Strategy to revitalize PPPs in India: 

Strategy to revitalize PPPs in India: 

Context

• India’s infrastructure deficit continues to persist despite the relative catch-up in recent years.

What is the need of the hour?

• 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.
• That demands more than $300 billion of spending every year for the next 13 years.
• Broad estimates indicate that the 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.

What are the problems?

• Much of this fund comes from the private sector, but weak economic growth and the debt overhang problem have constrained both the capacity and flow of private investment in asset creation.
• The difficult circumstances have prompted the government to step in and increase public expenditure on infrastructure.
• 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.
• On credit, the situation has aggravated sharply, with the non-performing assets (NPAs) of domestic lenders mounting.
• While the international credit and financing market is an avenue, high-quality sponsors and assets remain few.
• The dearth of bankable projects has contributed partly to the financing challenge, but the inability of project development and procurement agencies to adopt fairer risk-sharing principles and take on contingent financing obligations has contributed equally.

What is government going to do?

• It means that the government has to hit the reset button on PPPs to address core issues.
• Three aspects need immediate attention—restructuring PPP contracts through an objective process, broadening and deepening access to long-term credit and tightening procurement processes and timelines.
• Poor project preparation also remains an issue. Without adequate preparedness and appropriate risk allocation, large capital pools remain out of access.
• Bonds have worked very well overseas as a source of project finance, given their relative advantages over commercial bank debt.
• 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.