Report On Widening Of The Surat-Navsari Highway In India

Introduction

The cities of Surat and Navsari, in Gujarat, India are connected by the Surat-Navsari Highway (250km). The road connecting the two cities is currently a 4-laned road which is facing the constant traffic congestions. Also that part of the state receives most of the rain of the country. This make the roads vulnerable to damage like pot-holes and poor drainage leads to water clogging on the roads, resulting in more accidents and traffic jams during this season. In order to take care of the issue, the NHAI (National Highway Authority of India) has decided the road is proposed to be widened to 6-lanes. Moreover, the NHAI has a plan of developing all the highways as “Green Highways”, promoting plantation of local flora around the road and maintain the same throughout.

Public-Private Partnership

1. Principle of PPP

The basic principle of PPP is that a public-agency (mostly being the government) has specific requirements for construction/operation of a service/facility for the public use, such as a hospital, road, bridge, etc. but the entire process of design, finance, execution, operation, (and sometimes even ownership) is passed on to a private-agency for a particular period of time, generally lasting over 20 years. This makes the public entity to access the facilities without immediately bearing the capital cost of the construction/operation. The private-agency is normally a consortium of various private organisations which come together and for a SPV (Special performance vehicle) made specifically for a particular government project. The members of this consortium includes third party financers, designers, contractor, facilities management team, etc. In the past projects undertaken by the PPP format/s there has been a great advantage seen in the early completion of the projects which are also economic. According to the condition given, the NHAI being the public agency wants the construction of the highway between the two cities of Surat and Navsari. The NHAI appoints an association which is ready to take up the responsibility of the finance, design and construction on the existing road without being much hinderance to the daily commuters of that road. In this case the private sector would include financer+ consultant+ contractor+ professional plantation agency. Once the construction is complete as per the requirements, the association is asked to maintain the road throughout its contract period.

2. Merits

In India generally the public sector suffers from poor quality of work, constant repairs and maintenance of facilities leading to service disruptions, loads of power politics and parochialism. This makes the sector lack the expertise in providing the requisite services with the up to mark serviceability. Hence the greatest advantage that the PPP would provide is for the public sector to benefit from the new technology, innovation in design, execution and operation, also in better financial structure and risk mitigation measures. Moreover, the private sector would have a better experience, and resources for the execution. The other great aid from this form is the FINANCIAL assistance. The private financers who are a part of the SPV, can mobilise their funds in order to provide for the project at hand. This greatly reduces the national debts and expenses. This doesn’t mean that the private sector has a upper hand. The private sector is driven by profit, also they can be easily replaced. Therefore if they do not provide the requisite quality and serviceability they’re motivated to keep improving their quality or they tend to lose their revenue and most importantly the entire project. The kind efficiency shown by the private sector in PPP has lead not only to the early and low budget completion of great satisfactory projects but also on the operational stage the results have been largely positive. The projects have high customer satisfaction and even higher volumes of service, as the private sector will earn better from reaching out to more public.

3. Demerits

It is one thing to have the burden of risk to be entirely to the private sector from the public sector, but this mode also holds certain drawbacks which if not looked after could lead to the project being affected to a great extent. One of the greatest risk is that the PPP agreements are for 20-30 years or sometimes even more. During this duration there could be various political, economic and social transformations, such unforeseen occurrences could lead to the project being influenced economically and such sudden alterations can be very difficult to anticipate. These can also eventually lead to project being terminated altogether. Second major issue is the forecasting of the demand for the project. It’s important to understand whether the public consumers of the project are willing to accept it and its use is only as per the foreseen predictions. If not, then the project can also lead to a huge loss, which the government would have to bear for the private entity. Hence it is very important to not only carry out the feasibility study but also the current and the future market demand. Lastly the imposition of tariffs for the project by the private sector. The main aim of the private organization is to earn as much profit from the project execution and hence they could raise the tariffs to make the project economically feasible for them. This can be controlled by the government by controlling the budget and also the concession period of the private sector.

Analysis of PPP Formats

1. BTO

BTO which is an abbreviation for Build-Transfer-Operate. As the name suggests the basic principle of this is for the private sector to design and build the project, and upon the completion of the construction the ownership of the project is transferred to public sector, while its operation and maintenance still remains under the private sector. It is mainly suitable for high risk or low financial return projects. For this particular project the NHAI has to approach a private party which would finance, design, build and operate the highway. But after the completion of the construction of the road the ownership is “transferred” back to NHAI. Whereas the private body will continue to operateand maintain the road. This is generally taken into consideration when the SPV includes a foreign/international participant. Hence letting the government keep the asset under its name and run the operation smoothly by the private sector till the period mentioned in the PPP agreements. Also since this project doesn’t carry as much risk but expects better financial return from the toll, this format can be neglected.

2. BOT

BOT stands for Build-Operate-Transfer. According to this format the private party after the completion of the entire construction, operates and maintains the facility as per the period mentioned in the contract. The public body will hold the ownership of the facility throughout, only at the end of the contact the private party passes the ownership of O&M as well to the public party. This means that during the period of contract the private party will always be answerable to the public body. Also the private party finances the facility whereas the private body builds and operates it. Hence the risk associated with construction, operation and maintenance lies with the private entity. NHAI commonly uses this form of PPP with a concession period mentioned in their agreement. This is mainly because of the authority control by the NHAI throughout. It’s in this period that the private party earns back all its cost. Also since this is a highway of a greater distance it is advisable to go ahead with this format. The foremost reason being that the NHAI already has had experience working in this format, and has many successful results too. One example being the Ahmedabad-Vadodra Express Highway, which was not only completed 2 years ahead of schedule but is also successfully running smoothly with nearly no accidents faced every year since its opening in December 2015. The private sector here was the IRB which earns its payment in the form of nominal tolls imposed on the users. The NHAI also already has the trusted private parties which they have worked with before in this format who can execute this project. This would save a plenty of time and cost, making the project a reality sooner.

3. BOOT

BOOT is Build-Operate-Own-Transfer. According to this format, the private consortium finances, designs, builds, operates and owns the project as per the duration mentioned in the PPP contract. This is very similar to BOT. The thin line of difference being that in BOOT the private party is the key financer and would bear any equity risk being the sole owner of the asset. In other words the private party can take independent decisions over the facility, but needs to stick to the conditions mentioned by the public party in the contract. The NHAI can also consider this format as one of its option as then the financial burden would be directly transferred to the private consortium.

Normally this is to be adopted if the NHAI has a financial gap and is not able to finance for the project. The rest of the procedure would remain as the BOT is. But before the start of the project NHAI should have a thorough study about how the private body will finance the project throughout and also, they would hold no power over decision apart from that only mentioned in the contract which the private body would be bound to follow. This would help mitigate the risk of failure due to unforeseen financial issues faced by the private body. Similar to the above in this format, the private body would operate and maintain the road for NHAI for a period as mentioned in the PPP contract.

4. BOO

BOO stands for Build-Own-Operate. This is all similar to the BOOT, but here the private body doesn’t pass the ownership back to the public body at the end of the contract. They keep the asset under their ownership, meaning complete privatization of the facility. Under this the NHAI literally would not hold any authority whatsoever once the contract is signed. This would greatly affect the NHDP (National Highway Development Plan) because this particular road would simply not be a part of it and also the private body would have an upper hand to exploit their ownership. This would affect the users critically, for the NHAI would not be able to control the tolls or the standard of operation or maintenance of that road. The NHAI also has plans for the Green Highways, which also probably will not be followed if there is complete privatization of the road, because of it being uneconomic to the private body and their primary goal of earning profits stands first. Hence, this for cannot be used for this form of facility.

Private Finance Initiative

1. Introduction

The Private Finance Initiative (PFI) is the very first form of PPP agreement. It came into existence in the 1990s, when the government is not able to fully/partially finance the project in the construction and/or operation phase. This is also adopted when the government wants more emphasis on the “quality” of the service rather than the asset itself. In this form, the principle of “user pays” is not used, i. e. , in other words generally in other formats of PPP during the operation stage the “users” of these facilities are the ones who directly pay to the private parties for example in roads they pay tolls; but in this form the public body pays the private party annual/semi-annual payments. These payments are called UNITARY CHARGES, and is divided into two:

1. Avaibility Charges: In simple words, this is the payment done for providing the specified facility as per the requisite quality which would be finally available for use to the consumers. Hence if the provider fails to keep the facility in its maintained form the public body can withhold their Avaibility charge.
2. Serviceability Charges: As the name specifies, these charges are for the quality of the service that their facility would provide. Even after providing the facility the private party fail to run it as per the required standard mentioned in the contract the public party wouldn’t pay them their serviceability charge until they get it right.
2. Viability of PFI for Surat-Navsari Highway

For NHAI this form isn’t as new for it to be applied for the highway construction. The finance mode is annuity model with fixed semi-annual payments. In this form the NHAI has toappoint a SPV (in other words a private party) which would like in a usual PPP contact finance, design, build, operate and maintain the road till the terms mentioned in the agreement. The difference here would be that the private party would not be able to put in a toll to be collected from the users. Instead the NHAI would have to directly pay them annually or semi-annually. This is done by putting certain terms of the road maintenance and provision of certain facilities on the road like a rest area for the drivers to have a break, providing restrooms/washrooms at certain distances which have to be maintained and keep up to the NHAI recommendation, and also the maintenance of all kinds of plantations around the highway to not only beautify it but also meet the standards of the “Green Highway”, etc. If the SPV fails in providing the facility or the service the NHAI can deduct from their charges accordingly.

As such this form isn’t difficult to execute, but there are certain negative impacts of implementing this form of PPP. The primary being that the private party has no direct income from the users hence in order to make the project economic for them they would put in higher bills. The NHAI collects the road tax from the citizens, it is through this that the NHAI can fund for any traditionally procured projects. If PFI is to be selected as the procurement route then the NHAI will have to pay the private party the unitary charges from the road taxes collected. In order to meet their needs the NHAI could plan to increase the road tax, causing the citizens to pay more tax. Hence it doesn’t look a very satisfying picture for the user, as it will only increase the burden upon their taxes. Whereas if the BOT format is used the NHAI can keep a control over the toll rates which wouldn’t be very heavy on the pockets of the users.

Basic Procurement Routes Analysis

There are basic procurement routes which are normally and largely adopted in the construction industry. These are the routes are typically those which are used for the construction of independent bodies of client and the contractor. The basic forms are:

• Traditional/General Contracting
• Design and Build
• Management Contracting
• Contracting Management.

1. Traditional Contracting

Under this form of contracting the client invites the contractor to execute the construction for a finalized design which they have prepared from a consultancy. This basically separates construction from design. This is a very common and ancient form of contracting. In simple words the contractor is required to build what is designed by the architect, and the contractor puts a price for the works to be executed. This is the basis for which the contractors compete and the one with the lowest rate (normally) wins the contract. For this highway project, the very first requirement would be to have detailed plan ready for the road map and the provisions to be provided on the road before inviting tenders. After the plans are ready they would have to call for competitive bidding through newspapers or float e-tenders. This entire process will not only cost them a lot of money but also time required for all of this is too much. Apart from this the NHAI will have fund not only the construction but also the design aspect of the project and this includes cost-overruns. Another drawback to this would be that not all eminent contractors would have this opportunity, this would also sometimes lead to wrong selection of tenderers. Even after the facility is built the NHAI will have to take the responsibility of operating and maintaining, which would result in costing them more money. Moreover, the liability period would be short, this isn’t sufficient when talking about highways. All of this process would lead to not only high investment by the NHAI at once, but also consumes a lot of time, delaying the project over time.

2. Design & Build

In the traditional method of procurement, there is a separation of design and construction, this led to several management and coordination issues which resulted in cost and time overruns. Also, the client is not always sure about their requirements and their design faces several variations throughout the construction process. In order to avoid that, a better form of procurement was developed, called the design and build. As the name suggests the entire process of design and construction of the project is carried out by the contractor. The client usually would have a set of requirements with which they would approach a contractor. The contractor would put forward certain design proposals, the extent of the details in the design lies in the hands of the contractor. Hence during the competitive bidding, the range of options available in terms of design is available in plenty for the client. Moreover, the client also has options assessed in terms of the cost proposals given by those contractors. For the contractors to come up with the designs they can either have an inhouse design team or could appoint a consultant. In some cases, the client works with a consultant for some certain partial designs, and after a contractor is appointed, the client “novates” the consultant to the contractor where the further detail plans are made. The NHAI has already worked on several D&B contracts, but those normally where not for the national highways. It wouldn’t be a bad option to just neglect though. This form of procurement keeps the NHAI away from the risk of designing of the road. Also the NHAI can appoint a well-known consultant and novate it to the selected contractor, or simply invite tenders from contractors for D&B. The NHAI would still have control over the required design and the construction but carry no risk over them. They would also have nearly accurate price available prior to the construction upon satisfaction of the design. Moreover, the project duration will be comparatively shorter than that in the traditional method. They wouldn’t face any management issues, because of clear lines of power and communication presented in this mode of procurement. Therefore, the greater benefit would be a more economic project with better and effective construction methodology. However, the NHAI will have to be the sole funder for this, hence they would have to reserve/use their allocated national budget or loan from other sources like the World Bank.

3. Construction Management

In this form of procurement, the client divides the entire project into several work packages. These packages are then let to several potential sub-contractors by competitive bidding. The client appoints a construction manager who has the responsibility to coordinate and effectively manage the execution of the works by these subcontractors. But the construction manager has no direct contractual links with the subcontractors. This method is quicker and more reliable as more experts are directly linked to their respective jobs and the presence of a construction manager ensures efficient management of those jobs. However, this form works best when the teams have worked together before, this makes their coordination easier. In case of unfamiliarity or projects with higher risks the teams tend feel vulnerable. For the following highway project, the NHAI would have several components into which the project will be divided. For example, the construction of the asphalt road, the supporting infrastructure such as restrooms, rest areas, toll collection booths, etc. These components/work packages can be designed separately and then competitive bidding for each is to be done. The chosen subcontractors would work under the appointed construction manager, who would carry the risk of management. Although the risk of design and/or variations lies under the NHAI. However there stands a major risk of incompetence of management in power or communication leading to project cost and time over run.

4. Management Contracting

This procurement form is quite similar to the above, the difference being that the client has the project divided into packages and appoints a construction manager who further appoints the subcontractors for giving away the work packages. Hence the client would involve the construction manager at an early stage seeking the assistance in the construction expertise for better design and execution with efficient management. It is to be kept in mind that the construction manager is only to manage and coordinate the works, the execution is carried out by the subcontractors who are allocated the works. The NHAI has to appoint a construction manager, who further will let the work packages to subcontractors. Even though they would have control over the design by appointing consultants for it, they would be at greater risk in case of variations. The subcontractors would increase their costs which the managing contractor would add in to his costs and then present to the NHAI. Moreover, this method is more efficient in case the client is new to construction or doesn’t have a particular scope set for the project. This is not the case here, NHAI has had a lot of experience in road development, hence this method isn’t suitable here.

Conclusion

From the above report for the widening of the Surat-Navsari Highway, the NHAI as it has performed in their previous successful projects, can carry out the work using the BOT model of PPP. Their expense and time both can be saved, without compromising on the use of better technology and also getting better operation and maintenance of the Highway. If it has to proceed with any of the basic procurement routes, NHAI should first be financially be sound to make payments to the contractors and consultants. It can go ahead by working under the “Contracting Management” route where they can allocate the work packages to potential teams on their terms and involve the construction manager for the sole purpose of management and efficient execution.