An Indian government agency helmed by a former civil servant sprang a surprise last week by suggesting that the trigger for renegotiating a port concession agreement to address stress facing a cargo contract should be erosion of net worth by 50% and two years of cash losses.
The suggestion by the National Shipping Board, led by former shipping secretary Vishwapati Trivedi, seeks to take forward a key recommendation made by the government-mandated Kelkar panel that was tasked with revisiting and revitalizing the public-private partnership (PPP) model of infrastructure.
The National Shipping Board is the highest advisory body on matters related to Indian shipping and matters arising out of the Merchant Shipping Act, 1958.
While the panel headed by economist Vijay Kelkar laid down the broad framework for dealing with project stress and renegotiating a concession agreement without giving any scope for “abuse and undeserved gains” arising from such an exercise, it left a decision on what would constitute a trigger for stress and subsequent renegotiations for the government to define.
The panel, in its report submitted to the government last November, suggested an Infrastructure PPP Project Review Committee (IPRC) and an Infrastructure PPP Adjudication Tribunal (IPAT) to be set up for dealing with the complexities involved in the renegotiation process.
The National Shipping Board said it had proposed the trigger keeping in view the fact that a renegotiation should not be aimed at maintaining a required return on investment (which the Kelkar panel had also alluded to) and that the losses incurred by the project do not result in a compete erosion of its net worth.
The National Shipping Board’s recipe for a stress test to facilitate renegotiation is an accountant’s way of defining insolvency and mirrors the template followed by the soon-to-be redundant Board for Industrial and Financial Reconstruction (BIFR) while dealing with sick companies.
By the time a project’s net worth is eroded by 50% and it is running cash losses for two years, it becomes a terminally ill patient. At that stage, it’s too late to undergo a renegotiation. It doesn’t work.
A trigger mechanism cannot be measured in accounting terms.
Generally speaking, a trigger mechanism should arise whenever a PPP project is unable to achieve materially what it has projected in its business plan at the time of placing the bid.
For instance, if a cargo terminal designed to load iron ore becomes idle due to a ban on production and export of the commodity or if a power project is unable to import coal at the price factored in at the time of bidding, those become a trigger.
Because, why should the shareholders fund losses of a project? Trigger is a forewarning that something has materially changed. If you wait for all these accounting symptoms to appear before deciding stress, it will fail miserably. That’s not the right way to deal with stress.
BIFR had a different background origin. But, unlike the BIFR, the PPP project promoters may seek an external intervention at the first adverse turn facing the project.
The BIFR definition of stress is good for a competitive business where there is no concession. For instance, a biscuit/noodle maker may post losses this year but may turn around next year.
In such cases, interventions to deal with stress can wait till there is complete proof of erosion of competitive value/competitive power in the market.
PPP in infrastructure is not a free market, it is a concession market and a concession market business model depends not on free business but on business endowed by a concession.
PPPs in infrastructure refer to the provision of a public asset and service by a private partner who has been conceded the right (the concession) for the purpose, for a specified period of time, on the basis of market-determined revenue streams that allow for commercial return on investment.
When an infrastructure project fails, the government fails and the public suffers. Then the shareholders also suffer. Given the public interest in infrastructure, a shareholder-based measurement of stress such as net worth erosion and cash losses may not be the right approach. Besides, the government is also a stakeholder in PPP projects.
Basically, the trigger has to be pro-active without looking at it from a shareholder’s perspective.
The objective of PPP is not to enrich a shareholder; he should also make returns commensurate with his risks. The erosion of net worth and cash losses cannot be the deciding factor for a remedial action because this takes into consideration only one stakeholder at the neglect of others.
And, even if the interest of the private shareholder becomes paramount while deciding stress, it would be better not to wait for a stage till he bleeds. When a project faces a substantial variation, say about 20% from his original financial model, that’s the time to intervene.
BIFR, in any case, will soon fade into history once India’s Bankruptcy Code takes effect.
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