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«OPTIMAL RISK ALLOCATION IN PUBLIC-PRIVATEPARTNERSHIP (PPP) PROJECTS IN INDIA Prof M Kakati Professor, and Former Dean, Department of Business ...»

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The 2016 WEI International Academic Conference Proceedings Boston, USA


Prof M Kakati

Professor, and Former Dean, Department of Business Administration, Gauhati University, Guwahati, India

Mr Pallav Baruah

Former Manager(Technical), National Highway Authority of India, Executive Engineer, IIIT, Guwahati, India


The risks involved in PPP projects are significant and need to be thoroughly analysed, researched and managed. The contractual misallocation of risks is the leading causes of disputes during construction and operation phases which in turn are leading to sub- optimal value-for-money in PPP projects. Hence, proper risk identification and allocation is a key to successful PPP project implementation and is important for the public client & the private bidders to assess all the potential risk through the whole project life. This paper analyses thirty PPP projects in India and identifies a plethora of risks faced by these projects, their frequency of occurrence during the development, construction and operation phases.

The paper also presents and discusses the perceptions/views of 62 experts (who have long experience in handling PPP projects) regarding (i) optimal risk allocation amongst the partners (private sponsors/promoter, government, lender, consultants etc) (ii) misallocation of risks and their consequences (iii) preferred risk mitigation strategies (iv) deficiencies in PPP project management (v) factors leading to success and factors hindering the performance of PPP projects (vi)changes of risks criticality over the whole project life(vii) preferred government supports and (viii) expected risk allocation framework. The perceptions of 62 experts were captured through three rounds of interviews.

These research findings will enable public sector clients to establish more efficient risk allocation frameworks in the early stage of project development and also private bidders (both local and foreign) to assess all the potential risks through the whole project life before bidding for the same; which in turn will minimise disputes & economic costs and maximize the value-for-money in PPP projects.

Key words: Risk allocation, PPP projects, risk criticality, risk severity, performance matrix, success factor, value-for-money Introduction India offers today the world’s largest market for PPP projects and is largest recipient of fund from abroad. The volume PPP projects completed & under implementation in India is 2563 with an investment of US $ 179.7 billion as on March 31, 2013. A number of initiatives taken during the tenth and eleventh five year plan had resulted in the award of a large number of PPP projects especially in sectors such as highways, urban infrastructure, airports, sea-ports, railways and power both in Central and State level. The twelfth five year plan (2012-2017) of India has envisaged US$ 819.8 billion investment in infrastructure projects of which the share of PPP projects is estimated at 48% i.e. US$ 393.5 billion. Information on a large number of projects in pipeline suggests huge opportunities for foreign and domestic investors to invest in PPP projects in various sectors across the country. PPP projects offer good return on investment especially to the sponsors (private party). However it is not sure whether good return is sufficient to compensate the high risk assumed by the sponsors.

The risks involved in PPP projects are significant and need to be thoroughly analysed, researched and managed to minimize disputes & costs and maximize value-for–money. The objective of this paper is to identify a plethora of risks faced by PPP projects in India, their frequency of occurrence during the development, construction and operational phases and also to discuss the perceptions/views of experts regarding (i) optimal risk allocation amongst the partners (private sponsors/promoter, government, lender, consultants etc) (ii) misallocation of risks and their consequences (iii) preferred risk mitigation strategies (iv) deficiencies in PPP project management (v) factors leading to success and factors hindering the performance of PPP projects (vi)changes of risks criticality over the whole project life (vii) preferred government supports and (viii) expected risk allocation framework.

Issues requiring further research works The studies related to PPP projects focuses on seven areas– risk management, integration research, governance issues, investment environment, procurement, economic viability and financial packages (Ezeldin et.

al., 2013). Amongst them, the risks associated with PPP along with their management techniques occupy a considerable percentage and is still considered an area of concern in PPP project management.

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The following deficiencies/issues has been indentified where there is need to do further research works Many literatures have concentrated on identification of critical risks or risk criticality. However, none of the researches has focussed on how risk criticality changes over the different phases of project life (development, construction, and operation & maintenance phase)

• Most of the literatures have examined who are the best party (public or private agencies) to management the risk; but hardly examine the misallocation of risk for different categories of risk and how to share risk amongst the consortium of private partners

• The current literature has hardly attempted to establish the relationship between risk criticality of PPP projects and their influence on the success of PPP projects in reality.

• The success of PPP projects must be judged over a long period using different criteria. The existing literature is less focused on the criteria to be used.

This study is trying to address of the some issues highlighted above.

Methodology A mixed approach of on-site- observation, interviews, and questionnaire survey (among Government representatives, promoters/sponsor/developer, lenders, consultants ) and case studies were used for achieving the goals/above objectives of this research The design of the survey questionnaire followed the methodology adopted by by Thomas A. V. (2002), Ho Y. and Wang H. (2008), Maniar H. (2010).

Figure 1: Details of information gathering techniques used

The prepared questionnaires have been further subjected to test of reliability and validation with the help of standard statistical tools like Cronbach's alpha. Cronbach's alpha value for each group of respondents was found to be more than 0.60 indicating that data collected through the set of questionnaires/interview were fairly consistent.

Table 1: Cronbach's Alpha for different category of respondent

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All India questionnaire surveys (in three stages) were conducted among four major stake holders/participants (Government representatives, promoters/developers, lenders and consultants) of Indian PPP projects. A detailed case study analysis of 30 infrastructure projects was also carried out and survey findings have been validated through the case study comparison. The category wise details of respondents of survey are presented in Table 2.

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Risk can be classified on basis of allocation or mitigation strategy in an infrastructure project. Thus

there are:

• Transferrable risks, i.e., risks fully transferrable to the private sector.

• Retained risks, i.e., risks for which the government bears the costs, e.g., the risk of delay in gaining project approvals.

• Shared risks, i.e., risks that are shared based on a combination of the above two allocations due to the nature of the risk.

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Unlike many studies, this research focuses more on assessment of risk criticality rather than just identifying risks factors and their primary allocation. Risk criticality is defined as the combined effect of the probability of occurrence and the impact of a risk event or a risk factor.

The index developed by Wang et. al. (2000) was used for measuring risk criticality.

Criticality index =

Where n1 = number of respondents who answered “Most Critical”: n2 = number of respondents who answered “Very Critical”: n3 = number of respondent who answered “Critical”: n4 = number of respondents who answered “Some What Critical”: and n5 = number of respondents who answered “Not Critical”.

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Procurement process in Indian PPP projects The bidding process for item rate contracts ( i.e. EPC / traditional procurement process) and for PPP projects (both toll and annuity) in India is typically divided into two stages. In the first stage ( generally referred to as Request For Qualification-RFQ) ), eligible and prospective bidders are shortlisted based on technical and financial capability of the bidders(criteria used –(i) construction works undertaken (ii) revenues of BOT/BOLT/BOO from PPP projects already implemented by bidders and (iii) net worth of minimum 25% of the estimated project costs). In the second stage, which is generally referred to as the Request For Proposal(RFP) or invitation of final bids, shortlisted bidders are encouraged to submit their respective bids after visiting the project site and ascertaining for themselves the site conditions, traffic/demand, location, surroundings, climate, availability of power, water, and other utilities for construction, access to site, handling & storage of materials, weather data, applicable laws and regulations and any other matters considered relevant by them. The Government authority/agency acknowledges that the assumptions, assessment, statements and information contained in the bidding documents, especially Feasibility Report (supplied to bidders) may not be complete, accurate, adequate or correct. Each bidder should therefore conduct its own investigations and analysis, and should check the accuracy, adequacy, correctness, reliability and completeness of the assumptions, assessments, and information contained in RFP and obtained independent advices from the appropriate sources. The project is awarded to the highest bidders offering highest premium to the authority; and in the event that no bidder offers a premium, then project is awarded to the bidders seeking the lowest VGF (viability Gap Funding)/grants from the Government authority/agency.

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Exhibit 1 : Procurement process in Indian PPP projects Number of final bidders should be optimal (neither very high nor very low) for ensuring real competition in bidding. A large number of shortlisted bidders is viewed as a factor that dampen participation by serious bidders, thus diluting competition, because credible investors are normally less inclined to spend the time & money necessary for making a competitive PPP bid if zone of consideration is unduly large. Restricting the list to best available bidders improve the chances of a successful PPP operation. It is also an international best practices to shortlist about three to four bidders for the final stage of bidding process. Considering all the factors, the Planning Commission of India suggested short listing of about six to seven bidders with a view to securing high quality and competitive financial bid.

Table-5 provides some of statistics related to bid for procurement process in public goods & services under different delivery modes (the statistic is based on limited amount information provided by NHAI).

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Critical risk factors in PPP projects in India Out of the 61 risk factors considered in the study, 10 factors (table-6) have emerged as most critical and another 13 factors (table-7)emerged as very critical factors based on critical index (table-4)

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The perception level towards a particular risk by all the respondent categories are not same, even though overall perceptions does not differ in a significant way. One of the reason behind this difference in perceptions is that each category of respondent have got his own set of interest in a PPP project (being a stack holder) and looks into an issue through his own interest.

The natures of some of the identified critical risks are explained below:

Demand/Revenue generation risk: The demand risk is defined as fluctuation of number of users associated with introduction of toll, market changes and the level of service provided. Before linearization, public services were offered either free of cost or at very low price. Even after 25 years of liberation, people at large expect public services at low cost or for free. Still there is public resistance to price hike or toll collection. Hence, commercial justification is a critical issue in PPP projects. For many projects, commercial justification needs people participation from the beginning. Nagpur water project and Latur water project’s success is due to people participation through the mechanism of public hearing in fixing the rate, consumer redressal cell, awareness and education for optimum use of water (thereby reducing the bills amount). User must be convinced that they are now getting much better services compared to service previously provided by the public agencies at lesser cost.

Some projects are difficult to justify commercially because of problem of hiking user rate, low demand and public resistance. In order to encourage such projects, GOI came up with VGF for financing such projects facing shortfall of required revenues.

Financial Risks: In Indian context, most of the promoters are not in a position to mobilize money from their current balance sheets and are primarily relying on project financing. Since the revenue from projects is in local currency, it is not sustainable to repay foreign investment (debt or equity) from domestic revenue for a long run.

Secondly, the Indian promoter are more dependent on the commercial bank rather than to borrow from institutional financier. As a result there is always a chance of asset liability miss-match in case of long term projects like PPP. In India, projects like Cochin International Airport, Delhi Noida Toll Bridge, Vododara Halol Toll Road etc. suffered severely from Financial Risk at different stage of the project operation.

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