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.”
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.
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.
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
- 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.
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
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.
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
Demand for better services
- The Fourth Industrial Revolution, along with internet penetration and access to smartphones, has changed the outlook of people everywhere
- Everyone can see how others live and this has raised their aspirations and expectations
- People are demanding improved infrastructure to meet their aspirations
- This aspiration is particularly acute in the developing world, given the poor infrastructure and huge development financing needs
Infrastructure financing in developing nations
- 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
- Meeting the financing gap needed for infrastructure services will be one of the biggest challenges in development
- 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
- While the infrastructure financing gap is huge in the developing world, the potential for attracting private investment for infrastructure projects is also huge
- 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
- The funds managed by institutional investors in the Organization for Economic Cooperation and Development (OECD) countries exceed $100 trillion
- Their allocation to emerging-market infrastructure projects is tiny
Reaping the benefits
- Many developing countries have launched programmes to attract private investments into infrastructure projects
- India has experienced a rapid increase in the number of public-private partnership (PPP) infrastructure projects during the last two decades
- The government has established institutional structures in the ministry of finance and line ministries to scale up PPP projects
- 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
- The electricity and road sectors have attracted the lion’s share of PPP investments in India
- 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
- Ports and railways have also attracted investment but at the lower end
Challenges in financing
- Commercial banks have dominated the financing of infrastructure projects
- This amounts to the government transferring a huge amount of risk from public to the private sector
- 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
- India and most of the developing world face a twin challenge—closing the infrastructure financing gap and changing the composition of financing
- Given rising global macroeconomic and trade concerns, changing the composition of financing is as important as maximizing infrastructure capital
- 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
- 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
- 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
- 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
- More fiscal reforms could also generate more revenues to bridge the infrastructure financing gap
- 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
- A lot more regulatory and institutional reforms are also needed to make infrastructure projects more attractive for private investors
- No country can sustain growth and reduce poverty without maximizing development finance
- Maximizing finance for development, from billions to trillions, will not come from a single financing instrument
- Only by combining resources—international and domestic, public and private, corporate and philanthropic—will it be possible to achieve the necessary levels of financing
- The challenge is to increase both the scale and impact of financial resources, improve linkages, and build partnerships
- More can be done to strengthen the framework and tools needed to engage the private sector and maximize finance for development
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
Private sector participation declining
- The private sector contributed an estimated ₹20 trillion, or a third of India’s ₹60 trillion infrastructure investment, between fiscals 2008 and 2017
- 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?
- 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
- Six years on, private investment capacity is yet to recover meaningfully
No sector remains attractive
- While airports, ports and power transmission have robust engagement models, new investment activity is tepid
- In railways and urban infrastructure, private investments are negligible
- It’s down sharply at the state level as well
- National highways remain the only bright spot, where policy actions and the de-risked hybrid annuity model (HAM) have revived projects
- 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?
- India’s infrastructure investment spending needs to be ₹50 trillion between fiscals 2018 and 2022
- That would be ~5.1% of gross domestic product (GDP)
- Achieving this requires considerably more private sector contribution
- Private sector participation in infrastructure delivery helps deliver tangible benefits
- In highways, airports, ports and renewables, the private sector’s role has been landscape-altering
- The private sector has also delivered efficiently—both on project execution (where land and clearances have not been a constraint) as well as operations
- Besides, private participation enhances public accountability
- As consumers, we rarely hold public utilities to account for non-performance and resort to coping solutions
- Yet, when a public-private partnership (PPP) contract is awarded, we tend to demand better services right away
- 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
- Empower public institutions to drive transformation
- 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
- Capable creditworthy public institutions are an essential prerequisite to attract private investment
- 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
- 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
- Expediting creation of a PPP think-tank institution as recommended by the Kelkar committee could help
- Besides, we should look beyond conventional build-operate-transfer models to annuity and investment-lite performance-contracting models
- 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
- Stalled projects need to be dealt with steadfastly to nurse private developers and financial institutions to health
- Building certainty and capacity to implement the Insolvency and Bankruptcy Code will be crucial
- 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
- Creating a diversified and resilient financing ecosystem to facilitate a shift from overreliance on bank-led financing remains a key work-in-progress facilitation
- Allied guarantee instruments to strengthen bond markets and expeditious deployment of capital under the National Investment and Infrastructure Fund are facilitations that can help
- History has taught us that PPPs are no silver bullet
- Broad-basing private investment in infrastructure requires relentless commitment and holistic efforts from both the Centre and the states
- Revving the stalling private sector investments engine is crucial to sustain and accelerate the infrastructure build-up that India needs, aspires for, and deserves
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
Growth of PPP sector in India
- Developing road networks in a timely and cost-effective fashion plays an important role in economic development
- In recent years, the government has extensively adopted the public-private partnership (PPP) approach in road development
- India has the distinction of having the largest PPP programme globally in the roads sector
Types of PPP projects
- 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
- Toll and annuity projects vary mainly in the way the developers recoup their investment
- 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
- While the private developer assumes the demand risk in toll projects, it is not the case with annuity projects
- A basic difference between the toll and annuity projects is in the risk-reward equation
- In the case of annuity projects, the developer does not assume any demand risk, but the upside is capped
- 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
- 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
- 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
- Toll projects, in general, are characterized by longer stretches, and therefore higher project costs
- They also have more structures as compared to annuity projects, indicating that they could have a higher degree of complexity
- 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
- In the last few years, the response from developers to new projects has been poor
- The estimated project costs have significantly escalated in the case of toll projects, hitting the project economics
- There is also a gap between the actual and projected traffic estimations made by the developers
- The toll projects are not as investment ready at the time of project award as compared to that of annuity projects
- 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
- It is important to understand the reasons behind the cost escalations
- 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
- That would lead to sustainable results, else the euphoria of the hybrid annuity model will be short-lived too
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.
Why do we need the PPP to provide infrastructure(such as roads and power)?
- Public provision faces two challenges: an incentive problem and a budget problem
- 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
- As a consequence, many worthwhile projects must be postponed
But the PPP can help
- Suppose the project is a highway structured as a toll road with a 20-year concession
- This seems to solve both the incentive and budget problem
- The contractor will be responsible for the increased maintenance cost, presumably making him more likely to do high-quality work
- He also would have an incentive to run an efficient operation, because he gets to keep the savings
- 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
- The bidders(for road projects) need to plan for two phases: engineering, procurement and construction (EPC),
- and a longer phase of operation when toll revenue is collected to recover incurred costs and expected returns
- There are plenty of uncertainties in both phases, but especially during EPC, which may last three-seven years, depending on the project
- Given the risks in this phase, capital markets demand that it be financed with more equity than debt
- So, the project involves quite sophisticated financial engineering
- Almost always, such plans cannot be realized unless the government provides guarantees against geological or traffic risks
- Negotiating such agreements often adds years to the project
The main issues with the private projects
- The above uncertainties means that there are good reasons why privately financed projects become more expensive, given the higher cost of capital,
- and why completing them can be much, much slower
What can be done? : The possible solution
- An alternative is to concentrate the role of the private sector in the latter phases of the project
- The best option may be for the government to build the road and sell the concession for operation and maintenance
- This allows the government to cash out and reinvest the resources in pre-investment and EPC,
- thus recycling scarce public capital more quickly while cutting out the most expensive and slowest parts of private involvement
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
Equity-funding model for greenfield expressway projects
- 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
- The model will be tried for NHAI’s greenfield expressway projects under the Rs5.35 trillion-Bharatmala programme
Fund deficit may arise in future
- This year, the Economic Survey had revealed that India will face a $526 billion infrastructure investment gap by 2040
- Around $4.5 trillion worth of investments is required by India till 2040 to develop infrastructure to improve economic growth and community well-being
- The current trend shows India can meet around $3.9 trillion infrastructure investment
Tax bonds not feasible
- The move is also being devised because the finance ministry has raised red flags on idea of NHAI taxable bonds
- The concerns range from the impact of these bonds on other savings instruments to the quantum of the float
- It might impact other government schemes like National Saving Scheme, etc.
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.
- India’s infrastructure deficit continues to persist despite the relative catch-up in recent years.
- 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.
- While currently India is spending around $120 billion per year.
- 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.
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.
- Solutions: FM Arun Jaitley in 2014 had announced the creation of an institution called 3P India
- It had a corpus of Rs.500 crore to provide support to mainstreaming public-private partnerships (PPPs)
- The Vijay Kelkar panel had also given recommendations
- 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
- Other best practices: Largely standardised project contracts, a large and sophisticated investor base, and predictable project pipelines
- Source: Moody’s Investors Service report
- Historical underinvestment and rapid economic growth are straining India’s existing infrastructure
- 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
- Other causes: Complicated dispute resolution mechanisms in the concession agreements, and lower than expected revenues due to aggressive assumption
- Context: The hybrid annuity model for awarding highway contracts introduced by the government last year
- Progress: The model is beginning to find some traction after an initial lukewarm response from infrastructure players
- Reason: NHAI’s aggressive promotion of the model, through awareness campaigns to lenders and developers
- Context: Minister of State for Power, said that entire PPP framework needs to be reoriented to make it more investor friendly
- 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
- 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
- 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
- Way ahead: If any framework is created then it should provide penalty for private sector and the other side
- Context: A new framework to reinvigorate PPP projects is underway as announced in Budget
- Amendments suggested:
For a joint venture, both the partners should be equally accountable for any delays and cost escalation
- Those having less than 80% of land in possession would not be eligible for bidding
- This would help filter the applications at the first stage and save time and energy in swift execution
- Consultations and engagements with stakeholders at all levels are to be taken which can save time wasted in re-negotiation
- What? International financial institution that offers investment, advisory, and asset management services to encourage private sector development in developing countries
- Established in? 1956
- Objective: To advance economic development by investing in strictly for-profit and commercial projects that purport to reduce poverty and promote development
- 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
- The CCEA has given its approval for the Hybrid Annuity Model for implementing the highway projects.
- Such a model would be adopted for projects not found viable on BOT (Toll) mode.
- It shall be more effective in terms of maximizing the quantum of kilometers implemented within the available financial resources of the govt.
- Objective- To revive highway projects in the country by making one more mode of delivery of highway projects.
- It will facilitate uplifting the socio-economic condition of the entire nation due to increased connectivity.
Though India has many ports, there is no cluster or a section of coastline that enjoys special status and incentives.
- Government is planning to create coastal economic zones(CEZs) along the country’s 7,500-km long coastline.
- It will cover many States, ports and special economic zones having uniform policy to further boost manufacturing.
- 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.
- These cities enjoyed special policies of the government.
Infrastructure investments of about Rs.12 lakh cr remained stuck as of end-Dec. 2014.
- The Kelkar panel has come out with clear-cut norms on resolving issues and clarifying norms on re-negotiation of contracts.
- Kelkar Committee report has recommended creation of multi-disciplinary expert institutions.
- To address the problem of stalled PPP projects and legacy issues plaguing the projects.
- The report says that an Infrastructure PPP Project Review Committee (IPRC) be constituted comprising at least one expert in finance and economics, law.
- 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.
BITs help project India as a preferred foreign direct investment (FDI) destination as well as protect outbound Indian FDI.
- The Union Cabinet has given its approval for the revised Model Text for the Indian Bilateral Investment Treaty (BIT).
- It will be used for re-negotiation of existing BITs and negotiation of future BITs.
- 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).
- The FM had made an announcement regarding re-visiting the existing PPP mode to execute such projects, in 2015-16 budget.
- PPP projects which were doing well for quite some time have run into various kinds of problems, in recent years.
- It was entrusted to suggest ways on improving capacity building within the govt. for effective implementation of PPP projects.
- 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.
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.
- The newly conceived Hybrid Annuity Model (HAM) is designed to make investments in road projects more attractive for private player.
- In the new model, govt. takes all the risk including the traffic.
- As the model assures developers getting back their investment, it is bound to attract bids from private player.
- The HAM model was conceived in the last financial year to bring back private participation in highway projects.
- The govt. would provide 40% of the project cost to the developer to start work.
- The remaining investments have to be borne by developer.
- NHAI will collect toll and refund the amount in installments over a period of 15-20 years.
The committee will review the experience of PPP Policy.
- It will also include the variations in contents of contracts and difficulties experienced with particular conditions.
- Suggest optimal risk sharing mechanism by analyzing risks involved in PPP projects in different sectors.
- It will also look into existing framework of sharing of such risks between the Government and project developer.
- Include best international practices and in correspondence with our institutional context.
- Suggest measure to Government in order to improve capacity building for effective implementation of the PPP projects.
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