NOW AND EVER: TIME TO IMPLEMENT DESIGN-BUILD-OPERATE-MAINTAIN MODEL FOR THE CGD SECTOR

Unlocking the latent potential of gas demand of India will depend not just on resolving the supply and infrastructure bottlenecks, but also on the adoption of established project execution models, like Design-Build-Operate-Maintain (DBOM), for a new phase of infrastructure development.

Most city gas distribution (CGD) companies are already struggling to achieve the minimum work program which may be attributed to the award of multiple geographical areas (GA) without corresponding project execution infrastructure, pandemic issues, regulatory compliances, liquidity and financial closure issues.

PNGRB authorized more than 150 GAs, including 136 GAs in the 9th and 10th CGD Bidding Rounds. An investment of more than Rs 1.2 trillion was committed for the rollout of the CGD network in the GAs awarded in the 9th and 10th bidding rounds.

Due to Covid-19, dwindling revenue and profit realization for CGD entities has resulted in lower investment/ CAPEX. The slowdown of economic activity has also been a dampener to the current infrastructure build drive, especially for the new CGD GAs. The ongoing and new projects are likely to face numerous challenges in terms of project execution, planning, securing funds and risk management.

For current and future GAs, and 11th CGD Bidding Round being round the corner, it is important to give due consideration to the DBOM Model by CGD companies

This is more relevant now since we have large infrastructure funds available to raise and channel private investment for large infrastructure projects and companies like SANMARG which have the credentials required for DBOM projects.

Most asset building, augmentation/ upgradation or development of greenfield assets are still being built & operated by O&G companies without classifying them in critical (own & control), essential (control captive portion of capacity, external fund/investor-owned) and peripheral (neither own nor control, buy-in captive capacity & first right of refusal) assets. This method of asset creation results in heavy & unnecessary capital outlays & the development of layers of expensive, permanent & non-scalable resources to build, operate & maintain assets.

Although generally, the objective of DBOM projects is to reduce upfront capital costs and execute the contract through an OPEX model, DBOM projects also offer excellent opportunities to incentivize innovation and reduce project lead-time to complete, lowering project life-cycle costs and accelerating project returns.

Adoption of DBOM models will not just ensure speedier and timely creation of infra, but also, post commissioning seamless and cost-efficient operations & maintenance. Additionally, shared infrastructure can be created common for adjoining GAs. Overall turning CAPEX into OPEX based operation.

Suggested Models for adopting DBOM approach for execution of various components of CGD Network

The following packages have been identified for DBOM Model in the CGD sector, however, further detailing is required:

BOT or any other variant types of arrangement often cover a long-term period of service provision. Any agreement covering such a long period into the future is naturally subject to uncertainty. The BOT project must be clearly specified, including the allocation of risk and a clear statement of the service output requirements. The long-term nature of BOT contracts requires greater consideration and specification of contingencies in advance.

Key success areas for the model

The success of the BOT will depend on risk identification (e.g., Market, demand or volume risk, Force Majeure risks, Cost overrun, Political risks, etc.) and appropriate risk allocation among the Govt/ Company, concessionaire, pure investors, and lenders.

It is critical to define modalities for arbitration, mediation, penalties, commercial responsibilities and investments, revenue split, division of roles & responsibilities and penalties, both for non-performance of concessionaire and non-payment by Company or not honouring viability commitment.

Prevailing a one-sided contract favouring only the interests of Govt/ Company make it a risky proposition for the concessionaire/ investor. Thus, the contract’s structure and division of risk in a BOT scenario are critical and while can be complex, requiring prolonged negotiations, but also fair, given international models available for reference. 

It is also important to ensure that the proposed business models, BOT or any other variants, are in accordance with the regulatory guidelines laid down by the Petroleum and Natural Gas Regulatory Board (PNGRB) during the respective CGD licensing/bidding rounds. PNGRB should also facilitate, in terms of making amendments to the existing guidelines, to promote the adoption of established project execution models (e.g., DBOM) for faster execution of CGD projects.

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