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India has been struggling with Stressed Bank Assets (NPA) for years. The historic “reform” for resolving these stressed assets, called the Insolvency and Bankruptcy Code (IBC) of 2016, is collapsing as recoveries plummet. As of March 31, 2022, total recoveries of “resolution” and “liquidation” results under the IBC have fallen to 16.6% of “admitted claims” or payables. That’s less than 25% recovery under the Bureau of Industrial and Financial Reconstruction (BIFR) mechanism.
Now, a new category of stressed assets emerged in May 2022, called “stressed public-private partnership (PPP) projects in major ports”.
This is exactly how the Ministry of Ports, Shipping and Waterways has described the challenge it faces, while issuing new “guidelines for the rapid resolution of stalled public-private partnership (PPP) projects. in the main ports” on May 11, 2022.
Abandoned PPP port projects
The directives of the ministry were occasioned by the abandonment of PPP projects sanctioned by private partners, either at the stage of execution or after commercial operations. The ministry cited two reasons for this: (i) projects abandoned during the implementation phase for various reasons such as aggressive bidding, optimistic projections and unforeseen changes in activities; and (ii) abandoned during execution or after becoming operational because private partners defaulted on their loans, forcing creditors to declare their loans non-performing assets (NPAs) and initiate IBC proceedings.
The new guidelines provide a “resolution mechanism” for these stressed PPP projects.
According to this, the granting authority (in this case the public ports) would take over the abandoned projects after having paid for the work carried out or by taking over 90% of the loans from its private partner if the projects were abandoned at the execution stage. . For cases already in the IBC procedure, the granting authority (public ports) will be authorized to participate, to take over the PPP projects and then submit them to a “re-tendering”.
The resolution mechanism is therefore nothing other than a nationalization of PPP projects abandoned by private actors. Given that the CBI returns only 16.6% (a discount of 83%), this means that the Indian public will end up paying for the failures of private PPP players (“socialization” of the private sector loss).
In addition, the haircut would appear in the form of NPAs of public sector banks (PSBs), which would then be systematically written off. NPA write-offs have skyrocketed since 2015. RBI data shows write-offs have risen from ₹1.2 lakh crore in UPA’s 10 years (FY06-FY15) to ₹10.1 lakh crore in the six years of NDA-II (FY16-FY21) — a quantum leap of more than 8 times!
Through this resolution mechanism, the ministry hopes to “unlock stranded cargo handling capacity of approximately 27 MTPA (million tonnes per annum)”. In particular, he hopes for a quick resolution of five “long-standing disputes over assets under pressure at various major ports” – two PPP projects at Deendayal Port (formerly known as Kandla Port) and one each at the ports of Mumbai, Thoothukudi and Visakhapatnam. .
An unsurprising development
The ministry has acknowledged that despite several policy initiatives, incentives and due diligence, the survival of several PPP projects is at risk. One of them was an elaborate (234 pages) “New Model Concession Agreement – 2021 for Public-Private Partnership (PPP) Projects in Major Ports” unveiled in November 2021, which was to benefit (i) 80 “ongoing projects with investment over ₹56,000 crore”; and (ii) “31 projects over ₹14,600 crore to be awarded as PPPs until FY25”.
An important provision of this provision was pointed out by the Minister, Sarbananda Sonowal, on the occasion, called “Change in cargo due to change in law or unforeseen events”. This is specifically intended to protect private partners in PPP projects from the “external and unforeseen factors” that forced them to put in place the new resolution mechanism.
Questionable history of PPPs in the motorway sector
This is not the first time that PPP projects have gotten India into trouble.
During the UPA regime (2004-14), when PPP was widely used in the construction of national highways, many projects were abandoned, which led to an accumulation of the NPA crisis in the early years of government NDA-II. . Former Chief Economic Adviser (CEA) Arvind Subramanian called it the “double bottom line problem” – overleveraged private companies and struggling PSBs.
The UPA had virtually abandoned PPP projects by the end of its term. It would be instructive to look back on the PPP fiasco of that time, especially for the role that Viability Gap Financing (VGF) played in these PPP projects.
VGF is an initial payment to private actors in PPP projects by governments (Center and States) to encourage the construction of infrastructure. In accordance with the VGF policy set out in November 2022 for social and economic projects, the central government and state governments would provide (i) VGF up to 80% of total project costs (each contributing 40%); and (ii) VGF of 50% of the operational cost (each sharing 25%) for the first five years of operation.
This means that governments will finance 80% of PPP projects and then also finance 50% of the operational costs of these projects for the first five years. The rest must be paid by the private partner of the PPP projects. This is why PPP projects are very lucrative.
At the time of the UPA, the Planning Commission piloted PPPs, including the drafting of standard contracts and the granting of a 40% VGF by the central government. An “internal document” of responses from the Planning Commission and RTI revealed the murky happenings of PPPs in 2010.
These documents showed that for 20 highway projects under scanner, the PSBs granted ₹25,940 crore unsecured loan to private partners while the sanctioned cost of these projects was only ₹13,646 crore. In other words, the loans granted represented almost double the cost of the projects. Many PPP projects were abandoned and burdened the PBS with huge NPAs. Why did PSBs lend 200% without collateral, then end up with NPAs? Remains a lingering mystery.
There is more.
In all motorway projects, a VGF of 40% had also been granted to private partners by the central government. Taken together, the bank loan and the VGF were well above the project costs.
For ease of understanding, let’s say that a ₹100 crore PPP project has been sanctioned. The central government paid ₹40 crore of VGF in advance. The private partner approached a PSB and took out a loan of ₹200 crore (twice the cost of the project). In total, he received ₹240 crore for a ₹100 crore project. This means that the private partner did not need to contribute a penny (the reason why it is owed) and got an excess amount of ₹140 crore (₹240 crore minus ₹100 crore) to divert to his others projects. When the project is abandoned or the loan is in default, banks hold up to ₹200 crore of NPA.
This was not the only cause for concern.
The Gurgaon highway toll booths were dismantled in 2012. One of the main reasons was excessive profit by under-reporting the number of vehicles passing through the toll booths maintained by the private partner. The other irritant was the huge traffic jams on either side of the toll booths. The same was true for the DND flyway in Noida, which was dismantled in 2016.
NDA relaunches PPP and VGF
Instead of being wary, the NDA-II government revived both PPPs and VGF. In 2014, it announced ₹1 crore of VGF for every 1 MW of solar power plants. In 2015, it gave a “one-off cash injection” to many of the highway projects that were stuck – on top of the 40% VGF the private partners had already received.
Before and after the pandemic, the central government pushed aggressively for VGF for private medical schools (not private hospitals), in the budget and in official communications. He called on states to donate unencumbered land, tax breaks and other financial aid, which he could recover from Ayushman Bharat (PM-JAY). It also called on states to hand over district (public) hospitals to these private medical schools for operation and maintenance.
Now the VGFs for PPP projects are increasing.
In FY 2015 the VGF was ₹596 crore – Parliament was advised by the Government. Union Cabinet approved VGF expenditure of ₹1,400 crore for FY21, ₹1,500 crore for FY22, ₹1,6000 crore for FY23, ₹1,700 crore for FY24 and ₹19,000 for FY25 at its November 2020 meeting.
But there is no in-depth study in India on how many projects have been built under the PPP model, how much funds central and state governments have paid for it and how much NPAs have been built by these projects.
These are the key to knowing the effectiveness of the PPP model. Until then, we can expect more on “stressed” PPP projects.