India - PPP;Bid wiser (G.Read)

Vinayak Chatterjee

The new bidding guidelines for PPP projects have kicked up a storm. Yet, India does need a structured approach.


On December 5, 2007 the Ministry of Finance issued the “Guidelines for Pre-Qualifications of Bidders for PPP Projects.”

In March 2008, the National Highway Builders Federation filed a writ petition before the Delhi High Court challenging these new bid conditions. Domestic infrastructure developers (small, medium and large) have uniformly ranted and raved against these guidelines, and various industry associations have made strident representations against it.

To understand the issue, one must delve a little into economic history. The socialist years saw the sarkari lowest-cost-tender-system. This was followed by EPC. Then came the early ’90s with private investment in infrastructure. Unfortunately the symbol of this became Enron, and “sweetheart deal” and “gold-plating” got embedded in the national psyche. The process thereafter shifted to ‘competitive-bidding’.

Controversies erupted — Delhi airport and ultra-mega, to name just two high-profile cases. Our political and bureaucratic leadership finally woke up and found it well nigh impossible to carry on in a manner where any constituent of the federal and state governments, and the 5,000-plus urban local bodies is allowed to go around ‘developing’ its own bid parameters on the specious logic that ‘every project is unique’. At a broad national level, India needed to find a template that:

•Made for greater transparency in the bidding processes, evaluation and selection.

•Weeded out non-serious or unsuitable developers from attempting to grab key national infrastructure projects.

•Provided greater uniformity in bid design and structuring.

•Created a positive environment for attracting FDI in Indian infrastructure.

So, while the guidelines have been generally welcomed, four broad areas of concern have been voiced.

Excessive Weightage for “Development”
There is a scoring system for measuring the Applicants’ experience. Here, the weightage, a multiplying factor, given to revenue from development of projects is higher than that for implementation of projects. This is thought to benefit larger companies vis-à-vis smaller companies; as well as favour foreign companies over Indian. This ‘weightage-factor’ is shown in the table. Also shown alongside is the suggestion made from different quarters for its revision.

The guidelines presently also allow for any designated Authority to modify any factor by upto one-third in any category. This flexibility is thought to have potential for misuse.

Suggestions have, therefore, been made to have a fixed norm as shown alongside for all projects to remove arbitrariness and bias inherent in a project-to-project approach.

Number of Shortlisted Bidders Capped at five
Only those ranked at the top five are currently invited to bid.

No major mega projects of the kind now being conceived and being bid out have hitherto been developed in India. It is felt that foreign bidders will score far higher than Indian bidders because of the size of their projects, disparities in currency value/purchasing power parity, and the much earlier start of the infrastructure-privatisation game in developed countries.

As a result, competent Indian companies wishing to bid by themselves will rarely qualify, and would also leave even very reputed and proven Indian companies with no bargaining power vis-à-vis foreign consortium partners (wherever contemplated).

The points system, thus, is felt to be biased towards international firms. Further, limiting to five at the RFQ stage might lead to lesser competition if some of these applicants decide not to bid at the RFP stage.

With this background, various representations have argued that a minimum of 10 bidders should get pre-qualified, and that projects done in India in any of the four categories be given a 1.5 times weightage vis-à-vis projects done overseas.

Conflict of Interest
This clause seeks to prohibit two organisations under the same ‘management control’ bidding for the same project. As per the guidelines, if there is a shareholder who holds more than 5 per cent in one consortium and the same shareholder holds more than 1 per cent in another consortium then both the consortia will be seen as under same management, and both will be conflicted out.

This clause can disqualify a host of bidders. With many funds/institutions invested in more than one company above these specified percentages, this crucial clause needs to be reviewed and modified.

The suggestions in most representations on this matter are:

•That the threshold be at 11 per cent; and up to first level subsidiary only.

•That direct investments made by PE Funds/Mutual Funds/Financial Institutions/FII Investments should be excluded from the definition of being under same ‘management control’ (over and above “Banks, Insurance Companies, Pension Funds, or Public Financial Institutions” already excluded in the existing guidelines).

National Security and Market-Capture
In sector after sector, the fear is that same five/six foreign firms may get pre-qualified in every tender, leading to an undesirable situation. This could also be a major national security risk. [It may be recalled that the US did not allow Dubai Port World to take control of 16 US ports last year from P & O. Closer home, Hutchison of Hong Kong has had to deal with stringent security clearances vis-à-vis its interest in investing in Indian ports.]

There could equally be a concern if one or more Indian-led consortia end-up cornering bulk of the projects bid out.

The suggestions for revision in this area are that:

•Only those overseas bidders that are security cleared should be allowed to participate in the bidding process.

•For both domestic and overseas bidders, no bidder should be allowed to win and develop more than 20 per cent of the assets bid out in each sector over a moving five-year period.

To be fair to the document, it does provide for sufficient flexibility to cater to sector-specific, or project specific needs. Already sector-specific dilutions are creeping in. In an order passed on September 22, 2008, the pre-qualification criteria and the cap on number of bidders were done away for all future NHAI BOT bids. Speculation is rife that demands for similar exemptions, now quoting this precedence, will now emanate from other sectors.

However, the guidelines are indeed a good beginning at having a commonly-accepted framework.

India is learning to bid wiser!

The author is the Chairman of Feedback Ventures. He is also the Chairman of CII’s National Council on Infrastructure. The views expressed here are personal.