Cement, Energy and Environment July-Sep 2002

_...- Courtesy: IVISTEllnnovation. Jul 02. P- 19 Fax: 91-11--1619083 Email: will@nde.l'Snl .net.in rv eb: 11111'11 1• wi lfs. org NEW AREAS OF CONTRACTING R. Ramnathan - Former Member (Finance) in the Telecom Commission Increasing realization on the part ofgovernments that they cannot find the huge resources needed to finance infrastructure projects has led to the induction of the private sector in a big way in these projects. In fras tructure projects have long gestation pe,riods and to induce private funding, the government has to offer long-term stabi li ty of pol itics and reasonable returns over a period of time. Assurances of minimum usage ofthe facilities (e.g. in the power sector) with contractual guarantees are some of the features in the entirely new systems of contracting that have spawned. Projects in highways, rail , road, airport, water resources, waste water management, power projects and ut iIities operation and management are some of the areas where innovative contracting are being adopted increasi ngly in many parts of the world. The fo llowing types of contracting arrangements are possible: (a) Management contracts (b) Leasing (c) Service contracts (d) Build, own and transfer (BOT) and its variations. Before decid ing on the type of contract to be entered into, the Government should have some clarity on the fol lowing: What are the problems, which are being faced at present? Which could be resolved by the innovative method s of contracting. 11 Entrusting the public sector infrastructure projects to private parties may call for the poli tical consens us without which they ca nnot be successfully implemented. 111 The private utility will necessaril y entail a hi gher tariff. Will this be acceptable to the consumi ng public? 1v When private sector is permitted to play a large role in what so far have been the principal areas of operation of public sector, then, there is an immediate need for a strong independent reg ul atory mechani sm. Is it in place? Once these basic questions are answered, then, it wi ll be relatively easy to choose one of the types of contracts mentioned above. Before the government takes a decision on entrusting a utility or a project to a private party, a good pre-contract analysis would save a lot oftrouble later. Detai led analysis and the forms and timing of the private sec tor involvement, designing of a contract, regulatory regimes and ri sk managemen t mechanisms should also be gone into sufficient detail. A regulatory mechanism must come before the contracts are awarde~i. The advice of the regulator must be taken into account in working out of the arrangements. AII long-term contracts involve high ri sk, and un less arrangements are made to share the risk in a fa ir manner, these types of contracts will not succeed. The risk to be a ll ocated equ it ably in the following areas: Construction risk ii Financial risk iii Politi cal risk iv Revenue risk v Regulatory risk T here must be agreed parameters for performance measurement as also for the king of data, including financial data, wh ich the operator is expected to give to the regulator or to the licensor. Asset transfer can also create lega l problems whi ch must be attended to in advance. The types of approvals needed, including environment clearances, by the private party be fore he can award the work shou ld a lso be de te rm int:d. Apart from regulator, there mu st be a distinct di spu te sett lement mechanism in place, in advance. In Indi a, some proj ects are being taken up especiall y in the power sector by way of independent power producers. The experience so far has not been happy. But these are early days and much can be learnt from the experience of other countries who have adopted these new forms of contracting to push through many projects to bring in much needed private cap ital and efficiency of operation. Courtesy : FIICI Business Digest. Alay02, Pp. 5-6. Fax: 91-11-332071-1 Email: power@flcci.com or pOll'er@mantraonline. com IVeb: ll'll' lvjicci.com! energyconsen·ation HOUSING TO BOOST CEMENT DEMAND, SAYS– CMA The Statesman, Ahmedabad, 22. 07.02 The Cement Manufacturers' Association (CMA) believes that to boost the demand for cement in the country, a more flexib le housing loan term can be a strong driver. The CMA has observed that in recent times, because of the lowering of housing loan interest rates by banks and other financ ia l ins titutions, demand is going up in both the rural and urban areas. Industry sources said, as per the current estimates. the country faces a shortage of over 20 million dwelling units and this backlog is still growing. It has been also seen that urban development leads to improvement in the demand fo r housing which in turn plays an important role for economic growth. 'There is no dearth of land to m