India’s PPP model can revive public investment

Context:

The government has made public-private partnership (PPP) component mandatory for availing central assistance for new metro projects.

Introduction:

• The Union Cabinet chaired by Prime Minister Narendra Modi on Wednesday, approved a new metro policy for expanding and regulating metro rail services in cities across India

Public private partnership (PPP):

• Public Private Partnership is a cooperative arrangement between public and private sectors.
• The PPP model display three essential characteristics:

1. Long term contractual arrangement
2. A significant level of responsibility and risk that is transferred from public to private sector
3. Contractual arrangement are built around performance based outcomes

Significance of PPP model:

• India’s infrastructure needs can be addressed by enhancing the public-private partnership (PPP) model.
• PPP model will help in attracting more private sector investment in sectors like roads and highways, electricity, and many more.
• A panel headed by former finance secretary Vijay Kelkar formed for the purpose, recommended setting up independent sector-wise regulators for PPP projects.
• The panel also added that the government should encourage the development of airport, ports and railways through the PPP model by ensuring easier funding for longer-term projects.
• PPP model attract new private investment
• Public-private partnerships (PPPs) have played a vital role in spurring economic growth in India.
• PPP framework help in improving country’s infrastructure cost, by looking at long-term costs, deploying its expertise, and shielding public partners from risk.
• Private sector participation also make public-private partnership valuable in developing new project designs, or funding entirely new arrangements to address infrastructure needs
• It helps in stimulating growth and development of the country.
• Improves accountability in the provisions of infrastructure and public services.

Benefits of PPP:

• Incentivizing the private sector to deliver projects on time and within budget.
• It helps in making the country more competitive in terms of infrastructure base as well as by giving a boost to its business and industry associated with infrastructure development
• Better infrastructure solutions than an initiative that fully public or fully private. Each participant contributes their best.
• A public-private partnership’s return on investment (ROI) may be greater than traditional, entirely private or government methods because innovative design and financing approaches become available when the two sectors work in collaboration.
• Risks are fully appraised early on to determine project feasibility.
• The operational and project execution risk is transferred from government to private participants.
• It allows government funds to be re-directed to other important socio-economic areas.
• PPP model’s greater efficiency reduces government budget and budget deficits.

• Public-Private partnerships that reduce costs also allow lower taxes.

Public Private Partnership Disadvantages:

• Every public private partnership involves risk for the private participants, which reasonably expects to be compensated for accepting those risks, which can increase government’s costs.
• Profits of the projects can vary depending on the assumed risk, competitive level, complexity, and volume of the project being performed
• If the expertise in the partnership lies heavily on the private side, the government is at an inherent disadvantage

Failures of PPP model:

PPP activity has been low in the last few years due to challenges with the PPP model. Some of these challenges are listed below:

• The sharp decline in private investment in PPP projects.
• Delay in project approvals and land purchases by the government
• Complicated dispute resolution mechanism in the concession agreements
• Lower than expected revenues due to aggressive assumption
• Delays in projects completion have resulted in cost overruns and revenue lossess to private concession owners.
• The poor performance of some infrastructure projects including PPP, has been of stress for both developers and the Indian banking system
• Delays in project completion have resulted in cost overruns and revenue losses to private concession owners. These factors have impacted the financial viability of some projects and their ability to service debt.

Solutions:

• India’s PPP framework would be vastly improved by making a few changes to do with risk allocation and an overhaul of the basis on which projects are awarded.
• Need to developed PPP markets with well developed regulatory framework
• Largely standardized projects contract
• A large and sophisticated investor bas
• India’s PPP framework will benefit if it address key issues regarding like:

(1) improved risk allocation;

(2) The ability to renegotiate unpredictable factors in the bid documents; and

(3) a move away from project awards based on one metric, such as estimated revenues,”

Government steps:

• Finance Minister Arun Jaitley in 2014 had announced the creation of an institution called 3P India with a corpus of Rs 500 crore to provide support to mainstreaming public-private partnership (PPP).
• Finance Minister Arun Jaitley in 2014 had announced the creation of an institution called 3P India with a corpus of Rs 500 crore to provide support to mainstreaming public-private partnership (PPPs).
• A panel formed for the purpose, headed by former finance secretary Vijay Kelkar, recommended setting up independent sector-wise regulators for PPP projects.
• The panel also added that the government should encourage the development of airports, ports, and railways through the PPP model by ensuring easier funding for longer-term projects.

The draft National PPP policy sets several objectives for PPPs:

• Harnessing private sector efficiencies in asset creation, maintenance, and service delivery
• Providing focus on a lifecycle approach for development of a project, involving asset creation.
• Creating opportunities to attract innovations and technological improvements.
• Availability of affordable and improved services to the users in a responsible and sustainable manner.

Conclusion:

The government should adopt a structural and programmatic approach if they want to rely significantly on the PPP model for new infrastructure development.