Chapter 3. Trends related to Road based PPP Projects

Chapter 3 Trends related to Road based PPP Projects 3.1 Introduction During the last several decades vehicle population in India has grown at a very high rate. (Bose 2006). At the same time, the road network has expanded at a relatively rather slow rate. As a result, the road infrastructure has been stretched to its extreme limits. There is a wide and growing gap between the demand and the supply of road infrastructure. Roads are the dominant form of surface transport in India. (India Infrastructure report, 2008). Only 14 percent of national highways are four laned. In fact, road-density is rather small at 2.75 km per 1000 people and 770 km per 1000 sq. km. while world averages are 6.7 and 841, respectively. Compared to China, its major economic rival, Indian road network is rather poor (Ojiro 2003). China invests as much as 10 times more on roads than India does. The gap between the availability of road infrastructure and its demand is huge and growing which is to be met by PPP mode. This chapter discusses indepth road development in India and the trends related to PPP projects across the world, its progress in India and in A.P State. 3.2 Road Development in India Since independence, there has been a tremendous increase in the volume of road traffic, both passenger and freight. The total road length in India increased more than 11 times during the 60 years between 1951 and 2011. From 3.99 lakh kilometer as on 31 March 1951, the road length increased to 46.90 lakh kilometers as on 31 March 2011. 108

Concurrently, the surfaced road length increased both in absolute and relative terms. The length of surfaced roads which was 1.57 lakh kilometers (39.35 per cent of total road length) as on 31 March 1951 increased to 25.25 lakh kilometers (53.83 per cent of total road length) as on 31 March 2011 as shown in the figure 3.1 below. Figure 3.1 Total and Surfaced Road Length in India: 1951-2011 Despite their importance to the national economy, the road network in India is grossly inadequate in various respects. The existing network is inadequate and is unable to handle high traffic density at many places and has poor riding quality. Among all the infrastructure sectors, road transport contributes the most to the country s GDP. The transport sector in India has contributed 6% of the national income over a 109

period over a period of 10years from 1999-2000 to 2008-2009. Of this the road sector contribution had increase from 63% in 2000 to 73% in 2009. (PwC analysis 2012). The road network consists of National Highways, Expressways, State Highways, Major Districts Roads, other Districts Roads and Village of 46.90 lakh km. has road density of 1.43 km per square km. The National highways in India have a total length of 70,934 km and serve as the main road network of the country. Even though the expressways and national highways constitute only about 2% of the length of all roads, they carry about 40% of the traffic as shown in Table 3.1 below. Table 3.1 Distribution of Roads in India Type Length (Km) % of Total National Highways 71772 2% Expressway 150342 4% State highways 1437757 34% Other roads 2577396 61% TOTAL 4237267 100% Source: www.nhai.org Prior to the National Highways Development Programme (NHDP) initiated by the NHAI, almost all National Highways and State Highways were 2-lane, undivided roads with uneven surface causing traffic congestion, required more travelling time, more fuel etc. The road side amenities which make the journey comfortable such as petrol pumps, parking places, hotels and restaurants, service roads, toilets, repair shops, weigh bridges 110

etc. were either missing or inadequately available in an unplanned manner mainly by the private entrepreneurs. The main reasons for all above mentioned shortcomings is the inadequacy of funds for maintenance and improving the quantity and the quality of the road network and development of the National Highways and the State Highways. The status of the National and State Highways is shown in Figure 3.2 below: Figure 3.2 Status of National and State Highways Establishment of National Highways Authority of India (NHAI) and National Highway Development Program (NHDP) NHAI was established by an Act of Parliament viz. the National Highway Authority of India Act, 1988, to implement the National Highways Development Programme (NHDP) which constitutes 4/6 laning of the Golden Quadrilateral spread over seven phases with an estimated expenditure of Rs 4, 71,975 crores and envisages the 111

improvement of more than about 54000km of arterial routes of national highway network to international standards. NHAI is responsible for the development, maintenance, management and operation of National Highway totalling over 70,548 km in length. The NHAI has the mandate to implement the National Highway Development Project (NHDP). The NHDP is one of the most ambitious projects launched in the independent India. The NHDP comprises following phases as shown in Table 3.2 below: Table 3.2 Phases of NHDP and Preferred Model of Development NHDP Description Phase I Golden Quadrilateral, North-south and East West Corridors II III IV North South and East west corridors and other National Highway Four-Laning of certain National highways on BOT basis Upgrading single-lane highways to two lanes and paved shoulders Length (Km) 7,522 EPC 6.647 EPC 12,109 PPP 20,000 PPP V Upgrading four-lane highways 6,500 PPP VI Expressways 1,000 PPP VII Ring roads, bypasses and flyovers 700 PPP Preferred Model for Development Source: www.nhai.org Phase I of NHAI was approved in December 2000 for 5,846 km. It is called the Golden Quadrilateral (GQ) connecting the four major cities of Delhi, Mumbai, Chennai and Kolkata, portions of the NS EW corridors and connectivity of four major ports to 112

National Highways. Phase II was approved in December 2003 with an estimated cost of Rs. 34,339 Crores (at 2002 prices). It included the completion of the NS EW corridors and other 486 km highways. It links Kashmir in the North to Kanyakumari in the South including spur from Salem to Kochi and Silchar in the East and Porbandar in the West. Phase III started in March 2005 costing Rs. 22,207 Crores (at 2004 prices). It included up gradation and 4-laning of 12,109 km of National Highways on the BOT basis. Phase V was sanctioned in October 2006 for upgrading the two lane and four lane to 6-lanes for 6,500 km of which 5,700 km is on Golden Quadrilateral (GQ). This phase is entirely on a Design, Build, Finance and Operate (DBFO) basis. In the sixth phase 1,000 km of Expressways was to be developed at an estimated cost of Rs. 15,600 Crores. Phase VII was approved in December 2007 to develop ring roads, by-passes and flyovers to avoid traffic bottlenecks on selected stretches at an estimated cost of Rs. 16,680 Crores. The implementation of the NHDP faced many problems like delays in land acquisition and removal of structures, shifting of utilities, law and order problems in some states and bad performance of some contractors. But inspite of these problems, the projects are being completed. This has a positive impact on the economy. Special Accelerated Road Development (SARD) is a special programme of NHAI for the North Eastern Region. This programme wants to improve the road connectivity to state capitals, district head quarters and remote places in the North Eastern region. It consists of over 3800 kms of National Highways and about 4900 kms of State Roads. This will connect 85 district headquarters in the North Eastern States to the National Highways and the State Roads. 113

In order to give boost to rural connectivity, a rural road programme, Pradhan Mantri Gram Sadak Yojna (PMGSY) was launched in October 2000. The primary objective of PMGSY is to provide connectivity, by way of all-weather roads to the unconnected habitations in the rural areas, so that habitations with populations of 1,000 and above are covered in three years (2000 2003). All unconnected habitations with a population of 500 persons and above are covered by the end of the Tenth Plan Period (2007). In respect of the hill states (North-East, Sikkim, Himachal Pradesh, Jammu and Kashmir, and Uttranchal) and the desert areas, the objective is to connect habitations with a population of 250 persons and above. The programme also aims to achieve an equitable development of the rural roads network in different states / districts so as to fully exploit the potential for rural growth. The PMGSY is implemented as a 100 percent centrally sponsored scheme. The Central Government has created a fund, called Central Road Fund from collection of cess from petrol and diesel. At present Rs. 2 per litre is collected as cess on Petrol and High Speed Diesel (HSD) Oil. The Fund is used for development and maintenance of National Highways, State roads, rural roads and for provision of road over bridges, under bridges and other safety features at unmanned railway crossings.(www.nhai.org) 3.3 Evolution of PPPs in India Evolution of PPPs could be found as early as in the 19 th century like the Great Indian Peninsular Railway Company (1853), the Bombay Tramway Company services in Mumbai (1874). PPP models were therein power generation in Mumbai and Kolkata in 114

the early 20 th century. After the relative success of developing infrastructure through PPP mode in Europe where Europe accounted for 37.8% of the world PPP projects followed by Asia and Far East 36.7%, North America 15.8 %, paved the way for the next phase of PPP development in India and other developing countries from 1991-2006. After independence in the sixty years of planning and development in India, and the pressing need for more investment in infrastructure coupled with constrained government resources changed the focus of GOI, to adopt PPP as a mode for infrastructural development. Till the nineties, investment in infrastructure was almost exclusively in the public domain, made by government departments, specialized government agencies (SGAs) and public sector undertakings (PSUs). These investments were financed by budgetary allocations, surpluses of SGAs/ PSUs, market borrowings (mainly from the bank market), borrowings from multi-lateral agencies and a few capital market bond issuances. The nineties also saw the pursuit of policies of economic liberalization such as de-licensing of industry, increased market access by reduction in customs duties, freeing of the exchange rate on the current account and enhancement of the limits for foreign direct investment, resulting in an increased alignment of the Indian economy to global markets. Investment in infrastructure, however, continued to be low at levels ranging, over the years, between 3-6% of the gross domestic product (GDP), well below the investment levels of comparable economies like China and other East Asian economies, given the overall inadequacy of public resources. Given this backdrop, it was inevitable that the government looked at increasing the levels of infrastructure investment through private investment. To begin with, in 1991, a national 115

power policy was announced which opened up power generation to the private sector and provided various financial and fiscal benefits to investors. This was followed by the national telecom policy in 1994, guidelines for private sector participation in major ports in 1996 and a new civil aviation policy, all encouraging private investment in these sectors. A major fillip was provided by the announcement in 1999 of the National Highway Development Programme (NHDP) for systematic capacity enhancement (mainly four-laning) of 13,000 kilometers (kms) of national highways in two phases. This was followed by a decision to levy a cess on sales of petrol and diesel which would be deposited in a Central Road Fund specially created for this purpose and which would fund the development of national highways and rural roads. India was in a position of attracting private participation in the infrastructure sectors since the economic reforms were introduced in 1991. The first two phases of the NHDP which envisaged smaller levels of private investment (14% of the number of projects) have still offered around 48 projects to private investors. Given the initial success and speedy implementation of the private sector projects, the programme has since been expanded to a 7 phase programme covering 46,000 kms of national highways, with the bulk of investment in the ensuing phases expected to come by way of private investment. Under a PPP framework, new airports have been established at greenfield locations in Hyderabad and Bangalore; modernization and expansion of the existing airports at Delhi and Mumbai are underway. Plans are underway for developing landside infrastructure at smaller airports under administrative control of the Airports authority of India through private investment. A few smaller airports have been handed over by some state governments to private investors for modernization and expansion. 116

Several berth concessions (container terminals and some bulk/ multi-purpose berths), have been awarded to private players at several major ports; a number of minor ports have been handed over by various state governments (notably Gujarat and Andhra Pradesh) to private investors for expansion and up gradation. Several of these facilities are operating successfully, though there have been some regulatory challenges (over issues such as competition and tariff setting) to overcome in major ports. A few small sections on the Indian Railways (mainly for port connectivity) and more recently, container services, have also been developed as private infrastructure projects. All this has translated to aggregate private sector infrastructure investment of a little over USD 96 billion over the period 1990-2007. It is estimated that private infrastructure investment which now contributes to ~ 20% of the total investment in infrastructure and therefore around 1% of the GDP would increase to a level of 30% of the total infrastructure investment during the Eleventh Plan period (2007-12), which is expected to translate to a level of 3% of the GDP by 2011-12. There were only 86 PPP projects worth INR340 billion were awarded till 2004 (World Bank study) and most of the projects were in road sector. In the next phase with the increasing acceptance of PPP model, favourable policy reforms by the GOI and innovative PPP models lead to growth in PPP from 450 projects costing INR 2,242 billion in November 2009 to 758 PPP projects costing INR 833 billion in July 2012. 117

3.4 PPPs in Roads and Highways in India Recent liberalization of the Indian economy has brought the urgency of developing efficient roads and highways for increasing productivity and enabling the country to compete effectively in the world market. According to Tenth Five Year Plan (2002 2007), An efficient transport system is a pre-requisite for sustained economic development. Roads are not only the key infrastructural input for the growth process but also plays a significant role in promoting national integration, which is particularly important in a large country like India. In a liberalized set up, efficient roads become important in order to increase productivity and enhance the competitive efficiency of the economy in the world market. Since independence, there has been a tremendous increase in the volume of road traffic, both passenger and freight. However, the main road network comprising of national and state highways has not matched this traffic growth. Much of the expansion of the road network has been through building the rural roads to provide connectivity to rural masses, although 50 percent of the villages are still to be connected with all-weather roads. The main reasons for all above mentioned shortcomings is the inadequacy of funds for maintenance and improving the quantity and the quality of the road network and development of the National Highways and the State Highways. To bridge the resource gap and to instil the competitive efficiency, efforts were being made to associate the private sector with road projects. The Public Private Partnership (PPP) using the BOT (Build Operate Transfer) was adopted by the Government of India to develop the roads and highways. 118

PPPs in highways started with NHDP. While the projects under NHDP Phase I and II were predominantly implemented on EPC (engineering procurement and construction mode) very few projects were experimented with on PPP mode. The first PPP on national highways was construction of a railway over bridge (ROB) at Kishangarh located in the Ajmer district of Rajasthan. This segment was formed in March 1998 on NH 8 and was developed on BOT basis. However, the first policy framework for PPPs was introduced in 1997 as decision of the Cabinet of the Central Government (Haldea, 2000). It provided guidelines for toll based BOT projects. Later on, in December 2000, the cabinet committee on economic affairs approved the first phase of the NHDP. It was agreed that road projects under NHDP will be taken up for up gradation on BOT Toll and BOT Annuity basis, to the extent possible (Planning commission, 2006). From then PPP became the preferred way of procurement with NHDP phase III as can be seen in Figure 3.3 and Figure 3.4. There is a drastic increase in the length of the highway awarded on PPP mode from the year 2005 onwards till 2010 then a decrease from the year 2011 as shown in the Figure 3.5: Figure 3.3 NHDP wise No of PPP Projects awarded NHDPVI 2 NHDP V 25 NHDP IV NHPD III 17 107 No of PPP Projects NHDP II 39 NHDP 1 17 0 20 40 60 80 100 120 Source : NHAI, PwC analysis 2011 119

70 60 50 40 30 20 10 0 10 1 1 0 2 Figure 3.4 Year wise No of PPP Projects awarded by NHAI 12 2 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 30 21 13 6 27 58 36 No of Projects Linear ( No of Projects) Source : NHAI, PwC analysis 2011. 6000 5000 Figure 3.5 Year wise km length awarded under PPP 5363 4865 4000 3000 2000 1000 0 1 18 146 545 120 0 1678 1278 843 885 2489 Figure 4.7 Year wise km length awarded under PPP Source : NHAI, PwC analysis 2011 120

It can be observed from the Figure 3.6 that there are two stages in National Highway PPP, one before 2005 and another from 2005. In 2005, the government decided to give a big thrust to PPPs. In a meeting chaired by the Prime Minister, it was decided that as much as 2100 kms of NHDP phase II and all other future projects will be taken up on BOT basis. Moreover, to overcome the above constraints the government launched several initiatives. Following are the major steps taken to galvanize the PPP programme like standardization of bidding and concession agreement, setting up of IIFCL in 2006, provision for viability gap funding, setting of India infrastructure project development fund (IIPDF) and Public private partnership appraisal committee (PPPAC). So we can say that the PPP phase in road sector started from 2005. The number of projects decreased in 2008 can be primarily accounted to global financial meltdown after which the number of projects picked up to 58 in 2010. We can also see in Figure 3.6 that the length awarded under national highway PPP also saw a maximum increase in 2009 to about 5400 km. 121

The GOI gave a major boost to infrastructure from the Tenth Five Year Plan (2002 2007) onwards. GOI has announced various policy measures to attract the private investors in the road PPP projects. It can be seen from Table 3.4 that over the years investment in roads has increased considerably from 69.8 billion US $ in the eleventh plan to 145.8 billion US $ in the twelfth plan and the percentage of private sector investment increased from 23.7 billion US$ in the eleventh plan to 58.3 billion US$ in the twelfth plan. The GOI has announced substantial policy measure like permission of upto 100% FDI and provision of capital grants of upto 40% of the project cost to enhance the viability of projects to attract domestic as well as foreign investors for PPP on road projects. The private sector participation was merely 5% during five year plan (2007-2012) and envisaged to increase to 34% in the 11 th plan and 40% in the 12 th plan (2012-17) as seen in Table 3.3 below. Table 3.3 Investment in Roads and Highways in Five Year Plans 10 th Plan (2002-07) 11 th Plan (2007-12) 12 th Plan (2012-17) Estimated Roads and Bridges Investment ( US$ 32.2 69.8 145.8 Billions) Public 30.6 (95%) 46.1 % (66%) 87.5(60%) Private 1.6(5%) 23.7(34%) 58.3(40%) Total plan investment in infrastructure(us$ Billions) 193.7 456.9 910.9 Roads and bridges investment as % of total infrastructure investment 16.6% 15.3% 16% Source: Planning Commission and PwC analysis ( 1USD = 45INR) 122

The investment strategy of the GOI primarily relies on promoting investment through Public private partnerships (PPPs). The success of the on-going twelfth Five Year Plan critically depends on the development of infrastructure which in turn depends on the success of Public Private Partnerships (PPP) projects in infrastructure in India. 4.5 International Trends in Road PPP Projects All countries across the world are adopting PPPs as the preferred method of providing infrastructure to their people. While the developed nations have a more matured understanding of the model the developing countries are still in the process of developing the model. World Bank and Organisation for Economic Cooperation and Development (OECD) have important role as agenda setters and promoters of new governance modes in PPP methods. A fairly similar pattern can be seen in the way which PPP programmes are developed in different countries. Table 3.4 presents the PPP projects in the road sector in different regions of the world from 1990-2012. 123

Table 3.4 No of PPP Projects in Road Sector by region and year of financial closure with Index YEAR EAST ASIA AND PACIFIC Index EUROPE AND CENTRAL ASIA Index LATIN AMERICA & CARRIBEAN Index MIDDLE EAST AND NORTH AMERICA Index SOUTH ASIA Index SUB SAHARAN AFRICA Index TOTAL Index 1990 3 100 0 0 29 100.00 0 0 1 100 1 100 34 100.00 1991 4 133 0 0 3 10.34 0 0 0 0 0 0 7 20.59 1992 4 133 0 0 5 17.24 0 0 0 0 0 0 9 26.47 1993 11 366 0 0 8 27.59 0 0 0 0 1 100 20 58.82 1994 22 733 0 0 19 65.52 0 0 0 0 1 100 42 123.53 1995 11 366 0 0 10 34.48 0 0 0 0 0 0 21 61.76 1996 28 933 0 0 9 31.03 0 0 3 300 0 0 40 117.65 1997 32 106 0 0 19 65.52 0 0 4 400 3 300 58 170.59 1998 14 466 0 0 25 86.21 0 0 10 1000 0 0 49 144.12 1999 7 233 0 0 0 0.00 0 0 10 1000 2 200 19 55.88 2000 7 233 0 0 8 27.59 0 0 2 200 0 0 17 50.00 2001 5 166 0 0 7 24.14 0 0 2 200 1 100 15 44.12 2002 4 133 0 0 5 17.24 0 0 7 700 0 0 16 47.06 2003 9 300 0 0 9 31.03 0 0 16 1600 1 100 35 102.94 2004 6 200 0 0 5 17.24 0 0 7 700 0 0 18 52.94 2005 6 200 0 0 8 27.59 0 0 8 800 0 0 22 64.71 2006 9 300 0 0 11 37.93 0 0 46 4600 0 0 66 194.12 2007 11 366 0 0 18 62.07 0 0 32 3200 0 0 61 179.41 2008 3 100 0 0 14 48.28 0 0 12 1200 1 100 30 88.24 2009 2 66 0 0 18 62.07 0 0 11 1100 1 100 32 94.12 2010 0 0 2 0 21 72.41 0 0 50 5000 0 0 73 214.71 2011 4 133 0 0 8 27.59 0 0 45 4500 1 100 58 170.59 2012 4 133 2 100 3 10.34 0 0 60 6000 0 0 69 202.94 Grand 32 3260 130 206 6866 4 200 262 903.45 0 0 13 811 Total 6 0 0 2385.29 Source: http://ppi.worldbank.org (Private Participation in infrastructure database, World Bank) 124

An index was created to see the growth of PPP over the years. East Asia and Pacific region showed a growth and the index increased from 100 in the year 1990 to high of 1066 in 1997 and then slowed down 133 points in 2012.There is substantial increase in number of projects undertaken during the year 1996-98 and then there is a drastic decrease during 2008-2011 which can be attributed to global economic crisis. Europe and Central Asia region did not show any PPP projects which would indicate that they are using other methods for road infrastructure development. Latin America and Caribbean region shows that the index was 100 in 1990 and decreased considerably over the years. North America and Middle East regions did not show any PPP projects and Sub-Saharan Africa regions also were not very high on PPP projects. The overall PPP index increased 100 in 1991 to 2385 in the year 2012 as seen in Table 3.4 and there is a positive trend in the growth of PPP road projects as seen in Figure 3.7 and 3.8. There is a gradual increase in the overall PPP projects initiated and the total investment made in road PPP projects across the world, which shows that PPP mode is used widely across the world for development of road infrastructure. 80 60 40 20 0 Figure 3.7 Total No. of PPP Projects in the Road Sector in the World World Wide PPP projects in the Road Sector Linear (World Wide PPP projects in the Road Sector) Source: http://ppi.worldbank.org (Private Participation in infrastructure database, World Bank) 125

30,000 25,000 20,000 15,000 10,000 5,000 0 Figure 3.8 Total Investment in PPP Road Projects Worldwide in US$ million 1990 1993 1996 1999 2002 2005 2008 2011 Total Investment in PPP road Projects Worldwide Linear (Total Investment in PPP road Projects Worldwide) Source: http://ppi.worldbank.org (Private Participation in infrastructure database, World Bank) Comparison of PPP Road Projects in across the World, in India and A.P Projects in road sector were compared with number of projects undertaken in India and in A.P and presented in Table 3.5 below: 126

Table 3.5 Number of PPP Road Projects across the World, in India and A.P YEAR INTERNATIONAL PPP ROAD PPP PROJECTS PPP ROAD PROJECTS IN INDIA PPP ROAD PROJECTS IN AP 1990 34 1 0 1991 7 0 0 1992 9 0 0 1993 20 0 0 1994 42 1 0 1995 21 0 0 1996 40 4 0 1997 58 6 0 1998 49 10 2 1999 19 13 0 2000 17 2 2 2001 15 5 4 2002 16 9 5 2003 35 19 2 2004 18 7 0 2005 22 14 0 2006 66 54 1 2007 61 34 4 2008 30 16 8 2009 32 13 2 2010 73 57 6 2011 58 48 12 2012 69 60 4 Grand Total 811 373 63 Source: compiled from www. pppindia database and http://ppi.worldbank.org 127

From Table 3.5 above it can be seen that PPP projects in the road sector in India were extensively used only from the year 1996 and in the year 1997 only six projects were initiated. 10 projects were initiated in the year 1998 and 13 projects initiated in the year 1999. There was a drop in initiation of projects from the year 2000 to 2002. From the year 2005, there was a drastic increase PPP road projects as NHAI had decided to proceed with the NHDP program on PPP basis only. There is a slight drop in the year 2008 owing to global slowdown and there was an increase in project allotment from the year 2010 onwards till the year 2012. In the state of Andhra Pradesh, the PPP projects in the road sector started in the year 1998. There was a slow progression from the year 2000 with year 2004 and 2005 showing no progression in commencing PPP road projects. There was increase in projects from the year 2006 with year 2011 showing maximum number of projects initiated. Figure 3.9 shows that there is positive trend of PPP projects in road sector across the world, in India and in A.P. Figure 3.9 128

Table 3.6 describes correlation between the PPP road projects initiated across the world, in India and in A.P: Table 3.6 Correlations between No. of PPP projects across the world, India and A.P Correlations INTERNATIONAL ROAD PPP INDIA ROAD PPP AP ROAD PPP INTERNATIONAL r 1.00 0.80 0.14 p 0.00 0.52 N 23 23 23 INDIA r 0.80 1.00 0.35 p 0.00 0.10 N 23 23 23 AP r 0.14 0.35 1.00 p 0.52 0.10 N 23 23 23 ** Correlation is significant at the 0.01 level (2-tailed). From Table 3.6 it is observed that there is a positive correlation of 0.8 between the total projects initiated across the world in India showing that India is also following the same pattern of initiating PPP projects in the road sector. The correlation between PPP projects initiated in India and in A.P is positive but not very strong because A.P is only one state in A.P. 129

3.7 Sector wise PPP projects in India and in A.P Sector wise comparison of PPP projects in India and in A.P shows that highest number of projects are in the road sector followed by port sector with least number of projects in railways. There are no projects initiated in railways in A.P. Table 3.7 shows that there are 271 projects in India with an investment of about Rs 70,200 crores and 55 projects in the road sector with an investment of 16,909 crores. It is also seen from the Table 3.7 below that port projects have very high investment when compared to the road sector as 43 projects require 66,499 crores whereas 271 projects in the road sector have costed 70,202.7 crores. Table 3.7 Sector wise PPP projects in India and A.P S no 1 Sector Roads & Highways Sector wise PPP projects in India No of Projects % of the Total Sector wise PPP projects in A.P Project Project cost No of % of the cost Projects Total ( Rs Cr) ( Rs Cr) 271 63.02 70,200.70 55 50.5 16,909 2 Ports 43 10.00 66,499 4 3.7 12,596 3 Airports 5 1.16 19,111 1 0.9 2,487 4 Railways 4 0.93 1601.56 0 0.0 0 5 Power 24 5.58 17,111 3 2.8 1,371 6 Urban Infrastructure 73 16.98 15,288 39 35.8 24,490 7 Education 10 2.33 1,069 7 6.4 306 Source: www.pppindiadatabase.com (March2012) 130

Figure 3.10 shows the graphical representation of PPP sector wise PPP projects in India and in A.P. It is seen that at all India level there are more PPP projects in road sector when compared to A.P but road sector tend to dominate all sectors. Figure 3.10 Sector wise PPP projects in India and A.P Sectorwise PPP projects in India Urban Infrastructure, 73 Education, 1 Power, 24 Railways, 4 Airports, 5 Ports, 43 Roads & Highways, 271 Sectorwise PPP projects in A.P Water & Education, 7 sanitation, 7 Urban Infrastructur e, 39 Roads & Highways, 55 Power, 3 Railways, 0 Airports, 1 Ports, 4 Source: www.pppindiadatabase.com (March2012) 131

PPP Projects initiated in A.P A.P is also following a similar trend in initiating PPP projects. Table 3.8 presents the PPP projects initiated in A.P from 1998 to 2011: Table 3.8 PPP Projects Initiated in A.P from 1998-2011 Year PPP projects in all sectors Roads & Highways Road before 1998 No of Projects Initiated Total Project costs ( Rs Cr) No. of Projects 2 435.7 2 Project Cost in Rs Cr Projects as a % of the total projects 435.7 100.0 1998-99 1 360.2 0 360.2 0.0 199-00 7 6694.6 4 250.26 57.1 2000-01 5 826.25 4 824.65 80.0 2001-02 14 2190.56 14 2190.56 100.0 2002-03 6 273.87 2 269 33.3 2003-04 2 655 0 0 0.0 2004-05 1 5200 0 0 0.0 2005-06 6 3919.1 1 71.57 16.7 2006-07 7 2254.94 4 1192.44 57.1 2007-08 14 3908.74 8 2249.97 57.1 2008-09 8 6380 2 875 25.0 2009-10 14 7677.35 6 5823.16 42.9 2010-11 15 18738.87 12 64.87 80.0 Source: Compiled from NHAI and AP PPP cell From the Table 3.8 above, it is observed that are only two PPPs initiated in A.P before 1998 and that is only in the road sector. The PPP projects increased from the year 2005-06 with the road sector also following the same trend. There is a decline in the year 2003-04 and then there is an increase in awarding PPP projects thereafter. 132

The same can be observed from Figure 3.11 below: Figure 3.11 Total PPP projects in all Sectors and Road PPP projects Source: Compiled from NHAI and AP PPP cell 3.8 Distribution of PPPs across States in India PPP in state highways started much later compared to the national highways. This is mainly due to the absence of a body like NHAI, proper policies and institutional strength at state level. However many as 15 states in India have adopted the PPP mode for developing infrastructure and Andhra Pradesh is one of the pioneering and leading state for PPP projects followed by Karnataka, Maharashtra, Uttar Pradesh. Table 3.7 shows the distribution of state highway PPPs. National highways covered under Phases I, II, III and V span across most states in the union of India. Therefore, the upgradation work on NH s has been (is being) undertaken in most states. As was stated earlier, regardless of the state, wherever possible the NHAI has tried to award up gradation works on PPP basis. However, some States have attracted more PPPs than others. That is, investors have shown preference for some States over others. 133

Table 3.9 shows the ranking of Indian states in terms of the number of PPPs attracted by them: Table 3.9 Distribution of PPP projects and Road PPP projects across different States Rank States No of PPP projects No of PPP Road projects 1 Karnataka 106 22 2 Andhra Pradesh 99 20 3 Madhya Pradesh 88 10 4 Maharashtra 77 28 5 Gujarat 65 14 6 Rajasthan 61 18 7 Tamil Nadu 45 24 8 Punjab 34 10 9 West Bengal 28 11 10 Orissa 27 11 11 Sikkim 24 2 13 Uttar Pradesh 18 15 12 Kerala 18 11 14 Haryana 14 8 15 Delhi 12 4 16 Jharkhand 9 0 17 Bihar 6 1 18 Assam 4 0 19 Chhattisgarh 4 0 20 Jammu and Kashmir 3 0 21 Uttarakhand 3 0 22 Goa 2 0 23 Meghalaya 2 0 24 Himachal Pradesh 1 0 25 Arunachal Pradesh 0 0 26 Manipur 0 0 27 Mizoram 0 0 28 Nagaland 0 0 29 Tripura 0 0 Source: Compiled from NHAI and pppindia database It is observed from the Table 3.9 above that out of all states in India, Karnataka, Andhra Pradesh, Madhya Pradesh, Tamil Nadu, Maharashtra, Gujrat and Rajasthan are the favourite 134

states and together these states account for as much as 50 percent of all PPPs in the country. States like Bihar, Orissa Kerala, Assam, Jharkhand etc. on the other hand, have failed to attract many of the PPP projects and north east states like Arunachal Pradesh, Mizoram, Manipur, Nagaland and Tripura have no PPP projects. Reasons for Skewed distribution of Road PPP projects across various states in India 1. Diverse size of State and length of highways passing through Indian states are quite diverse in terms of their size and the length of national highways passing through them. More importantly, there can be scope for forming a PPP only on projects that are parts of the highways up gradation programme undertaken by the NHAI. Therefore, it is quite possible that states like Uttar Pradesh and M.P. have attracted a fair amount of financial resources in PPP projects simply because NHAI has taken up many projects in these states. Similarly, Delhi and Punjab may be lagging behind not because projects located in these states are un-remunerative for toll based road facilities, but because NHAI has not taken up too many projects where PPPs could be formed. If there is not much up gradation work undertaken in a state, there is little scope for PPPs to add to the pot. Ceteris-paribus, the larger is network of highways (in terms of the length covered or the total costs of all projects) undertaken for up gradation the greater will be private investment, and vice-versa. 2. Legal and Institutional Framework for PPPs at State level In India, State governments have understood that achieving high volumes of private investment in infrastructure is not easy, therefore they found it necessary to develop an environment which is both attractive to investors and also seen to be fair to consumers. It 135

can be seen from table 3.8 that states which have taken initiatives for PPP development have more PPP projects when compared to other states which have taken no steps to promote PPP. 3. Traffic/Revenue Risk Under PPPs most of the construction and maintenance related risks are passed on to the private investors. Under BOT Toll contracts, the traffic and financial return related risks are borne by investors. Therefore, as one would estimate, several factors are likely to influence the decision making of the private investors in PPPs. For example, road projects with high projected traffic are more likely to attract PPPs. Other things held constant, the higher is the demand and willingness to pay for a better road service, more likely it is that the project will attract private investment (Ananth and Singh 2009). 4. Gross Domestic Product of the State (SGDP) A higher per capita SGDP is indicative of income as well as of the demand for transport services in the state. States with higher SGDP are also the states with larger number of economic activities that involve intensive use of surface transport, and vice-versa. Moreover, when average per capita income is high, average road user will be more willing and able to pay for the services of BOT toll roads. Therefore, states with relatively high per capita income are likely to attract more PPP projects as compared to the states with relatively low per-capita GDP. Table 3.10 shows the PPP projects initiated in each state with the investment made in PPP and the SGDP. 136

Sno State Table 3.10 State wise PPP projects and State Gross Domestic Product Gross Domestic Product of the state 2012 in RS Cr (Source: CMIE) No of PPP projects in all sectors (Source: pppindia database) Total Project costs in Rs Cr. PPP cell 1= Present 0= Absent State Govt Initiatives for PPP "1= Infrastructure dev. act or policy present " "0= Infrastructure dev. act or policy absent" State wise Total length of NH in KM ( Source: NHAI.org) 2012 No of Road PPP projects (Source: pppindia database) Road Sector Total project cost in Rs Cr (Source: pppindia database) Andhra 1 Pradesh 3732.14136 99 67999 1 1 4537 23+1* 15411.49 Arunachal 2 Pradesh 19.34272789 0 0 0 2027 0 0 3 Assam 382.8209987 4 391 1 1 2940 0 0 4 Bihar 600.6136297 6 422.04 1 1 4106 13+2* 10253.9 5 Chhattisgarh 298.6159716 4 838 0 0 2289 5 3172.03 6 Delhi 651.9186336 12 10877.2 1 0 80 2* 525 7 Goa 61.65585201 2 250 0 1 269 2 2343 8 Gujarat 1139.07676 65 18711.89 1 1 4032 14 13818.465 9 Haryana 588.749247 14 756 1 0 1633 7+8* 7587.2 Himachal 10 Pradesh 142.6565263 1 475 1 0 1506 1+1* 2015.09 Jammu and 11 Kashmir 173.3759616 3 6320 0 0 1245 4 7060.46 12 Jharkhand 380.7270827 9 681 0 0 2170 4+2* 4974.57 13 Karnataka 1069.90958 106 45699 1 1 4396 21+1* 14195.19 14 Kerala 649.7575821 18 11972.5 0 0 1457 7 6981.66 Madhya 15 Pradesh 899.048245 88 7788.55 1 1 5064 14+2* 12753.29 16 Maharashtra 2585.81446 77 45979 1 0 4257 19+2* 19174.665 17 Manipur 36.09048456 0 0 0 0 1317 0 0 18 Meghalaya 42.54832049 2 762 0 0 1171 3 1152 19 Mizoram 17.9395432 0 0 0 0 1027 0 0 20 Nagaland 27.94035241 0 0 0 0 494 0 0 21 Orissa 445.5648367 27 7623.44 1 1 3704 8 7574.45 22 Punjab 710.087273 34 1543.98 1 1 1557 5+3* 3353.18 23 Rajasthan 934.549562 61 5253.41 1 1 7130 14+2* 11885.89 24 Sikkim 9.04847432 24 7110.59 0 0 149 25 Tamil Nadu 1401.80423 45 12451.78 1 0 4943 28 15224.77 26 Tripura 51.83130081 0 0 0 0 400 27 Uttar Pradesh 1891.83282 18 28570 1 0 7818 20+6 17342.37 28 Uttarakhand 136.7683703 3 1275 1 1 2042 0 0 29 West Bengal 1451.33283 28 2055.4 0 0 2681 9+2* 8349.3 137

Regression analysis is conducted to understand the relationship between investment in PPP projects for infrastructure and State Gross Domestic Product (SGDP). Two levels of regression analysis were carried out. In the first level the relationship between PPP projects in infrastructure and SGDP. The independent variable was GSPD and the dependent variable taken was PPP project investment as seen in Table 3. 11 below. The hypothesis set was: Ho: There is no relationship between SGDP and investment in PPP projects by each state Regression Statistics Multiple R 0.86 R Square 0.74 Adjusted R Square 0.73 Standard Error 9286.18 Observations 24 Table 3.11 Relationship between PPP Projects & SGDP ANOVA df SS MS F Regression 1 5356793811 5.4E+09 62.1199 Residual 22 1897129724 8.6E+07 Total 23 7253923536 Significance F 7.55419E- 08 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept -2824.62 2662.21-1.06 0.30-8345.71 2696.47 GDP 0.1735 2.20 7.88 0.00 12.78 21.92 138

It is observed from Table 3.11 that the correlation between the two variables is.86 which shows that there is a positive relationship between investments in PPP projects for infrastructure with SGDP of each state. Adjusted R Square of 0.73 & a significance level of 7.55E-08 indicate a Goodness of fit of the regression equation along with a strong relationship between SGDP of each state and PPP project investment in the state. Regression equation is given as: Investment in PPP projects = -3713.462 +17.883GSDP The null hypothesis is rejected as p-value is less than.005 the alternate hypothesis is accepted that there is relationship between SGDP and investment in PPP projects in each state. The second level of regression was carried out to find the relationship between total investments in PPP projects in all sectors to investment in road PPP projects in each state as can be seen in Table 3.12. 139

Table 3.12 Regression Analysis for relationship between PPP projects in each state to PPP projects in Road sector Dependent variable Amount invested in Road PPP Projects Independent Variable Amount Invested in PPP Projects in all sectors Multiple R 0.69 R Square 0.48 Adjusted R Square 0.46 Standard Error 4197.95 Observations 21 ANOVA df SS MS F Significance F Regression 1 312493904.8 3.12E+08 17.73 0.00047331 Residual 19 334833206 17622800 Total 20 647327110.7 Coefficients Standard Error t Stat P value Lower 95% Upper 95% Intercept 6019.42 1131.55 5.32 0.00 3651.05 8387.78 PPP Projects 0.21 0.05 4.21 0.00 0.11 0.32 From the Table 3.12 above it is observed that there is a positive correlation between investment in PPP projects and investment in road PPP projects. Out of every INR 1cr invested in PPP projects, INR 0.21cr is coming from the Road PPP Sector. Road PPP Sector is contributing 21% to the total investments in the infrastructure projects. Regression equation is given as: Investment in PPP projects in each state = 6019.42 +.21 Invst in Road PPP projects 140

3.9 Trends of PPP projects in Andhra Pradesh Andhra Pradesh is the fourth largest state in the country which has been agriculturally prosperous and now has also emerged as the key state for IT, pharmaceuticals and biotechnology. Over 70 of the 500 top global corporations are present here. It is the first state to have a comprehensive ITES/BPO Policy and also offers a wide range of fiscal and policy incentives for businesses under the Investment Promotion policy 2010-2015. (www.ibef.org). The state is a key player in the country's power sector with the highest hydel power generation and with its proactive policies ensures a good investment climate for investors contributing to a GSPD of US $85.8 billion in 2009-10. The Government of A.P (GoAP) has taken proactive measures towards PPP approach to facilitate infrastructure for sustainable economic development. The strategy paper on infrastructure by government of A.P envisages that infrastructure is one of the 17 growth engines identified that will create the highest economic impact in short term. The study conducted by Majumder (2008) on infrastructure and regional development in India concluded that there is a multiple and complex linkage between infrastructure and economic growth, as infrastructure affect production and consumption directly and production and consumption affect the GSDP of the state. There is a positive growth trend in GSDP and number of PPP projects initiated for development of infrastructure in A.P in Table 3.13 below and Figure 3.12 below: 141

Year Table No: 3.13 Year wise GSDP and PPP projects in A.P GSDP at current prices 2006-07 (Rs in Cr) No of PPP projects initiated in A.P Cumulative No. of PPP projects in A.P Total Project Cost ( Rs in Cr) Cumulative Project Cost in ( Rs in Cr) Before 1999-00 3 3 1,246 1,246 1999-00 1,28,797 7 10 6,695 7,941 2000-01 1,44,723 5 15 2,830 10,771 2001-02 4,56,711 14 29 2,291 13,062 2002-03 1,67,096 6 35 2552 15,614 2003-04 1,90,017 2 37 2755 18,369 2004-05 2,11,802 1 38 5,450 23,819 2005-06 2,39,683 6 44 3,919 27,738 2006-07(R ) 2,77,286 7 51 3,355 31,093 2007-08(P) 3,26,547 14 65 3,909 35,002 2008-09(Q) 3,77,346 8 73 6,480 41,482 2009-10(A) 4,06,641 14 89 7,678 49,160 2010-11* Not compiled 15 103 18,739 67,899 R- Revised P Provisional Q Quick A- Advanced Estimates Source: compiled from Directorate of Economics & Statistics, A.P &www.ppp.ap.gov.in Figure 3.12 Growth Trend of GSDP and PPP projects in A.P 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Value Rs Cr 16 14 12 10 8 6 4 2 0 No of PPP Projects GSDP (in Rs Cr) No of PPP projects Growth trend of GSDP(in Rs Cr) Growth Trend of PPP projects Year Source: compiled from Directorate of Economics & Statistics, A.P & www.ppp.ap.gov.in 142

The Government of Andhra Pradesh has taken many initiatives to promote PPP projects for development of social and physical infrastructure in the state which have turned out to be positive and have enabled the state to keep in pace with the target of Eleventh Five Year Plan. 1. A.P is the first state to enact the Infrastructure Development Enabling Act (IDEA) which came into effect from August 2001.This act provides guidelines for process for selection of developers, addresses issue of project delivery process, risk sharing, dispute resolution and collection of user charges. It applies to all infrastructure projects implemented in the state. 2. An AP state PPP cell was created in April 2007 under the Department of Finance, Government of Andhra Pradesh as per the MOU signed by the Department of Economic affairs, Ministry of Finance, Government of India for mainstreaming PPP projects at state level. It is a nodal agency for processing all PPP projects in the state. The PPP cell has created a repository of all information relating to PPPs in state, including best practices, guidelines, schemes, and shelf of projects which can be undertaken through PPP route. The cell coordinates with all the government departments and Ministries of state at all stages of Project development and also interacts with PPP cell at central level for proving assistance through Viability Gap Funding. The PPP cell has signed a Memorandum of Understanding (MOU) between Asian Development Bank (ADB), Department of Economic Affairs (DEA) and the State Government to provide advisory technical assistance under ADB Technical Assistance Project. 143

3. Infrastructure Corporation of Andhra Pradesh (INCAP) was set up in May 2005 as a public limited company under the Department of Infrastructure and Investment, Government of A.P to identify, conceptualize, promote, advice and to create Special Purpose Vehicles (SPV) that will provide impetus to infrastructural projects on PPP mode in the state. Some of the major projects undertaken by INCAP are Development of Krishna Godavari Gas Network in energy sector, Outer Ring Road Project for Hyderabad, Development of Inland Water Ways, all new Airports, development of District Central Library at Visakhapatnam etc. It is designated the role of a developer, advisor, financier and manger to render a full range services from in every phase of project development from inception to completion. 4. Andhra Pradesh Industrial Infrastructure Corporation (APIIC) incorporated in 1973 provides industrial infrastructure through development of industrial areas. It has developed more than 300 industrial parks, food processing zones and Special Economic Zones (SEZs).The first successful PPP project was HITEC City project in 1996 with 89% equity by L&T and 11% by APIIC in shape of land. The Corporation is a principle facilitator in developing mega projects like Visakha Industrial water supply, Gangavaram port, Hyderabad International Convention centre, Pahamlylaram Financial District Hardware Park etc. The corporation is a nodal agency for government sponsored growth centres, export promotion, industrial parks and integrated infrastructure development centres. 5. "Infrastructure & Investment department" has been created by the GoAP to achieve the development and growth objectives of the State through creation of adequate and 'state-of-the-art' infrastructure facilities in the State. The Department 144

is responsible for facilitation and monitoring of the Project from conceptualization to the last stage in project delivery. For this purpose the department utilizes the services of Andhra Pradesh Invest, Andhra Pradesh Infrastructure Authority (APIA) for facilitating Public Private Partnership (PPP) Projects in infrastructure and INCAP for execution and monitoring of infrastructure projects implemented by it, and also the technical support staff such as Engineering Departments of the respective line departments. 6. AP Urban Finance and Infrastructure Development Corporation (APUFIDC) is a nodal agency for improving urban infrastructure, monitoring reforms in Urban Local Bodies(ULBs) of A.P under Jawaharlal Nehru Urban Renewal Mission(JNNURM) and provides financial assistance by way of loans and advances, technical or any other assistance and guidance to the Urban Local Bodies, Municipal Corporations, and Urban Development Authorities. JNNURM in A.P has 95ULBs under it and has received sanction for 268 projects costing 12,528 crores out of which 27 infrastructure projects costing Rs 1143 cr are completed which is a big step in improving the quality of life for citizens in urban A.P. 145

Figure 3.13 Initiatives by Govt of A.P and GOI in the PPP Project Process Infrastructure Development Enabling Act, 2001 Identify to meet the gap in Service Needs Set make a shelf of PPP projects Infrastructure & Investment AP PPP cell INCAP APIIC In Coordinati on with Preparation of Initial screening report and approval by Government / statutory authority, training officers for PPP capacity building Project Feasibility analysis Development of contractual structure, bidding structure, financial structure, legal documentation Project Bidding Process Creation of SPV, Final draft of Concession Agreement and key project Financial support through VGF, Long term debt finance through IIFCL etc. Sector specific organisations like Roads - NHAI, APRDC Urban Infrastructure -ULC, GHMC Water & sanitation: HWSWB Power: APGENCO, APTRANCO, APCPDCL Airports: Airport Authority of India Ports: Ministry of Surface transport Railways: Ministry of railways Monitoring Performance and cost Operations Stage Contract closure and asset transfer stage Source : Complied by the Author. 146