Govt Mulls Concession Pacts For Private Road Projects
The ministry of surface transport is toying with the idea of introducing concession agreements for road projects in the private sector. These agreements will be on the lines of the power purchase agreement for independent power projects.
The concession agreements will incorporate in-built obligations to be met by the government as well as the private party executing the project, if either fails to meet its commitments. For lenders to such projects, the agreement will serve as a sovereign guarantee.
The ministry recently requisitioned, informally, concession agreement drafts from the two final bidders for the Ahmedabad-Vadodara expressway project: Reliance Industries and HCC-Reynolds. Both the companies sent their drafts some seven weeks ago, though there is no response so far from the ministry of surface transport.
The response of the surface transport ministry will set the trend for outlining the framework and policy guidelines for road projects. At present, although tenders have been floated for several expressways and road projects, there is no policy framework to infuse confidence either in the entrepreneur or the lender to kick-start the projects.
The absence of a policy direction from the Centre unlike for power projects has led to road projects conceived by state governments on a build-operate-transfer basis proving to be non-starters. An example is the Mumbai-Pune expressway project, for which Reliance emerged as the final bidder.
The Shiv Sena-Bharatiya Janata Party government has been averse to entering into any concession agreement with the bidder.
According to private companies in the infrastructure sector, only a section of the ministries of surface transport and finance has appreciated the need for a concession agreement. We are still sceptical if something positive would come out of the surface transport ministrys requisition for drafts of the agreements. Without it, you can rest assured that road projects will just not take off, said an executive.
A concession agreement complete with clauses of warranty, rate of return, financial closure and arbitration is the document that a lender, whether international or domestic, would scrutinise before tying up the finances. Lenders would like to have their interests protected. It is more so in a road project, because of their non-asset-based nature and the traffic risk, said an analyst with a leading financial institution.
Experts believe that acceptance of a fixed-price, fixed-cost concept with liquidated damages backed by a concession agreement will lead to more of co-privatised projects than a purely privatised ones.
Private infrastructure projects, except in the power sector, have been a success only through either direct or indirect financial support from the government, including cross-subsidisation.