PPP Investment Models: HAM, Swiss Challenge, Kelkar Committee

[op-ed snap] The conundrum of PPP road projectsop-ed snap


Note4students

Mains Paper 3: Economy | Investment model

From the UPSC perspective, the following things are important:

Prelims level: PPP model, Hybrid Annuity model

Mains level: Problems being faced by the private sector in infrastructure development and solutions for them


Context

Growth of PPP sector in India

  1. Developing road networks in a timely and cost-effective fashion plays an important role in economic development
  2. In recent years, the government has extensively adopted the public-private partnership (PPP) approach in road development
  3. India has the distinction of having the largest PPP programme globally in the roads sector

Types of PPP projects

  1. PPP road projects broadly fall in one of the two categories of toll or annuity, though many recent projects are being implemented under a hybrid annuity model
  2. Toll and annuity projects vary mainly in the way the developers recoup their investment
  3. In the former, the road developer collects a toll from the users, whereas in the case of the latter, the developer receives predefined annuity payments from the government
  4. While the private developer assumes the demand risk in toll projects, it is not the case with annuity projects
  5. A basic difference between the toll and annuity projects is in the risk-reward equation
  6. In the case of annuity projects, the developer does not assume any demand risk, but the upside is capped
  7. However, in toll projects, the private developer assumes the demand risk, but would also benefit if the traffic growth is more than what is assumed

More profits for developers

  1. While PPP in roads has multiple objectives, the fundamental reason for going for the PPP route in India is that it helps to attract private sector capital
  2. Private developers will consider bidding for toll-based PPPs if they see a sensible risk-reward balance because the private sector by its very nature will pursue the path of higher returns rather than settle for modest returns
  3. Toll projects, in general, are characterized by longer stretches, and therefore higher project costs
  4. They also have more structures as compared to annuity projects, indicating that they could have a higher degree of complexity
  5. But the estimated unit project costs are lower, indicating that developers are able to achieve economies of scale associated with longer stretches

Lukewarm response in recent years

  1. In the last few years, the response from developers to new projects has been poor
  2. The estimated project costs have significantly escalated in the case of toll projects, hitting the project economics
  3. There is also a gap between the actual and projected traffic estimations made by the developers
  4. The toll projects are not as investment ready at the time of project award as compared to that of annuity projects
  5. The private sector also needs to do the task of handling much of the pre-development phase risks—such as clearances, land acquisition, and so on, leading to increases in cost overruns

Way forward

  1. It is important to understand the reasons behind the cost escalations
  2. The government should focus on making the project development ready at the time of award to attract more private sector interest, rather than changing the concession model
  3. That would lead to sustainable results, else the euphoria of the hybrid annuity model will be short-lived too

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