PPP IN INDIAN RAILWAYS- A CASE STUDY

OF PIPAVAV PORT CONNECTIVITY

A dissertation
Submitted to

Punjab University Chandigarh

For the award of

Master of Philosophy in Social Sciences

In partial fulfillment for

40th Advanced Professional Programme in Public

Administration
(2014-15)

By

Brijesh Kumar Gupta

INDIAN INSTITUTE OF PUBLIC ADMINISTRATION (IIPA)

I.P. ESTATE, RING ROAD, NEW DELHI-110002

CERTIFICATE
I have the pleasure to certify that Shri Brijesh Kumar Gupta has pursued his
research work and prepared the dissertation titled PPP In Indian Railways- A Case
Study of Pipavav Port Connectivity under my guidance and supervision. The
dissertation is the result of his own research and to the best of my knowledge, does
not contain any part of work, which has been submitted for the award of any degree
either in this university or any other University/Deemed University without proper
citation. This is being submitted to Punjab University, Chandigarh for the degree of
Master of Philosophy in Social Sciences (M. Phil) in partial fulfillment of the
requirements for the Advanced Professional Programme in Public Administration
(APPPA) of the Indian Institute of Public Administration (IIPA), New Delhi.

I recommend that the dissertation of Shri Brijesh Kumar Gupta is worthy of

consideration for the award of the degree of Master of Philosophy (M. Phil) of Punjab
University, Chandigarh.

(Prof. Rakesh Gupta)

Supervisor
Indian Institute of Public Administration
I.P. Estate, Ring Road,
New Delhi-110002

Acknowledgements

I am grateful to the Indian Institute of Public Administration and Department of

Personnel and training, Government of India for giving me this opportunity to further
enhance and enrich my skill set through participation in 40 th APPPA. I have found the
programme extremely useful and enlightening even after such long years of service.
I would like to express my heartfelt gratitude to my guide Prof. Rakesh Gupta,
who has always put me at ease, even in difficult circumstances, when I found the
going tough. He has been extremely prompt in going through the manuscript word by
word. Prof. Nand Dhameja has been the inspiring spirit behind the study. The way he
brought out various aspects of Infrastructure management made me confident of
dealing this topic.
This study would not have been possible without the active guidance and
support from officers of Ministry of Railway Shri S. K. Pathak ED/CE, Shri Mukul
Saran Mathur ED/PPP/Traffic, Shri R. C. Rai ED/PPP/Finance and Shri Achal Khare
ED/Infra/Civil. I am also very grateful to Shri Ashish Sharma GM/CRIS for valuable
suggestions and help provided by him during writing of thesis. They all, were very
helpful and kind enough to give me access to documents required for completing
this work. Our course director Shri Suresh Mishra and APPPA office Staff Shri
Manish Rawat have been extremely helpful and supportive during the writing of
thesis.
My wife Mrs. Sunita Agarwal and my son Rishabh Gupta have been pillar of
strength during this study. They have allowed me to work without any disturbance
whatsoever and motivated me to work harder. My son Rishabh Gupta helped me out
whenever I had problems with WORD Software. I am also thankful to Shri Mool
Chand for meticulous typing for long time.

Brijesh Kumar Gupta

New Delhi

CONTENTS
Contents
Certificate

Page

Acknowledgements
Abbreviations
Chapter -1 Introduction
Chapter -2 Objectives & Methodology
Chapter -3 Literature Survey
Chapter -4 Private Investments
Chapter -5 Pipavav Port Rail Connectivity
Chapter -6 Analysis & Finding
Chapter -7 Conclusions
Annexure A
Annexure B
Annexure C
Annexure D
Annexure E
Bibliography

Abbreviations
BOT
BBO
BOO
BOOT
BLOT
CA
CAGR
CC
CONCO
R

Build Operate and Transfer

Buy Build Operate
Buy Own Operate
Build Own Operate Transfer
Build Lease Operate Transfer
Concession Agreement
Compounded Annual Growth Rate
Cash Contract
Container Corporation of India

DB
DBFO
DBFOT
DP
FDI
GDP
GOI
GPPL
MCA
MOR
NPM
O&M
PC
PFI
PRCL
PPP
RPF
RFQ
SPV
VGF
WB

Design and Build

Design Build Finance Operate
Design Build Finance Operate Transfer
Delivery Period
Foreign Direct Investment
Gross Domestic Product
Government of India
Gujarat Pipavav Port Limited
Model Concession Agreement
Ministry of Railways
New Public Management
Operation & Maintenance
Planning Commission
Private Finance Initiative
Pipavav Railway Corporation Limited
Public Private Partnership
Request for Proposal
Request for Qualification
Special Purpose Vehicle
Viability Gap Funding
World bank

Chapter 1
INTRODUCTION
Indian Railways, the worlds third largest railway network has suffered due to lack of
sufficient investment and populist policies of subsidising the fares. Lack of
investments has turned once a mighty system into a slow and congested network,
that crimps the economic growth. Indian Railways, an engine of economic growth of
the country requires continuous infusion of funds and technology for its infrastructure
and modernization.

In order to arrange the sufficient funds for investment in

infrastructure, Minister of Railways in his budget speech in Indian parliament in 2014

has announced that bulk of future projects requiring bulk investments in IR will be
executed on PPP model.
Indian railways (IR) started its 53 km journey between Mumbai and Thane on
April 16, 1853 and is today one of the largest Railways in the world. The railway
network, invariably referred to as the lifeline of the Indian economy. is spread over
109,221 Km. covering 6906 stations. Operating on three gauges, trains in India carry
over 481 Billion Tonne Kilometres (BTKMs) and 695 Billion Passenger Kilometres
(BPKMs) of goods and passenger traffic respectively every year. IR carries around
40% of freight traffic and 20% of the passenger traffic in the country
IR is one of the premier infrastructural wings of the economy ,builds and
maintains infrastructure assets like Track, Electric traction, Signalling Systems,
Telecom network, Stations / Terminals etc. Apart from operating goods and
passenger trains, it operates suburban trains in various metros. It manufactures
locomotives, coaching stock, wagon and components of rolling stock like Wheel &
Axle. It runs workshops to maintain its rolling stock & is also involved in ancillary
activities like catering, tourism etc.
1.1 PPP initiative in Past
The current legal framework under the Railways Act 1989 allows private railway
systems in all forms. However, the government policy enunciated under Industrial
Policy Resolution of 1991 as amended from time to time, reserves railway
transportation for the public sector. It means that train operation can only be done by
the public sector, while all other activities of design, construction, financing, and
maintenance can be undertaken through private participation through award of

concessions by Government of India. Presently, the Railways are managed through

17 Railway Administrations which are legal entities. In addition there are six port and
other railways. These railway systems are members of the Indian Railway
Conference Association, a body which deals with issues of inter railway movement of
wagons and locomotives such as levy of hire charges for use of rolling stock
belonging to other railways and neutral train examination for ensuring that railways
do not pass on deficient wagons to other railways.
The Railway Board was constituted under the Railway Board Act, 1905 and it
is also a railway regulator, dealing with a large number of issues including tariff
regulation. Railway Board and the Commissioner of Railway Safety, whose office is
under administrative control of Ministry of Civil Aviation, jointly work as safety
regulator. There are only two kinds of rail systems that lie outside the integrated IR
network. The first includes the close circuit systems that is, the Merry- Go-Round
systems created and operated by the NTPC for super thermal power plants. The
other kind includes standalone metro rail systems which are planned for and
financed by the Ministry of Urban Development. The private sector has been largely
associated in design, financing, construction, and maintenance of fixed infrastructure
in railways. Construction activity in rail sector is normally undertaken by the private
sector through contracts. However, no large Engineering Procurement and
Construction contracts are being awarded to Construction Supervision Consultants.
Design, build, finance, maintain, and operate concessions are being given to SPVs,
which are JVs between IR and private sector strategic partners.
Unlike ports, highways & airports, where a regulator offers certain level of
stable returns to private investors, railways by virtue of their monopolistic nature of
operation, do not offer an alternative to customers among various Railways. The

tariff policy is also fixed by the Government. There is thus a need for separate
accounting for infrastructure and train operations for initiating any long term PPP
regulatory framework. 28. It would thus be seen that Ministerial, commercial, and
regulatory powers are vested with a single entity. While it is possible for other
infrastructure projects in ports, highways & airports to be an independent system
which could be operated and maintained independently of the existing system, the
same is not possible for Railways. Here any project has to be supplementary or an
extension to an existing larger railway network. Due to this historical perspective,
railway activities are not readily available to private sector which poses a new
challenge of building capacity with private sector through PPP
During the XI FYP, the share of the private investment in major infrastructure
sectors is: electricity (49%), telecom (80%), roads (20%), ports (81%) and airports
(64%). In contrast, share of the private investment in railways has been negligible
(5%).
1.2 Risks in PPP
A project under PPP mode may be subjected to a number of technical,
environmental, economic and political risks particularly in developing countries and
emerging markets. Financial institutions and project sponsors may occationally find
that the risks inherent in project development and operation are unacceptable. To
cope with these risks, projects in these industries (such as power plants or railway
lines) are generally completed by a number of specialist companies operating in a
network with each other that allocates risk in a way that is proportional to their
exposure to the project.
Infrastructure projects have at least three phases, namely preparation and
promotion, construction and operating phase. Thus, task of the project

management is to find a way to mitigate these phase specific risks . The key
issue of the promotion and preparation stage is the commercial and political
risks related to the procurement .The major risks in different infrastructure project
are summarized below in the table.
Phase name
Promotion and preparing

Primary risk
Commercial and political risk

Risk subgroups
Competitiveness risk,

phase
Construction phase

Construction and political risk

legislative delay risk

Technological risk, Supply risk,

Operating phase

Commercial and political risk

Regulatory risk, Government intervention risk

Demand risk, Revenue risk, Technological
risk, Government intervention risk

1.2.1 Preparation and promotion phase

The success of this stage is highly dependent on how government arranges the
procurement of PPP project. The ultimate goal is to have competitive and short
procurement. High competition lowers the total cost of PPP project for the
government. Secondly, short procurement means cost savings for both public and
private sector.

Government can make procurement more efficient by preparing project well in

advance. In this way, government can speed up the procurement process.
Government can also help competition by making procurement process
transparent, providing clear bidding criteria and avoiding legislative delays.

Before announcing procurement, government should consider carefully what

exactly is needed to be achieved by PPP. The aim of the project should be crystal
clear for the government, because only then negotiations with a private sector
can go immediately into details. Also, clarity over PPP project objectives should
exist among the public authorities. Well defined project proposal including full

scope and objectives of the project is likely draw more attention among the private
sector actors than vague and unclear project description.

Moreover, the PPP project should have full support of government, without
political unity exists, problems are likely occur in the procurement process. Lack of
political support can cause legislative delays. For instance, difficulties may appear
while PPP company is applying for necessary legal permissions for the project from
various government offices.

In sum, the commercial and political risks are always present in the
preparation and promotion phase. Thus, the key behind the successful outcome of
this phase is governments strong political engagement and unity over project
objectives in procurement process, and competitive procurement.

1.2.2 Construction phase

The risk of construction phase is that project will not be completed on time and for
the price stated in contract. The availability problems and increased price of input
supplies may incur extra costs on project. In addition, delivery of supplies may not
arrive in time for the construction. Moreover, one of the sub-contractors may pull out
of the pack and leave the project causing severe damage to other parties. Subcontractors might not perform as expected resulting in delays on the project. Moreover,
government

may

partly

delay

construction

work

by

demanding

certain

assessments during the construction and halting the work. In sum, project
management is facing construction and political risks on construction phase. To

overcome these risks project management should avoid cost overruns and
delays.
1.2.3 Operating phase
Operating phase includes political and commercial risks. Here, the risks comprise
mainly technical, market and regulatory risks, which may effect on returns. The main
source of the revenue in railway partnerships is usually the operating payments;
passenger service fees, cargo tolls, license fees, provisions and government
subsidies. Cuts and disruptions in service are likely to effect negatively on the
revenue. Indeed, customers might change their type of transportation if they cannot
account on it.

The change in government policies may cause remarkable expenses for

the private sector. For instance, new safety regulations increasing the safety
standards may force private sector to reform some of its railway assets. Even small
changes in signaling systems may lead into replacement of whole signaling system
and cost fortunes for the private sector.

In the operating phase in particular commercial risk is significant. A private

sector provider of infrastructure must be able to generate sufficient operating
profits to repay private sector contributions to financing. Predictability of the future
revenues is, therefore, of crucial importance particularly in PPPs which include
very time-consuming construction period where a strong negative cash flow
appears during the long construction period. After the start of the operation
period, cash flow grows slowly due to large interest payments
1.3 Windfall gains/ losses

These are gains/losses which occur due to unforeseen circumstances in a service

may be due to unexpected demand or due to change in government regulation
since these profits/gains are unforeseen hence there is no uniform formula to
distribute these gains/losses among the various stakeholders. Up till now no
provisions are made in the contract for the windfall gains/losses however in
recently issued document Overview of Framework for Participative Models of Rail
Connectivity and Domestic & Foreign Direct Investment for BOT Model it is
brought out that in case actual user fee in a particular year is in excess of 120% or
150% of the projected revenue, 50% or 75% of the excess revenue respectively
will be paid to MoR by the concessionaire. This system has in built incentive for the
concessionaire to make efforts to bring more revenue.

Chapter 2
Objectives & Methodology

2.1 Objective of Research

Balancing of the risk among the different stakeholders according to their
responsibilities and shared equity as decided by various provisions of concession
contracts is of utmost importance for the success of any PPP projects. On the basis
of projected investment for initial scope of work to be provided by different
stakeholders and projected likely revenues to be shared during the different phases
of project construction and operation are normally covered under the provisions of
concessionaire contract. However, it has been observed there are huge uncertainties
in the original projected estimates of investments for meeting their obligations and
availability of projected revenues during the execution and operation of PPP
projects, hence it is quite imperative that necessary provisions are included in
concession contracts for sharing windfall gains/losses which cannot be foreseen at
the time of formulation of project proposal. These provisions will not only satisfy
different stakeholders to share uncertain risks/revenues at various stages of project
execution and maintenance but also necessary for maintaining transparency
requirements which are very important involving the public agencies like IR. Proper

drafting of provisions for sharing windfall gains and losses will ensure building trust
and confidence among the various stakeholders of the PPP project, hence, these are
very important for the success of these projects undertaken by agencies from using
the public funds.

The process of the PPP project is often itself a learning process for many
organizations. Thus, it is important to look already established PPP projects under
magnifying class to identify potential pitfalls to avoid them in future. The aspect of
learning from PPP projects makes case studies very valuable for all governments
planning to reform railway sector . Study of PRCL rail connectivity project involves a
systematic approach for a better railway PPP mechanisms and methods, with the
expectation that these can improve future results.
Provisions of PRCL concessionaire agreement are scrutinized with an
objective to identify the most efficient ways of mitigating the risks and overcome
challenges specific to ppp projects .We try to identify

those mechanisms,

techniques, elements and principles behind the success or failure to overcome

these specific challenges.

2.2 Research Questions

In view of above an attempt was made to study the answer of following
questions.
a) How risk sharing and revenue sharing are balanced in concession
agreement between PRCL and Indian Railways.
b) Are the existing provisions in PRCL concession agreement are adequate
to take care uncertainties due to wind fall gains/losses. If not, what are

problems faced in this regard during construction and operation of a rail

connectivity project of Pipavav port in Gujarat
c) What are suggested provisions to taking care uncertainties due to
windfall gains/losses during concessionaire period?
2.3 Methodology
Relevant documents pertaining to rail connectivity project of Pipavav port in Gujarat
on Indian railways were collected in regards conceptualization, construction phase,
operation phase and other aspects like maintenance etc. All these details will be
analyzed on the basis of actual problems faced in pipavav port connectivity project
financed by arranging the investments through PPP model.
2.4 LIMITATIONS
The concept of public-private partnership encompasses a variety

of

different

partnerships and relationships, which are not covered fully in the thesis. The paper
focuses on one particular case study of PPP JV model port connectivity

project,

within which the topic is analyzed .To get generalized conclusion it is pertinent
that results of numbers of PPP projects are studied , hence this is a limitation.

CHAPTER 3
LITERATURE SURVEY
It is widely acknowledged within the relevant literature that there is no clear
definition for PPP which would cover all aspects of different relationships that these
PPPs encompass (Daube, Vollrath, & Alfen, 2007; Hodge & Greve, 2007; OECD,
2008) and at the same time restricting it to a more narrow description. As
Weihe (2006) argues, the concept of PPP is nebulous it allows for great variance
across

parameters

such

as

time,

closeness

of

cooperation,

types

of

products/services, costs, complexity, level of institutionalization as well as number

of actors involved, as a result, nearly any type of the relationships that include
both the private and the public sector (whether it is a service contract or a joint
venture) may be called a public-private partnership (PwC, 2005). In order to make
some distinction between the variety of definitions present, Weihe (2006)
attempted to classify them into 5 categories: local regeneration, policy,
infrastructure3, development and governance approaches. The local regeneration
and the policy approaches are similar due to perceiving PPP concept as a very
wide definition that covers changes in policies of environment, economic renewal,
development, and institutional set up. The difference between the two is that the
local regeneration approach focuses on the local level while policy approach on
the national. The third approach the infrastructure approach covers the

cooperation of private and public sector in order to create and maintain

infrastructure, as well as deal with the financial and legal aspects of such projects.
The fourth approach the development approach concentrates on the
development of infrastructure in developing countries where corruption, social
deprivation, global disasters are present. This approach includes many forms of
cooperation between the public and private sectors such as strategic or
entrepreneurial partnerships. The last approach is the governance approach which
does not specify any context or policy as it emphasizes on organizational and
management side, as well as new ways of cooperation and governing. For the
purpose of this thesis, the concept of PPP will be limited to the infrastructure
approach.
3.1 DE F I N I T I O N
Even thought the concept has been narrowed down, there are still many definitions
explaining what a PPP is under the approach chosen. For example, the European
Commission (2004, p. 3) defines PPPs as forms of cooperation between public
authorities and the world of business which aim to ensure the funding,
construction, renovation, management or maintenance of an infrastructure or the
provision of a service; whereas OECD (2008, p. 12) defines it as an arrangement
between the government and one or more private partners (which may include the
operators and the financers) according to which the private partners deliver the
service in such a manner that the service delivery objectives of the government are
aligned with the profit objectives of the private partners and where the
effectiveness of the alignment depends on a sufficient transfer of risk to the private
partners. Further examples of definition include the one proposed by IMF (2006,
p. 1) that explains the concept as the arrangements where the private sector

supplies infrastructure assets and infrastructure-based services that traditionally

have been provided by the government, and EIB (2004, p. 2) that views PPP as a
relationship of the two sectors which has an aim of introducing private sector
resources and/or expertise in order to help provide and deliver public sector assets
and services...<it is> used to describe a wide variety of working arrangements
from loose, informal and strategic partnerships, to design build finance and operate
(DBFO) type service contracts and formal joint venture companies. An overview of
the PPP definitions under the variety of international organizations draws some
Conclusions on the basic set of features that characterise PPP under
the infrastructure approach:
long term contractual arrangement between the public and private sector;
functions are bundled;
responsibility for the provision of the services is shared;
resources are shared:
the private sector brings in capital, skills, experience, commercial
innovation, etc.;
the public sector delivers skills, political authority, access to
publicly run services, assets, etc.;
risks and rewards are shared.

In order to understand the PPP concept fully, it is also useful to distinguish it from
the traditional procurement mode. The reason for this is that the boundaries

between the two modes are ambiguous. In order to remove this ambiguity the main
differences between the two modes are identified and explained.
First of all, the main differentiating point between PPP and traditional
procurement is that in PPPs risks are shared between the private and public
partners whereas in a conventional procurement most of the risks are retained by
the government4 (European Commission, 2005; OECD, 2008) . This is in line with
the functions included in the contracts. In a PPP different tasks are bundled together
and, as a result, private partner takes responsibility for the whole package of the
associated risks. In the conventional procurement, on the other hand, the government
usually purchases a single function from a private partner and, as a result, the
private partner is responsible only for the risks associated with this function.
Consequently, in the traditional procurement the private partner has no incentives to
incorporate decisions that may favour future operations as after completion of the
task, the private partner is no longer involved in the operations of the
asset/service. For instance, if the government proposed a tender to deliver a
package of services, such as design, build and maintain a facility, the private partner
involved would be incentivized from the very beginning to make decision that could
minimize the future risks associated with cost overruns. Such an example has been
identified in the international experience by Grimsey and Lewis (2004, p. 135),
where an innovative decision to construct 45-degrees windowsills in UK hospital
was proposed with an intention to save future cleaning costs. It is hardly likely that
such a decision would have been made in the conventional procurement case.
A government would propose a tender to design a facility with input requirements
already specified. The specific requirements can be seen as a frame from the

private partners point of view as these requirements restrict private partner to

innovate and come up with more efficient solutions. The aim of the private partner
responsible for a design function is to design a facility while incorporating all the
details required and within the budget stated. The review of function bundling and
risk allocation in both procurement cases help to determine what defines a PPP
and a traditional procurement approach.
Secondly, the two modes differ between each other when the function
specification is considered. What this means is that, in a PPP, government
states what it expects from the private partner in output terms, whereas in the
conventional procurement

it

does

that

through

input

specification.

Considering the aforementioned example, in a PPP case, government might

require a hospital to be big enough to accommodate 300 people and to be kept in a
good condition by clarifying what good condition means, whereas in the conventional
procurement option, a government would request a certain size, with a certain
number of rooms, with specific materials used, etc. In the PPP case, private partner
is free to use its skills and innovation in order to provide the outputs required in a
most efficient way, whereas the latter case does not allow such a freedom as a
private sector is restricted to the requirements specified.
Thirdly, in a PPP approach, returns to the private partner are linked to
the performance of their functions, i.e. the provision of outputs specified by
the government, whereas in a conventional procurement approach, private partner is
remunerated for the completion of a specific function. This contributes to the level
of incentives attached to the private partner: in a PPP case, if a private partner
does not operate as expected, it might incur some sort of penalties (Harris, 2004),

if it operates better than expected, it may be awarded by, for example, receiving
higher portion of additional profits. In a traditional procurement case, on the other
hand, private partner is not awarded for an extra value added to the task it was
responsible for, however, it might be penalized for the uncompleted function.
Considering all this, the private partner in a traditional procurement is not
encouraged to provide more than the government requested for, which means
some possible gains might be overlooked.
Fourthly, the relationships involved in both of the procurement modes
differ (OECD, 2008). In the traditional procurement, in order to deliver the services
and infrastructure required, the government acts as an intermediary on the one
side it deals with direct users of the services, taxpayers, and financial markets, and on
the other side with other private companies. The idea behind such a relationship
structure is that the government gathers financing directly from the users of the
service, taxpayers and financial markets, and uses it to remunerate the other side
the private companies for the capital goods provided to deliver the public service
and develope the infrastructure. If the project is handled through a public-private
partnership, the intermediary role of the government is decreased public authority
deals with the taxpayers and the single private operator only. The role of the
private operator, on the other hand, is enhanced: private operator becomes
responsible for the intermediary role it collects financing from the direct users of
the service and financial markets and remunerates the other side other private
companies for the capital goods provided.

3.2. TYPES OF PPPS

The spectrum of different PPPs range from the short term service contracts to
concessions. Nevertheless, as the focus of this thesis is the concept of PPP under
an infrastructure approach, the overview of different PPP modes will be limited to
the ones that are covered by the PPP approach chosen. These modes have
common characteristics, such as: being long term, involving risk transfer, shared
responsibility, resources and rewards.
In general, private partner involvement arrangements in PPPs differ between
each other depending on the level of responsibilities and risks transferred to the
private partner (Amekudzi & Morallos, 2008). The responsibilities concerned
include activities such as: designing, building, financing, maintaining, operating,
and owning the facilities. The allocation of risks will be discussed in more detail later
in the paper; however, what matters at this point is the amount of risks transferred
and retained by the government.
Most common forms in the infrastructure approaches are:

Turnkey procurement, which includes: BOT (build-operate-transfer), BBO

(buy-build-operate), etc. (European Commission, 2003, 2005);
DBFO (Design-Build-Finance-Operate), which includes: DBOM (designbuild-operate-maintain), BOOT (build-own-operate-transfer), concessions,
etc. (Deloitte Research, 2006; European Commission, 2005; IMF, 2004).
Turnkey procurement6 is described as the scheme where the private partner
takes on the responsibility to design, construct and operate the asset, whereas the

public sector retains the responsibility for the financial risks involved. Using
this procurement mode, public sector sets the quality outputs required and by doing
so it ensures that the private sector brings the necessary efficiency gains as well as
the asset is maintained to the standards expected. This mode of procurement is
used in water and waste projects as it ensures incentivized management and
maintenance of the asset through the bundling of functions passed on to the
private partner (European Commission, 2005).
DBFO scheme7 is characterized by involving a private partner with
responsibilities (financing, designing, building, constructing, and operating the
asset/service) attached to it. Public sectors role is to set the specific output
requirements for the private partner, whereas private partners role is to fulfill
those requirements. The DBFO schemes are usually long term and involve bundling
of functions in order to provide private partners with the necessary incentives for it to
operate in the most efficient and innovative way. These schemes involve performance
linked payment mechanisms with an aim to ensure the presence of motivation for
the private partner to operate on its full capacity. The idea behind such schemes is
that the private partner designs, builds, operates and maintains the asset for the
agreed term. At the end of this term, the asset is either transferred back to the
government or is left under the ownership of the private partner depending on the
specific structure of the scheme chosen. For example, one of the most common
schemes under DBFO is concession. Concession is described as a PPP scheme,
where exclusive rights to operate an asset or provide certain services are granted to
a private company (usually a SPV8), which in return has to design, build, finance and
operate the asset/service for the time agreed upon. These exclusive rights usually

permit the private partners to collect the revenues from the direct users of the
asset/service. Concessionaires typically own the rights to the asset/service during
the time of concession, however, at the end of this period the ownership of the
asset/service is usually transferred back to the public sector (Deloitte Research,
2006; European Commission, 2005; IMF, 2006). Literature overview shows that
concession is usually assumed to be a form of PPP (Deloitte Research, 2006;
European Commission, 2004; IMF, 2006; Ng, Xie, Cheung, & Jefferies, 2007;
PwC, 2005), however, OECD (2008) argues the opposite. First of all, it states, that
the amount of risk transferred differs in PPPs and concessions: concessions
involve higher level of risks allocated to the private partner, compared to other
forms of PPPs. Secondly, it is usual for concessionaires to collect revenues from
the direct users of the asset/service and, according to OECD, this feature
differentiates concession from other PPP forms. As a result, OECD concludes that
concessions should not be treated as a PPP.
The international experience shows that most of the time DBFO schemes are
used in transport sector for building highways, bridges, railways, whereas
concessions are chosen for mobile phone services, toll roads or provision of
municipal water.
The similarities between the turnkey procurement and DBFO schemes are that
the activities involved are same in both of the schemes, differing only in the amount of
functions involved in the arrangements. What differentiates the two schemes is that
in the first one the majority of risks remains within the public sector, whereas in the
latter risks are shared between the partners, allowing for the possibility to transfer
the optimal amount of risks to the private partner.

3.3 REASONS FOR IMPLEMENTING PPPS

The main objective of procuring a public project through a PPP mechanism is to
achieve value for money (VFM) (Grimsey & Lewis, 2004; Harris, 2004; New South
Wales Government; Quiggin, 2004; Shaoul, 2005) which as Grimsey and Lewis
(2005, p. 347) argue is the optimum combination of whole life cycle costs, risks,
completion time and quality in order to meet public requirements. This definition
assents to the one implied by the European Commission (2003, p. 55) which
identifies a set of factors that determine value for money: life cycle costs, allocation
of risks, time required to implement a project, quality of a service, and ability to
generate additional revenues. Following this, a general principal used to determine
whether a project should be implemented through a PPP or a traditional
procurement is to evaluate which procurement mode ensures lower life cycle costs,
better allocation of risks, quicker implementation, higher quality and additional
profits. In other words, additional value for money represents additional efficiency
gains delivering or maintaining the same service or asset in a more cost efficient
or a more qualitative way than it would have been if the government retained the
full responsibility for delivering/maintaining service/asset concerned (EIB, 2004, p.
4; Meidute & Paliulis, 2011; Nisar, 2006). EIB (2004) argues that the critical aspect
in order to reach value for money is the ability to share risks and rewards
appropriately. OECD (2008) confirms this view recognizing that main reasons for
PPP establishment are the appropriate risk allocation and value for money gains 9.
Grimsey and Lewis (2005, p. 347), however, imply that the value for money gains
can only be achieved if the following conditions are present: a competitive
environment, optimal risk allocation and if the comparison between the financing
options is handled in a fair, realistic and comprehensive way. Furthermore, when

questioning PPPs ability to deliver additional gains, one should consider the
qualitative benefits of PPPs whether they are achievable and whether they really
provide the benefits expected. It is essential therefore to check whether the private
partner is capable of bringing in skills that the government lacks and whether it has
the expertise and know-how necessary to operate more efficiently compared to the
government (PwC, 2005).
According to the literature review, further reasons that lie behind the use of
PPP as a procurement mode differ between countries depending on the
environment present. For example, the main aim of a PPP at the early stage of its
development in the United Kingdom was to finance the public infrastructure projects
(Grimsey & Lewis, 2004; IMF, 2006; Meidute & Paliulis, 2011). The issue at that time
consisted of a growing need for public infrastructure development (as it also is the
case in Hong Kong (Cheung, Chan, & Kajewski, 2009)) and a lack of available public
funds to finance this need. As a result, a new initiative took place Private
Finance Initiative (PFI) with the purpose to provide additional funds for
public infrastructure projects. On the other hand, countries like Australia do not
have such an issue. They are capable of financing projects by themselves,
however, they still choose to involve the private sector for the possibility of
achieving additional value (Cheung et al., 2009). Moreover, Hong Kong and
Australia involve a private partner into the procurement of public services with the
aim to ensure a better quality of services. This, on the other hand, does not
seem to be the prioritized reason for the PPP development in the United
Kingdom, which emphasizes the point that reasons to implement PPP

depend on the circumstances surrounding countries economic and political

environment.

In many of the countries the choice for PPPs, however, is due to financial
reasons (such as lack of public funds and restricted public investment). This
reason is amplified when a tight fiscal environment following the development of
European Monetary Union (EIB, 2004, p. 4) is considered as due to this European
countries experience difficulties in organizing large investment sums to finance
public infrastructure projects from the public funds only.
All in all, in theory, the main reason to develop PPPs lies behind the
concept of value for money, creating additional benefits due to private partners
expertise, know-how, ability to operate efficiently and generate additional revenues.
Despite the theoretical foundations, it is evident that PPPs are also often used in
cases when there is a lack of public funds for the growing need for public
infrastructure.
3.4. VALUE FOR MONEY
The allocation and valuation of projects risks is inherent in the value for money
concept (European Commission, 2003; Grimsey & Lewis, 2004; Nisar, 2006;
Sarmento, 2010). The aim of the risk transfer is to transfer only those risks that the
private partner could offset in a most efficient and least costly way(Grimsey &
Lewis, 2004; Harris, 2004; Nisar, 2006). Risk allocation produces highest value for
money once the optimal risk transfer point is identified: transferring too much or too
little risks results in either procuring an inefficient project or procuring a project with
excess costs incurred by the government (for example, if risks are transferred to

the private partner that it does not have control over or cannot control it at leastcost, then the private partner will require higher premium for these additional risks
assumed (Hodge, 2004)), consequently, producing lower value for money (Amekudzi
& Morallos, 2008).
Unfortunately, there is no universal solution regarding risks allocation for
every single project, however, there is a general agreement on how different risks
should be allocated. To begin with, risks in general are allocated to different
categories, such as, for example, proposed by OECD (2008): legal and political
risks in addition to the commercial ones. Categories are differentiated on the basis of
who takes the responsibility for the risks concerned private partner or the government
authority. For example, construction, supply and demand side risks lie under the
commercial risk category (market risk, project risk and internal risk) as they are
handled better by the private partner, whereas legal and political risks are assumed
to be handled better by the government. Other categorization is proposed by Li,
Akintoye, and Hardcastle (2001), who distribute risks into three levels: macro,
meso and micro. Macro level covers risks outside the project environmental,
political, legal risks that are concerned with national or industry level. Meso level
risks emerge within the projects implementation phase design, construction,
operation. Finally, the micro level risks concern risks that appear between the
partners involved, they rest on the idea that both of the parties have different
incentives and objectives, and therefore, risks due to power struggle, differences in
working methods and environment between the partners may emerge.
3.5. ADVANTAGES AND DISADVANTAGES OF P PP

As it has already been reviewed, the appropriately constructed PPPs entail the
advantage of delivering better value for money compared to the traditional
procurement approach. Delivering projects on time and on budget set (Meidute &
Paliulis, 2011) are two of the most important advantages that are hidden under the
concept of value for money. As study conducted by UKs National Audit Office
(2003) showed, from all conventionally procured projects, 70% were delivered late
and 73% with costs exceeding the initial budget (data of 1999), whereas only 22%
of PFI projects were late and only 24% delivered project in excess of the budget
(data of 2002). The reason for such a difference lies behind the risks transferred in
line with additional responsibility and accountability attached to the private partner in
the case of PPP, what incentivizes the private partner to operate in the most efficient
way. In addition, due to the long term characteristics of the partnerships, partners
involved tend to act in a more cooperative way to each other in this case creating
additional

synergy

benefits.

Private

partner

manages

complex

financial

arrangements as well as highly technical tasks more efficiently by using its

innovative skills, on the other hand the public sector preferably controls the legal
system, regulation and policies. As a result, a combination of the leading features of
both of the partners produces a higher value (Harris, 2004).
The other advantage of PPPs lies behind the construction of the proposal
to procure a public project. Government constructs PPP proposals that focus more on
outputs rather than inputs. As a result, such mindset encourages government to
perform a thorough discussion on which services should be provided, what
standards should be expected, and what is the aim of the service provided/asset
developed. Such a detailed discussion on service provision or asset development
requires a detailed analysis of the project which in some of the cases may hinder

the government from moving ahead if the project becomes inadequate. In addition,
such kind of initial discussions encourage the government to think about the project
with long term strategic goals in mind rather than focus on short term objectives.
Furthermore, PPPs ability to spread the costs of large investments
over the lifetime of the asset is seen as an attractive advantage for the public
sector. This eases the current debt of the government sector as it does not have to
incur large cash outflows immediately. It follows, that the government can get
projects financed even though in reality there are no public funds available. This
advantage could be considered from two points of view: first large investment
costs are spread out, and second private funds are considered as the new
financing opportunities for the government (Meidute & Paliulis, 2011). On the other
hand, this advantage should be considered with caution as sometimes the
government might be incentivized to prove better value for money for a PPP project
than it actually is just to guarantee the financing of the project.
Finally, from the private partners point of view, PPPs deliver opportunity
for the private sector to get involved in the new markets (telecommunication,
municipal water systems, energy, etc.) that otherwise would be closed for the private
sectors participation. In addition to this, the private partner involved in the new
markets has a support of the government, which may facilitate gathering the funds
required.
On the other hand, one of the main disadvantages of PPPs is large bidding
and contractual costs, which refer both to the government and the private
partner. Large bidding costs of the PPP projects act as a rejecting force for the

private parties as they are unwilling to invest heavily in the bidding process just
to be rejected later. What concerns government, large preparation costs consist
of feasibility studies, lawyers, etc. Moreover, PPP projects are highly complicated.
Usually, they involve more than two parties: public, private and banking sectors,
and all of these parties have their own contradicting aims. In order to construct a
unified agreement, a lot of time and capital needs to be invested on complex
negotiations.
Furthermore, PPPs are said to deliver benefits because they transfer a
significant amount of risks to the private partner. Nevertheless, it should be kept in
mind that even though most of the risks are transferred to the private partner, the
final entity that is responsible for providing services to the public is the
government. As a matter of fact, if the private partner goes bankrupt, solely the
government has to deal with the consequences and try to find other expedients how
to keep delivering the service to the public. This implies that even though the risks are
contractually transferred to the private partner, in practice, government retains a large
portion of them in case of the private partners failure.
Moreover, in a PPP agreement, government bounds itself to a single
private partner for a long term period and it agrees today for services/assets that will
be in use in further future. There is a certain amount of risk concerning the future
consumers need for the specific service. The idea behind the risks concerned is
that the partnership may end up delivering services that are no longer required by
the public. As a result, the partnership will appear to be less valuable than initially
expected.

Finally, PPPs work well only for specific projects, which are complex and
require specific private partners know-how, skills, and experience. Therefore,
advantages that are attached to PPPs are attained only if certain project
characteristics are met, whereas if the project is simple, executing it trough a PPP
implies higher preparation costs, and as a result, lower value for money.
Considering all of the above, the main idea behind the PPP option is to
have a project intricate enough that its complexity could justify additional
preparation and negotiation costs. Developing a project through a PPP usually
ensures additional benefits such as implementing the project on time and on
budget. Nevertheless, these benefits should be considered while keeping in mind
the risks involved in having the long term agreement between private and public
sectors for a certain service provisions.
3.6 CR I TIC ISM OF PPPS
Even though the majority of the international institutions seem to favour the PPP
option (EC, UK Treasury, OECD, IMF), some of the researchers see PPPs as a
language game in the politics PPP is regarded as another way of privatizing a
service/asset (Hodge & Greve, 2007). This point of view has been neglected by
many other researchers who represent arguments proving that PPPs differ from
the privatization (Grimsey & Lewis, 2004; Harris, 2004; Hong Kong Efficiency Unit,
2008; OECD, 2008). One of the first differences identified is the sale/transfer
concerned. PPP involves government granting a right to the private party to
develop and provide certain services/assets for a period of time, whereas
privatization, in general terms, involves the sale of the asset. This assents to the
amount of risks transferred. In PPP case, the amount transferred differs on the

type of PPP chosen. Concession is the mode of PPP that involves the largest
amount of risks transferred to the private partner; however, it still does not
encompass the transfer of all risks. On the other hand, privatization includes the
sale of the full package, which means the transfer of all associated risks. In this
case, government is left with no direct responsibility for the service provided/asset
developed, whereas in a PPP case, government is the one that retains the initial
control and responsibility for the service/asset (Harris, 2004). If the private partner
goes bankrupt, the service/asset is transferred back to the government. If the
private partner does not operate to the standard required, the government has a
right to intervene and punish the private partner. All in all, it is true that privatization
and PPP share some similarities, but the idea of PPP is that it shares some
superior features of the privatization as well as of the conventional procurement
mode as Grimsey and Lewis (2004) argue: PPP fills in the missing gap between
privatization and the traditional procurement approach.
Other critiques concentrate on the idea that the government should be
fully responsible for the services provided as this is the role of the government and
not the private sector. However, as Harris (2004, p. 3) argues, the provision of public
services (such as free education, transportation or health) by the government is
comparatively recent development. So the question rises whether it is the actual
provision of the services or is it the regulation and control of the service provision
(what kind of services to deliver, what kind of standard should be kept, what policy
to follow, etc.) that is the role of the government? As Harris (2004) concludes the
role of the government is to ensure that a policy is being adopted. If delivering the
policy through the parties that are able to do that in the best possible way while

additionally creating value for money to the public means that the private partner
should be involved, then the advantages of private partners efficiency and
innovative skills should be utilized.
Further critique concerns the view that PPPs are a trendy politics. This
means that countries might favour PPPs over the conventional procurement due to
the lack of public funds available. Owing to this, the government is left with a
choice not between a PPP and a conventional procurement project but with a
choice between a project and no project at all as a government is unable to finance
the project from its own funds (Robinson, 2000; Shaoul, 2005). The problem of such
a preference for PPPs is that there is a high degree of possibility for approval of
projects that do not generate better value for money but are accepted for the
financial resources only getting a project procured while having debt off
governments balance sheet (Maski & Tirole, 2008). In addition to this, as value of
PPPs are most of the times assessed by using PSC, problems appear when
hypothetical risk-adjusted nature of the model is considered. The PSC depends
highly on the assumptions employed (Amekudzi & Morallos, 2008), one of the
most important one being the rate used to discount the cash flows of the PSC.
Furthermore, when risks allocation is performed, it is criticized that not all of the
risks may be identified and valued (Amekudzi & Morallos, 2008; OECD, 2008;
Shaoul, 2005), thus leading to inaccurate PSC estimate. As OECD (2008) argues
some of the risks may be left out and neither of the party initially agrees to take
responsibility for it, however, once the risk evolves, it is the government and the
public that have to bear the consequences and not the private partner, leaving
some element of value for money out of the initial estimate. Considering all this, the

value for money estimate may be easily adjusted in order to make the PPP proposal
more attractive, which is seen as a problem when the only reason for PPP project
implementation is the lack of public funds.
Moreover, it has been noted that an advantage of PPP is its ability to spread
out the huge initial investment costs throughout the years of the lifetime of the
asset. This means that the government avoids large investments today and is able
to incur them later on in smaller amounts. However, who may guarantee that the
government with increasing number of PPPs will be capable of financing these
payments in later years? Will it pass this contingent liability to the future taxpayers
(Harris, 2004)? In addition, who can be reassured that the same
service/infrastructure will be necessary in, for example, 30 years? In addition, will
the taxpayers be happy for paying taxes for the services that are unnecessary
anymore? These questions are especially relevant to the cases of PPPs where the
government contracts to pay availability payments for the services provided by the
private partner.
Overall, PPPs attract some significant critiques, however, it should be noted
that PPPs are not a magic solution for the conventional procurement issues. The true
experiences of PPPs have not been observed yet as it takes time to acknowledge
the full impact of each PPP, however, the initial stages of the PPP and the
theoretical foundations allow PPPs to be considered as a possible way to bring on
additional efficiency gains to the public sector.

Chapter 4
Private Investments
There is a growing demand for investment to improve the quality of public services.
Public sectors or governments worldwide are experiencing

significant

challenges as public resources are often insufficient to meet the increasing demand

for new infrastructure projects to facilitate and sustain economic growth. As a

result, there has been a growing and intense debate about the respective roles of
the public and private sectors in the delivery of traditional public services. The United
Kingdom and many other developed countries in Europe, United States, Canada,
Australia, New Zealand and many developing and middle-income countries from
Asia, Latin America and the Caribbean, Eastern Europe, Africa and the Middle East
have now recognised the importance of the private sector in the delivery of traditional
public services.
There are various definitions of the term public-private partnership (PPP). PPP
is a generic term for any type of partnership involving the public and private sectors to
provide services. It is generally a contractual arrangement where the private sector
performs some part of a public sector service delivery responsibilities or functions by
assuming the associated risks in return for payment. A recent research paper by the
World Bank (2007) defines a PPP broadly as an agreement between a government
and a private firm under which the private firm delivers an asset, a service, or both, in
return for payments contingent to some extent on the long-term quality or other
characteristics of outputs delivered. The Indian definition of PPP states that Public
Private Partnership (PPP) Project means a project based on a contract or concession
agreement, between a Government or statutory entity on the one side and a private
sector company on the other side, for delivering an infrastructure service on payment
of user charges. Private Sector Company means a company in which 51% or more of
the subscribed and paid up equity is owned and controlled by a private entity. But
regardless of the definitions, the objective is to utilise the strengths of the different
parties to improve public service delivery and should always be underpinned by clear

principles and contractual commitment reflecting a balance between profit and the
need for regulation to ensure value for money in the use of public resources. Under a
PPP approach, public sector expertise are complemented by the strengths of the
private sector such as technical knowledge, greater awareness of commercial and
performance management principles, ability to mobilise additional investment,
innovation, better risk management practices, and knowledge of operating good
business models with high level of efficiency. In a developing country like India, the
model of this type has enormous opportunities in the upliftment of economy specially in
infrastructural and service sectors.
4.1 Evolution and Development of PPPs
Publicprivate partnerships have a long history in many countries, but grew
significantly more popular during the 1980s. At this point, private sector thinking was
introduced and used in the public sector, and market-based criteria were applied to
the delivery of public products and services. During the 1990s, New Public
Management (NPM) and market-based philosophies further influenced public
management in many countries. Because the degree of complexity of the problems
needing to be solved increased as a result of growing interdependencies between
assignments and parties involved, more partnerships between public and private
sectors were formed.
Publicprivate partnerships have the longest tradition in the USA. In the 1950s
and 1960s, PPPs in the USA were set out by the federal government as a tool
for stimulating private investment in intercity infrastructure and regional
economic development. They became an explicit instrument during President
Carters administration: the 1978 National Urban Policy and Urban Development

action grant (UDAG) encouraged cities to go from private investment subsidies to

joint equity venture PPPs.
Throughout the 1980s, PPPs increasingly became a derivative of the
privatization movement and government rethinks. Private providers were assumed
able to provide higher quality goods and services at lower cost, thereby
significantly reducing the governments tasks and responsibilities. It was not only in
the USA that PPPs assumed greater importance in the latter half of the twentieth
century. In Spain, early examples occurred in the 1960s and toll roads had already
been developed by 1968. In the UK, the 1979 Conservative government believed
that central government was too involved in the economy and needed to step down
in favour of utilising private capital. Enterprise zones and urban development
corporations (UDCs) were important instruments in this ambition. In the UK in the
late 1980s, the Thatcher administration turned to PPPs as the preferred method for
economic regeneration. City Challenge, the programme that encouraged local
authorities to propose schemes for economic regeneration in partnership with local
businesses, replaced UDCs. The UK thinking on partnerships was significantly
influenced by the best practices in the USA.
Other parts of Europe also started using PPPs in the late 1980s. Examples
of PPPs in developed countries can also be found outside Europe and the USA. In
Australia, for example, the introduction of publicprivate arrangements for the
provision of infrastructure dates back to the early 1990s. In many countries
worldwide we see similar trends in private sector involvement and PPP
developments. At first sight the rationale behind publicprivate cooperation is
similar: in all countries, governments are relying increasingly on private sector

money and skills. However, there are major differences in the motives and
procurement rules in different forms of PPP between countries.
4.2 Types of PPP Models
There are various types of PPPs, established for different reasons, across a wide
range of market segments, reflecting the different needs of governments for
infrastructure services. Although the types vary, two broad categories of PPPs can
be identified: the institutionalised kind that refers to all forms of joint ventures
between public and private stakeholders; and contractual PPPs.

4.2.1 Concession Model

Concessions, which have the longest history of public-private financing, are most
associated with PPPs. By bringing private sector management, private funding and
private sector know-how into the public sector, concessions have become the most
established form of this kind of financing. They are contractual arrangements
whereby a facility is given by the public to the private sector, which then operates the
PPP for a certain period of time. Oftentimes, this also means building and designing
the facility as well. The normal terminology for these contracts describes more or less
the functions they cover. Contracts that concern the largest number of functions are
Concession and Design, Build, Finance and Operate contracts, since they cover all
the

above-mentioned

elements:

namely

finance,

design,

construction,

management and maintenance. They are often financed by user fees (e.g. for
drinking water, gas and electricity, public transport etc. but not for social PPPs
e.g. health, prisons, courts, education, and urban roads, as well as defence).

4.2.2 Public Finance Initiative (PFI) Model

Another model is based on the UK Private Finance Initiative (PFI) which was
developed in the UK in 1992. This has now been adopted by parts of Canada,
France, the Netherlands, Portugal, Ireland, Norway, Finland, Australia, Japan,
Malaysia, the United States and Singapore (amongst others) as part of a wider
reform programme for the delivery of public services. In contrast to the concession
model, financing schemes are structured differently. Under PFI schemes,
privately financed contracts for public facilities and public works cover the same
elements but, in general, are paid, for practical reasons, by a public authority and not
by private users. For Example, public lighting, hospitals, schools etc. come under
such scheme.
There are a range of PPP models that allocate responsibilities and risks
between the public and private partners in different ways.
The following terms are commonly used to describe typical partnership
agreements:
Buy-Build-Operate (BBO): Transfer of a public asset to a private or quasi-public
entity usually under contract that the assets are to be upgraded and operated for a
specified period of time. Public control is exercised through the contract at the time
of transfer.
Build-Own-Operate (BOO): The private sector finances, builds, owns and operates
a facility or service in perpetuity. The public constraints are stated in the original
agreement and through on-going regulatory authority.

Build-Own-Operate-Transfer (BOOT): A private entity receives a franchise to

finance, design, build and operate a facility (and to charge user fees) for a specified
period, after which ownership is transferred back to the public sector.
Build-Operate-Transfer (BOT): The private sector designs, finances and constructs
a new facility under a long-term Concession contract, and operates the facility during
the term of the Concession after which ownership is transferred back to the public
sector if not already transferred upon completion of the facility. In fact, such a form
covers BOOT and BLOT with the sole difference being the ownership of the facility.
Build-Lease-Operate-Transfer (BLOT): A private entity receives a franchise to
finance, design, build and operate a leased facility (and to charge user fees) for the
lease period, against payment of a rent.
Design-Build-Finance-Operate (DBFO): The private sector designs, finances and
constructs a new facility under a long-term lease, and operates the facility during the
term of the lease. The private partner transfers the new facility to the public sector at
the end of the lease term.
Finance Only: A private entity, usually a financial services company, funds a project
directly or uses various mechanisms such as a long-term lease or bond issue.
Operation & Maintenance Contract (O & M): A private operator, under contract,
operates a publicly owned asset for a specified term. Ownership of the asset
remains with the public entity. (Many do not consider O&Ms to be within the
spectrum of PPPs and consider such contracts as service contracts.)
Design-Build (DB): The private sector designs and builds infrastructure to meet
public sector performance specifications, often for a fixed price, turnkey basis, so the

risk of cost overruns is transferred to the private sector. (Many do not consider DBs
to be within the spectrum of PPPs and consider such contracts as public works
contracts.)
Operation License: A private operator receives a license or rights to operate a
public service, usually for a specified term. This is often used in IT projects.
4.2.3 PPP vs. Privatisation
The central question on governance from the perspective of PPPs is how to
organise the interaction between public and private sector. The main goal is to
improve efficiency, quality of public services and products, and legitimacy. The
question how to organise a PPP cannot be answered in general for every market,
and, in most cases even for every project, the answer has to be customised.
Confusion about the PPP concept is striking in the political and social discussion on
these governance questions. Often, PPP is used as a synonym for privatization.
Nevertheless, there are significant differences between PPP and privatisation. In
PPPs, public and private parties (actors) share costs, revenues and
responsibilities. Privatisation represents the transfer of tasks and responsibilities to
the private sector, with both costs and revenues being in private hands. The confusion
impedes a rational discussion about PPPs since all the disadvantages of
privatisation are imputed to PPPs.
The key differences between public-private-partnership and privatisation may
be summarised as :

Responsibility: Under privatisation the responsibility for delivery and funding a

particular service rests with the private sector. PPP, on the other hand, involves full
retention of responsibility by the government for providing service.
Ownership: While ownership rights under privatisation are sold to the private sector
along with associated benefits and costs, PPP may continue to retain the legal
ownership of assets by the public sector.
Nature of Service : While nature and scope of service under privatisation is
determined by the private provider, under PPP the nature and scope of service is
contractually determined between the two parties.
Risk & Reward : Under privatisation all the risks inherent in the business rest with
the private sector. Under PPP, risks and rewards are shared between the
government (public) and the private sector.
4.3 PPPs in India
There is now over 10 years experience in India in the development and use of
PPPs for delivering infrastructure services. Policies in favor of attracting private
participation have met with varying degrees of success, but real progress has been
made in some sectors, first in telecommunications, and now in ports and roads, and
with individual projects in other sectors. There has been considerable innovation with
different structures now being developed to attract private participation. But at the
same time progress has been uneven.
India had a few notable PPPs as early as the 19th century. The Great Indian
Peninsular Railway Company operating between Bombay (now Mumbai) and Thana
(now Thane) (1853), the Bombay Tramway Company running tramway services in

Bombay (1874), and the power generation and distribution companies in Bombay
and Calcutta (now Kolkata) in the early 20th century are some of the earliest
examples of PPP in India. Since the opening of the economy in 1991 there have
been several cautious and tentative attempts at PPP in India. However, most
PPPs have been restricted to the roads sector. Large private financing in water
supply has so far been limited to a few cities like Visakhapatnam and Tirupur. Most
PPPs in water supply projects have been through municipal bonds in cities such
as Ahmedabad, Ludhiana, and Nagpur. West Bengal has recorded significant
success in housing and health sectors. For example, the housing projects coming
up on the outskirts of Kolkata City are a good example of what a PPP model can
deliver in terms of quality housing and quality living conditions to the lower
middle class and the middle class. Gujarat and Maharashtra have had success
especially in ports, roads, and urban infrastructure. Karnataka also has done well in
the airport, power, and road sector. Punjab has had PPPs in the road sector
A study conducted by the World Bank of 12 states and 3 central agencies in
2005 in India found only 86 PPP projects awarded by states and select central
agencies (not including power and telecom). Their total project cost is Rs 339.5
billion. An optimistic projection of PPPs growing by, say, five times between 2004 and
2006, in a country of Indias size, that is, around 500 projects, is not very
encouraging. The largest number of PPP projects is in the roads and bridges
sector, followed by ports, particularly Greenfield Ports. Apart from these two
sectors, there are very few PPP initiatives
Across states and central agencies, the leading users of PPPs by number
of projects have been Madhya Pradesh and Maharashtra, with 21 and 14

awarded projects, respectively, all in the roads sector, and the National Highways
Authority of India (NHAI), with 16 projects. The other states or central agencies
that have been important users of PPPs are Gujarat (9 projects) and Tamil
Nadu (7), Karnataka (4) and Ministry of Shipping, Road Transport and
Highways (MOSRTH) (4). However, looking at a breakdown by estimated
project size, we see that MP becomes significantly less prominent due to the large
number of relatively small-sized projects in its portfolio, falling to 3 percent of total
project costs.
States like Andhra Pradesh, Gujarat, and Punjab have legislation which
clearly defines what infrastructure is and how these infrastructure projects are going
to be executed by the private sector. Some other states have administrative
frameworks in place for decision-making. Despite these frameworks, in the last five
years the number of successful projects has not increased substantially. Madhya
Pradesh and Maharashtra have exhibited the possibility of developing a PPP
program in a single sector (roads) by building up capacities in line departments.
However, they have no PPPs in other sectors, possibly in part because of the absence
of platforms to transfer acquired skills to other departments. Gujarat, Andhra Pradesh,
and Punjab have developed cross-sectoral enabling legislation and dedicated
agencies but have not had a very successful track record in taking PPPs to the
market. Some other states, such as Tamil Nadu, have developed a few PPPs across a
wide range of sectors, without explicit cross-sectoral PPP units or legislation.
Rajasthan has a cross-sector policy/ regulatory framework and a project
development company but has concluded only one tourism project and a few road
projects. Therefore, there seems to be no clear link between institutional structure

and success of PPP. One possible reason for this is the non-availability of sufficient
skilled staff in the Government of India as well as in the states, who could
actually look at how PPP projects should be structured. This is one important
area where significant capacity building is required, both at the Centre and in the
states.
Various studies in developed and developing countries have shown that
there is a significant shortfall in infrastructure investment and lack of maintenance
resulting in a deteriorating stock of public infrastructure capital to support the
deliveryof core public services. Public-private partnership is an approach that is
increasingly adopted to facilitate the improvement of public services where there are
public sector budgetary constraints and there is a need for innovation by stimulating
private investment in infrastructure facilities such as health, education, transport,
defence and social housing, regeneration and waste management. The
alternative public-private partnership is a whole-life or integrated approach from
design to facilities management and service delivery aimed at addressing the
problems associated with the traditional approach by creating a shift in emphasis
from building contracting and lump sum payment to service contracting and
performance-based payment. However, it is important that appropriate policy,
strategic and implementation structures and processes are in place to address the
key objectives of the public sector in PFI/PPP projects. Another critical success factor
that should be added is sustainability to reflect the increasing need to balance
economic objectives with environmental and social obligations. putting
Typically, in larger countries, the national PPP units will not undertake the
projects but rather provide the policy, technical, legal and other support mechanisms

to local authorities and government ministries that have the responsibility of the
project together. Practically, it can help the relevant procuring authority more
confidently manage the whole process from the development of the initial project
design through to the bid evaluation process and post-financial close. In India, NHAI,
MOSRTH attracting PPP projects, is an example of such mechanism. Though
PPP is a relatively new approach to procurement, lessons could be drawn from the
experiences of developed and developing countries on the conditions for the success
of PPP. As a relatively late entrant in the PPP development process, India can learn
and benefit from these lessons.

Chapter 5
Pipavav Port Rail Connectivity
5.1 General
Port Pipavav is located at Latitude 20 54N and Longitude 71 30E on the west
coast of India, in the state of Gujarat. For decades the port was functioning as an
anchorage serving the then existing minor Port called Port Albert Victor. It is
protected by islands on either side, which act as a natural breakwater making the
port safe in all weather conditions. The presence of these islands also leads to the
tranquility in the harbor as well as ensures the wave height is less than 0.5m most of
the time.

In 1992, it was decided to develop the port as an all weather facility for
handling bulk, liquid and container cargo. A private limited company called Gujarat
Pipavav Port Limited (GPPL) was incorporated as a joint venture between Sea
King Infrastructure Limited and Gujarat Maritime Board, a state owned
organization.
General cargo handling operations at the Port commenced in November
1996 followed by container handling operations in 1998. Presently, the container
terminal offers direct services to Europe, US East Coast, China and the Far East.
Port Pipavav is today recognized as one of the principal gateways on the West
Coast of India.
The port is being developed for handling 19 million tonnes of cargo per
annum including 13 million tonnes of containerized cargo. APM Terminals is
making an investment of US$ 245 million to develop the facilities. With available draft
of 13.5 metres, the port is also able to handle Post-Panamax vessels.

5. 2 Connectivity
Initially, there was no rail connection to the port. The nearest railhead was
located at a distance of 18 km on the Rajula-Surendranagar metre gauge line of
Western Railway, beyond which the broad gauge rail network was available. In the
absence of a rail connection, the Port could not be adequately developed; hence
its keenness for a proper rail connectivity, preferably a broad gauge rail link.
Indian Railways had earlier sanctioned a project to convert the existing
Rajula-Surendranagar metre gauge line into broad gauge as a part of the
railways long-term plans for broad gauge network on the entire system.
However, financial constraints had prevented its timely execution. In the

meanwhile, the Ministry of Railways launched a programme for undertaking rail

projects through public-private partnership.
In 1998, GPPL proposed a joint venture with the Ministry of Railways to
undertake the rail connectivity project which would include provision of a rail link of
18 km and conversion of the existing meter gauge line. Detailed feasibility studies and
traffic projections established the financial viability of the proposed project. A
memorandum of understanding (MoU) between Ministry of Railways and Gujarat
Pipavav Port Limited was signed on 28 January 2000.
Based on the techno-economic studies, a business plan of the proposed
joint venture was prepared by financial consultants engaged by GPPL. This plan
was reviewed in the Ministry of Railways, who then obtained formal approval of the
Government of India. As a follow-up, Pipavav Railway Corporation Limited was
incorporated in May 2000 as a joint venture with equal participation between the
Indian Railways and the Gujarat Pipavav Port Limited.
The above was followed by a host of agreements between various
stakeholders Ministry of Railways, Western Railway (a constituent of Indian
Railways), Gujarat Pipavav Port Limited, Pipavav Railway Corporation Limited. A
Shareholders Agreement between MOR and GPPL was signed on 28 March 2001,
Concession and Lease Agreements between MOR and PRCL on 28 June 2001.
The Construction Agreement for the project between PRCL and Western
Railway was signed on 13 March 2002, followed by Operation and Maintenance
Agreement in January 2003. The Transportation and Traffic Guarantee
Agreement was signed between GPPL, PRCL and Western Railway in February

2003. The table below shows the various contractual agreements and the dates of
their execution between different parties.
Table 1: Chronology of Agreements
Date

Sl.
No.

Agreement

1
2
3
4

MoU for formation of SPV

Concession Agreement
Lease Agreement
Construction Agreement

Memorandum & Articles PRCL

of Association of PRCL

17.04.2002

Operation &
Maintenance
Agreement
Transportation &
Traffic Guarantee
Agreement

PRCL & WR (GOI)

15.01.2003

GPPL; WR and PRCL

15.02.2003

Shareholders Agreement

MOR & GPPL

28.03.2001

Parties to Agreement
MOR & GPPL
MOR (GOI) & PRCL
MOR (GOI) & PRCL
PRCL & Western
Railway (GOI)

20.01..2000
28.06.2001
28.06.2001
13.03.2002

5.3 Concession Agreement

Under this agreement, the President of India through the Ministry of
Railways is the Licensor and PRCL is the Concessionaire for the project. The
concession period is for 33 years and permits PRCL to own and operate the project
line both for freight and passenger operations. It enjoins upon the SPV to pay lease
rent of Rs. 2 crore (20 million) per year to the Ministry of Railways for the use of
land and other assets. In turn, the railways would pay to PRCL the apportioned
revenue derived from the freight moved on the rail line after deducting the
operational expenses. The revenue derived from passenger services is not
apportioned, since there is a heavy subsidy component in the fare structure.

5.4 Transportation and Traffic Guarantee Agreement

Under this agreement, WR guarantees evacuation of traffic from the port by
timely supply of wagons, and GPPL guarantees traffic of 1 MT in the first year, 2
MT in the second year and 3 MT in the third and each of the subsequent years.
Failure on the part of either party attracts penalties. Shortfalls in offering of traffic on
the part of GPPL or its evacuation by the railways is be converted into
deemed traffic and proportionate revenue is to be credited to PRCL as
compensation.
5.5 Construction Agreement
This agreement enjoins upon Western Railway to design and construct the
railway line with the SPV procuring and supplying the construction materials. The
specifications and standards laid down by the Ministry of Railways were to be
followed.
5.6 Operations and Maintenance Agreement
It lays down the process, procedure and accountal of operating and maintenance
practices to be followed by Western Railway and the SPV.
It would be seen that there was a considerable time lag from the
conceptualization of the project to the execution of various contractual agreements
specifying the roles and responsibilities of the concerned stakeholders. This was
mainly due to the fact that PRCL was the first joint venture under the Ministry of
Railways and all agreements had to be evolved ab initio. There was also the usual
bureaucratic zeal observed for safeguarding the interests of the government, with a
mindset not fully attuned to the new paradigm of public-private partnership.

Furthermore, all agreements had to be vetted by the Ministry of Law, Government of

India.
5.7 Project Profile
The total length of project line is 268.84 km. A metre gauge (MG) railway line existed
between Surendranagar and Rajula Junction. This stretch was converted to broad
gauge. A new line of 18 km length was constructed between Rajula and Pipavav
station. The alignment traverses Surendranagar, Amreli and Bhavnagar districts in
Gujarat.
The broad gauge rail line (1,676 mm gauge) was constructed fit for a
maximum speed of 100 kmph. Standard III inter-locking is provided with Multi-Aspect
Colour Light Signals and token-less block instruments. Level crossing gates are
inter-locked by signalling with adjoining stations.
The project involved construction of 198 bridges: 32 major and 166 minor
bridges on the gauge conversion route and 3 major and 16 minor bridges on the new
line section between Rajula and Pipavav. In the gauge conversion section (between
Surendranagar and Rajula), the existing station buildings were utilised and two new
stations were built, one each at Rajula and Pipavav. There are 35 railway stations on
the rail route from Surendranagar to Pipavav.
5.8 PRCLs Promoters
PRCL was promoted by the Ministry of Railways (Govt. of India) and GPPL.
Ministry of Railways: Railways are a full fledged Ministry with a Minister of
Cabinet rank holding charge. IR is fully owned by the Government of India,

administered by Railway Board. Indian Railways (IR), the fourth largest railway
network in the world, has a route length of 63,500 km. IR has 1.5 million
employees running over 8,000 passenger trains and 5,500 freight trains every day.
It moves over 17 million passengers and 2.0 million tones of goods daily. Its rolling
stock fleet includes some 8,300 locomotives, 4,400 coaching vehicles and
210,000 freight wagons.
Gujarat Pipavav Port Limited: Gujarat Pipavav Port Limited (GPPL) is one of the
first private sector ports in India. It was incorporated in 1992, as a joint venture
between Sea King Infrastructure Limited (SKIL) and Gujarat Maritime Board for
developing and operating an all-weather port for handling bulk, liquid and container
cargo at Pipavav, in Amreli district of Gujarat. The cargo handling operations had
commenced in 1998.
GPPLs principal shareholders are:
i.

A.P.Moeller-Maersk Sealand (APMT/Maersk), one of the largest port

container terminal operators in the world and the largest container shipping
line, with around 20% worldwide market share. It holds 50.76% shares.
APMT/Maersk is in the process of developing the Pipavav port into a
world-class port with state-of-the-art container handling facilities and
terminal management.
ii.

AMP Capital Investors,

iii.

New York Life International India Fund,

iv.

Industrial Development Bank of India (IDBI),

v.

Unit Trust of India (UTI) and Infrastructure.

vi.

Leasing & Financial Services Ltd. (IL&FS)

The key developments from conceptualisation of Pipavav port to

APMT/Maersk taking over its management control have been as follow:

1986 - Gujarat Maritime Board (GMB) initiates development of

Pipavav Port
February 1992 GMB

K i n g Infrastructure Ltd. (SKIL) group led by Mr. Nikhil Gandhi

June, 1992 MoU converted into Joint Venture agreement
July, 1997 Government of Gujarat (GoG) announces BOOT Policy -

enters into an MoU with

Sea

June 1998 GMB divests its entire equity in favour of SKIL Group

July 1998 GoG declares Model Concession Principles for ports

September, 1998 Concession Agreement based on Model

Principles signed
September, 1998 Lead promoter SKIL licensed to develop, operate,

and maintain the port

April, 2005 GoG agrees to change the promoters SKIL group to

A.P.Moller-Maersk group, Denmark

May, 2005 APM Terminals takes full management control of the port
GPPL is planning to enhance its cargo handling capacity to 19.16 MT by

2009-10, including 13.70 MT of containerised cargo and 5.56 MT of bulk cargo.

The port expansion programme is being taken up in three phases with a capital
investment of Rs.1,167.30 crore which is through equity contribution of Rs.200
crore, internal accruals of Rs.289.04 crore and debt of Rs.596.26 crore. A.P.MollerMaersk has committed an investment of Rs.1,200 crore for port infrastructure
development. Three quay cranes will be installed for container-handling facilities in
addition to the existing three quay cranes to enhance the container handling capacity
to 1 million TEUs. GPPL commenced capital dredging project in December 2005
which was completed by April, 2006 to increase the draft to 13.5 m to handle postPanamax vessels.

Maersk Sealand, the port operator, has started dedicated weekly service
between Pipavav and Salalah (Oman) and Jebel Ali (United Arab Emirates), which
has contributed to increase in container throughput at Pipavav port.
5.9 Shareholders Agreement
The basic structure of the company (PRCL) is defined in the Shareholders
Agreement (SHA). In addition, the other formalities like registration of the
Company, Memorandum of Articles of Association, registration with various
government revenue agencies like Sales Tax etc were also completed. The salient
features of the SHA are given in the table in Annexure - B.
5.10 Project Implementation Process
Project

Development

Phase:

The

gauge

conversion

of

the

SurendranagarRajula MG line was an approved work of the WR to be completed

at railways cost. However, it was not a priority line and therefore annual fund
allocations were very meagre. In normal course, if the WR were to complete the
conversion, it could take anything between 10- 15 years. It was not coinciding with
the port development plans and hence the need for GPPL to contribute to the
gauge conversion costs.
Construction Phase: The construction phase started on the date of
signing the construction agreement on 13th March 2002. Till then WR had been
carrying out preliminary works on the erstwhile sanctioned Railway Gauge
Conversion Project which mainly related to the strengthening of bridges and
structures for BG trains.
The Construction Phase was divided into the following main activities: Procurement of material by PRCL

Transportation to sites by PRCL

Testing and certification of specifications by WR
Labour contracts for track laying and linking by WR
Signalling and telecom works, station buildings by WR
New bridges for the new line between Rajula-Pipavav by WR
Consolidation of track, testing and safety certification by WR

The main items of procurement were the following:

Rails
Concrete sleepers
Stone ballast
Rail switches
Rail turnouts and traps
CMS rail crossings
Glued joints
Track fastenings
Sleeper fastenings
Signalling cables
In addition to the above materials, tools and material handling and
transportation equipments like motor trolleys, road trucks and rail grinding and drilling
machines, etc. were also procured for reducing the man power requirement
by mechanization of processes. A Tender Committee was set up with Directors of
PRCL Board representing MOR, GPPL and the CEO of PRCL to finalise
procurements. Orders were placed and PRCL Board was apprised of the progress
periodically.
Placement of Orders: A strategy of splitting the orders for the same item among
several suppliers was adopted. Incentives were given to suppliers for supplies
made before time. Since Bhilai Steel Plant and IR had initially regretted to supply
rails, international bids were called for. This process took a long time as it

involved inspection of the mills abroad by RDSO teams, production of samples

by the mills and their testing as per IR standards. To save time, MOR was
requested for a loan of 5000 mt to be replaced later by PRCL supplies. This was
done. Later, Railways agreed to release the supply of entire requirement from
Bhilai.
Orders for 30,000 mt of rails were placed on SAIL in September 2002 with
stipulated supply within 3 months, i.e., by the end of December 2002 at
Sabarmati. To reduce the costs of rails, PRCL obtained a license under EPCG
scheme which saved payment of Central Sales Tax.
Orders for other materials were placed in May-June 2002 for supplies to be
made between September and December 2002. These included concrete sleepers,
stone ballast, rail switches, rail turnouts and traps, CMS rail crossings, glued
joints, track and sleeper fastenings and signalling cables. All orders were
supplied in time.
Transportation to sites by PRCL: Except for rails all the contracts for supply were
CIF site. The major item for transportation was rails which required two-stage
movements: from Bhilai to Sabarmati and then to designated sites. Railways
provided the BFR rakes at Bhilai which were closely monitored. For transportation
to sites from Sabarmati, close circuit MG rakes of BFRs were formed and
deployed.
Testing and certification of specifications by WR: A team of engineers of WR
was formed to be available at sites at the time of arrival of consignments. A
monitoring team was in position in PRCL office to watch day-to-day arrival of

different materials at various sites and a team of supply chasers was deployed at
important suppliers locations. These teams, working in tandem, kept WR informed
of the arrival dates to ensure inspection and certification. In the case of ballast,
several laboratories were approved for testing.
Labour contracts for track laying and signalling and telecom works were fixed
by WR including station buildings and staff quarters
5.11 Strengths of the Project
Both shareholders, namely, MOR and GPPL have gained substantially by
the Joint Venture arrangement of implementation.
Gains to MOR:

It would have completed the gauge conversion at its own cost in due
course of time as it was an approved work included in WRs works
programme. The WR would have incurred an expenditure of over Rs. 400
crore at present-day costs. With the JV arrangement, project was
completed with the total expenditure of only Rs. 98 crore which MOR
contributed as equity. The remaining funds came from other partner and
through debt from open market, servicing of which was not MORs

responsibility.
The project was completed in less than 2 years of contributing equity

money and started paying revenues to MOR as freight.

MOR recovered Rs. 50 crore as value of released material from the

MG line.
MOR was losing Rs. 20 crore per year on operating this un economical branch line. Losses of three years would wipe out the

cumulative loss of Rs. 60 crore. Thus, MOR recovered the total

contribution made for the project in less than three years.

MOR got a guarantee of 6 MT of traffic in the first three years and
thereafter a guarantee of 3 MT every year. This would not have been possible
without the JV arranagement.

Gains to GPPL
GPPL got rail connectivity to the port in time in fact, much before
port was ready for producing guaranteed traffic volumes of 3 MT.
-

Port connectivity cost to GPPL was only Rs. 98 crore. Otherwise, they
would have had to construct the entire line at their expense as a private
siding.

Early connectivity enhanced the share value of GPPL. - Port got traffic
clearance guarantee from MOR.

Land acquisition for new line was expedited as it was done by WR as an

agency of GOI. For a private party, it would have taken much longer.

5.12 Problems faced in implementation

There were problems encountered during the implementation, most of which
were new both to the Railways as well as to the private investor, since it was the
first joint venture. The majority of problems related to the signing of agreements
with Railways which involved delays. Main delay was in the signing of construction
agreement with the Western Railway which took over one year.
5.13 Signing of Construction Agreement

Immediately after signing of the Shareholder and Concession Agreements,

GPPL started pressing for the finalization of the construction agencies. This
process took inordinately long. The Railways wanted the passenger train
operations to continue which conflicted with the freight operation requirements of
GPPL and costs of implementing with passenger traffic requirements. The
Saurashtra region of Gujarat is mainly served by MG passenger services and the
gauge conversion of an Island Stretch would separate and fragment the MG
network. Therefore, there was need to convert the adjoining links to Bhavnagar
(Dhola Jn. Bhavnagar), to Mahua (Rajula Jn. Mahua), and to Palitana (SihorPalitana). These conversions had to be financed by WR alone. Planning for these
took time and affected the signing of the construction agreement.
During 2001-2002, discussions were held at different levels to decide upon
the modality of choosing a construction agency. Possibility of engaging a private
sector contractor was also explored by PRCL. PRCL found that at that time there
were few contractors who could take up the work of this magnitude. The costs and
time-frames quoted were also not favourable.
It was finally decided to entrust the job to WR whose construction
organization was already in place. Considering the very tight-time schedules of the
project completion which was set as December 2002, WR suggested that
procurement of all materials required be done by PRCL which may have more
flexibility in finalizing purchase orders and arranging transportation of materials to
site, as against the government procedures which are time consuming. It was a new
concept where Indian Railways agreed to work as a contractor for a Private Sector
Company. This was a path-breaking agreement signed in March 2002. This

agreement opened up the Railways responding to the schedules set up by a

private entity and deliver. The work was completed in March 2003, within one year.
The line was opened to traffic and formally inaugurated in May 2003.
The main features of the agreement which helped were:
i.

Identify where Indian Railways are weak on project management:

ii.

Procurement:
-

PRCL to procure all P Way and signalling & telecom material,

including rails, sleepers, ballast, fastenings, etc.

Materials to be inspected by WR

WR to provide schedule of supply to PRCL and locations of

delivery

PRCL to arrange transportation to sites

PRCL to arrange welding of rail panels in WR Sabarmati welding plant

and bear the cost of augmentation of the welding capacity of the plant.

5.14 Problems in Procurement

This was the first big rail project under private sector and most rail project suppliers
had committed supplies to IR. Being behind schedule for supplies to Indian
Railway, they were not able to commit timely supplies to PRCL. Problem was
particularly grave for procuring rails of which there was only one supplier in the
country, namely, Bhilai Steel Plant of SAIL (Steel Authority of India Ltd.). Bhilai
could not supply rails to any other buyer without the written consent of IR whose own
requirements were much more than Bhilai was able to produce. Therefore, the

request of PRCL to the MOR for releasing a quantity of 30,000 MT of class-one

rails from Bhilai Steel Plant was initially not accepted. Same was true of other
critical items like points and crossings, turnouts, concrete sleepers and ballast.
Despite all these difficulties, PRCL had to supply all the materials at site within a
period of 4 months if the target of December 2002 was to be met. Other than
shortage of materials, there were other critical issues of non-availability of railway
wagons for transporting rails from Bhilai, track machines for the newly laid track,
etc. due to pending works of IR itself. After a protracted process, the efforts of
taking international supplies failed due to non conformity to IR standards and the
tender was cancelled. Considering the importance of the first JV project of MOR
and to meet the timeline, MOR finally agreed to release rails from Bhilai.
Accordingly, orders were placed.
No track work could be done since the MG line was in operation and
passenger trains were running. The passenger traffic was to remain suspended
for more than 6 months for the construction. At the same time, the MG line had to
be kept running till all the P way and other material had reached the
designated sites along the 271 km stretch. Heavy materials like rails, sleepers,
ballast and cables, etc. were difficult to transport on the entire length of the
alignment by road since the road network did not connect the entire stretch.
Another major concern was carriage of rails from the steel plant to the
welding plant and then after welding to several designated sites. Rails were
supplied in 13 m lengths from the Bhilai Steel Plant and were to be converted
into three rail length panels by welding through a special process (flash butt
welding) which requires a special set of equipment. Options were to first take the

rails to Sabarmati in the WRs flash butt welding plant, unload, have three rail
panels welded, load on rail wagons, transport the panels to several sites on the
MG rail track, unload and stack them for laying on the formation. Other option was
to organize welding at a site on the line by using mobile welding plants. In 2002,
mobile welding plants were not easily available. Therefore, welding was organized
at Sabarmati. The plant had limited capacity and was overloaded with the pending
work of WR. It was, therefore, necessary to increase the capacity of the plant
which was done at PRCL cost.
O&M Agreement: The fixing of the elements of fixed costs to be paid to WR for
O&M of the line was the main concern. Each item of maintenance had to be
analysed and bench marked with the best practices. Help was taken from the
Konkan Railway to define the elements and put down norms and unit costs. Staff
costs being the major cost, tremendous efforts were required to set manning
norms at half of what is followed on IR. There were problems of redeploying
surplus staff. The process of redeployment was started early in 2001 and by 2004 it
was possible to relocate most of the surplus staff. Help of WR was invaluable in this
regard. This manning norm and practice became a benchmark for WR also for
their future projects.
5.15 Funding Arrangements
The Project line has been funded through a mix of equity and debt. The total
project cost of Rs. 373 crore, was met by equity of Rs.196 crore and a debt of Rs.173
crore. The completion cost was lower at Rs. 367 crore.
Table: Project Funding

Source
MOR equity
GPPL equity
Total Equity
Debt
Total

Amount in

Percentage

Actual

Percentage

98.00
crore
98.00
196.00
173.00
369.00

26.6%
26.6%
53.1%
46.9%
100.0%

95.66
amount
98.00
193.66
173.00
366.66

26%
27%
53%
47%
100%

5.16Means of Finance
PRCL being an equal partnership between MOR and GPPL, the capital cost
of Rs. 373 crore was financed by equity contribution of Rs. 196 crore on 50-50 basis
by the two promoters and the balance by raising debt from the open market. The
debt equity proportion was approved at 2:1 but actually it was maintained at
0.86:1. The means of finance are given in the table below:
Table : Means of Finance
Sl. No.
1.
(a)
(b)

2.

Particular

Amount (in

% of project cost

Equity
Ministry of Railways & its
GPPL & its Associates
PSUs
Debt from FIs and Banks
Total

100
100
173
373

27
27
46
100

Equity funding: As discussed earlier, this is a joint venture company with

an authorised capital of Rs. 200 crore. As on date, the company has received
Rs.193.66 crore as contribution towards equity. The promoters, MOR and GPPL,
were required to contribute equally to the tune of Rs.98 crore each. The equity
contribution by MOR till date is Rs.95.66 crore and the balance investment of
Rs.2.34 crore from MOR is to be capitalised from current liabilities of PRCL for
project construction related expenses. GPPL, including its assigns GIC, NIA and

IL&FS Investment have contributed their portion of the share capital, i.e., Rs.
98 crore. Until March 2005, GPPL was in default of not paying nearly Rs. 26 crore of
its share capital amount, which it has subsequently paid.
Debt funding: PRCL has availed long term loans amounting to Rs.173 crore
from various banks/financial institutions, details of which are set out in the table below.
PRCL had taken an initial loan of Rs.173 crore with a moratorium period ending on
31st March 2005 and repayment in 7 years starting from 1st April 2005. However, the
company had renegotiated with the lenders and got a further extension of
moratorium period from the lenders till 31st March 2007. Also, the lenders reduced
the interest rate to 8 percent instead of the original interest rates. Now this loan is
repayable in seven instalments starting from 1st April 2007. The lenders have also
agreed for deferment of interest on term loan for the period January 2005 to March
2007.This amount will be treated as Funded Interest on Term Loan (FITL) and
added to the loan amount which will be payable over the period of the loan term.
Apart from the above loans the company had taken a short-term loan of
Rs.25 crore from IRFC (Indian Railway Finance Corporation) due to delay in
receiving Railways share of equity, which was repaid during 2005-06. The total
debt is Rs. 204.70 crore inclusive of FITL and would be repaid in seven years
starting from FY08.

Table: PRCLs Long-Term Debt

(Rs. crore)

Lender

Loan
amount

Funded
interest Total
loan
term
loan

Rate of
interest

Union Bank of India

50.00

9.16

59.16

8.00%

Indian Railway

30.00

5.50

35.50

8.00%

Central bank of India

Finance
Corporation
State Bank
of India
Bank of Maharashtra
General Insurance
New India Assurance
Corporation
Total
Company

25.00
24.00
24.00
10.00
10.00
173.00

4.58
4.40
4.40
1.83
1.83
31.70

29.58
28.40
28.40
11.83
11.83
204.70

8.00%
8.00%
8.00%
8.00%
8.00%

5. 17 Traffic Guarantee Agreement

PRCL entered into a Traffic Guarantee Agreement (TGA) with GPPL and
MOR. As per the terms of this agreement, GPPL has to provide 1 million tons
(MT) of cargo in the first year of operation (2003-04), 2 MT in the second year of
operation and 3 MT from the third year onwards. So, from 2005-06 GPPL would
be required to provide at least 3 MT cargo for the project line and MOR/WR as
part of this agreement has to provide sufficient rolling stock for evacuation of
minimum guaranteed traffic (MGT). In case there is any shortfall in the traffic,
PRCL will be compensated for any shortfall by GPPL. While Railways also at
times defaulted in 100% evacuation, the port traffic was continuously low over the
years. GPPL was required to pay the minimum guarantee amount to the
company.
Traffic Guarantee revenue

As per the traffic projections, GPPL is required to pay the traffic guarantee amount
for FY06 and FY07. The traffic guarantee shortfall is to be calculated as follows:
Traffic shortfall for the year = Traffic guarantee - Actual traffic achieved
during the year.
The amount of traffic shortfall is calculated by multiplying traffic shortfall @
Rs. 0.74 per ton per km.
Any variable cost saving due to traffic shortfall is calculated based on the
variable cost per MT for the year.
Net traffic guarantee = Traffic shortfall amount Variable cost saving. The net traffic
guarantee so calculated is payable by GPPL as the base traffic.
Traffic Projections
In view of poor performance in the first three years of operation, GPPL revised the
traffic projections to make them more realistic. Traffic projections were based on
the port traffic projections given by GPPL. It was understood that the project line
would fully depend upon the port traffic. Some corrections were made to make the
projections more realistic by moderating and scaling them down.
Traffic Performance: The actual traffic on Pipavav Railway was 0.36 MT in the
first year of operation (2003-04) which went up to 0.88 MT in 2004-05. The
principal commodities moving on the corridor are containers, gypsum, coal,
foodgrains, salt, and fertilisers. The projected cargo for 2005-06 was estimated at
1.38 MT and 1.59 MT was achieved by the company for this period. The traffic

performance of the company for the first three years was rather poor as shown
below:

Table: PRCL traffic performance (in MT)

Item
Dry Bulk
Containers
Total

2003-04
0.26
0.13
0.39

2004-05
0.10
0.78
0.88

2005-06
0.55
1.02
1.57

5.18 Financial Performance

PRCLs profit and loss statements and balance sheet for 2003--04 and 2004- 05
show that PRCL has incurred losses of Rs.32.96 crore and Rs.24.72 crore for the
years 2003-04 and 2004-05, respectively. The principal reason for this is the low
cargo originating/destined from GPPL. The traffic on the corridor was 0.39 MT and
0.88 MT during 2003-04 and 200-05 as against the traffic guarantee of 1 MT and
2 MT, respectively. The unique feature of PRCLs existing business is that GPPL
would pay for the shortfall in traffic. However, in the past two years, GPPL has not
paid the traffic shortfall of Rs.27 crore and the company had to struggle hard to
resolve this issue.
Successes of the Project
-

Project was completed within one year of signing the construction

agreement;

There were no cost overruns;

Manpower requirements were scaled down to 50% of railway norms;

New standards of maintenance practices were introduced.

Weaknesses of the project

-

There was serious delay in finalizing the Construction Agreement

with Western Railway. It took one year to get it signed.

The finalization of Operations and Maintenance Agreement with

Western Railway also took long.

There was a serious problem and delay in finalizing the order for
rails; first Railways agreed to supply, then withdrew the offer. There was
again a delay in finalizing an international tender for rails.
Subsequently, after 6 months of delay, Railways agreed to the supply of
rails from Bhilai steel plant.

The most serious weakness of the project was its inability to get the
projected traffic. Even guaranteed traffic of 1, 2 and 3 MT in the first
three years respectively did not materialize. This created a serious
problem of inability to service the debt. Failure to do so would have
rendered the Company as an NPA and could have resulted in
bankruptcy.

All this was due to the fact that GPPL went under restructuring and
replacing the original promoter SKIL with AP Moeller. The new
management of GPPL dithered in honouring the commitments made by
GPPL toward payment of traffic guarantees.

A major gap in equity funding happened because GPPL did not

bring in the full equity in time.

The port development was tardy and even bulk traffic like coal and
fertilizers could not be handled resulting in poor materialization of traffic.

The pace of port development is still slow till the writing of this
report.

Chapter 6

Analysis & Finding

Indian Railways in fourth largest Railway network in the world in terms of route
kilometers. Against the total route length of 64640 Km. only 21034 Km. is electrified.
Considering the requirement of economy and size of country the expression of
railway network has been inadequate. Indian Railways here added 11864 km. of
new lines since independence. It has not been able to cover major areas in country.
Gauge conversion has been instrumental in adding capacity in the system despite
low addition of new line. The network needs extensive modernization of
infrastructure to meet the needs of rapidly growing economy.

It is estimated that during the 12 th plan period Rs. 519221 Crore investment is
required to achieve the plan objective visualized for this period. This include Rs.
194221 Crore of general budgetary support (GBS), 225000 from internal and extra
budgetary resource (IEBR) and reaming Rs. 1,00,000 Crore is expected from private
sector.

It should be clearly realized that modernization of engine railway cannot be

achieved simply relying on additional GBS. Requirement of funds cannot be met
from IEBR also. Hence for modernization investment from private sector essential.
The expansion and modernization of Indian Railway was slow in past due to paucity
of resources. A superior mode of investment in infrastructure is through PPP
approach where construction operation and commercial risk are borne by private
sector.

Private sector participations in infrastructure development is not however a simple

matter. It requires a framework that can enable the private investor to secure a
reasonable return at manageable levels of risk, assure the user of adequate service
quality at an affordable cost, and facilitate the Government in procuring value for
public money. These preconditions are more difficult to fulfill that is commonly
realized. Because of the multiple stakeholders pursuing conflicting interest, risk
mitigation arrangements are usually complex. They involve detailed legal and
contractual agreements that specify the obligations of different participants, set forth
clear penalties for non performance, and offer protection to in vestors against actions
beyond their control. Even the best of solutions involve managing competing
objectives. It is, therefore, important to address the problems associated with risk
allocation, standard setting and transparency. Inadequate preparatory work in these
areas will only lead to excessive transaction costs, years of delay in project
implementation, inadequate quality, and large contingent liabilities for the
Government.

The concession agreement unbundles risks and costs and allocates them to
the party best suited to manage them. Throughout, it seeks to achieve a reasonable
balance between risks and rewards for all participants. The predictability of cost and
obligations will be a key factor in improving efficiencies and reducing costs.
Various provisions incorporated in PRCL concessionaire agreement are
examined below to evaluate their suitability for balancing the risk among the various
stake holder and also operation of the agreement during the period of concession. A
compression of these provisions is also made with the corresponding relevant

clauses in the newly issued model concession agreement for joint venture project
through PPP mode by Indian Railway.
6.1 Linking traffic variation with the Concession Period
From the scrutiny of PRCL Concessionaire Contract it is found that no provisions
are available in regard to linking of traffic variation with period of concession.
Important clauses linking the traffic variation with the period of concession are
reproduced below from latest MCA issued by Indian Railways.
24.1.1The Parties acknowledge that the total NTKM during the Concession
Period as [on October 1, 20__] is estimated to be ***** (the Target
Traffic)13.
24.1.2 In the event that, as on expiry of 25 th (twenty fifth) year after Appointed Date
the actual NTKM shall have fallen short of the Target Traffic by more than
[4% (four per cent) thereof or exceeded the Target Traffic by more than [4%
(four per cent) thereof, the Concession Period shall be deemed to be
modified in accordance with Clause 24.2. For the avoidance of doubt, in the
event of any Dispute relating to actual NTKM, the Dispute Resolution
Procedure shall apply.
24.2.1 Subject to the provisions of this Clause, in the event actual NKTM shall
have fallen short of the Target Traffic, then for every 2% (two per cent)
shortfall or part thereof as compared to the Target Traffic, the Concession
Period shall be increased by 6(six) months or part thereof; provided that
such increase in Concession Period shall not in any case exceed 5 (five)
years.

24.2.2 Subject to the provisions of Sub-clause 24.1.1 above, in the event actual
NKTM shall have exceeded the Target Traffic, then for every 2% (two per
cent) excess or part thereof as compared to the Target Traffic, the
Concession Period shall be reduced by 6(six) months or part thereof;
provided that such reduction in Concession Period shall not in any case
exceed 5 (five) years.
The Target Traffic shall normally be a number based on 5% (five per cent)
Cumulative Average Growth Rate over the base traffic assumed for the Rail
System. The target traffic shall be for the entire Rail System and not for
individual lines or sections of the Rail System.
During the initial period of concession actual traffic and targeted traffic as
stipulated in traffic guarantee agreement, is compared below.

Table: Comparison of actual traffic with target traffic:

Actual Traffic (MT)

Target Traffic

Year

Shortfall (MT)
guarantee (MT)

2003-04
2004-05
2005-06
2006-07
2007-08

0.39
0.88
1.57
2.28
2.18

1.0
2.0
3.0
3.0
3.0

0.61
1.12
1.43
1.72
1.82

PRCL entered into a Traffic Guarantee Agreement (TGA) with GPPL and MOR. As
per the terms of this agreement, GPPL has to provide 1 million tons (MT) of cargo in

the first year of operation (2003-04), 2 MT in the second year of operation and 3 MT
from the third year onwards. So, from 2005-06 GPPL would be required to provide
at least 3 MT cargo for the project line and MOR/WR as part of this agreement has
to provide sufficient rolling stock for evacuation of minimum guaranteed traffic
(MGT). In case there is any shortfall in the traffic, PRCL will be compensated for any
shortfall by GPPL. While Railways also at times defaulted in 100% evacuation, the
port traffic was continuously low over the years.
In the latest MCA Provision of variation of traffic at the rate of 5% growth
from base year is kept and concession period if to be modified on the basis of
available actual traffic in comparison to estimated traffic used for deciding the
concession. To address the issue of windfall gains the Agreement providers a
review of concession in terms of traffic materialization after a period of 25 years
from signing of concession agreement. The concession period of 30 years will
be reduced or extended symmetrically depending upon traffic exceeding/going
below a Projected NTKM threshold. For this purpose the traffic will be measured
after a period of 25 years from signing of concession agreement. However, the
concession period shall not be less than 25 years or extend beyond 35 years.
However review of concessionaire period is to be done only after 25
years from the appointed date which may not likely to satisfy private
concessionaire. Due to this private concessionaire may not get adequate
confidence in regard to availability of projected traffic and corresponding
projected revenue.
6.2 Selection of Concessionaire

On scrutiny of various provision of concession agreement and details available in

the literature it is observed that offers for expression of interest were not invited in
PRCL project and partner for JV was selected on the basis of proposal from GPPL
for port connectivity. Accordingly MOU was signed between MOR and GPPL in
2000.
In the latest overview of frame work issued by planning commission, for
selection of the Concessionaire will be through on open competitive bidding. All
project parameters such as the concession period, toll rates, price indexation and
technical parameters are to be clearly stated upfront, and short-listed bidders will be
required to specify only the amount of grant sought by them. The bidder who seeks
the lowest grant should win the contract. In exceptional cases, instead of seeking a
grant, a bidder may offer to share the project revenues with the Authority.
Ministry of Railway Document of participative models for rail-connectivity and
capacity augmentation projects issued vide letter no. 2011/infra/12/32 dated
10.12.2012. Brief details of this policy are surmised below.
Selection of equity partners, Funding, Revenue Model

It envisages participation of the stakeholders and beneficiaries besides

national level infrastructure funding institutions in the development and
creation of rail infrastructure through appropriate concession.

Financial participation will be through equity participation in the JV. The

JV will be a joint venture with Railways as a partner with IR or its PSU
holding a minimum of 26% equity shares. Other partners will be selected
from the stakeholders such as users of the line like ports, mines etc.

Selection of partners will be done through a transparent Expression of

Interest process, with clearly laid down technical qualifications based on
parameters like networth, minimum threshold of equity participation etc.
However participation by state governments and PSU's and other
government entities will be through nomination basis.
Project will be assigned to the JV by Ministry of Railways on nomination
basis.
Debt will be raised through Project Finance route without any guarantee
by the Government of India.
Revenue from the operation on the project line will be collected by IR
through its commercial staff.

Revenue stream of the JV shall be

established through revenue apportionment from freight operation for the

project line as per Inter-Railway Financial Adjustment as stipulated in IR
Finance Code Vol-I. No apportionment of passenger revenues will be
made. JV will provide free access to IR passenger trains. Normal IR tariff/
freight rates shall be applicable. Inflated tariff to improve bankability could
be approved by Railway Board in specific cases. Commercial utilisation
of railway land, commercial publicity rights as permissible under the law
and public policy.
In a recent documents under the title Overview of Framework for
Participative Models of Rail-connectivity and Domestic & Foreign Direct
Investment, Ministry of Railways further confirmed the policy of creating JV for
constructing the Railway project. As per policy, for JV project it is envisaged that

concessionaire in future for JV model projects will be selected through open

bidding process mentioning all the project parameter.
Although now as per the new policy document Railway Ministry has
agreed for calling of EOI but only for selection of partner for JV and not for
selection of concessionaire. System of selecting private partner in the form of JV
as per latest Railway Policy is not likely to be very efficient system to utilized the
potential and creativity of private sector, instead this arrangement is likely to
dampen the innovativeness and creativity of private partner.
In the above policy document private concessionaire who is a equal
partner in the project has not been allowed to collect the revenue. Further rate
the revenue is to be decided by railway administrator and JV partner has not
been given any rule on the matter. In this manner involvement of the private
concessionaire is quite limited.
In

the

PRCL project

Indian

Railway

is

playing

both

the

roles

simultaneously one as regulator and operator in the form of partner. This is

against the sound business norms due to the conflicting interest under these to
roles and private partner does not get proper level field in the project.
6.3 Risk allocation
As an underlying principle, risks have been allocated to the parties that are best
suited to manage them. Project risks have, therefore, been assigned to the private
sector to the extent it is capable of managing them. The transfer of such risks and
responsibilities to the private sector would increase the scope of innovation leading
to efficiencies in costs and services.

The commercial and technical risks relating to construction, operation

and maintenance are being allocated to the Concessionaire, as it is best suited to
manage them. Other commercial risks, such as the rate of growth of traffic, are also
being allocated to the Concessionaire. On the other hand, all direct and indirect
political risks are being assigned to the Ministry of Railway.
It is generally recognised that economic growth will have a direct influence on
the growth of traffic and that the Concessionaire cannot in any manner manage or
control this growth rate. By way of risk mitigation, the MCA provides for extension of
the concession period in the event of a lower than expected growth in traffic.
Conversely, the concession period is proposed to be reduced if the traffic growth
exceeds the expected level It would be seen that there was a considerable time lag
from the conceptualization of the project to the execution of various contractual
agreements specifying the roles and responsibilities of the concerned stakeholders.
In the PRCL project construction of gauge conversion/new construction
line from Surendranagar to Pipavav Port was finally undertake in by Western
Railway hence there was no scope to utilize the creativity and innovation of
private partner. The only purpose private partner GPPL has served was to
provide additional fund for the project construction.
6.4 Right of substitution
Substitution rights are quite important from lenders point of view for securing their
interests through substitution clauses . However PRCL concession agreement does
not permit any substitution.

In this regard relevant clauses from PRCL

concessionaire agreement are given below.

4.3 (c) without the prior approval of MOR, not to assign or crate any lien or
encumbrance on the Concession hereby granted except as permitted in this
Agreement
(d) without the prior approval of the MOR, not to assign the whole or any part
of the Project nor transfer, lease or part possession therewith except as
permitted in this Agreement.

In the latest MCA issued by the Ministry of Railways proper substitution

clause alongwith the draft substitution agreement is incorporated. Relevant clauses
from MCA pertaining to substitution rights is given below.
33.3 Substitution Agreement
33.3.1 The Lenders Representative, on behalf of Senior Lenders, may exercise
the right to substitute the Concessionaire pursuant to the agreement for
substitution of the Concessionaire (the Substitution Agreement) to be
entered into amongst the Concessionaire, MOR and the Lenders
Representative, on behalf of Senior Lenders, substantially in the form set
forth in Schedule-L.
33.3.2 Upon substitution of the Concessionaire under and in accordance with the
Substitution

Agreement,

the

Nominated

Company

substituting

the

Concessionaire shall be deemed to be the Concessionaire under this

Agreement and shall enjoy all rights and be responsible for all obligations
of the Concessionaire under this Agreement as if it were the
Concessionaire; provided that where the Concessionaire is in breach of

this Agreement on the date of such substitution, MOR shall by notice grant a
Cure Period of 120 (one hundred and twenty) days to the Concessionaire for
curing such breach.
33.4 Assignment by MOR
Notwithstanding anything to the contrary contained in this Agreement, MOR
may, after giving 60 (sixty) days notice to the Concessionaire, assign and/
or transfer any of its rights and benefits and/or obligations under this
Agreement to an assignee who is, in the reasonable opinion of MOR,
capable of fulfilling all of MOR s then outstanding obligations under this
Agreement.
From private partners point of view, the project assets may not constitute
adequate security for lenders. It is the project revenue streams that constitute the
mainstay of their security. Lenders would, therefore, require assignment and
substitution rights so that the concession can be transferred to another company in
the event of failure of the Concessionaire to operate the project successfully. The
MCA accordingly provides for such substitution rights.

6.1.7 Termination Payment:

In the PRCL concessionaire agreement provision of the compensatory
payment to concessionaire is available. These provisions are given below
8.2 Transfer Payment on termination on account of MORs Event of Default.
PRCL may require the MOR to purchase all the movable and immovable
assets existing in the Period Area for a consideration equivalent to

The Depreciated Replacement Value (DRV) of such Assets plus 30% of

DRV if the default occurs within 15 years of COD.

The Depreciated Replacement Value (DRV) of such Assets plus 30% of

DRV if the default occurs after 15 years but within 25 years of COD.
The Depreciated Replacement Value (DRV) of such Assets if the default

occurs after 25 years of COD.

8.2.1 The assets will be takeover by MOR unencumbered
8.2.2 DRV is defined as (Cost of replacing the asset on Termination Date)
minus (Depreciation on straight line method)
Depreciation on straight line method is defined as (number of years the asset
has been in use divide by the codal life of the asset) multiplied by (the cost of
Replacement of asset on Termination Date).
The asset life will be as per the provisions in the codes and manuals of the
Ministry of Railways. Wherever life of an asset is not mentioned in Railway codes/or
minutes, if will be decided mutually between the Railway and the Company.
Cost of Replacement will be determined by the then prevailing accepted rate
for the relevant assets of the Indian Railway.
8.3 Transfer Payment on Termination of PRCLs Event of Default.
Ministry of Railways shall acquire all the movable and immovable assets of PRCL
existing in the Project Area at 50% of the book value of such assets. The book
value of the assets shall be computed by depreciating the historical cost of the
assets on a straight line method, on the basis of the codal life of the assets as per
Railways codes and manuals.
9.0 Transfer fees and charges.

Transfer fees and charges, if applicable and other incidental expenses incurred at
the time of Termination or Normal Transfer shall be borne by the MOR and PRCL
in the following proportion.

S.No.

Head of Charge

Onus

1.

Transfer fees or stamp duties, recording Party in default or On expiry of this

costs, notarial fees

2.

agreement by MOR

Fees to third party experts for any Shared by both

required inspections or certifications, if
applicable

3.

Fees to Appraising Team, if applicable

4.

Internal costs and expenses of each To

party

(management

time,

cost

Shared by both
be

borne

by

each

Party

of respectively

surveys, inventories, inspections, etc.

In the PRCL agreement it is quite difficult to calculate the actual DRV value
hence it is likely that these clauses may not withstand the test of the time under
conditions leading to termination.Further utility of these clauses in such a complex
contract having so many stakeholder it quite limited.
In the latest MCA, issued by the Ministry of Railways rational method of
calculating the termination payment is incorporated out of which relevant portion is
given below.
30.3.1 Upon Termination on account of a Concessionaire Default during the
Operation Period, MOR shall pay to the Concessionaire, by way of
Termination Payment, an amount equal to:
(a) 90% (ninety per cent) of the Debt Due less Insurance Cover; and

(b) 70% (seventy per cent) of the amount representing the Additional
Termination Payment:
Provided that if any insurance claims forming part of the Insurance Cover
are not admitted and paid, then 80% (eighty per cent) of such unpaid claims shall
be included in the computation of Debt Due.
For the avoidance of doubt, the Concessionaire hereby acknowledges that no
Termination Payment shall be due or payable on account of a Concessionaire
Default occurring prior to COD.
30.3.2 Upon Termination on account of a MOR Default, MOR shall pay to the
Concessionaire, by way of Termination Payment, an amount equal to:
(a)

Debt Due;

(b) 150% (one hundred and fifty per cent) of the Adjusted Equity;
and
(c)

115% (one hundred and fifteen per cent) of the amount

representing the Additional Termination Payment.

*COD-- Commercial Operating Date

Ministry of Railways (MoR) shall terminate the agreement in case specified

defaults are not cured within 60 days period. Similarly, JV can terminate the
agreement if MoR fails to cure its default within 90 days. Ministry of Railway in
case of JVs default during the operation period shall pay to the JV an amount
equal to 90% of the debt due less insurance cove and 70% of the amount

representing Additional Termination Payment. In case termination is on account of

MoRs default, JV will be paid an amount equal to full debt due plus 150% of the
Adjusted Equity and 115% of the amount representing Additional Termination
Payment.
In the event of termination, the MCA provides for a compulsory buy-out
by the Government, as neither the Concessionaire nor the lenders can use the
rail system in any other manner for recovering their investments.

Termination payments have been quantified precisely as compared to the

complex formulations in most agreements relating to private infrastructure
projects. Political force majeure and defaults by the Government are proposed to
qualify for adequate compensatory payments to the Concessionaire and will thus
guard against any discriminatory or arbitrary action by the Government.

Chapter 7
Conclusions
Concession agreement which consists of matrix of risk and rewards to
stakeholder is one of the important instrument of final outcome of delivery
objective of the project. Various provisions incorporated in concession
agreement to balance risks and responsibilities among the stakeholders are
examined and compared with the available provisions of latest MCA .Role of
various provisions of PRCL concessionaire agreement is also evaluated during
the actual construction and operation of project.
7.1Proper partner

Partner selection for PRCL project was contextually (strategically), rather through
open system of calling of EOI along with technical details. Hence element of
competition was completely absent in the process for selection of partner for this
project. GPPL, the chosen partner was not having any experience in dealing with
construction and operation of a railway project, hence GPPL was not suitable to
take these risk in such a complex project. Hence during the operation phase,
instead of applying innovativeness within the concessionaire agreement GPPL
demanded number of modification in concessionaire and other subsidiary
agreements. These are given in annexure- 99
7.2 Same regulator and operator
In the PRCL Rail connectivity project IR has assumed the role of a licensor,
regulator and operator (being 50% partner in PRCL). This is against the basic
principle of natural justice (player cannot also be umpires). The principle of
checks and balances aiso prohibits both roles to one authority as there will be
conflict of interest and level playing will field not be available to private player.
It is unrealistic to expect from one partner to forgo their power and
priveleges particularly when these are related to contracts and fiefdoms. It is in
vain to anticipate the progress when fundamental principle of human behavior
are violated.For any PPP framework reform to success it is necessary that
decision making is vested in institutions that are free from any conflict of interest.
In the PRCF project which is being studied, Railway had played all the
three roles i.e. licenser, regulator and operator. In other sector live telecom till the
conflict of interest is removed success of PPP could not be achieved in JV
projects.
Role of Railway Ministry as a regulator and operator has delayed the execution
of various partnership agreements in this project.
7.3 Risk transfer
Obligations of various stakeholders and subsequent action in their default, are
not properly incorporated in concessionaire agreements. It is observed that only

risk which GPPL was to bear was guarantee for availability of minimum
aggregate cargo of 1, 2, 3 million tonnes in first three years respectively. All the
risks in regard to construction and operation of railway line were to be borne by
Indian Railway. Hence inspite of signing so many complex agreement major
risks of construction and operation remained with Indian Railway and could not
be transferred to other partner. Ideally concessionaire agreement should
unbundle the risks in the project and these are to be allocated to party which is
capable to manage these easily. But GPPL was not capable of neither
construction nor operation of the project. Hence the selection of the partner were
not as per the accepted principles of PPP.
7.4 High debt cost for private sector
With JV arrangement Indian Railway could complete project (including gauge
conversion) total equity capital of 98 Crore which IR contributed its share of equity to
PRCL. The remaining funds came from other partner and through open market. As
per the recent study by Sh. Ajmer Singh it is reported that for a highway project cost
of debt to private sector is higher in comparison to cost of debt to public sector. In the
study it is brought out that due to higher cost of raising debt for private sector over
public sector has resulted in 60% higher unit cost for highway projects in BOT. From
the above it is observed basic purpose of project partner( i.e. GPPL) in this project is
to provide additional finances and to enable creation of an instrument for arranging
finance from the market, but as seen above that involving a private partner just for
arranging the finance for the project is likely to cause higher cost of financing to the
project.
7.4 Provisions for uncertainties
No provision is available in concession for dealing with uncertainties which was
one of important reason for many problems in construction and operation of
project. Government can compensate private sector loss via different kinds of
compensation mechanisms such as direct subsidy payments, availability
payments, demand guarantees, loan guarantees and viability gap funding.
Government should carefully consider which compensation mechanism to apply in
the PPP and take account dilemma always attached to it. Indeed, government

guarantees tend to appear often as a risk in the procurement stage. Government

guarantees encourage private sector to make unrealistic project plans (extremely
high revenue and unrealistic low project cost estimations) in the bidding process in
order to win the bid. Hence, government should always approach private sector
future profitability calculations skeptically.
One solution to solve this dilemma between weak profitability and
government guarantees is a conditional guarantee. The guarantee provided
compensation to the private sector when lower threshold was exceeded, while
private sector was obligated to pay certain percentage of the profit to the public
sector when higher threshold was exceeded as wind fall gain.