Chanakya IAS Academy Blog

IAS Blog | Civil Services Preparation | Chanakya IAS Academy Blog
18 August 2016 K2_CATEGORY IAS Blog

Public Private Partnerships- issues and solutions

Background

  • A public–private partnership is a government service or private business venture that is funded and operated through a partnership of government and one or more private sector companies.
  • PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project
  • Public Private Partnerships (PPPs) in infrastructure refer to the provision of a public asset and service by a private partner who has been conceded the right (the “Concession”) for the purpose, for a specified period of time, on the basis of market determined revenue streams, that allow for commercial return on investment.
  • PPPs in infrastructure represent a valuable instrument to speed up infrastructure development in India. This speeding up is urgently required for India to grow rapidly and generate a demographic dividend for itself and also to tap into the large pool of pension and institutional funds from aging populations in the developed countries.
  • India offers today the world’s largest market for PPPs. It has accumulated a wealth of experience in getting to this premiere position. As the PPP market in infrastructure matures in India, new challenges and opportunities have emerged and will continue to emerge.

Issues with PPPs

Over the past few years, a number of public private partnership (PPP) projects across various sectors have been in a stalled state (Economic Survey 2015). Further, private investment under the PPP investment model has failed to come by due to various reasons. An examination of various reasons for issues plaguing PPPs is as follows:

  • According to Economic Survey-2015, many companies have been “over-leveraging” i.e. bidding beyond capacity and expecting government to redraw contracts
  • Finance-The long term finance for PPP projects has dried up due to excessive dependance on banks and lack of proper corporate bond market in the country. Banks are further stressed due to high NPAs and governance issues.
  • Clearance issues for projects - land acquisition and environmental clearances for projects have been difficult to come by
  • According to Economic Survey 2015, PPPs have certain inherent flaws in design due to which they have been stalled eventually- no re-negotiation structures; wrongful risk allocation; lack of focus of efficient service provision
    • Focus on fiscal benefits rather than efficient service provision; no measures to penalise the providers for poor service
      • Bidders giving highest revenue share to govt win the contract
    • Neglect the principle of allocating risk to the agency best able to manage it eg traffic risks
    • No ex-ante renegotiation structures; failed projects don’t lead to investigations against bureaucrats while re-negotiated projects might do so.

Vijay Kelkar Committee on PPP

  • The Vijay Kelkar Committee was formed to revamp and revitalise the PPP model of development
  • Recommendations of the committee
  • setting up independent regulators to address stalled infrastructure projects for various sectors
  • The Government may take early action to amend the Prevention of Corruption Act, 1988 which does not distinguish between genuine errors in decision-making and acts
    • Measures may be taken immediately to make only malafide action by public servants punishable, and not errors, and to guard against witch hunt against government officers and bureaucrats for decisions taken with bonafide intention.
  • There is an urgent need to rebuild India’s PPP capacities.
    • Structured capacity building programmes for different stakeholders including implementing agencies and customized programmes for banks and financial institutions and private sector need to be evolved.
    • The need for a national level institution to support institutional capacity building activities must be explored. The Committee strongly endorses the “3PI” which can, in addition to functioning as a centre of excellence in PPPs, enable research, review, roll out activities to build capacity, and support more nuanced and sophisticated models of contracting and dispute redressal mechanisms. A dynamic 3PI can support a dynamic process of infrastructure design, build, and operate in India and thereby help deliver on the promise of reliable infrastructure services for all citizens
  • Funding- It is necessary to explore options for sourcing long term capital at low cost.
    • Towards this, the Committee recommends, encouraging the banks and financial institution to issue Deep Discount Bonds or Zero Coupon Bonds (ZCB); will not only lower debt servicing costs in an initial phase of project but also enable the authorities to charge lower user charges in initial years.
    • Monetisation of viable projects that have stable revenue flows after EPC delivery may be considered. This should be seen as a monetisation opportunity that can attract risk averse long-term funding like pension and institutional investors.
  • Changing mindsets and attitudes of the authorities- the success of deploying PPP as an additional policy instrument for creating infrastructure in India will depend on the change in attitudes and mindsets
    • means moving away from “transaction to relationship,” accommodating “give and take” between private and public sector partners, and finally accepting uncertainties and appropriate adjustments inherent in implementing long-time contracts.
  • Risk allocation : The dominant, primary concern of the Committee was the optimal allocation of risks across PPP stakeholders. Inefficient and inequitable allocation of risk in PPPs can be a major factor in PPP failures, ultimately hurting the citizens of India
    • A rational allocation of risks can only be undertaken in sector and project-specific contexts.
    • For the next generation of PPP Contracts, the Committee suggests the following broad guidelines while allocating and managing risks:
      • an entity should bear the risk that is in its normal course of its business;
      • an assessment needs to be carried out regarding the relative ease and efficiency of managing the risk by the entity concerned
      • the cost effectiveness of managing the risk needs to be evaluated
      • any overriding considerations/stipulations of a particular entity need to be factored in prior to implementing the risk management structure.
      • DEA, or preferably the 3PI, should deploy sophisticated modeling techniques that exist to assess risk probabilities and the need to provision for them;
      • there should be ex-ante provisioning for a renegotiation framework in the bid document itself
  • Focus on service delivery rather than fiscal benefits- better identification and allocation of risks between stakeholders
  • Setting up of an Infrastructure PPP review committee (IPRC)-
    • to evaluate and send its recommendations in a time-bound manner upon a reference being made of “Actionable Stress” in any Infrastructure Project developed in PPP mode beyond a notified threshold value.
  • Setting up on an Infrastructure PPP Adjudication Tribunal (IPAT)-
    • chaired by a Judicial Member (former Judge SC/Chief Justice HC) with a Technical and/or a Financial member
  • Model Concession Agreements- to ensure a rational allocation of risks undertaken in sector and project-specific contexts. MCAs for all sectors to be reviewed to capture the interests of all stakeholders
  • Swiss Challenge Issues- Unsolicited Proposals (“Swiss Challenge”) may be actively discouraged as they bring information asymmetries into the procurement process and result in lack of transparency and fair and equal treatment of potential bidders in the procurement process
  • Case of very small Projects- The authorities may be advised against adopting PPP structures for very small projects, since the benefits of delivering small PPP projects may not be commensurate with the resulting costs and the complexity of managing such partnerships over a long period.
  • Recommendations for various sectors-
    • Roads: avoiding delays, institutionalized dispute resolution, improved project development activity, monetization of operational assets, efficiency and transparency by electronic tolling, etc
    • Ports: review of role and need of Tariff Authority for Major Ports (TAMP), review of MCA, quicker clearances, rationalized leases and stamp duties
    • Airport: PPPs to be encouraged where viable in Greenfield and brownfield projects, have policy that addresses potential demand for airport services in the country, notify a unified regulatory structure, clarity in delineation of Till policy,
    • Railways- Encourage use of PPPs in sectors like Railways, Urban, etc. Railways to have an independent tariff regulator, tap potentially useful PPP opportunities including brownfield assets

Other government interventions

Hybrid annuity model

  • The hybrid model is actually a mix of Engineering, Procurement and Construction(EPC) and BOT models
  • In the annuity type, the concessionaire gets a fixed and assured payment from the government. The assured return balances the risk of insufficient revenues for the developer. Further, the government shoulders the responsibility of revenue collection.
  • Also, the government pays 40% of the project cost to the concessionaire during the construction phase in five equal instalments of 8% each
  • The government will provide 90% of land and the related environmental and forest clearance
  • The operation and maintenance of the toll road rests with the concessionaire.
  • The model goes a long way in shielding the risks for the developer and attracting funding to the infrastructure sector which is facing shortfall of funds in the recent years.
  • The model has achieved considerable success, leading to increase in the average bidders for projects by 3 times.

Way forward

  • The Vijay Kelkar committee on PPP restructuring suggests some forward-looking and viable steps for the regime. Some of the recommendations such as encouraging 3PI to be a centre of excellence, model concession agreements, optimum risk allocation and independent regulators for each sector will go a long way in addressing the problems plaguing the PPP projects.
  • Further, there is dire need for a independent project renegotiation structure for negotiating stalled PPP projects.
  • The Kelkar committee has suggested exploring various mechanisms for finance of PPP projects. Some other measures maybe to simplify corporate debt market regulation and explore other financing alternatives- corporate bonds; pension funds etc
  • Further, there is a need for better exit options- bankruptcy codes, asset reconstruction etc
  • Also, according to economic survey 2015, Highway tolls should have correlation between
    • reasonable profit for the private player
    • users’ capacity to pay
    • measures such as traffic triggers and re-equilibrium discount should be employed to ensure quality service at the same time.