PPP Investment Models: HAM, Swiss Challenge, Kelkar Committee

Dec, 06, 2018

[op-ed snap] Maximizing India’s development finance

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: Fourth Industrial Revolution

Mains level: Interventions required by the government to diversify India’s infrastructure financing


Context

Demand for better services

  1. The Fourth Industrial Revolution, along with internet penetration and access to smartphones, has changed the outlook of people everywhere
  2. Everyone can see how others live and this has raised their aspirations and expectations
  3. People are demanding improved infrastructure to meet their aspirations
  4. This aspiration is particularly acute in the developing world, given the poor infrastructure and huge development financing needs

Infrastructure financing in developing nations

  1. It is estimated that infrastructure investments needed in energy, transport, telecommunications, water and sanitation, education, and health projects will amount to more than 5% of gross domestic product (GDP) in developing countries
  2. Meeting the financing gap needed for infrastructure services will be one of the biggest challenges in development
  3. In developing economies, nearly 70% of the funding for infrastructure projects comes from the government budget, 20% from private players, and 10% from multilateral development banks

Potential for investment

  1. While the infrastructure financing gap is huge in the developing world, the potential for attracting private investment for infrastructure projects is also huge
  2. The basic traits of infrastructure projects, such as market size, long-term steady revenue stream, and investment returns that exceed inflation, make them attractive for institutional investors
  3. The funds managed by institutional investors in the Organization for Economic Cooperation and Development (OECD) countries exceed $100 trillion
  4. Their allocation to emerging-market infrastructure projects is tiny

Reaping the benefits

  1. Many developing countries have launched programmes to attract private investments into infrastructure projects
  2. India has experienced a rapid increase in the number of public-private partnership (PPP) infrastructure projects during the last two decades
  3. The government has established institutional structures in the ministry of finance and line ministries to scale up PPP projects
  4. A fast-growing economy and public-sector capabilities to prepare, procure and implement PPP projects have played a key role in creating markets and improving efficiency gains
  5. The electricity and road sectors have attracted the lion’s share of PPP investments in India
  6. India’s energy efficiency market, estimated to be more than $12 billion per year, is one of the largest untapped energy-efficiency markets in the world
  7. Ports and railways have also attracted investment but at the lower end

Challenges in financing

  1. Commercial banks have dominated the financing of infrastructure projects
  2. This amounts to the government transferring a huge amount of risk from public to the private sector
  3. With the structure of financing such that there is heavy reliance of private financing on the public sector and with heavy termination clauses included in PPP contracts, the government is potentially exposed to fiscal risks
  4. India and most of the developing world face a twin challenge—closing the infrastructure financing gap and changing the composition of financing
  5. Given rising global macroeconomic and trade concerns, changing the composition of financing is as important as maximizing infrastructure capital
  6. Changing the composition of capital flow also has the potential to increase the efficiency and sustainability of public finance and infrastructure projects

Other measures required

  1. There exists a huge potential for creating markets and improving the preparation and regulation of PPP projects in areas such as time taken to prepare projects, contract management, risk management, socioeconomic impact, affordability, and bankability of projects, and meeting the strategic importance of development goals
  2. While commercial banks will continue to be an important source of infrastructure finance, capital markets need to play a bigger role, given the increased demand for long-term sources of finance for infrastructure projects
  3. Bond markets, especially local currency bond markets, will be critical to filling the infrastructure-investment gap. There is also a need to avoid currency mismatches from borrowing in foreign currency for projects that generate revenues largely in local currency
  4. More fiscal reforms could also generate more revenues to bridge the infrastructure financing gap
  5. Taxation will play a key role in incentivizing investment and ensuring that the proceeds of investment are redistributed and reallocated in line with sustainable development priorities
  6. A lot more regulatory and institutional reforms are also needed to make infrastructure projects more attractive for private investors

Way forward

  1. No country can sustain growth and reduce poverty without maximizing development finance
  2. Maximizing finance for development, from billions to trillions, will not come from a single financing instrument
  3. Only by combining resources—international and domestic, public and private, corporate and philanthropic—will it be possible to achieve the necessary levels of financing
  4. The challenge is to increase both the scale and impact of financial resources, improve linkages, and build partnerships
  5. More can be done to strengthen the framework and tools needed to engage the private sector and maximize finance for development
Nov, 20, 2018

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

Note4students

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


Context

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
Nov, 15, 2018

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

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
May, 04, 2018

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

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
Mar, 19, 2018

Highways authority plans equity funding mechanism

Note4students

Mains Paper 3: Economy | Investment model

From UPSC perspective, the following things are important:

Prelims level: NHAI, Bharatmala programme, equity-funding model, taxable bonds, National Saving Scheme

Mains level: Different types of investment models


News

Equity-funding model for greenfield expressway projects

  1. The National Highways Authority of India (NHAI) is working on an equity-funding model for its upcoming expressway and economic corridor projects, auctioning them before they are built
  2. The model will be tried for NHAI’s greenfield expressway projects under the Rs5.35 trillion-Bharatmala programme

Fund deficit may arise in future

  1. This year, the Economic Survey had revealed that India will face a $526 billion infrastructure investment gap by 2040
  2. Around $4.5 trillion worth of investments is required by India till 2040 to develop infrastructure to improve economic growth and community well-being
  3. The current trend shows India can meet around $3.9 trillion infrastructure investment

Tax bonds not feasible

  1. The move is also being devised because the finance ministry has raised red flags on idea of NHAI taxable bonds 
  2. The concerns range from the impact of these bonds on other savings instruments to the quantum of the float
  3. It might impact other government schemes like National Saving Scheme, etc.
Oct, 04, 2017

[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.


News

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.

 

Oct, 21, 2016

India’s PPP model can revive private investment: Moody’s II

  1. Solutions: FM Arun Jaitley in 2014 had announced the creation of an institution called 3P India
  2. It had a corpus of Rs.500 crore to provide support to mainstreaming public-private partnerships (PPPs)
  3. The Vijay Kelkar panel had also given recommendations
  4. Best practices abroad: In the U.K., Canada and Australia, the Moody’s report said that more developed PPP markets typically feature well-developed regulatory frameworks
  5. Other best practices: Largely standardised project contracts, a large and sophisticated investor base, and predictable project pipelines
Oct, 21, 2016

India’s PPP model can revive private investment: Moody’s I

  1. Source: Moody’s Investors Service report
  2. Historical underinvestment and rapid economic growth are straining India’s existing infrastructure
  3. Report findings: The sharp decline in private investment in PPP projects in recent years is due to delays in project approvals and land purchases by the government
  4. Other causes: Complicated dispute resolution mechanisms in the concession agreements, and lower than expected revenues due to aggressive assumption
May, 20, 2016

Hybrid annuity model for highways draws bidders

  1. Context: The hybrid annuity model for awarding highway contracts introduced by the government last year
  2. Progress: The model is beginning to find some traction after an initial lukewarm response from infrastructure players
  3. Reason: NHAI’s aggressive promotion of the model, through awareness campaigns to lenders and developers
Mar, 09, 2016

PPP framework needs to be reoriented

  1. Context: Minister of State for Power, said that entire PPP framework needs to be reoriented to make it more investor friendly
  2. Relevance: If India has to develop at the kind of pace that we all wanted to and provide bare necessities to its people by 2022, then clearly the PPP model is unavoidable
  3. Why? It will be the engine in growth in the infrastructure sector and have to evolve the right regulatory framework which should be simple and predictable
  4. Minister’s suggestion: Penalty should be a 2 sided affair in PPP model and not just restricted to the private body as partnership means sharing the fruits of development and the losses
  5. Way ahead: If any framework is created then it should provide penalty for private sector and the other side
Mar, 09, 2016

Govt to be held liable for delays in PPP projects

  1. Context: A new framework to reinvigorate PPP projects is underway as announced in Budget
  2. Amendments suggested:
    For a joint venture, both the partners should be equally accountable for any delays and cost escalation
  3. Those having less than 80% of land in possession would not be eligible for bidding
  4. This would help filter the applications at the first stage and save time and energy in swift execution
  5. Consultations and engagements with stakeholders at all levels are to be taken which can save time wasted in re-negotiation
Mar, 03, 2016

Learn about International Finance Corporation (IFC)

  1. What? International financial institution that offers investment, advisory, and asset management services to encourage private sector development in developing countries
  2. Established in? 1956
  3. Objective: To advance economic development by investing in strictly for-profit and commercial projects that purport to reduce poverty and promote development
  4. Functions: It offers an array of debt and equity financing services and helps companies face their risk exposures, while refraining from participating in a management capacity
Jan, 28, 2016

Hybrid Annuity model for implementing highway projects

  1. The CCEA has given its approval for the Hybrid Annuity Model for implementing the highway projects.
  2. Such a model would be adopted for projects not found viable on BOT (Toll) mode.
  3. It shall be more effective in terms of maximizing the quantum of kilometers implemented within the available financial resources of the govt.
  4. Objective- To revive highway projects in the country by making one more mode of delivery of highway projects.
  5. It will facilitate uplifting the socio-economic condition of the entire nation due to increased connectivity.
Jan, 27, 2016

Centre mulls coastal economic zones to boost manufacturing

Though India has many ports, there is no cluster or a section of coastline that enjoys special status and incentives.

  1. Government is planning to create coastal economic zones(CEZs) along the country’s 7,500-km long coastline.
  2. It will cover many States, ports and special economic zones having uniform policy to further boost manufacturing.
  3. There is a thinking in the government that there should be a port-led development as was done in China where cities were granted special status of open coastal cities.
  4. These cities enjoyed special policies of the government.
Dec, 29, 2015

Kelkar chalks out rules for PPP revival

Infrastructure investments of about Rs.12 lakh cr remained stuck as of end-Dec. 2014.

  1. The Kelkar panel has come out with clear-cut norms on resolving issues and clarifying norms on re-negotiation of contracts.
  2. Kelkar Committee report has recommended creation of multi-disciplinary expert institutions.
  3. To address the problem of stalled PPP projects and legacy issues plaguing the projects.
  4. The report says that an Infrastructure PPP Project Review Committee (IPRC) be constituted comprising at least one expert in finance and economics, law.
  5. It recommends creation of an Infrastructure PPP Adjudication Tribunal, to be chaired by a former SC Judge or former HC Chief Justice, with at least 1 technical and financial member.
Dec, 19, 2015

Model Text for the Indian Bilateral Investment Treaty (BIT)

BITs help project India as a preferred foreign direct investment (FDI) destination as well as protect outbound Indian FDI.

  1. The Union Cabinet has given its approval for the revised Model Text for the Indian Bilateral Investment Treaty (BIT).
  2. It will be used for re-negotiation of existing BITs and negotiation of future BITs.
  3. A BIT increases the comfort level and boosts the confidence of investors by assuring a level playing field.

It will also be used for investment chapters in –

  • Comprehensive Economic Cooperation Agreements (CECAs)
  • Comprehensive Economic Partnership Agreements (CEPAs)
  • Free Trade Agreements (FTAs).
Nov, 20, 2015

PPP revival: Kelkar panel submits report to Arun Jaitley

  1. The FM had made an announcement regarding re-visiting the existing PPP mode to execute such projects, in 2015-16 budget.
  2. PPP projects which were doing well for quite some time have run into various kinds of problems, in recent years.
  3. It was entrusted to suggest ways on improving capacity building within the govt. for effective implementation of PPP projects.
  4. The panel’s terms of reference included:
    • Reviewing the experience of PPP policy
    • Analysis of risks involved in such projects in different sectors
    • Existing framework of sharing of such risks between project developer and govt.
Aug, 28, 2015

HAM model attracts Malaysian developers

Govt. has kicked off efforts to woo Malaysian contractors, who have been among the earliest investors in the roads sector in India.

Recently, Malaysian contractors have expressed interest in developing the Delhi-Meerut Expressway (DME), the first project to be bid under HAM model.

  1. The newly conceived Hybrid Annuity Model (HAM) is designed to make investments in road projects more attractive for private player.
  2. In the new model, govt. takes all the risk including the traffic.
  3. As the model assures developers getting back their investment, it is bound to attract bids from private player.
  4. The HAM model was conceived in the last financial year to bring back private participation in highway projects.
  5. The govt. would provide 40% of the project cost to the developer to start work.
  6. The remaining investments have to be borne by developer.
  7. NHAI will collect toll and refund the amount in installments over a period of 15-20 years.
May, 29, 2015

Committee headed by Vijay Kelkar to revisit PPP infra model

The committee will review the experience of PPP Policy.

  1. It will also include the variations in contents of contracts and difficulties experienced with particular conditions.
  2. Suggest optimal risk sharing mechanism by analyzing risks involved in PPP projects in different sectors.
  3. It will also look into existing framework of sharing of such risks between the Government and project developer.
  4. Include best international practices and in correspondence with our institutional context.
  5. Suggest measure to Government in order to improve capacity building for effective implementation of the PPP projects.
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