Solving BOTs Through TOTs

For real privatisation in infrastructure, the old model needs to be inverted

The Narendra Modi government has failed to privatise any public sector undertaking (PSU). Its sale of minority stakes in several PSUs is disinvestment, not privatisation — the latter implying a transfer of management to a private sector party to gain efficiency and conserve government money for public goods.

However, arguably, privatisation by another name is happening through the toll-operate-transfer (TOT) scheme for roads. Thirty-year leases of existing toll roads are being auctioned to private operators, who win the right to collect tolls, maintain the roads, and transfer them back to GoI after 30 years. At that point, a fresh auction will be held for another 30 years. By transferring management control from GoI to private parties, TOT fulfils a core requirement of privatisation, even though Modi has carefully avoided using that word.

Doesn’t Take a Toll

This monetisation of government assets can be scaled up hugely to auction other forms of GoI infrastructure. This has already happened to some extent in airports. It can be extended to power plants, railways, ports, dams, canals and other infrastructure assets. That will raise large sums for much-needed investment in new infrastructure.

The first TOT auction covering 698 km in Gujarat and Andhra Pradesh fetched ₹9,681 crore last March, the winner being a joint venture of Ashok Buildcon and Australia’s Macquarie. A roadshow for the second auction, aiming to garner at least ₹5,362 crore, was launched on November 15, and the auction will be completed by December 5. It covers 586 km of national highways in eight sections across Bihar, Rajasthan, Gujarat and West Bengal.

All auction proceeds will go into the building of fresh infrastructure. This will help to overcome the shortage of funds that has long plagued infrastructure. UPA 2 tried to tackle the resource constraint by promoting massive public-private partnerships (PPPs). This approach ended badly in major stranded and failed projects that cannot repay lakhs of crores borrowed from banks. Many PPPs suffered long delays in land acquisition, environmental and other clearances, and in getting coal linkages or rail connections.

Historically, government infrastructure projects routinely suffered big cost- and time-overruns. Such projects were typically launched without land being acquired in advance or clearances being obtained for environmental and other reasons. The cost overruns were plugged by additional government money. But in PPPs, no additional government funds were available to meet cost overruns. Such projects depended heavily on debt, often to the tune of 70-80% of total cost. In such highly leveraged contracts, a delay of even 12 months could mean insolvency.

The Supreme Court added to the problem by cancelling coal and spectrum auctions and banning iron ore mining in some states. Road traffic projections frequently turned out to be hopelessly inflated. In other cases, gas to be delivered by Reliance never materialised.

Guaranteed Delays

An overarching reason for failure was also the winner’s curse. The most optimistic bidders would win auctions with high bids that soon proved unviable. In the bad old licence-permit raj, companies aimed to get contracts by hook or by crook, and then manipulate politicians to amend and make the contracts profitable. Such manipulation ended with the Anna Hazare anti-corruption wave. Today, getting a project by hook or by crook can be a recipe for bankruptcy.

Many early PPPs had a build-operate-transfer (BOT) framework. The private party would build the project, operate it for a fixed number of years, and then transfer it to the government. This was a seriously flawed framework. The highest risks, of delays in land, clearances and finance, were borne by private operators with limited finance that could not bear the cost of delay.

By contrast, GoI, which had the greatest financial and risk-taking capacity, bore the least risk, as it collected auction money upfront and ultimately inherited a functioning project.

This model needed inversion. The greatest risk, in clearances and construction, needed to be taken up by GoI. Indeed, many risks — such as delays in land acquisition and environmental clearances — were government-made. So, it was appropriate for GoI to bear the cost of the consequences. The private sector, with its limited financial and risk-taking capacity, needed to be assigned a less risky role.

One riskless route was engineering, procurement and construction (EPC) deals, where GoI provided all funding, and the private parties simply executed government contracts. But GoI lacked money for such massive funding.

Enter TOT. In this framework, GoI builds the project, operates it for 30 years, and then leases the project to private parties, who have the low-profit, low-risk task of operating and maintaining it for 30 years. TOT rectifies the deep risk-sharing weaknesses of BOT and regularly garners fresh funds for investment.

Earlier, GoI focused on a reducedrisk approach called the ‘annuity hybrid’. In this, GoI-owned National Highways Authority of India (NHAI) provided 40% of the cost upfront to a joint venture, plus an annual stream of payments linked to road traffic and maintenance.

However, banks have not been enthusiastic. Reportedly, 64 out of 115 hybrid projects have failed to reach financial closure. Better models are needed, and TOT looks the most promising.

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