Kelkar panel suggests sector regulators for PPP projects

The Kelkar Committee, set up to suggest ways for revisiting and revitalising the public-private partnership (PPP) model of infrastructure development, has suggested the setting up of independent regulators in sectors that are going in for PPPs.

The committee also recommended a unified mandate that encompasses activities in different infrastructure sub sectors to ensure harmonised performance by these regulators.

The committee welcomed the current review and amendment of the Arbitration Act, and strongly endorsed the need for time limits on hearings.

The dominant, primary concern of the committee was the optimal allocation of risks across PPP stakeholders. Inefficient and inequitable allocation of risk in PPPs can be a major factor in PPP failures, ultimately hurting the citizens of India, the report submitted by the committee said.

The committee noted that the adoption of the Model Concession Agreement (MCA) has meant that project specific risks are rarely addressed by project implementation authorities in the `one-size-fits-all' approach and recommended a rational allocation of risks in sector and project-specific contexts.

For the next generation of PPP contracts, the committee has suggested the following broad guidelines while allocating and managing risks:

• An entity should bear the risk that is in its normal course of its business;
• An assessment needs to be carried out regarding the relative ease and efficiency of managing the risk by the entity concerned;
• The cost effectiveness of managing the risk needs to be evaluated;
• Any overriding considerations/stipulations of a particular entity need to be factored in prior to implementing the risk management structure;
• DEA, or preferably the 3PI, should deploy sophisticated modelling techniques that exist to assess risk probabilities and the need to provision for them; and
• There should be ex-ante provisioning for a renegotiation framework in the bid document itself.

Since infrastructure PPP projects span over 20-30 years and a developer often loses bargaining power related to tariffs and other matters in case there are abrupt changes in the economic or policy environment, which are beyond his control, the committee said, there is a strong need to protect the private investor against `Obsolescing Bargain' - the loss of bargaining power over time by private player in PPPs.

For this, the committee suggested separate mechanisms, including the setting up of independent sector regulators.

''PPP projects can become distressed when risks emerge that may not have been contemplated at the time of signing. This could give rise to a call for amending the terms of the concession agreement to reflect new project realities better,'' the report noted.

The committee has suggested benchmarks to be applied to each proposed renegotiation as well as set out a set of conditions that should not be accepted as valid reasons for a request for amendment of a concession agreement.

The committee said the final decision on a renegotiated concession agreement must be based on full disclosure of the renegotiated estimated long-term costs, risks and potential benefits; comparison with the financial position for government at the time of signing the concession agreement; and comparison with the existing financial position for government just prior to renegotiation.

This, the committee said, will permit the regulating authority to take decisions on revisiting and revitalising the PPP model of infrastructure concession based on a full comparison of the likely outcomes over the future of the concession.
 
The committee noted that there are a number of stalled PPP projects that are needed to be kick started. For this, there is an urgent need to evolve a suitable mechanism that evaluates and addresses ''actionable stress''-using stress and adversity to deal with the underlying systemic problems. Sector specific institutional frameworks should be developed to address these stalled infrastructure projects, the report said.

The proposed `Tribunal' and Infrastructure Projects Appellate Tribunal (IPAT) approach, in the committee's view are the possible solution. The committee said it was of the view that only a statutorily established credible empowered multi-disciplinary expert institutional mechanism may be able to deal with the complex issues involved.

The committee said there is a need for quick, equitable, efficient and enforceable dispute resolution mechanism for PPP projects. ''It is suggested that PPP contracts have clearly articulated dispute resolution structures that demonstrate commitment of all stakeholders and provide flexibility to restructure within the commercial and financial boundaries of the project,'' the committee said in its report.

For the new project proposals emerging in various infrastructure sectors, the committee has recommended that appropriate legal frameworks be developed against which these can be evaluated.

The committee wanted authorities to refrain from adopting PPP structures for very small projects, since the benefits of delivering small PPP projects may not be commensurate with the resulting costs and the complexity of managing such partnerships over a long period. The transaction costs of well-structured PPP projects are significant, including essential but expensive expert advisory services, it noted.

Besides, it suggested actively discouraging unsolicited proposals (''Swiss Challenge'') as they bring information asymmetries into the procurement process and result in lack of transparency and fair and equal treatment of potential bidders in the procurement process.

''Inherent in the concept of PPP is the role of a `Private Sector Partner' that will implement the project, based on the need to leverage private sector financing and also the managerial and operational efficiencies of the private sector party. It is in this context that the Committee is of the view that since state owned entities SoEs/PSUs are essentially Government entities and work within the government framework, they should not be allowed to bid for PPP projects.

The committee said authorities should not treat PPPs as an off-balance sheet funding method for the government's responsibility of providing reliable infrastructure services to its citizens. PPPs should not be used as the first delivery mechanism without checking its suitability for a particular project. States and other agencies should also not treat central PPP VGF as a source of additional grants that can be accessed by adopting a PPP delivery mode for projects that are not suitable for such a long-term financing structure

To address concerns raised by all stakeholders on the demand for developer books of account being subjected to government audit and for access under RTI and Article 12 of Constitution, the committee has recommended that the government notify comprehensive guidelines on the applicability and scope of such activities.

The laid down process would enable review only of government internal systems, and not that of SPVs but SPVs would need to follow best practice in corporate governance systems, including those related to related party transactions, financial disclosures etc as in the Companies Act, 2013, it pointed out.

The committee is of the view that monetisation of viable projects that have stable revenue flows after EPC delivery may be considered. This should be seen as a monetisation opportunity that can attract risk averse long-term funding like pension and institutional investors.

Equity in completed, successful infrastructure projects may be divested by offering to long-term investors, including overseas institutional investors as domestic and foreign institutional investors with long-term liabilities are best suited for providing such long-term financing, but have a limited appetite for risk. Cash generated out of divestment of equity would be available for the creation of new infrastructure projects in the country, the committee said.

Improving a PPP project's risk profile so that it is more suitable for overseas and domestic long-term investors can be accomplished through partial recourse to credible third-party institutions. This could be implemented through a partial credit guarantee or cash flow support mechanisms, it added.