PPP Investment Models: HAM, Swiss Challenge, Kelkar Committee

PPP Investment Models: HAM, Swiss Challenge, Kelkar Committee

Hybrid Annuity Model(HAM) for the benefit of the road sector

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Working of HAM

Mains level : Paper 3- Hybrid Annuity Model and risks involved

The article explains the working of Hybrid Annuity Model in the road construction and the risks involved in the model.

Investment in road sector

  • The central government has set a target of increasing the investment in infrastructure to over Rs 111 lakh crore over the period FY20-FY25.
  • Within the transportation segment, projects worth Rs 36.7 lakh crore, constituting 55% of transportation infra, are for the road sector.
  • The large investments planned in the road sector signifies its importance—it has a multiplier effect on the economy and provides large employment opportunities.

Models for the road sector

  • Out of HAM (Hybrid Annuity Model) and BOT (Build, Operate and Transfer)—toll developers prefer the relatively lower risk HAM model.
  • This is due to its various positives like lower equity requirements, provision for mobilisation advances, better right of way availability, inflation-linked adjustments for bid project cost, termination payments during the construction period and de-linking construction and operations.
  • These HAM features have garnered a favourable response and mix of HAM awards has increased from 10% in FY16 to 48% in H1FY2021.

How HAM works and risks involved

  • During the operations period for a HAM project, the recovery from authority is in the form of fixed annuity payments along with interest on balance accumulated annuity payments (calculated @300 bps over prevailing bank rate)
  • The only major risk for HAM is the prevailing low bank rates adversely affecting the overall project viability and returns.
  •  Such interest receipts account for around 45% of total inflows.
  • Low bank rate would thus reduce the overall inflows for a HAM project, thereby adversely affecting its debt coverage metrics and returns to the investors.
  • The second problem is related to delayed and inadequate interest rate transmission—there is a transmission lag for the project loan (linked to MCLR of banks).

Changes in model concession agreement

  • As per revised concession agreement dated November 10, 2020, interest rate on annuities will be equal to the average MCLR of top 5 scheduled commercial banks plus 1.25% instead of bank rate.
  • With the average MCLR replacing the bank rate, there will be a natural hedge between the annuity inflows and interest costs,
  • This will reduce the interest rate risks to a large extent, and that too without any delay.
  • The other major revision is the grant payment from the authority which will now be paid in 10 instalments instead of five.
  • The other major revision is the grant payment from the authority which will now be paid in 10 instalments instead of five.
  • Thus, the spacing between the payment milestones is reduced.
  • This will improve the cash conversion cycle for the contractors executing the HAM projects as their payments are back to back in nature.
  • However, these changes will be applicable for new awards, and the fate of the existing HAM projects is hanging in the balance.

Conclusion

With improved attractiveness, HAM is expected to remain the mainstay for public-private partnership projects in the road sector.


Source:-

https://www.financialexpress.com/opinion/hamsome-gains/2171329/

By Root

Caretaker @civilsdaily

PPP Investment Models: HAM, Swiss Challenge, Kelkar Committee

The possibility of a two-front war

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- The possibility of three-front war

The possibility of a two-front war has been debated for long in the Indian security establishment. However, the Galwan valley incident has added an urgency to that possibility. 

 

Two front situation

  • In the Indian military’s thinking, while China was the more powerful, the chance of a conventional conflict breaking out was low.
  • The Chinese intrusions in Ladakh in May this year, the violence that resulted from clashes have now made the Chinese military threat more apparent and real.
  • This comes at a time when the situation along the Line of Control (LoC) with Pakistan has been steadily deteriorating.
  • Between 2017 and 2019, there has been a four-fold increase in ceasefire violations.
  • The larger challenge for India’s military would come if the hostilities break out along the northern border with China.
  • In such a situation, it is unlikely that Pakistan would initiate a large-scale conflict to capture significant chunks of territory as that would lead to a full-blown war between three nuclear-armed states.

China-Pakistan relationship

  • China has always looked at Pakistan as a counter to India’s influence in South Asia.
  • There is a great deal of alignment in their strategic thinking.
  • Military cooperation is growing, with China accounting for 73% of the total arms imports of Pakistan between 2015-2019.
  • It would, therefore, be prudent for India to be ready for a two-front threat.

The dilemma for India: In resources and strategy

  • It is neither practical nor feasible to build a level of capability that enables independent warfighting on both fronts.
  • A major decision will be the quantum of resources to be allocated for the primary front. This is the dilemma of resources.
  • If a majority of the assets of the Indian Army and the Indian Air Force are sent towards the northern border, it will require the military to rethink its strategy for the western border.
  • This is the second dilemma.
  • Even though Pakistan may only be pursuing a hybrid war, should the Indian military remain entirely defensive?
  • Adopting a more offensive strategy against Pakistan could draw limited resources into a wider conflict.

Way forward

  • We need to develop both the doctrine and the capability to deal with this contingency.
  • Capability building also requires a serious debate, particularly in view of the country’s economic situation.
  • We need to focus on future technologies such as robotics, artificial intelligence, cyber, electronic warfare, etc.
  • The right balance will have to be struck based on a detailed assessment of China and Pakistan’s war-fighting strategies.
  • Diplomacy has a crucial role to play.
  • India would do well to improve relations with its neighbors so as not to be caught in an unfriendly neighborhood.
  • The engagement of the key powers in West Asia, including Iran, should be further strengthened.
  • Relationship with Moscow should not be sacrificed in favor of India-United States relations given that Russia could play a key role in defusing the severity of a regional gang up against India.
  • Political outreach to Kashmir aimed at pacifying the aggrieved citizens would help in easing the pressure from the western front.

Consider the question “India faces the possibility of a two-front war. What strategy India should follow to deal with such a challenge?” 

Conclusion

A politically-guided doctrine, comprehensive military capability, and exploring other options will help to deal with the China-Pakistan threat.

By Root

Caretaker @civilsdaily

PPP Investment Models: HAM, Swiss Challenge, Kelkar Committee

Reviving the private investment in infrastructure

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Declining private investment in the infrastructure and ways to boost it

Declining private investment in the infrastructure needs policy overhaul. The article suggests the changes in the policy and approach on the part of the government to achieve the sustainable 40 per cent private investment in the infrastructure. 

Declining private investment in infrastructure

Currently, private financing into the infrastructure sector has declined to around 20 per cent of the total funding.

Reasons for the decline are-

  • 1) the crisis in the non-banking finance sector.
  • 2) the financial challenges faced by infrastructure companies.
  • 3) the inadequately developed Indian market for infrastructure financing.
  • The Economic Survey 2017-18 has assessed India’s infrastructure financing needs at $4.5 trillion by 2040.
  • Reviving private investment flows into infrastructure to around 40 per cent will be key to attaining this threshold.

Actions need to be taken to revive the private investment in infrastructure

  • The Vijay Kelkar committee had put out a balanced report in 2015 on overhauling the PPP ecosystem, including governance reform, institutional redesign, and capacity-building.

Ramping up private investments in infrastructure will need action on two fronts:

  • 1) Refreshing institutions and policies for channelling financing.
  • 2) Providing a stable, durable, and empowering ecosystem for private players to partner with government entities.

1) Institutions and policies for channelling financing

  • Due to long-duration profitability cycles of infrastructure projects, successful PPP  requires stable revenue flow assurances and a settled ecosystem to investors over long periods.
  • This could be achieved means of policy stability, assurances possibly secured by law.
  • PPP contracts also need to provide for mid-course corrections to factor in uncertainties including utilisation patterns, as well as the creation of competing infra assets.
  • Government partners in PPP arrangements need to ensure that open-ended arrangement that might entail unforeseeable risk are minimised for the private investor, including aspects such as land availability and community acceptance.

2) Institution and policies for financing

  • There is a need to change the culture and attitude towards the conjoining of government entities and private partners.
  • Kelkar committee has stated that there needs to be an approach of “give and take” and the Government should avoid a purely transactional approach.
  • Government should avoid trying to minimise risk to themselves by passing on uncertain elements in a project — like the land acquisition risk — to the private partner.
  • This attitudinal change can be achieved by amending the Prevention of Corruption Act to encompass modern-day requirements, including factoring in the need for government agents to take calibrated risks while engaging with the private sector.
  • The private partners also need to be incentivised to focus on project outcomes, with guard-rails in place to discourage rent-seeking behaviour.
  • In sum, risk avoidance by the public entity and rent-seeking by the private partner are the twin challenges that need to be carefully addressed.
  • On the regulatory front, a compelling need would be to promulgate a PPP legislation which can provide a robust legal ecosystem and procedural comfort.

Consider the question “Declining private investment in the infrastructure has several implications for the economy. In ligh of this, examine the factor for such decline and suggest the measures to boost the private investment in the infrastructure.” 

Conclusion

After we emerge out of this pandemic, a focus area for public policy has to be the creation of a modern-day, sustainable and resilient infrastructure. . Designing a fresh approach and creating a stable policy environment that provides comfort and incentives to private investors will be key to attaining this goal.

By Root

Caretaker @civilsdaily

PPP Investment Models: HAM, Swiss Challenge, Kelkar Committee

[op-ed of the day] Partnership lessons

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Lessons from UK in following PPP

Note- Op-ed of the day is the most important editorial of the day. Aspirants should try to cover at least this editorial on a daily basis to have command over most important issues in news. It will help in enhancing and enriching the content in mains answers. Please do not miss at any cost.

CONTEXT

As India deepens private participation in infrastructure through Public-Private Partnerships (PPPs), it is an opportune moment to explore the lessons from the UK, the pioneer in the use of PPPs and privatisation in infrastructure.

 

Public service analysis after following PPP model

1.Health and education –
  • A National Audit Office (CAG equivalent) assessment of the UK’s pioneering Private Finance Initiative (PFI) found that schools and hospitals built with PFI are 40 per cent and 60 per cent more expensive than their respective public sector alternatives.
  • Using the government’s lower borrowing cost to discount the cost of projects, it found that very few PFI projects would have passed the Value for Money test.
  • It concluded that the country had “incurred billions of pounds in extra costs for no clear benefit”.

2.Railways, water and sewage

  • The balance sheet on service quality is not much better.
  • Over 2000-11, the reliability and punctuality of British rail increased from 88 to 91 per cent, a small increment given the advances in digital technology and massive public investments.
  • Skimping on investments on the less salient parts of the privatised water and sewerage utilities has taken its toll on the environment.

Favouring nationalisation

An early 2018 poll by Legatum Institute found that 76-83 per cent favoured renationalising the railways, energy, and water industries.

The Labour party has announced that it would renationalise the utilities. Finally, in his 2018 Budget speech, after 716 projects since 1992, the Chancellor of Exchequer formally brought down the curtain on PFI saying he would never sign a PFI contract.

Relevance for India

1.The difference in public sector efficiency  –

  • In the UK, the starting point in terms of efficiency and service quality was high, and corruption in service delivery low.
  • The Indian public sector suffers from peculiarly Indian constraints.
  • Political interference in recruitment, competitive trade union activity (witness the posters in every railway station), rigidities on salaries and writs in courts on service matters, reduce the efficiency of personnel management in the public sector.
  • Activities of oversight agencies — Vigilance, Comptroller and Auditor General etc — cause extreme risk aversion in decision taking, reducing efficiency of procurement and operational decisions.

A stronger case for PPP

  • The starting point in India may often be a public agency which is inefficient, corrupt at the point of contact with the citizen and providing very poor service.
  • With a much lower starting point, it is quite conceivable that private providers may be operationally more efficient and give better service.
  • To that extent, the case for PPP is stronger in India than in the UK.

Weak regulatory approach

  • On the other hand, the regulatory capacity in India is weaker.
  • The unambiguous lesson from the UK is that capable regulators could not prevent asset stripping and skimping on investments.
  • There is nothing to suggest that this would not be repeated in India.
  • Also, using PPP purely for off-balance sheet financing to reduce the short-run fiscal deficit, is penny-wise and pound-foolish because the cost of borrowing of the private sector is much higher.

Way forward for PPP

1.Improve service quality – For a start, PPP must not be a short cut only to save money or bridge fiscal gaps or transfer risks; it should be used to improve service quality or bring efficiency improvements.

2. Careful selection –

  • Second, project design and the PPP components need to be carefully chosen.
  • For instance, outsourcing labour-intensive and customer-service operations, while retaining pricing and investment in public hands, may bring in efficiencies without under-investment or over-pricing.
  • Given the higher cost of private capital, and the inevitability of delays and related cost over-runs, construction is best financed with public borrowing though the operating asset could then be privately operated.

3. Principles for renegotiations –

  • Third, since it is impossible to write perfect long-term contracts, renegotiations are inevitable.
  • Clear principles and a mechanism for renegotiations without moral hazard need to be planned for

Back2basics

A PPP Project means a project based on a contract or concession agreement, between a Government or statutory entity on the one side and a private sector company on the other side, for delivering a service on payment of user charges. The rights and obligations of all stakeholders including the government, users and the concessionaire flow primarily out of the respective PPP contracts.

Unlike private projects where prices are generally determined competitively and Government resources are not involved, PPP projects typically involve transfer of public assets, delegation of governmental authority for recovery of user charges, private control of monopolistic services and sharing of risks and contingent liabilities by the Government.

The justification for promoting PPP lies in its potential to improve the quality of service at lower costs, besides attracting private capital to fund public projects. For creating a transparent, fair and competitive environment, the Government of India has been relying increasingly on standardising the documents and processes for award and implementation of PPP projects.

By Root

Caretaker @civilsdaily

Kelkar Committee Report: Reforming the PPP

 

In the Union Budget 2015-16, Finance Minister announced that the PPP mode of infrastructure development has to be revisited, and revitalized. In pursuance of this announcement, a Committee was constituted to look into the issues.

The proposals include a provision for monetisation of projects, revamp of the model concession agreement and creation of a new institutional mechanism.

What was committee asked to look into?

  • Review of the experience of PPP Policy.
  • Analyse risks involved in PPP projects in different sectors and suggest optimal risk sharing mechanism.
  • Propose design modifications in PPP based on international best practices and our institutional context.
  • Measure to improve capacity building in govt for effective implementation of the PPP projects.

Why is there need to reform PPP framework?

Background: PPP contracts are typically of very high-value, often with huge capital and operating costs.

  • The emergence of risks not foreseen at the time of signing the agreement exposes such projects to potential distress, making them unviable for the developers and prompting demands for a renegotiation of the original terms.

 


 

How to manage risks in PPP projects?

  • Optimal allocation of risks across PPP stakeholders to boost investment.
  • Sector specific model concession pacts to capture interest of all stakeholders. 

What are the design modifications proposed by the committee?

The Kelkar panel has come out with clear-cut norms on resolving issues and clarifying norms on re-negotiation of contracts.

  • Formulate a national PPP policy and seeking Parliament’s backing for it to be effective.
  • It emphasised upon the need to establish independent sector regulators for faster implementation of infrastructure projects and swifter dispute resolution mechanisms.
  • The report stated that the PPP structure should not be adopted for small projects.
  • It added that the govt should encourage development of airports, ports and railways through PPP, by ensuring easier funding for projects with long gestation periods.

Let’s take a look at much deeper level about various specific dimensions of PPP framework and panel’s recommendation.

How to streamline the stalled projects?

Background: The Ministry of Statistics and Programme Implementation (MOSPI) says that 40% of all central govt infrastructure projects are behind schedule or have overshot their original cost estimates.

Panel’s view: Follow the example of the Ministry of Road Transport and Highways, and NHAI, which has taken several successful steps in reducing the number of stalled projects in the sector.

What are the institutions proposed in the report?

  • An Infrastructure PPP Project Review Committee be constituted.
  • It recommends creation of an Infrastructure PPP Adjudication Tribunal.

How to renegotiate the PPP contracts?

Background: More than 50% of PPP projects come up for renegotiation.

The panel has suggested extensive guidelines stipulating the reasons that form the basis for re-negotiation & those that should not be entertained as valid reasons.

The panel wants full disclosure of few items prior to the renegotiation:

  • Long-term costs
  • Risks and potential benefits
  • Financial implications for the govt

Panel has suggested formation of an independent body, like a renegotiation commission, which can oversee the renegotiation of model concession agreements across sectors.

What is panel’s view on Swiss Challenge method?

Swiss Challenge Method: It is a process of awarding contracts as any person with credentials can submit a development proposal to the govt, which will be made online and a second person can give suggestions to improve and beat that proposal.

The Panel wants Swiss Challenge method to be actively discouraged.

Reason: It brings information asymmetries in the procurement process and result in lack of transparency and in the fair and equal treatment of potential bidders in the procurement process.

Criticism: India’s ambitious plan to build new expressways across the country by adopting the ‘Swiss Challenge’ method has become uncertain.

Why report calls for changes in anti-corruption law?

The report calls for promptly amending the Prevention of Corruption Act, 1988

Reason: To differentiate between genuine errors in decision-making and plain corrupt practices.

What is panel’s view on 3P India?

Background: Finance Minister had announced the setting up of 3P India in 2014-15 budget with a corpus of Rs 500 crore.

The panel wants the revival of a defunct proposal to establish 3P India to support PPP projects. It can function as a centre of excellence, enable research, and review and roll out activities to build capacity

How to deal with private sector?

The private sector must be protected against the loss of bargaining power over long time spans. It has asked for comprehensive guidelines to be framed in this regard.

How to build capacity in PPP projects?

  • Strengthen 3 key pillars of PPP framework – governance, institutions and capacity.
  • Structured capacity building programmes for different stakeholders.
  • A national level institution to back institutional capacity building activities.

The report pitches for pragmatism, transparency and a business-like attitude for all stakeholders.


 

Published with inputs from Pushpendra 

By Root

Caretaker @civilsdaily

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