Indian PPPs inspire “irrational” bidding
- From: Vol 10, Issue 8 (August 2009)
- Category: General
- Region: Asia
- Related Companies: Aquatech, Doshion Limited, Ion Exchange India, Jindal Water Infrastructure Ltd, JUSCO, Mahindra and Mahindra, Nagarjuna Constructions, Nagpur Municipal Corporation, Suez Environment , VA Tech (Wabag) and Veolia
As a guest you can read up to 3 full articles before a subscription is required.
You can read a further 2 articles for free.
Private companies are eager to become established in the market for Indian water concessions and other PPPs. Only time will tell if the projects under consideration become viable investment opportunities.
With encouragement from the UPAled government, a spate of water concessions has sparked excitement among bidders in the Indian market.
The race to become established in a potentially lucrative market has become intense, and concerns have been raised about the sustainability and longevity of certain deals. "The private sector has gone a little wayward with their enthusiasm in bidding for PPP projects," said Sanjiv Paul, JUSCO's managing director. "A few players have started bidding irrationally. They have often bid for projects at a lesser margin or sometimes even at a loss in the hope of becoming a preferred partner for upcoming projects," he told GWI.
A senior official at Veolia in India added: "Given the large size of the market, there is space for good competitors. The water sector needs competition, but also probably needs to allow the private sector to deliver first-class quality at the best price, and not only at the lowest cost."
Commenting on bidding practices, Vikas Goyal of Jindal Water said: "All players are bidding at levels that they think is right. It is difficult to say what is the right bid amount. Players have sometimes bid at prices much higher than the actual price of the project." JUSCO’s Paul adds: "Private players should realise that water is a slow, tedious, long gestation business, and enter [the market] knowing that it is a long-term business and that their bid prices should have longevity and sustainability. The danger is if it does not pan out as we think it should. This could be suicidal. Any unsustainable and thus unsuccessful PPP deals could set a bad precedent and would discourage the public sector from choosing PPPs."
Despite the keen interest, water concessions are a relatively new and untried phenomenon in India. Traditionally, privatisation in Indian utilities has been mostly limited to billing and collection, in addition to EPC project work. This has created scores of small EPC contractors and turnkey solutions providers, but only a handful of firms such as JUSCO, Jindal Water, Subhash Projects, Nagarjuna Constructions, Mahindra Water, Doshion, VA Tech Wabag, Ion Exchange, and Veolia India have the capability to take on water concessions with longer contract timelines and high capital investment.
Prakash Urade, a senior official in the Nagpur Municipal Corporation, told GWI: "Many water concession/management contracts are coming up in Tier I, II and III cities. There are more projects for leak detection and UFW reduction in the offing. Private players are interested in these projects as they can earn more by way of increasing production of water apart from contractual earnings." While there is indeed huge potential - the JNNURM targeted 63 cities for infrastructure development - only a handful of concession projects are going forward or are under consideration in the short term, including some pilot projects. One reason for this is the ongoing difficulties in obtaining cheap credit. "The absence of any universally applicable legislation or regulatory framework for concessions slows the process of finalising the projects", adds Goyal. A great deal of time is spent in seeking approvals from multiple bodies, and the process of hammering out commonly acceptable terms for a concession agreement can tie up a project for a long time.
"There will be fewer water concessions coming up and more annuities, EPC projects and long-term performance-based O&M contracts in the mid-term," predicts Sanjiv Paul (see table).
Devesh Sharma, EVP with Aquatech, is more bullish, telling GWI: "Given the inadequacy of water and sewerage infrastructure, there are tremendous opportunities for PPP projects in general in India. We are planning to enter the market by 2010." Other players such as Suez Environnement and Reliance are watching the market closely. The performance of the current wave of concession deals will be crucial.