Question

For robust economic growth infrastructure sector growth through Public Private Partnership (PPP) is necessary. In this context, write the challenges faced by PPP projects and recommendations on revisiting & revitalising the PPP Model of Infrastructure.

Answer 1

Approach:

• In introduction write about Public Private Partnership
• Write risk is inherent in all PPP projects.
• Write recommendations on revisiting & revitalising the PPP Model of Infrastructure
• Provide conclusion

Public Private Partnerships (PPPs) in infrastructure refers to the provision of a public asset and service by a private partner who has been conceded the right (the “Concession”) for the purpose, for a specified period of time, on the basis of market determined revenue streams that allow for commercial return on investment.

PPPs in infrastructure represent a valuable instrument to speed up infrastructure development in India. This speeding up is urgently required for India to grow rapidly and generate a demographic dividend for itself and also to tap into the large pool of pension and institutional funds from ageing populations in the developed countries.

India offers today the world’s largest market for PPPs. It has accumulated a wealth of experience in getting to this premiere position. As the PPP market in infrastructure matures in India, new challenges and opportunities have emerged and will continue to emerge.

Periodic review of PPPs, as in the present Committee's remit, are a must to help address issues before they become endemic and to mainstream innovations and foster new ones that improve the successful delivery of PPP projects.

India’s success in deploying PPPs as an important instrument for creating infrastructure in India will depend on a change in attitude and in the mind-set of all authorities dealing with PPPs, including public agencies partnering with the private sector, government departments supervising PPPs, and auditing and legislative institutions providing oversight of PPP’s.

Risk is inherent in all PPP projects as in any other infrastructure projects. The main types of risks include:

• Construction risk (mainly delays in construction)
• Technology risk (arises when the technology is not a proven one)
• Environmental risk
• Commercial risk (lower than expected demand for services produced by the project)
• Operating risk (inefficiency in operation leading to higher operating cost)
• Legal risk (change in law)
• Regulatory risk (change in regulatory regimes)
• Political risk (change in government policy)
• Force majeure (risks due to unpredictable natural and man-made events such as earthquakes, floods, civil war, etc.)

Dr.Kelkar committee recommendations on revisiting & revitalising the PPP Model of Infrastructure:

• Contracts need to focus more on service delivery instead of fiscal benefits
• Better identification and allocation of risks between stakeholders
• Prudent utilization of viability gap funds where user charges cannot guarantee a robust revenue stream.
• Improved fiscal reporting practices and careful monitoring of performance
• An Infrastructure PPP Project Review Committee (“IPRC”) may be constituted to evaluate and send its recommendations in a time-bound manner upon a reference being made of “Actionable Stress” in any Infrastructure Project developed in PPP mode beyond a notified threshold value.
• An Infrastructure PPP Adjudication Tribunal (“IPAT”) chaired by a Judicial Member (former Judge SC/Chief Justice HC) with a Technical and/or a Financial member, where benches will be constituted by the Chairperson as per the needs of the matter in question
• Unsolicited Proposals (“Swiss Challenge”) to be discouraged to avoid information asymmetries and lack of transparency.
• Amend the Prevention of Corruption Act, 1988 to distinguish between genuine errors in decision-making and acts of corruption
• Build up capacity in all stakeholders, including regulators, authorities, consultants, financing agencies, developer.
• Set up an institution for invigorating private investments in infrastructure, providing guidance for a national PPP policy and developments in PPP, developing a mechanism to capture and collate data for decision making, undertaking capacity building activities.
• An institutionalized mechanism like the National Facilitation Committee (NFC) to ensure time bound resolution of issues including getting timely clearances/approvals during the implementation of projects for the smooth running of such projects.
• Restrict the number of banks in a consortium and banks to build up their own risk assessment/appraisal capabilities
• Checklist of items listed as a guide for lenders. RBI may provide guidelines to lenders on encashment of bank guarantees.
• The monetisation of viable projects that have stable revenue flows after Engineering, Procurement and Construction (EPC) delivery should be considered
• Ministry of Finance to allow banks and financial institutions to issue Zero Coupon Bonds which will also help to achieve a soft landing for user charges in the infrastructure sector
• Improved fiscal reporting practices and careful monitoring of performance.
• Independent sector regulator.

Given the need for robust economic growth 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. PPPs have the potential to deliver infrastructure projects both faster and better. Building on India’s years of experience with PPPs, there is a need to iron out the difficulties in the performance of PPP at every stage of the contract. A successful and growing stream of PPPs in infrastructure will go a long way in accelerating the country’s development process.