PPP Model of Infrastructure Development and its Viability

Jan 7, 2016 14:39 IST

Infrastructure development is a pre-condition to achieve broad based and inclusive growth on sustained basis. The XII Five Year Plan (2012-2017) has an ambitious target of infrastructure investment at 1 trillion US dollars. Given the huge requirement of funds and limited availability of public resources, it becomes necessary to explore new avenues of funding infrastructure development.

One such avenue is the use of PPP which has been recognised globally. PPP or the Public Private Partnership involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. There are various models in PPP like Design-Build (DB), Operation & Maintenance Contract (O&M), Build-Own-Operate-Transfer (BOOT), Build-Own-Operate (BOO) etc.

Benefits associated with PPP

•    It bridges the gap between demand and supply of funds for creation of infrastructure projects.

•    It provides much needed expertise, operational competency and managerial efficiency of the private sector.

•    It brings in new and cost effective technology.

•    It puts contractual accountability on the private party to ensure timely and quality infrastructure service to the end users.

•    PPP is an “off-balance sheet" method of financing the delivery of new or refurbished public sector assets. It is because project borrowing is done by the private sector.

Present scenario

The PPP India database indicates that, as of now, 758 PPP projects costing 3833 billion rupees has been awarded/underway status. Karnataka, Andhra Pradesh and Madhya Pradesh are the leading states in terms of number and value of PPP projects. At the central level, the National Highway Authority of India (NHAI) is the leading user of the PPP model.

Government initiative to encourage PPP

•    Setting up of the Public Private Partnership Appraisal Committee (PPPAC) responsible for the appraisal of PPP projects in the Central Sector.

•    The Government has created a Viability Gap Funding Scheme for PPP projects. It provides financial support in the form of grants to make infrastructure projects commercially viable.

•    The Government has set up India Infrastructure Finance Company Limited (IIFCL) with the mandate to provide long-term debt for financing infrastructure projects.

•    The scheme for 'India Infrastructure Project Development Fund' (IIPDF) has been launched to finance the cost incurred towards development of PPP projects. The IIPDF supports up to 75 % of the project development expenses.

•    Web based tool kits are available to improve decision-making for infrastructure PPPs in India.

•    An infrastructure projects database (www.infrastructureindia.gov.in) was developed to provide key information on the status of infrastructure projects.

•    The Public Private Partnership (PPP) Cell is responsible for matters concerning policy, schemes, programmes and capacity building.

•    Government has also set up a Committee on Revisiting and Revitalising the PPP Model of Infrastructure under Dr. Vijay Kelkar. The committee has submitted its recommendations.

Challenges & Issues in PPP in India and Kelkar Committee

Regulatory Environment:  There is no independent PPP regulator in India currently. This has led to private players loosing bargaining power due to changes in environment over time leading to Obsolescing Bargain. Further a significant number of PPP projects have been stalled by legal disputes relating to financial issues.

According to the Economic Survey 2014-2015, the stalled projects added up to 8.8 trillion rupees or 7% of India’s Gross Domestic Product (GDP). This saddled banks with huge amount of bad loans.

Lack of Information:  The PPP program lacks a comprehensive database consisting feasibility reports, agreements etc regarding the projects/studies to be awarded under PPP. In this context the committee has spoken against unsolicited Proposals (“Swiss Challenge”) as they bring information asymmetries and result in lack of transparency and fair and equal treatment of potential bidders.

Lack of institutional Capacity:  The limited institutional capacity to undertake large and complex projects at various levels hinders the PPP project. Structured capacity building programmes for different stakeholders   need to be evolved.

The Kelkar Committee recommends “3PI” which can, in addition to functioning as a centre of excellence in PPPs, enable research, review, and support sophisticated models of contracting and dispute redressal.

The committee also recommended building a host of other institutions such as Infrastructure PPP Project Review Committee (IPRC), Infrastructure PPP Adjudication Tribunal (IPAT) and a national PPP policy.

Financing Availability:  Private sector is dependent upon commercial banks to raise debt for the PPP projects. However, with commercial banks reaching the sectoral exposure limits, and large Indian Infrastructure companies being highly leveraged, funding the PPP projects is getting difficult.

The committee recommended that the government encourage banks and financial institutions to issue zero coupon bonds or deep discount bonds for sourcing long-term capital at a low cost for PPP projects.

Allocation of Risk: Inefficient and inequitable allocation of risk in PPPs can be a major factor in PPP failures. A rational allocation of risks can be undertaken in sector and project-specific contexts.

Conclusion

PPPs in infrastructure represent a valuable instrument to speed up infrastructure development in India. India is currently in a win-win situation with large young population that will need good jobs and a huge pool of global savings that can be tapped for building out infrastructure.

PPPs are an important policy instrument that will enable India to move faster towards economic growth and development. Given the urgency of India’s demographic transition, and the experience India has already gathered in managing PPPs, the government must move the PPP model to the next level of maturity and sophistication.

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