India has been battling with stressed banking assets (NPAs) for years. The historic “reform” for resolution of such stressed assets, called Insolvency and Bankruptcy Code (IBC) of 2016, is flailing as recoveries are nosediving. At the end of March 31, 2022, total recoveries from the “resolution” and “liquidation” outcomes under the IBC dropped to 16.6% of the “admitted claims” or debts. This is lower than 25% recovery under the Bureau of Industrial and Financial Reconstruction (BIFR) mechanism.

Now a new category of stressed asset has emerged in May 2022, called “stressed Public Private Partnership (PPP) projects at the major ports”.

This is exactly how the Ministry of Ports, Shipping and Waterways described the challenge it is facing, while issuing new “guidelines for early Resolution of Stuck Public Private Partnership (PPP) projects at Major Ports” on May 11, 2022.

PPP port projects abandoned

The ministry’s guidelines were occasioned by abandonment of sanctioned PPP projects by private partners, either at the execution stage or after commercial operations. The ministry offered two reasons for this: (i) projects abandoned during the execution phase because of various reasons like aggressive bidding, optimistic projections and unforeseen changes in business; and (ii) abandoned during the execution or after becoming operational as private partners defaulted on their loans, forcing creditors to declare their loans non-performing assets (NPAs) and go for IBC proceedings.

The new guidelines provide “mechanism for resolution” of these stressed PPP projects.

According to this, the concessioning authority (in this case public ports) would take over the abandoned projects after paying for the work done or by taking over 90% of loans of its private partner if the projects were abandoned at the execution stage. For those cases already undergoing IBC proceedings, the concessioning authority (public ports) will be allowed to participate in it, take over the PPP projects and then put it to “re-bidding".

The resolution mechanism is, thus, nothing but nationalisation of PPP projects abandoned by private players. Given that the IBC is yielding only 16.6% (a haircut of 83%), this means the Indian public will end up paying for the failures of private PPP players (“socialisation” of private sector loss).

Besides, the haircut would show up as NPAs of public sector banks (PSBs), which will then be written off as a matter of routine. The NPA write-offs have skyrocketed since 2015. RBI data shows the write-offs jumped from ₹1.2 lakh crore during the 10 years of UPA (FY06-FY15) to ₹10.1 lakh crore in the six years of NDA-II (FY16-FY21) — a quantum jump of more than 8 times!

Through this resolution mechanism, the ministry hopes “unlocking the blocked cargo handling capacity of approximately 27 MTPA (million tonnes per annum)”. It particularly hopes for early resolution of five “long standing disputes on stressed assets at various major ports” — two PPP projects at the Deendayal Port (earlier called Kandla port) and one each at Mumbai, Thoothukudi and Visakhapatnam ports.

Not a surprising development

The ministry acknowledged that despite several policy initiatives, incentives and due diligence, the survival of several PPP projects is at risk. One of this was an elaborate (234 pages) “New Model Concession Agreement — 2021 for Public-Private-Partnership (PPP) Projects at Major Ports” unveiled in November 2021, which was to benefit (i) 80 “on-going projects with investment of over ₹56,000 crore”; and (ii) “31 projects of over ₹14,600 crore to be awarded on PPP till FY25”.

A significant provision of this was flagged by the minister, Sarbananda Sonowal, on the occasion, called “Change in Cargo due to Change in Law or Unforeseen Events”. This is specifically meant to protect private partners in PPP projects from “external and unforeseen factors” that has forced it to bring the new resolution mechanism.

Dubious history of PPPs in highway sector

This is not the first time PPP projects have landed India in trouble.

During the UPA regime (2004-14), when the PPP was taken up in a big way in building national highways, many projects were abandoned, leading to a build-up of the NPA crisis in the early years of the NDA-II government. Former chief economic advisor (CEA) Arvind Subramanian famously called it the “twin balance sheet problem” — over-leveraged private companies and bad loan-saddled PSBs.

The UPA had virtually abandoned PPP projects towards the end of its tenure. It would be instructive to revisit the PPP fiasco of that era, more so for the role viability gap funding (VGF) played in those PPP projects.

VGF is an upfront payment to private players in the PPP projects by governments (Centre and states) to incentivise building infrastructure. As per the VGF policy spelt out in November 2022 for social and economic projects, the central and state governments would provide (i) VGF of up to 80% of the total project costs (each contributing 40%); and (ii) VGF of 50% of the operational cost (each sharing 25%) for the first five years of operations.

What this means is that the governments will fund 80% of PPP projects and then also fund 50% of operational cost of these projects for the first five years. The rest is to be paid by private partner of the PPP projects. This is why the PPP projects are very lucrative.

During the UPA era, the Planning Commission helmed PPPs, including writing the model contracts and granting of a VGF of 40% by the central government. An “internal paper” of the Planning Commission and RTI replies revealed the murky goings on in PPPs in 2010.

These documents showed that for 20 highway projects under scanner, PSBs had given a loan of ₹25,940 crore without collaterals to the private partners while the sanctioned cost of these projects was just ₹13,646 crore. That is, the loans given were nearly double the cost of the projects. Many PPP projects were abandoned and saddled PBSs with huge NPAs. Why did PSBs give 200% loans without collaterals and then landed themselves with NPAs remains an abiding mystery.

There is more.

In all highway projects a VGF of 40% had also been given to private partners by the central government. Taken together, the bank loan and VGF were far excess than the project costs.

For easy understanding, let us say a PPP project of ₹100 crore was sanctioned. The central government paid ₹40 crore of VGF upfront. The private partner went to a PSB and took a loan of ₹200 crore (double the project cost). In all, it received ₹240 crore for a ₹100-crore project. This means the private partner didn’t need to bring a penny of its own (the reason why it is being owed) and got an excess amount of ₹140 crore (₹240 crore minus ₹100 crore) to divert to its other projects. When the project is abandoned, or the loan is defaulted banks are holding up to ₹200 crore of NPAs.

This was not the only cause of worry.

The Gurgaon Expressway toll booths were dismantled in 2012. One of the main reasons was excessive profiteering by under-reporting number of vehicles that passed through the toll booths maintained by the private partner. The other irritant was the huge traffic jams at either side of toll booths. The same was the case with the DND flyway in Noida, which was dismantled in 2016.

NDA revives PPP and VGF

Instead of being wary, the NDA-II government revived both PPPs and VGF in a big way. In 2014, it announced ₹1 crore of VGF for each 1 MW of solar energy plants. In 2015, it gave “one time fund infusion” to many of the highway projects that were stuck — over and above the 40% VGF the private partners had already received.

Before and after the pandemic hit, the central government aggressively pushed for VGF for private medical colleges (not private hospitals), in the budget and in official communications. It asked states to give unencumbered land, tax concessions and other financial help, which it could reclaim from the Ayushman Bharat (PM-JAY). It also asked states to hand over (public) district hospitals to those private medical colleges for running and maintenance.

Now VGFs for PPP projects are climbing up.

In FY15, the VGF was ₹596 crore — the Parliament was informed by the government. The Union Cabinet approved VGF outlays of ₹1,400 crore for FY21, ₹1,500 crore for FY22, ₹1,600 for FY23, ₹1,700 crore for FY24 and ₹1,900 crore for FY25 at its meeting in November 2020.

But there is no comprehensive study in India of how many projects have been built under the PPP model, how much funds the central and state governments have paid for it and how much NPAs have been built up by these projects.

These are the key to know the efficiency of PPP model. Until then, one can expect more about “stressed” PPP projects.

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