Public-private partnership (PPP), as a mode of project implementation, has been prevalent for several years in the development and delivery of public goods and urban infrastructure. Since the 2000s, the scope of private sector participation (PSP) has expanded and evolved in terms of both the number and nature of projects.
Overall, the PPP experience in urban infrastructure has been a mixed bag with some successes and some failures. However, the experience has resulted in a bank of case studies which offer some key lessons for states and urban local bodies (ULBs).
Despite efforts to revive PPP interest in the urban infrastructure sector, the pessimism regarding the relevance of PPP has remained. Factors such as ULBs’ limited resources and lack of capacity to execute large-scale projects, absence of a stable revenue stream, information asymmetry and high capital costs combined with high revenue risks are currently delaying the award and completion of PPP projects.
Overall experience
Globally, there have been massive investments and efforts towards enhancing the role of PSP in infrastructure development. During 2000-18, emerging and developing economies including India undertook close to 6,000 PPP projects involving an investment of around $1.35 trillion.
India saw an unprecedented surge in projects being implemented on a PPP basis, mobilising a cumulative investment of Rs 9.31 trillion during 2000-17 across 1,457 projects. India’s PPP investment in the infrastructure sector witnessed a peak in 2010 despite the global financial crisis of 2008-09. Investments in the road sector accounted for a 48 per cent share, followed by the energy sector (22 per cent). With regard to project status, about 50 per cent of the projects have been completed, of which 48 per cent are at the operations and maintenance (O&M) phase. The remaining projects are either in the pre-construction stage (20 per cent) or are being implemented (30 per cent). However, post 2010, this mode of implementation lost its popularity, both globally and within the country.
Lessons to be learnt: PPP experience of port and railway sectors
Ports: Conventionally, in a PPP scenario, the private sector is believed to be a major risk bearer. This has necessitated a greater need for the management of these risks to ensure an equitable position for the government and the private sector. In India, the first PPP project in the port sector was implemented in the late 1990s, in the backdrop of increasing containerisation of cargo. During the late 1990s to mid-2000s, there was an absence of a regulator in the sector. This was followed by the establishment of the Tariff Authority for Major Ports in 2004, which defined the fundamental principles of tariff setting for the major ports in the country. With the firming up of the regulatory framework, the government made exhaustive attempts to lay down norms for privatisation of port facilities. Thus the sector has attracted a lot of players including established foreign majors.
However, PPPs in the port sector declined after the 2010s. A new phenomenon then emerged which challenged the concept of regulation in the sector. While the central government continued to focus on the major ports, there was a mushrooming of private ports. Thereafter, a slew of initiatives were taken by the government to provide the major ports with a level playing field vis-à-vis non-major ports. The government introduced the new Guidelines for Determination of Tariff at Major Ports, 2014. With this, additional flexibility was granted to the major ports in tariff fixation.
Railways: Private investment has been slow to flow into the sector amidst uncertainty over the bankability of projects and excessive control exercised by Indian Railways. Two schemes were introduced in the 1990s for promoting PPP in railways – the Own Your Wagon Scheme in 1992 and the Build, Own, Lease and Transfer Scheme in 1996.
Over the past few years, certain areas have been carved out to utilise the technical expertise and experience of the private sector. So far, port-rail connectivity projects (to maritime ports) have been the most successful PPP projects in the sector. The biggest development in the PPP space so far has been the introduction of the Participative Policy of Investment in Railway Infrastructure for rail connectivity and capacity augmentation (December 2012). So far, eight lines spanning a total length of over 1,000 km have been completed. Besides, work on 11 connectivity projects (spanning 1,100 km) is under way. These projects involve an investment of Rs 200 billion-Rs 230 billion. Further, PPP has been successfully introduced in the container transportation segment, which was privatised in 2006. Currently, around 16 private container terminal operators are allowed to invest in rolling stock and container terminals. According to the latest available estimates, the total private investment in rolling stock and private rail lines amounts to Rs 80 billion.
ADB’s experience in creating institutional capacity
Capacity building could play an important role in helping ULBs and Indian private players mobilise funds for PPP projects. Currently, the biggest constraint in the urban infrastructure sector is the lack of capacity and trained manpower at the ULB level. Of late, local bodies have been taking measures to improve their financial and operational health. The most successful example is the Kolkata Municipal Corporation. Since 2006, the Asian Development Bank (ADB) has been providing technical assistance for building capacity in project and contract management. The conventional classroom training exercises have been successfully replaced by the principle of “learning by doing”. Another successful example of PPP in the Asia-Pacific region is Cambodia’s 24×7 water supply project. The implementing agency has been successful in reducing the non-revenue water component in total water supply to 10 per cent and achieving 97 per cent tariff recovery.
Key issues and challenges
While significant progress has been made in attracting private investments, there exist certain unresolved challenges across the PPP lifecycle, particularly in the design-finance-build-operate-transfer model. At the design stage, there has been a complete lack of efficient and robust project planning and preparation, leaving little scope for design innovation by the private sector. Mobilising finance for PPP projects is another major structural challenge as there are increasing cases of non-performing assets in the infrastructure sector. The development of a robust financing and hedging ecosystem is still in the nascent stage.
PPPs have also been adversely affected by delays in land acquisition and clearances for undertaking construction. Further, during the O&M phase, there has been a lack of focus on asset management, leading to rising disputes and litigation. Thus, there are very few projects that successfully reach the transfer phase.
Other key issues and challenges affecting the successful implementation of PPP projects include the unwillingness to pay user charges, lack of a stable revenue stream and stakeholder support, asymmetrical risk distribution, and irrationally low user charges.
Conclusion and the way forward
Given inadequate resources with the central government, long-term PPP arrangements are expected to play an increasingly important role. For successful implementation of PPP projects, equal emphasis should be laid on the creation as well as O&M of assets. PPPs need to be seen as a governance tool for service delivery and not merely as a financing tool. Further, there is a need to bring in the fourth P in PPP, making it People, Public, Private Partnership (4P). The role of the public sector is also crucial for achieving a balance between risk identification, allocation and mitigation. Unless ULBs take steps to address operational inefficiencies, enhance revenue collection and reduce losses, PSP will always face hurdles.
Based on a panel discussion among Yudhvir Malik, Secretary, Ministry of Road Transport and Highways;, Gopal Krishna, Secretary, Ministry of Shipping; Sanjay Reddy, Vice Chairman, GVK Group; Kenichi Yokoyama, Country Director, ADB, India; and Moazzam Mekan, Principal Investment Officer, IFC, at a recent NITI Aayog conference