Development Issues

3P thrust

Print edition : August 22, 2014

The T2 terminal at Chhatrapati Shivaji International airport in Mumbai, during its inauguration on January 10, 2013. Photo: Rajanish Kakade/AP

The CAG raises serious concerns over the viability of PPP projects and their overall cost and benefit to the government and consumers.

A RECENT performance audit report of the Comptroller and Auditor General (CAG) of India on the public-private partnership (PPP) mode of development of the Chhatrapati Shivaji International Airport in Mumbai has once again highlighted the fact that in the name of greater efficiency and provisioning of services ostensibly for the good of the public, public money and employees’ interests, among other things, have been given short shrift under the PPP arrangement. The lessons to be drawn are significant as the National Democratic Alliance (NDA) government led by Narendra Modi at the Centre is pushing the PPP model of development aggressively. The concept of PPP in infrastructure projects dates back to 2000 when the NDA was in power at the Centre. It was taken forward by the United Progressive Alliance (UPA) government during its second term in power from 2009 to 2014. The Modi government is touting it aggressively.

Union Finance Minister Arun Jaitley, in his Budget speech, left no one in doubt about the government’s intentions. He said India had become a great destination for PPP projects and announced the creation of a corpus of Rs.500 crore to create an institution called 3P India.

The CAG report has raised concerns over the wisdom of allowing PPP projects given past experience. The report on the Mumbai international airport, and the one released in July finding fault with the execution of PPP projects by the Indian Railways, provided the immediate context for the matter to be raised in Parliament through a private member’s resolution moved by K.N. Balagopal, a Communist Party of India (Marxist) member in the Rajya Sabha. The issue was discussed by 15 MPs, cutting across party lines. “It appears that PPP is going to be the order of the day,” Balagopal told Frontline.

The resolution expressed concern over the recent protests and complaints against the inflated bills of private companies and licensed service providers in different service sectors. It said the functioning of public-private projects and public services, including sovereign functions delegated to the private sector, required a review. The resolution demanded the expansion of the scope of the government auditor to audit projects that gave sovereign functions and services such as electricity and water supply to licensees with the power to charge the public; monitoring of the allotment of natural resources such as minerals, mines, spectrum and land to private players and their utilisation by them; ensuring a level playing field in power distribution and telecommunication sectors to maintain affordable rates for consumers; strengthening the regulatory mechanism in sectors such as highways, shipping, airports, power, telecommunication, banking, insurance, and finance; and controlling monopolistic practices in the sale and pricing of products. Most importantly, the resolution demanded that parliamentary approval be sought for all PPP or private involvement in key sectors such as defence, airports, ports and national highways and that PPP projects involving rare natural resources and sovereign functions and services be brought under the purview of the Lok Pal. “All PPP projects at present are exempt from RTI [Right to Information] queries. Also, we tried to bring them into the ambit of the Lok Pal but it was not accepted,” Balagopal told Frontline. There are around 900 projects of the PPP model at present.

Rao Inderjit Singh, Minister of State (Independent Charge) for Planning, Statistics and Programme Implementation and Defence, defended the government’s decision but admitted that there was a need to exercise caution. Later, a statement issued by the Press Information Bureau (PIB) articulated the apparent concerns expressed in the Rajya Sabha.

Airport infrastructure

In 2006, the PPP model of development was agreed upon to modernise and augment airport infrastructure and also to generate a revenue surplus. However, a Cabinet decision in 2000 cleared the idea for the restructuring of airports through long-term lease routes, with the rider that each lease would be subject to scrutiny by the Cabinet Committee on Economic Affairs (CCEA). Action plans were drawn up subsequently to restructure four airports.

The CAG made several observations in the case of the Mumbai international airport. The prominent ones were that neither the operation management development agreement (OMDA) nor the lease deed signed between the Airports Authority of India (AAI) and Mumbai International Airport Limited (MIAL) demarcated and defined the specific details of leased land; the AAI did not have up-to-date land records; and the area of the Mumbai airport, stated to be 1,875 acres (750 hectares), increased to 2006 acres (802 hectares) on actual survey by MIAL. In fact, similar issues concerning leased land were raised in the audit report of 2012-13 relating to the implementation of PPP arrangements in the Indira Gandhi International (IGI) airport, New Delhi. The CAG report on MIAL did not question the rationale behind the positions as it was reminded that the decisions were taken by the Cabinet. However, the CAG report was to take into account the findings of the audit report of 2012-13 and the recommendations of the Public Accounts Committee (PAC) in the matter of the Delhi international airport. The main purpose of the CAG report was to see whether the government benefited from the arrangement and whether its interests had been protected.

“In the case of both the Delhi and Mumbai airports, which were commissioned through a joint venture agreement, you will see that the project cost went up several times. A user fee was levied on passengers without appropriate legislation. The private developers of the Delhi airport collected a development fee of Rs.1,481 crore. I wrote to the then Prime Minister and the Civil Aviation Minister, following which an amendment was made to the Airports Economic Regulatory Authority, which, in turn, allowed them to levy the development fee! The difference in the estimated project cost and the subsequent increase was levied on the passengers by way of user fees. The contracts did not provide for user fees,” Balagopal told Frontline.

The report noted that the commercial exploitation of land increased under the provision of non-transfer assets with no accruing benefit to the passengers in the form of reduced levies; the AAI transferred 48.15 acres (19.26 hectares) out of carved-out assets against a meagre consideration based on the upfront fee paid by MIAL. Neither the OMDA nor the lease deed signed between the AAI and MIAL demarcated and defined the specific details of leased land. The AAI incurred a loss of Rs.71.37 crore as interest as retirement compensation for unabsorbed employees was to be paid to the AAI.

Moreover, what was not provided for in the contract was given as a concession to MIAL. MIAL was given the unilateral right to extend the 30-year concession period for another 30 years, which, the audit report noted, should have been subject to mutual agreement and negotiation of terms.

The absence of a review clause and renegotiation before extending the concession allowed MIAL to operate an airport for 60 years with the terms and conditions frozen under the OMDA. In fact, MIAL, which failed to meet the project completion targets, was allowed to a levy development fee on passengers to cover its funding gap. This, as Balagopal pointed out, was not part of the financing plan—it was to be done through equity, debt and internal accruals as per the agreement. In October 2011, a gap of Rs.3,485 crore was detected and permission was sought to levy a development fee on passengers. The levy of the fee as a means of financing was not envisaged in the OMDA and, subsequently, the financing risk of MIAL was diluted.

Development fee

The report observed that Delhi International Airport Limited (DIAL) was also allowed a development fee of Rs.3,415 crore and the PAC, in its report presented to Parliament in February 2014, on the basis of the audit report of 2012-13 that dealt with the implementation of PPP in the IGI airport, commented that the action of the Ministry had enabled the private partner to garner post-contractual benefits in contravention of the provisions of the OMDA.

“Though the OMDA did not provide a cap on project cost or monitoring such costs, such control nevertheless is a desirable good practice, particularly in view of the very significant cost escalation in the project which were largely being funded through additional levies on passengers,” the CAG report said. There was provision in the OMDA for the Ministry of Civil Aviation to place a ceiling on project costs, and as a result there were frequent revisions that contributed to nearly a doubling of estimates in five years.

The report noted that no mechanism was designed in the agreements to go into the appropriateness of the process or systems followed by MIAL. Clearly, neither the Ministry nor the AAI was monitoring anything. The Ministry “would need to review the issues highlighted above for necessary action to derive an assurance that the interests of government and that of the passengers are protected adequately”, the report cautioned.

It found fault with the subcontracting arrangements, where negotiations were done with techno commercially successful bidders on a random basis, and said that MIAL did not have its own cost estimate to compare the quotations given by subcontractors.

Responding to the resolution moved by Balagopal, Rao Inderjit Singh reiterated that the government was committed to a fair, transparent and competitive approach to the PPP model in order to ensure that superior services were procured at the lowest possible costs. He informed the House that the regulatory commissions in different sectors followed divergent practices and required re-examination for a uniform framework. The government, he said, would take suitable steps to undertake reforms relating to these regulatory commissions. However, he added that for “rapid growth, we will have to rely increasingly on private investment but need to ensure that this will only be on terms that benefit the economy and the users”. He pointed out that capital requirements for bridging the infrastructure deficit were far too large to be financed by public investment alone.

While the CAG’s performance report on MIAL poses more questions than provides answers in terms of the viability of PPP projects and their overall cost and benefit to the government and consumers, the Finance Minister’s statement on the concept of PPP indicated that regulation was not on the government’s agenda. If anything, his speech indicated a relaxation of norms. He said: “We have seen the weaknesses of the PPP approach, the rigidities in contractual agreements, the need to develop more nuanced and sophisticated models of contracting and develop quick dispute redressal mechanisms. PPPs have developed some iconic infrastructure such as airports, ports and highways, which are seen as models for development globally.”

With India emerging as a major hub for PPP, and, as the Minister claimed, as “the largest PPP market in the world”, and with Budget allocations worth Rs.37,880 crore being made for National Highways and State roads, it is hoped that the PPP model for infrastructure projects will lead to a double loss—to the exchequer and to the public.

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