PPP Investment Models: HAM, Swiss Challenge, Kelkar Committee

[op- ed snap]  Strategy to revitalize PPPs in India


Note4Students:

Mains Paper2| Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Prelims: Asian Development Bank, GDP

Mains level: This article is important with respect to Mains as it highlights the concerned problems relating to PPP in infrastructure sector and how it can be solved.


Context

  1. India’s infrastructure deficit continues to persist despite the relative catch-up in recent years.
  2. The Asian Development Bank, in its report titled “Meeting Asia’s Infrastructure Needs”, has estimated that $4.36 trillion is needed to fix India’s infrastructure deficit by 2030.
  3. While currently India is spending around $120 billion per year.
  4. India’s debt-to-gross domestic product ratio is relatively high (65%) and with already stretched finances, the government’s ability to fund new assets will remain constrained.

Problems with Private investment

1.      The weakening economic growth and the debt overhang problem have constrained both the capacity and flow of private investment in asset creation.

2.      Even the successful awards in roads, rail, airports and other infrastructure segments have been mired in implementation challenges, affecting the private sector’s capacity to invest afresh.

3.      To fix India’s infrastructure needs private arm of public-private partnerships (PPPs) will need to contribute at least $90 billion every year for the next 10 years, entailing a potential borrowing of at least $55-60 billion a year. That is quite a large sum for the stretched balance sheets of lenders and investors.

Areas of Focus in PPP

1.      Long-term credit and procurement processes.

  • The situation has aggravated sharply, with the non-performing assets (NPAs) of domestic lenders mounting.
  • The international credit and financing market is an avenue but high-quality sponsors and assets remain few.
  • The inability of project development and procurement agencies to adopt fairer risk-sharing principles has contributed to the financing challenge.

2.      Poor Projects

  • Inadequate preparedness and risk allocation has contributed to the lack of large capital.
  • Bonds have worked well overseas as a source of project finance but the corporate or municipal bond market in India is still not deep enough to support long-term credit and refinancing commitments, unless backed by sovereign guarantees, which are difficult to come by.
  • High project risks, poor entity rating and regulatory uncertainties also make yield-based structures difficult to implement.

3.      Market making

  • Financial institutions like India Infrastructure Finance Co. Ltd and the National Infrastructure Investment Fund (NIIF) should lead the market-making role by securing foreign capital and providing equity support to critical infrastructure projects.
  • It is important in the current scenario of high NPAs.

4.      Elongated timelines due to lack of institutional capacity in the project-award process have been hurting.

  • Single-window clearance has rarely worked and inability to resolve disputes during the implementation stage has been a big deterrent for high-quality investors.
  • The whole value-for-money principle that favours PPPs over traditional public sector procurement is defeated with time and cost overruns resulting from delayed pre-development and procurement activities.

Way Forward

1.      Restructuring of PPP contracts should be through objective process.

2.      The changes in concession contracts needs to be based on asset risk profiles, market conditions, technology impacts, investor appetite and bankability

3.      Experience reveals that strong leadership can make a big difference. The Delhi Metro is a good example.

4.      The same quality of leadership is required for all mega projects, whether implemented by the government or its agencies or by the private sector.

 

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