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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