Challenges Galore

Greater policy support required for the success of PPPs

From the perspective of the number and the overall value of projects, India has emerged as one of the major public private partnership (PPP) markets within South Asia. The government has considered the PPP route in almost all sectors, including transportation (roads, ports, airports and railways), energy (power, oil and gas) and urban utilities as well as in social sectors. Although there was a substantial increase in PPP investments of $48.9 billion in 2010, India has witnessed a significant decline in PPP investment thereafter with investments of $4.12 billion in 2015 and $2.01 billion in 2016. The key reasons for this declining trend in the recent past are unfavourable market conditions, inability of promoters to infuse fresh equity, and delays in obtaining environmental and forest clearances for the private sector.

Regulatory framework

India earlier did not have dedicated central legislations on PPPs. With the objective of laying down robust procurement procedures and ensuring transparency in the PPP process, more recently, guidelines and manuals on PPPs have been issued. The government has also taken a series of measures towards improving the PPP environment in the country. Foreign direct investment (FDI) in most sectors is via the automatic route, implying 100 per cent FDI in almost all infrastructure sectors. In 2016, 19 per cent of PPP projects attracted foreign investors.

Although unsolicited bids or Swiss Challenge proposals are not preferred by the government owing to their lack of transparency, asymmetry of information and lack of fair and equal treatment to potential bidders, a number of states have embraced this procurement methodology. Rajasthan and Madhya Pradesh, for instance, have included it in their guidelines for infrastructure projects. Bihar, Karnataka and Punjab have also come out with guidelines/policies/procedures for treating unsolicited bids. Gujarat and Andhra Pradesh have adopted the Swiss Challenge approach in their respective state PPP acts and policies in different ways.

The government has introduced a new model, the hybrid annuity model, for road projects. Under this, the National Highways Authority of India (NHAI) will pay 40 per cent of the project cost in five equal instalments during the project tenure. The concessionaire will have to initially bear the balance 60 per cent of the project cost through a combination of equity and debt, which will be paid by NHAI in semi-annual instalments after the completion of project construction along with interest at the bank rate plus 3 per cent.

With a view to enhancing transparency in PPP projects, the Department of Economic Affairs has proposed the setting up of a dedicated dispute resolution mechanism to address issues related to bidding and award of PPP projects. However, this is yet to be implemented. Various alternative methods of dispute resolution such as amicable settlement, conciliation mediation, arbitration and expert adjudication are generally provided for in concession contracts.

Sector-wise PPP landscape

Roads

The government envisages the following projects potentially being developed through PPP models:

  • Completion of the Golden Quadrilateral and East-West and North-South corridors
    • Four-laning of 10,000 km under the National Highways Development Project (NHDP), Phase 2
    • Two-laning with paved shoulders of 20,000 km of national highways under NHDP, Phase 4
  • Augmenting highways in the Northeast under the Special Accelerated Road Development Programme
    • Six-laning of selected stretches of national highways under NHDP, Phase 5
    • Development of 1,000 km of expressways under NHDP, Phase 6
  • Construction of ring roads, flyovers and by-passes on selected stretches under NHDP, Phase 7

Build-operate-transfer is the preferred mode of delivery with around 70 per cent of the projects being developed under this model. The majority of PPP road projects are supported in terms of land acquisition by the government.

Recently, the sector has faced debt repayment issues and project fund constraints. It is noted that a few projects are undergoing debt restructuring processes with lenders, leading to delays in project completion. Further, traffic figures of the government tend to be optimistic, leading to the need for independent traffic projections by the private sector causing delays in financial closure.

Railways

The Indian Railways has not adhered to the model concession agreement offered by the erstwhile Planning Commission but has been relying on its past experience in PPP projects. This has, to a certain extent, resulted in delays and oversights causing operational challenges. At present, there is no independent PPP regulator.

Ports

Around 95 per cent of India’s trading by volume and 70 per cent by value is done through maritime transport, and the government plays an important role in supporting the port sector. It plans to introduce a new framework in the sector for renegotiating PPP contracts, based on sector-specific issues, to provide higher flexibility to the parties involved. The powers of the Ministry of Shipping have been enhanced to accord investment approval to PPP projects in the sector. Some of the challenges dampening the progress of PPPs in the port sector include inadequate cargo handling equipment and navigational aids and information technology systems, insufficient dredging capacity, tariff regulatory risk arising from the Tariff Authority for Major Ports’ policy, and a lack of technical expertise, all of which have lowered the efficiency of Indian ports.

Airports

The private sector played an unprecedented role during the 2005-12 period, acting as a key contributor to the development of airports in the PPP mode. The major contributors are the GMR Group (for Hyderabad International Airport and the modernisation of the Delhi International Airport), GVK (for the modernisation of the Mumbai International Airport), Larsen & Toubro, Unique and Siemens (for the Bangalore International Airport), and MAYTAS Infra (for the Shimoga and Gulbarga airports).

Land acquisition is a major roadblock in the development of airport projects under the PPP mode. Lack of information for bidders and obtaining statutory approvals are some other issues.

Energy

Issues such as obtaining environmental clearances, the absence of a dispute resolution facility, the lack of fuel supply and private sector liquidity limits have hampered PPP progress in the energy sector (power, oil and gas). An infrastructure group has been set up for addressing inter-ministerial clearances and other related issues.

Municipal solid waste

Some of the challenges for the progress of PPPs in the sector include insufficient sanitary landfill, lack of incentives for the private sector to invest, and insufficient land allocation. In the Solid Waste Management [SWM] Rules, 2016, detailed criteria have been established for setting up of solid waste processing and treatment facilities, SWM in hilly areas, waste-to-energy processing, site selection for sanitary landfills, development of facilities at sanitary landfills, specifications for landfilling operations and closure on completion of landfilling, and pollution prevention. Such measures are expected to facilitate the introduction of new landfill and waste processing facilities.

Water and wastewater

The absence of adequate pre-project development activities reduces the interest of private players as does the lack of information made available to bidders. The limited institutional capacity to undertake large and complex projects at various central ministries, and at the level of state and local bodies hinder the translation of targets into actual projects.

Information and communication technology

The lack of information as also of a comprehensive database has led to the overestimation of the potential demand for services, which in turn is leading to erroneous pricing of services, and hence significant fluctuations in the actual project cost as compared to original budgets. Long-term agreements are subject to technology and market uncertainty, thereby entailing large cost risks to public and private parties.

Conclusion

India needs huge investments for infrastructure development and PPPs seem to be the right way to attract foreign investment and contractors. There have been some success stories of the PPP model in the highway segment with standardised contracts which signal a level playing field and a structure that encourages private sector participation. However, there needs to be consistent policy support for the model to serve as an assurance to investors and contractors.

Based on the first edition of the Public-Private Partnership Monitor of the Asian Development Bank, November 2017

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