Wednesday, December 4, 2019

Derisking political risk

The first thing what the incumbent Chief Minister of Andhra Pradesh did after assuming charge of office was to order cancellation of many projects awarded by the preceding government (see here). The Andhra Pradesh Government also decided to reopen power purchase agreements (PPAs) inked under the previous TDP government, that could potentially bring 5.2GW solar and wind energy projects with an estimated debt exposure of over INR21,000cr under stress (see here). The state moved ahead with this proposal despite strong request from central government (see here) and order of the High Court (see here).
Subsequently, the World Bank decided to "drop" funding of “Amaravati Sustainable Infrastructure and Institutional Development Project”, seriously affecting the future of the project which has already swallowed Rs 45,000 crore worth of public money with less than twenty per cent of the work completed. (See here) Following the World Bank, the Asian Infrastructure Investment Bank (AIIB) also decided to withdraw from funding the project. The multi lateral agencies took the decision to withdraw funding after the Central Government withdrew its request for funding of this project. Last month, the state government finally decided to abandon the project leading to severe financial loses to many contractors and the state exchequer.
If a number of small and medium contractors are to be believed, the Chief Minister Office has also ordered a hold on payments due to them for various projects under execution, and some even fully executed, pending investigation of any irregularity in awarding of contracts by the preceding government.
The incumbent Chief Minister of Karnataka had also expressed his intention to review the decisions taken by the preceding government, jeopardizing financial interests of numerous contractors and vendors.
Reportedly, the new government in Maharashtra is also treading on the same path. They have already ordered suspension of the Metro rail shed project for which most of the ground work has already been done. Apparently, Chief Minister Uddhav Thackeray has told media that he has ordered a review of all on-going development projects in the state, including the Mumbai-Ahmedabad bullet train. Interestingly, in this case the party of the incumbent Chief Minister was also part of the outgoing government.
This practice of cancelling or suspending ongoing projects and harassing the contractors & vendors is certainly not a good sign for the economy. On one hand, this shall dissuade many small and medium sized vendors from participating in the government business; while on the other hand it shall cause totally avoidable delay in execution of projects, in many cases impacting the viability of the project itself.
I think there is an urgent need to rework the standard government contracts to provide for protection to the contractors and suppliers against any such review, suspension, cancellation etc. unless the charges of corruption in award of the contract are conclusively proved in a court of law.
In my view, a better solution for de-risking the projects from political risk would be to create a middle layer that cushions all the third party contractors and vendors from political changes. All the state governments and the central government may be required to form a specialized project executing company. Once the government finalizes the project after obtaining all the approvals etc, the government should award the project to this company through an irrevocable contract and transfer necessary funds to it in the form of cash and marketable government securities. This company in turn should sub-contract it to the third parties. The intermediary company should be responsible for making timely payments to the contractors and suppliers, and ensuring timely execution of the projects.

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