The Bharatiya Janata Party appears quite enamoured by the public-private partnership model of development. With one eye on the nation’s coffers, the government has turned to PPP projects to fill the funding gaps that plague India’s infrastructure services, including Indian railways.

“It is our target that the bulk of future projects will be financed through the PPP model, including high-speed speed rail, which requires huge investments,” said railway minister Sadananda Gowda while tabling the rail budget earlier this month. Gowda would go on to name-check PPP projects 12 times in his speech, suggesting the model could be used to build everything from bullet trains to the boundary walls around stations.

And now the Railways appears to be formulating a PPP model that would give higher returns to private parties and safeguard them from extra risk. If the government is determined to go ahead, it would do well to listen to the Comptroller and Auditor General of India. A CAG report tabled in Parliament suggests there are major problems with the way the Railways sets up its PPP projects.

Faulty Model
The Planning Commission had earlier offered a model concession agreement for PPP projects in the infrastructure sector, delineating what form the agreement between the government and the special purpose vehicles created for the projects should take. Indian Railways, however, chose not to stick to this and instead used a trial-and-error process with the core of its provisions coming from the first, somewhat faulty, PPP project it had carried out.

As a result, having to formulate a new agreement in each case led to delays as well as oversights that caused numerous problems. In some cases, crucial details such as area of land leased to the SPV or dates of the beginning of the concession period were left out of the agreements. Many also lacked a financial close, a date on which all funding documents such as loans and bonds, are effective, leading to open-ended project costs with undefined interest liabilities on debt funding.

“The provisions of the agreement need to be complete and clearly defined,” the CAG recommended, “with the requisite safeguards to address any unforeseen event during the concession period.”

Return Rates
The economic viability of infrastructure projects are key in deciding whether to go ahead with them, especially if portions of the contract are to be handed off to a private entity. To assess this, the government measures the internal rate of return of a project, with the ministry of finance prescribing a minimum of at least 14% for a plan to be considered viable.

The CAG found that two of the six projects it audited had been granted government approval despite having a projected IRR of less than 14%, at 10.5% and 11.8%. Additionally, in projects where the IRR was projected to be as high as 22% of the project, the government did not release funds to start the process in timely fashion.

“Adequacy and accuracy of data/information including assumptions need to be exhaustively analysed for assessing IRR in order to judge the economic viability of the project,” the CAG recommended.

Stuck in Traffic
For decent rates of return, there has to be an assurance that railway projects will garner a certain amount of traffic. The SPVs are expected to ensure minimum traffic and revenues based on this, but the CAG found that of the six projects it studied, the government had executed traffic guarantee agreements on only two. Indian Railways was unable to provide an explanation for why it hadn’t insisted on traffic guarantees for the other projects. Additionally, the CAG termed incomplete the two with agreements.

In those cases, the penal provisions for not achieving the minimum traffic were found to be too complex while the agreements themselves were too rigid to be adjusted to ground realities. The railway ministry sought to defend itself by claiming getting traffic guarantees involved hard negotiations, but the CAG rejected this assertion saying, “the basic objective of IR to opt for private participation in railways’ projects was not only to augment its network but also to enhance its share on the growth of traffic and revenue earnings thereof.”

Costs and Delays
As is standard in infrastructure, many of the projects ended up delayed by many years. But Indian Railways failed to put target dates of completion in their agreements. In the case of the Haridaspur-Paradip railway link, even though 70% of the land required for the project was available by 2006, it was not complete six years later. The audit found that only 17% of the line had been completed by March 2013, while the costs had gone up nearly 100% in the meantime.

“IR needs to streamline the project approval process, formation of SPVs and signing of requisite agreements in a time-bound manner to avoid delay in completion of projects,” the CAG recommended.

Class monitor
Each of the PPP projects were supposed to involve a Construction Project Review Board that would receive monthly progress and financial reports. This way, the review board was supposed to keep an eye on the projects and prescribe corrective measures if anything seemed like it was going awry. The CAG’s scrutiny of records however revealed that there was no evidence that the CPRB did review things on a monthly basis, and additionally there was no role specified for the ministry to monitor projects as per the concession agreements.

“Thus, ineffective monitoring mechanism resulted in time and cost overruns, particularly in respect of the two New Line projects,” the report said.