PPP Investment Models: HAM, Swiss Challenge, Kelkar Committee

[op-ed snap] The right approach for public-private partnershipop-ed snap


Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: The newscard discusses some issues related to the PPP projects(especially, road projects). And it also suggest some possible solutions.


News

Why do we need the PPP to provide infrastructure(such as roads and power)?

  1. Public provision faces two challenges: an incentive problem and a budget problem
  2. The budget problem stems from the fact that there is only so much that a government can safely borrow, because it will have to raise future taxes to repay the debt
  3. As a consequence, many worthwhile projects must be postponed
    But the PPP can help
  4. Suppose the project is a highway structured as a toll road with a 20-year concession
  5. This seems to solve both the incentive and budget problem
  6. The contractor will be responsible for the increased maintenance cost, presumably making him more likely to do high-quality work
  7. He also would have an incentive to run an efficient operation, because he gets to keep the savings
  8. In addition, because the project is financed by tolls, it need not be limited by fiscal constraints

Uncertainties with the engineering, procurement and construction (EPC) phase

  1. The bidders(for road projects) need to plan for two phases: engineering, procurement and construction (EPC),
  2. and a longer phase of operation when toll revenue is collected to recover incurred costs and expected returns
  3. There are plenty of uncertainties in both phases, but especially during EPC, which may last three-seven years, depending on the project
  4. Given the risks in this phase, capital markets demand that it be financed with more equity than debt
  5. So, the project involves quite sophisticated financial engineering
  6. Almost always, such plans cannot be realized unless the government provides guarantees against geological or traffic risks
  7. Negotiating such agreements often adds years to the project

The main issues with the private projects

  1. The above uncertainties means that there are good reasons why privately financed projects become more expensive, given the higher cost of capital,
  2. and why completing them can be much, much slower

What can be done? : The possible solution

  1. An alternative is to concentrate the role of the private sector in the latter phases of the project
  2. The best option may be for the government to build the road and sell the concession for operation and maintenance
  3. This allows the government to cash out and reinvest the resources in pre-investment and EPC,
  4. thus recycling scarce public capital more quickly while cutting out the most expensive and slowest parts of private involvement
Posted on | Live Mint

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