PPP Investment Models: HAM, Swiss Challenge, Kelkar Committee

[op-ed snap] Easing the government’s infrastructure burden


Mains Paper 3: Economy | Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

From the UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Need of reviving private sector investments in India in order to maintain the growth momentum


Private sector participation declining

  1. The private sector contributed an estimated ₹20 trillion, or a third of India’s ₹60 trillion infrastructure investment, between fiscals 2008 and 2017
  2. However, it has declined sharply in recent years in terms of share of investment, from 37-38% to below 25% in fiscal 2018

Why such decline?

  1. As per the Crisil Infrastructure Yearbook 2018 released last month, over-investments in a couple of fiscals through 2012 backfired, leaving in their wake stalled projects and a mountain of stressed assets
  2. Six years on, private investment capacity is yet to recover meaningfully

No sector remains attractive

  1. While airports, ports and power transmission have robust engagement models, new investment activity is tepid
  2. In railways and urban infrastructure, private investments are negligible
  3. It’s down sharply at the state level as well
  4. National highways remain the only bright spot, where policy actions and the de-risked hybrid annuity model (HAM) have revived projects
  5. And the recent toll-operate-transfer (TOT) auction is a great example of asset monetization and crowding-in of private capital

Why private investments are important?

  1. India’s infrastructure investment spending needs to be ₹50 trillion between fiscals 2018 and 2022
  2. That would be ~5.1% of gross domestic product (GDP)
  3. Achieving this requires considerably more private sector contribution
  4. Private sector participation in infrastructure delivery helps deliver tangible benefits
  5. In highways, airports, ports and renewables, the private sector’s role has been landscape-altering
  6. The private sector has also delivered efficiently—both on project execution (where land and clearances have not been a constraint) as well as operations
  7. Besides, private participation enhances public accountability
  8. As consumers, we rarely hold public utilities to account for non-performance and resort to coping solutions
  9. Yet, when a public-private partnership (PPP) contract is awarded, we tend to demand better services right away
  10. PPPs bring back trust in public utilities that execute them, improve service delivery, bridge resource gaps, and help wean away dependence on unsustainable coping solutions which the poor can ill afford

Transformations required

  • Empower public institutions to drive transformation
  1. Public institutions, viz. city governments, power utilities, and bus transport corporations, barring a few, are incapacitated and need to be the epicentre of transformation efforts
  2. Capable creditworthy public institutions are an essential prerequisite to attract private investment
  3. Corporatized and empowered structure, adequate capital and ring-fenced finances, accrual accounting and effective audits, and transparent disclosure in these departments is the need of the hour
  • Prepare shovel-ready projects along PPP models, rewire contracting frameworks
  1. The government ought to build capacity to create a bankable pipeline of shovel-ready strategic projects worth $150 billion annually, with focus on sectors and line departments where this capacity is missing
  2. Expediting creation of a PPP think-tank institution as recommended by the Kelkar committee could help
  3. Besides, we should look beyond conventional build-operate-transfer models to annuity and investment-lite performance-contracting models
  4. This would require recalibrating risk-sharing, and reworking contracts with clear performance metrics and flexibility to handle changes and exits
  • Create supply-side enablers to deepen the infrastructure financing ecosystem
  1. Stalled projects need to be dealt with steadfastly to nurse private developers and financial institutions to health
  2. Building certainty and capacity to implement the Insolvency and Bankruptcy Code will be crucial
  3. A concomitant and scaled up asset monetization of operational assets can attract global capital and help increase public spending and government support for greenfield PPPs
  4. Creating a diversified and resilient financing ecosystem to facilitate a shift from overreliance on bank-led financing remains a key work-in-progress facilitation
  5. Allied guarantee instruments to strengthen bond markets and expeditious deployment of capital under the National Investment and Infrastructure Fund are facilitations that can help

Way forward

  1. History has taught us that PPPs are no silver bullet
  2. Broad-basing private investment in infrastructure requires relentless commitment and holistic efforts from both the Centre and the states
  3. Revving the stalling private sector investments engine is crucial to sustain and accelerate the infrastructure build-up that India needs, aspires for, and deserves
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