ROAD TRANSPORT, HIGHWAYS AND SHIPPING
ROAD TRANSPORT, HIGHWAYS AND SHIPPING
- Previously, road construction was going on at a pace of two km/day. Today, it is 12 km/day, which could go up to 14 km/day by the end of this month. The target is 30 km/day in two years.
- Awarding projects worth about Rs 3,00,000 crore, through the PPP, hybrid or EPC (engineering, procurement and construction) model, in the next six months.
- Govt’s stress on constructing concrete roads, the website, INAM-PRO, has brought down costs for cement procurement.
- Across the world, the cost of goods transport is Rs 1.3/km a tonne. Here, it is Rs 3/km a tonne because we do not use multi-axle trucks. In a study, IIM Kolkata and the Transport Corporation of India said India faced Rs 80,000 crore of loss due to this.
- Ministry of Road Transport,highways and shipping converting 12 major ports into smart cities. This is not part of the 100 smart cities.Money available with ports will be utilized. These cities will have separate industrial and residential zones. Singapore government planning authority will devise the overall plan.
- The government has awarded 7,972 km in 2014-15, of which hardly 700 km were under the BOT (build-operate-transfer) model, while the rest has been under EPC (engineering-procurement-construction).
- There are two sets of issues – some project is 50 per cent complete and the contractor runs into financial problems and a Rs 1,000-crore project becomes Rs 1,400 crore and the bank says it won’t pay and even if it is ready, it asks the developer to pay 30 per cent. How will he (pay)? Projects get stuck. So, we have looked at this solution that we will put in our equity and we will do agreement with the bank. And then we will ask the bank to take first our repayment with two-three per cent interest on profit. Second, the problem is that someone has multiple projects, then he can sell the project. Till now, there was no permission to sell a project. With the equity that comes, he will complete the other projects. But we will put a condition that the money you get from the sale will have to be put in other projects.
Public Private Partnerships
1.1 Public Private Partnership means an arrangement between a government / statutory entity / government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or public services, through investments being made and/or management being undertaken by the private sector entity, for a specified period of time, where there is well defined allocation of risk between the private sector and the public entity and the private entity receives performance linked payments that conform (or are benchmarked) to specified and pre determined performance standards, measurable by the public entity or its representative.
1.2 Essential conditions :
i. Arrangement with private sector entity:
The asset and/or service under the contractual arrangement will be provided by the Private Sector entity to the users. An entity that has a majority non-governmental ownership, i.e., 51 percent or more, is construed as a Private Sector entity.
ii.Public asset or service for public benefit:
The facilities/ services being provided are traditionally provided by the Government, as a sovereign function, to the people. To better reflect this intent, two key concepts are elaborated below:
(a)Public Services are those services that the State is obligated to provide to its citizens or where the State has traditionally provided the services to its citizens.
(b)Public Asset is that asset the use of which is inextricably linked to the delivery of a Public Service, or, those assets that utilize or integrate sovereign assets to deliver Public Services. Ownership by Government need not necessarily imply that it is a PPP.
iii. Investments being made by and/or management undertaken by the private sector entity:
The arrangement could provide for financial investment and/or non-financial investment by the private sector; the intent of the arrangement is to harness the private sector efficiency in the delivery of quality services to the users.
iv. Operations or management for a specified period:
The arrangement cannot be in perpetuity. After a pre-determined time period, the arrangement with the private sector entity comes to a closure.
v. Risk sharing with the private sector:
Mere outsourcing contracts are not PPPs.
vi. Performance linked payments:
The central focus is on performance and not merely provision of facility or service.
vii. Conformance to performance standards:
The focus is on a strong element of service delivery aspect and compliance to pre-determined and measurable standards to be specified by the Sponsoring Authority.
PPP Models supported by the Government
User-Fee Based BOT models – Medium to large scale PPPs have been awarded mainly in the energy and transport sub-sectors (roads, ports and airports). Although there are variations in approaches, over the years the PPP model has been veering towards competitively bid concessions where costs are recovered mainly through user charges (in some cases partly through VGF from the government).
Annuity Based BOT models In sectors/projects not amenable for sizeable cost recovery through user charges, owing to socio-political-affordability considerations, such as in rural, urban, health and education sectors, the government harnesses private sector efficiencies through contracts based on availability/performance payments. Implementing annuity model will require necessary framework conditions, such as payment guarantee mechanism by means of making available multi-year budgetary support, a dedicated fund, letter of credit etc. Government may consider setting-up a separate window of assistance for encouraging annuity-based PPP projects. A variant of this approach could be to make a larger upfront payment (say 40% of project cost) during the construction period.
Performance Based Management/ Maintenance contracts In an environment of constrained economic resources, PPP that improves efficiency will be all the more relevant. PPP models such as performance based management/maintenance contracts are encouraged. Sectors amenable for such models include water supply, sanitation, solid waste management, road maintenance etc.
Modified Design-Build (Turnkey) Contracts: In traditional Design-Build (DB) contract, private contractor is engaged for a fixed-fee payment on completion. The primary benefits of DB contracts include time and cost savings, efficient risk-sharing and improved quality. Government may consider a Turnkey DB approach with the payments linked to achievement of tangible intermediate construction milestones (instead of lump-sum payment on completion) and short period maintenance / repair responsibilities. Penalties/incentives for delays/early completion and performance guarantee (warranty) from private partner may also be incorporated. Subsequently, as the market sentiment turns around these projects could be offered to private sector through operation-maintenance-tolling concessions.
PROBLEMS WITH PPP
- Inflated projections like inflated traffic projection for theAirport Express Line of Delhi Metro.
- absence of an institutional mechanism, like those present in other countries, to deal with renegotiations.
- poor preparations, flawed risk-sharing, inappropriate business models and fiscal uncertainties to vested interests leading to development of skewed qualification criteria.
- Unlike railways, in roads, delayed clearances and aggressive bidding have emerged as two major factors causing problems.
- slowdown in decision-making in the government regarding such projects.
- Problems on Loan Raising.
- Even when PPP contracts were redrawn, matter was stuck in courts because of corruption allegations.
- With booming Indian economy (before sub-prime crisis), the private companies started “overleverage” i.e. creating assets on borrowed money beyond a sustainable level. Even companies with modest balance sheets started bidding for big PPP projects beyond their “abilities”.
- No integrated planning: ports that lack railway lines or power plants that lack coal supplies
- Corporate bond market is not developed. Companies rely on banks for finance. higher interest rate = more chances of NPA.
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Traditionally, when the contracts are executed, engineering is done by one party; procurement is done by either the client or a different party and the construction is executed by the party that specialises in construction.
Under an EPC contract, the contractor designs the installation, procures the necessary materials and builds the project, either directly or by of the work. In some cases, the contractor carries the project risk for schedule as well as budget in return for a fixed price, called lump sum turnkey (LSTK) depending on the agreed scope of work.
The ‘keys’ to a commissioned plant are handed to the owner for an agreed amount, just as a builder hands the keys of a flat to the purchaser.
Minimum Management: Once the client awards the EPC job to the contractor, he does not have to worry about the co-ordination that has to be done with the engineering, procurement and construction teams. The client needs to only formulate the billing schedule for ensuring that fair payment is made to the contractor and the contractor gets an ample opportunity to prove his mettle in the project.
Choice of Executing Multiple Projects Simultaneously: Since EPC projects are the big ticket ones, the client has the choice of starting multiple projects together thus reducing the execution cycle time. While a client will keep a macro view on the day-to-day monitoring of the projects, the respective contractors would need to keep a micro view of the day-to-day activities of the project.
Efficiency in the Project: In terms of Engineering, Procurement, Project Management, and Construction etc – the contractor takes the lead and these projects are controlled in a much better manner as the contractor has many controls of interfacing. Complex projects if executed in the regular manner are most likely to be completed with a minimum delay and cost increase.
Specialised Manpower and Machinery: Availability of skilled manpower is a biggest challenge faced by the construction industry. With the central government introducing schemes like Mahatma Gandhi National Rural Employment Guarantee Act for the benefit of rural people, the exodus of unskilled and semiskilled personnel in cities and toward project sites has minimised as the labour is assured of employability in their residential place itself. This has caused a huge demand for the existing skilled manpower.
Not understanding the legal environment in terms of labour laws and their applicability can become a big issue for the client which is then passed on to the EPC contractor. In an EPC mode, the risk of adhering to the rules and regulations is completely passed on to the contractor.
Further, complex projects require a lot of specialised equipment and machinery. The job may involve manufacturing or fabricating heavy equipment like heaters or cracker units or installation at heights that require high capacity cranes etc.
Delay in installation can lead to heavy charges, the risk of which is passed on to the contractor.
Currency Fluctuations or Market Fluctuations: During the tenure of the EPC contracts, all the client has to worry about is the financing required for the signed contract value and nothing else, that is if there are no modifications suggested by the client. If there is any import of material required, the client has the option of transferring the risk on to the contractor’s part without him having to worry about the fluctuations.
Click on images to enlarge
Click on images to enlarge
EPC SECTOR IN INDIA
EPC sector in India continues to evolve In India, the construction industry has evolved from item rate packages to lumpsum contracts and then to EPC contracts over the years. It has resulted in a visible shift from owner-managed projects to projects where the risk of time and cost overruns has been transferred to the contractor, along with the responsibility of designing, procurement of material and construction. This form of contract even protects the owner/developer from currency and interest rate fluctuations.
Initially there were only few contractors in India who had the required technological and financial capabilities to take overall responsibilities of the complete project; therefore, large projects were divided into small EPC packages. Gradually, EPC contractors developed technical expertise and became financially competent. As a result the project owners began to award them complete projects as single lump sum turnkey contract.