Greenfield airport project in India, the SPV used the EPC Contract method by which the project was finished in record time of three years.

Modern and inventive strategies were utilized to conquer the operational challenges and the rising Air Turbulence Fuel (ATF); three mega storage tanks for the fuel storage were constructed on the lines of an Open Model Fuel Farm.

To cancel out the rising costs due to the design changes, HIAL used External Commercial Borrowing (ECB) and obtained another debt of amount INR 7180 million.

World Renowned plans were employed in building the maintenance, repair and overhaul (MRO) facility to service airplanes. By welcoming the Lufthansa Technik and Indian Airlines to operate the MRO, extra costs of taking the aircrafts abroad was evaded. This facility can be employed by the airlines operating in other international airports of India, thus, becoming a source of additional income.

HIAL anticipates that the passenger traffic growth would rise by 25 percent in the first year. The passengers' number is expected to mount from existing 8 million to 9.4 million per annum.

HIAL has received VAT (Value added tax) relief from the Andhra Pradesh Government. This Schedule includes a list of 51 goods that do not attract the tax. This would benefit travellers both at the domestic and international terminals.

Success Factors

The three types of success factors which were identified from this project are described below.

First, the HIAL have adopted a PPP structure that is suitable for an airport project. Since airports have well-built public good characteristics and also form a division of planned national assets. Besides BOOT structure is the most apt as the government can take over the possessions at the end of the concession period.

Second, though the majority shareholding in this project is with the private sector, government has a sturdy presence. Government has a shareholding of 26 percent, the smallest threshold level required to retain significant sponsor rights.

Third, the contractual structure has proper features to ensure better performance and lessen opportunistic behaviour. Further, the concession agreement has evidently stated the standards for performance. After the expiration of the concession agreement, the possessions revert to the government.

4.4.8 Weaknesses of the Project

The difficulties faced by the HIAL during the construction and operation of the project are described below.

Land acquisition for the project was severely opposed by the public as it resulted in depriving a set of people the quality of life and their livelihood. During the process of land acquisition total information about the area of land required was kept hidden from the civic. HIAL faced a variety of risks such as revenue and regulatory risks. The revenue risk was due to demand suspicions and pricing (Balaraman and Malhotra, 2008).The regulatory risks were due to uncertainty in licensing, tariff fixation and revenue sharing.

The other problems faced by HIAL is that several private Airlines were not fascinated in moving to the new airport from the old airport, but ultimately the officials from the Department of Civil Aviation have proclaimed that the old airport would be closed totally for Civil Aviation operations. In addition there was a delay in the construction of elevated express way which connects to the new airport and resistance from the public for increasing the user charges (Bradley, 2008; Lalith, 2009).

4.4.9 Lessons Learned

The following points are the important lessons learned from the above case study.

5450 acres of Land: Voices were raised by the public for the allotment of 5450 acres of land for the airport in the preliminary stages.

Opposition to shift the Airport: In the beginning there was lot of opposition and criticism from the workforce and the general public to shift the old airport. There was lot of pressure to operate both the airports simultaneously.

P.V. Narasimha Rao Elevated Expressway: This Expressway connects the main city to the new airport. This is not completed by the time the airport opened to the traffic in March 2008. The work is still taking place for one year after opening of the airport. Due to this lot of difficulty is caused to the general public and also to the airport users.

Opposition for increasing the user charges: There was lot of opposition and criticism for levying the user charges. With immense amount of influence and compelling user charges are now being levied.

4.5 Summary

This chapter has studied the implementation of PPPs in India by analysing the two case studies: Pipavav Railway Corporation in Gujarat and Hyderabad International Airport in Andhra Pradesh. It was found that the implementation process of the two projects was accomplished successfully. The strengths and obstacles encountered in both the cases have been highlighted. It was found that public infrastructure projects should be carried out by the most appropriate procurement method and revenue stream from the project should be an imperative aspect for delivering the projects successful. It is supposed that through the important lessons learned from both the cases, PPP infrastructure projects can be better implemented in future.

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