BharatNet provides a unique opportunity in PPP; Risk allocation critical

India Ratings and Research (Ind-Ra) believes that setting up an optical fibre network across the country, also known as BharatNet, through the public private partnership (PPP) model is a unique growth opportunity for the private infrastructure sector. It also is a harbinger for the adoption of the PPP model in more such distributed asset classes. Risk allocation in concession agreements is critical for the success of the PPP model and availing debt capital. Nature of risks will differ for BharatNet compared to traditional infrastructure assets because of the widespread geographical area of the project, technology involved, competition in the telecom space and associated risks.

Ind-Ra expects BharatNet assets to be the core of India’s digital infrastructure plan to deliver high-quality internet connectivity to homes, government agencies and private companies in rural regions.

This is the first market wire in a two-part series and the second part will include a review of model concession agreement based on Ind-Ra’s maser criteria for Infrastructure and Project Finance.

Pace of Right of Way (RoW) – A Crucial Factor: Obtaining RoW is the responsibility of developers in the PPP model for BharatNet while the concession authority will facilitate the same. BharatNet phase II has experienced significant delays including delays in procuring RoW. As the project implementation will be complex and span a large geographical area, stakeholders will be concerned over delays in RoW which can affect the project completion and the revenue potential of the network. Experience in implementing large projects across states will be positive. For remote areas, the connectivity may be provided through radio or satellite as well. Clarity that the concessionaire will be incentivised/penalised only to the extent of the scope of work within their ambit, after accounting for delays not in control of the concessionaire, will be positive.

Demand-linked Revenue: Revenue will consist of the fees collected by allocating bandwidth to users, by leasing the unused fibre and sale of broadband connections. Demand projections for fixed line broadband services will be an important part of the analysis. The telecom industry is transitioning towards data-centric models compared to voice-centric models historically. Also, the low penetration of broadband in rural areas signifies the unmet demand which BharatNet can meet. The existing broadband penetration is predominantly through wireless connections. Price, reliability and quality of connectivity will determine the attractiveness of BharatNet for consumers.

The model concession agreement defines a revenue share of 4% which is to be paid to the authority starting 11th year from COD and it will increase to 6% from the 21st year from COD. Revenue share for the north east package is fixed at 1% from the 11th year. Viability gap funding (VGF) is the bid parameter to award the packages. VGF is envisaged to be distributed over a construction period of 1.5 years and the first five years of operations. The concession period will be 30 years post the construction period. Mechanisms to ensure timely payment of VGF during construction (up to 40% in the form of equity support, not more than twice the developer’s equity) and operation period will provide additional comfort in credit analysis.

BharatNet implementation through PPP is split into nine packages across 16 states. Tenders for all nine packages were floated on 20 July 2021. A single bidder can be allotted a maximum of four packages. The envisaged engineering procurement and construction cost is INR294.3 billion and VGF approved is INR190 billion, according to PPP Appraisal Committee.

Network Uptime is Key for High Quality Service Delivery: The network uptime requirement is at least 98% in the PPP framework. However, the present network reported an uptime of 58% on 30 November 2020. The design of the asset and technology deployed are likely to govern the maintenance requirement and network uptime during operations. The major components of the network are optical fibre cables, splitters, optical line terminal and optical network unit/terminal. During operating period, the major factors to ensure high uptime include uninterrupted power supply, safeguarding from theft/damage, ensuring accessibility to equipment at all times, time to detect and subsequent restoration.

Alternate Infrastructure Assets Gaining Pace: Ind-Ra considers the advent of PPP model in telecom network, electric bus market, rail infrastructure, possibly in advance metering infrastructure in electricity network, etc is positive for the private sector. Reforms-based and Results-linked, Revamped Distribution Sector Scheme announced on 30 June 2021 also envisages installing metering infrastructure through PPP model. Defining the outcomes of infrastructure projects (uptime for BharatNet assets/electricity meters) in the concession agreements ensures quality of assets, as revenue depends on the operations of assets. Thus, balanced concession frameworks could enhance the social outcomes for public and utilities too. Applying the learning under PPP models over the last decade would aid in getting the investor interest while competition would bring in efficiencies in financing, implementation and operations.

On 30 June 2021, the Union Cabinet approved the implementation of BharatNet in 16 states through PPP. The network will cover estimated 3.61 lakh villages including gram panchayats (GPs). BharatNet connections have been provided to 1.7 lakh GPs. BharatNet aims to provide non-discriminatory access to service providers such as internet service providers, telecom service providers, cable TV operators and content providers who deliver connectivity or other services across the country. Phase I and Phase II had the target of connecting 2.5 lakh GPs, of which connectivity across 1.7 lakh GPs has been achieved till date. Both Phase I and Phase II were not implemented under a concession framework. The revised strategy for connecting the balance GPs and villages envisages creation, upgradation, operation, maintenance and utilisation of BharatNet through a concession agreement. India Ratings