CCEA nod on roads sets off debate on PPP model

The Cabinet Committee on Economic Affairs' (CCEA) approval of substitution of road concessionaires see more private players enter PPP space, says Oscar Fernandes, minister for transport, roads and highways.

Also read: CCEA approves fully exit norm for developers of NHAI But the industry partially disagrees to the government's optimism. Talking to CNBC-TV18, Vinayak Chatterjee, chairman and managing director of Feedback Infra says the private sector, domestically and internationally, is extremely cutup with the behaviour of governmental agencies, so there will be few private players entering this space. Below is the edited transcript of the interview on CNBC-TV18. Q1: Congratulations on the new portfolio. It was a big bang debut as the roads minister with the Cabinet Committee on Economic Affairs (CCEA) approving substitution of road concessionares; a long pending demand from the sector. About 15-20 highway sector projects will get relief. Will new developers come into the public private partnership (PPP) space? Fernandes: Due to the world's economic situation, and the economic condition in India having slightly changed, there were not enough bidders for the projects in the year 2012-2013. With these decisions, more people will come forward to take up projects. Q2: It is your first working day as the roads minister. What stage substitution of road concessioners will be allowed? Fernandes: During the course of the project, after its implementation, they can come in and change the partners. We will allow that. If they are at fault, there maybe a minor penalty. Otherwise, if they are not at fault, there need not be any penalty. Q3: You know the decisions taken by the CCEA on Friday. Some environmental related issues have been sorted out. Financing related demands of the industry seem to have been taken this afternoon. Will we get back to interest in the PPP space in the road sector? Chatterjee: Let us just analyse this in terms of what this new policy can and cannot do. It clearly recognises that in the roads PPP business, there are three phases to a project. The first phase is the development risk, the second phase is construction risk and the third phase is operating risk. The requirements from the key promoter or the key anchor in each of these three stages are different. In the development phase, a company should have a different bundle of skills which is a high risk taker and an aggregator of finance, engineering, construction. In the second stage you need a company which has very strong construction risk. In the third stage, you need somebody like pension funds and provident funds that are able to hold a concession for a long period of time, 15-20 years. This policy should be seen as a first recognition of different classes of investors can come across the different lifecycle of the project. That is a very strong message and should be seen as a positive message. Somebody is doing something wrong, and we are substituting him or because somebody is very tight on liquidity, he wants to exit and churn his portfolio. These are subsidiary reasons. The key reasons should be horses for courses. If that seeps into the PPP culture of the country, I would welcome the policy. _PAGEBREAK_ Q4: But for projects with financial closure, substitution will be allowed only after the concessioner pays a penalty of 1 percent. Could that be a dampener? Chatterjee: It is alright. We don't want PPP projects to become tradable stocks which is bid and immediately sold. There has to be some degree of continuity. If somebody has defaulted, the penalty will bring down the price of the equity realisation and therefore there should be a certain negative for default. The important point to note is that this policy should not be seen as solving the PPP problem. The people, who are going to come in, and pick up the equity from troubled existing concessioners could equally have formed a consortium and bid for the new projects. So, obviously the people who have money could equally well have bid for the new projects and what has prevented them from bidding for new projects which the minister says we don't have bidders. Q5: Then you don't share the government's optimism that private equity firms will come in and pick up completed highway projects. That seems to be the sense emanating from the government? Chatterjee: It is partially correct. Today's restrictive conditions do not allow PE funds and provident funds and other pension funds to pickup the assets is certainly a fact. The policy is positive about allowing that to happen. But to think that it is going to renew interest in PPP projects may not be true. Lack of liquidity is only one-third the problem. After all, if I am financially stretched and I own a road project, somebody else comes and takes my equity, I get the money in my account only reduce my debt with it. The real problem with PPP is that the private sector, domestically and internationally is extremely cutup with the behaviour of governmental agencies. This is being partners in spirit, and moving ahead with the project. The huge number of delays on clearances and other issues of partnership have a loss of confidence in the state system. This policy does not remove. It just substitutes a distressed owner by another owner, that's all. Q6: Even completed road projects will be eligible for substitution? Fernandes: They will be allowed to exit. Q7: There have been no takers for PPP road projects in the past couple of years. Is the engineering, procurement and construction (EPC) mode of road development the way forward? Fernandes: That is why we have brought in this change in PPP mode. We expect more people to come in with this change as there are risks involved. Even at the construction stage or after completion or during the remaining period, they can go for a change. Q8: There also was a proposal on restructuring of premium for stressed PPP road projects. Will you take it to the cabinet any time soon? Fernandes: That is not finalised. We will have a look at it and then we will take a decision.