Eastern Dedicated Freight Corridor: What will determine PPP success
The Dedicated Freight Corridors have progressed slowly, and now, a portion of the Eastern DFC is trying to attract private interest under PPP. Vishnu Sudarsan and Shashank Vikram Singh of J Sagar Associates identify the embedded factors that could be sticky, and suggest what to do about them.
The Eastern Dedicated Freight Corridor Project (EDFC) project is part of India’s ambitious Dedicated Freight Corridor (DFC) programme, with the potential to create a mammoth network of freight cargo operations. The 1,840 km EDFC project starts in Ludhiana in Punjab and ends in Dankuni in West Bengal.
The Dedicated Freight Corridors have progressed slowly, and now, a portion of the Eastern DFC is trying to attract private interest under PPP. Vishnu Sudarsan and Shashank Vikram Singh of J Sagar Associates identify the embedded factors that could be sticky, and suggest what to do about them. ----------------- The Eastern Dedicated Freight Corridor Project (EDFC) project is part of India’s ambitious Dedicated Freight Corridor (DFC) programme, with the potential to create a mammoth network of freight cargo operations. The 1,840 km EDFC project starts in Ludhiana in Punjab and ends in Dankuni in West Bengal. The World Bank is funding up to $975 million (approximately Rs 7,142 crore) of the project cost of the 1,200 km Ludhiana-Mugalsarai stretch of the EDFC project with an estimated total project cost of $1,458.44 million (Rs 10,683 crore). The Ministry of Railways, through the Dedicated Freight Corridor Corporation of India Limited (DFCCIL), has been actively trying to elicit interest from private-sector participants to implement the final 538 km Sonnagar (Bihar)-Dankuni (West Bengal) stretch of the EDFC project on public-private partnership (PPP) basis at an estimated total project cost of Rs 15,000 crore ($2.04 billion). The World Bank is likely to extend support for the Son Nagar-Dankuni stretch as well. As per public data, the proposed concession framework, which is still under finalisation by DFCCIL, envisages that the concessionaire would construct the line and maintain infrastructure (civil engineering, signalling, overhead equipment [OHE] and station building) of a period of 25 years. In the event 80% of projected total traffic is not achieved within a target date of 20 years, the concession period is likely to be extended by one year (corresponding to every 4% shortfall) and the reverse will be applicable if actual traffic exceeds threshold traffic. However, the minimum concession period guaranteed to the developer would be 20 years. The PPP model is not new for the Indian infrastructure sector, with concession agreements being the familiar tool for PPP project implementation. Upon completion of the negotiations between the private participant and DFCCIL, the concession agreement would require approval from the central government. Any major deviations from the model concession agreement framework are likely to be faced with resistance. It is understood that the model concession agreement for the EDFC project is still under finalisation and DFCCIL is still in the process of finalising other critical inputs, such as detailed project reports, traffic projections, and viability studies. Another key element that will decide the course of PPPs in dedicated freight corridor development would be the qualification criteria. In the past, Indian Railways has been known to include qualification criteria mandating experience in India rather than international experience of recognised project proponents. As maintaining the asset will be key to the concession, the emphasis should be on the overall operation and maintenance (O&M) experience of the developer rather than exclusion of bidders simply based on geographic limitations. While equitable risk allocation is the cornerstone of PPP project structuring and implementation, certain risks while being allocated to the public sector directly impact the concessionaire and overall success of the project. Land acquisition remains one of the most challenging aspects of PPP project execution in the Indian context. The land acquisition process has been hampered mainly owing to myriad reasons, including local hindrances and agitations, arbitration cases, demand for compensation by landowners and, in some cases, demand for lease rent by government authorities, eventually leading to delay in taking possession of land for road under-bridges, overbridges and high-tension lines forming part of the corridor. Finally, the most vital aspect of the concession framework will be the clear identification of termination events and payouts applicable in such termination scenarios. These are generally spread over termination because of defaults attributable to the authority, defaults attributable to the concessionaire and defaults occurring owing to force majeure, including change in law. In India, across sectors, the governing concession agreement framework with respect to termination payments has been consistent. If all the triggers of occurrence of a change in law event are met, and if the consequences of such an event cannot be dealt with, and the effect (in financial terms) of such change in law exceeds the compensation to be provided by the authority under the change in law resolution procedure, such an event would qualify as a ‘political force majeure event’ for a specified period. In this scenario, a concessionaire will be entitled to relief, which usually includes full repayment of the debt and a reasonable return on equity. In case of a change in law after the commercial operations date, private participants would expect relief in the form of extension of the concession period, interest payments on debt, O&M expenses and any increase in the cost of construction works directly attributable to such a political force majeure event. Hence, to sum up, to maximise private-sector participation under the PPP route in dedicated freight corridor projects, an evolved and well thought-through concession agreement that addresses the concerns of private participants will be pivotal. Authors: Vishnu Sudarsan and Shashank Vikram Singh are Partners at law firm J Sagar Associates. Image: A 2015 map showing status and plans of the Eastern DFC.