Long way to go – The PPP model for infrastructure
Long way to go
The public private partnership model in infrastructure projects is well on track but it still has miles to go, writes Shyamal Asangi
To provide momentum to infrastructure construction in the country, the government has accelerated the formulation of policy framework for public private partnerships (PPPs), effected regulatory changes, established institutional procedures and drawn the road map for implementing the PPP projects.
According to Dr Kalpana Dube, financial adviser and chief accounts officer at Indian Railways (Views expressed are personal and are not meant to reflect the views of her organisation in any way whatsoever.): “Momentum has built up in the government to readily execute infra projects.” However, two or three issues stand out if we assess the current PPP scenario in the country – firstly, there is sectoral imbalance.
For instance while the XIth plan outlay is maximum for the power sector (electricity generation/distribution) central assistance is largely tilted towards the road sector that is National Highway projects. More than 90% of the projects approved by the Public Private Partnership Appraisal Committee (PPPAC) are in the highway sector.
Secondly, while the Planning Commission and the Finance Ministry have cleared the ground as far as policy issues are concerned, the implementing ministries in the infrastructure sector have not kept pace with the process. This creates bottlenecks and hampers the speed of implementation. Thirdly, creation of social infrastructure through PPPs is clearly lagging behind, inadequate attention is being paid to creation of rural roads, rural electrification, housing, sanitation, education which could be speeded up through PPPs. Few State governments, however, have taken active steps in this regard.
Prof SS Chakraborty, chairman, CES (India) Pvt Ltd agrees that, “PPPs are seen as an important tool for producing an accelerated and larger pipeline of infrastructure investments, and catching up with the infrastructure deficit in the country.” Prof Chakraborty, whose company is very active in the infrastructure sector and has a number of PPP projects going, says that the PPP arrangements have several advantages.
More refinement required
The PPP model needs to be refined further and the government needs to resolve certain issues to allow the private sector to earn a reasonable RoI (Return on Investment) along with providing a quality infrastructure. According to Prof Chakraborty: “The provision of a regulatory and institutional framework is essential for PPPs which are characterised by long contract periods of 30 years. In case of a change in the conditions at any time during the contract period, adjustments and course-corrections should be permitted. Without this, companies will be reluctant to opt for PPP.”
Private players are of the opinion the both exit clause and dispute resolution mechanism should be provided for in the contract. There should be a term assessment. Based on the reports carried out by the individual assessor there should be scope for renegotiations.
However, Dr Dube opines that, “Firstly, we must be clear that we are talking about a reasonable RoI and not about windfall gains/short term immediate gains available through the PPP arrangement to the private investor through commercial exploitation of land and their own internal pricing models.”
PEs looking for good projects
According to Dr Dube, in these times of recession: “Infrastructure projects are a good way of investing private equity where a reasonable rate of return is virtually guaranteed because of the very nature of these projects-toll roads, metropolises, urban mass transit rail projects to name a few all guarantee a steady, assured rate of return and an exponential demand graph where there is virtually no demand risk.”
In fact the main grouse of some major PE firms in the country today is that there are just not enough, good bankable infrastructure projects which could be funded by the PE players. So lack of money is not the constraint rather lack of good, ready-to-be-bid-out projects in the government sector is.
PPPs in the key infrastructure sectors
Railways: According to Dr Dube, the direction of Indian Railways (IR) for developing the PPP models for IR in particular has been put in place by Ms Mamata Banerjee, Union Railway Minister in her Budget speech of July 2009.
These include about 50 railway stations to be remodelled as Model Railway Stations or World class Railway stations; multifunctional complexes (MFCs) at railway stations for shopping, food courts, budget hotels etc at places of pilgrimage, industry and tourist interest; opening of nursing colleges, medical colleges etc attached to the Railway hospitals; setting up of cold storage facilities and temperature controlled perishable cargo centre, and setting up of EMU/MEMU coach factories and 1000 MW power plant at Adra etc.
Airports: According to the Frost & Sullivan report – ‘Strategic Opportunities in the Indian Airport Infrastructure Market’ in 2008 approximately Rs24.60 billion was invested, which will go upto Rs. 43.09 billion by 2013.
Even though private players will need huge amount of investment in taking up the projects in the aviation sector, according to BK Mundhra, Chairman & MD of Simplex Infrastructures, “If the government policies and the proposals are attractively combined with the several tax benefits then private sector can generate sufficient long term funds. Private sector is capable of meeting the major portion of funds requirement for infrastructure projects in India.”
The government has done just that in the terms of giving tax holidays, and land for construction. Besides there is no dearth of projects in the airport sector as several of the non metro airports have been upgraded. This also means that apart from the airport development there will also be projects related to the airport including airport maintenance, airport security, communication, and designing of the interiors.
Shipping: As part of actively involving private players in the shipping sector in FY 2009 – 2010, the shipping ministry has earmarked 23 PPP projects worth over Rs15,000 crore. Some of these projects are:
• Development of multi-purpose berths at Paradip Port
• Container terminal at Visakhapatnam
• Mega container terminal at Chennai
• To set up a single point mooring and allied facilities at Kandla.
• However, how far the ministry is successful in awarding these projects remains to be seen as out of the nine projects that were announced to be awarded to the private sector; only one development of an iron ore terminal at Paradip actually was awarded.
The shipping ministry has also announced plans to invest Rs21,000 crore out of Rs55,000 crore in PPP in the next three years. The remaining amount will come from private players. The government is also planning to involve private sector in cruise tourism. However, for this, it will have to take care of the necessary infrastructure, and ease regulations.
Highways: National Highways Development Project (NHDP) was the first successful project with the private participation in the roads sector. To attract the private players to take up the highway projects the government came up with the many initiatives.
The sector has an industry status and the government provides capital subsidy up to 40% of the project cost. Government to meet expenses relating to land and other pre-construction activities and allows FDI up to 100%. The norms for external commercial borrowing have been eased. Also, private companies can collect and retain toll.
From the Government’s perspective one of the challenges is to speedily evolve the mindsets and promote PPP project development skill building among public managers to conceive, design, develop and execute infrastructure projects. Also, as Prof SS Chakraborty, “A flexible approach in tackling complex issues concerning risk allocation between the partners, degree of public involvement and the expected gradual improvement of the economy will certainly contribute to re-kindling of private sector interest in PPP projects.”
From the private perspective-sufficiently large number of project reports are required to be built up. In India, the ‘Swiss Challenge’ format has not emerged where the private players themselves send out project proposals to the government as is so commonly witnessed in countries such as South Korea.
According to Dr Dube, “The situation can be summed up to re-emphasise the glaring infrastructure deficit in India and the fact that there is no getting away from the PPP route.” Mundhra of Simplex puts it in a nutshell. He says: “The biggest challenge to implement the infrastructure projects is time. Basic infrastructure is the need of the hour and such projects should be implemented on top most priority in the interest of overall development. Also, India is a vast country and requires huge investment in the infrastructure sector and to meet this challenge, we require continuous flow of large amount of funds.”
Nevertheless, momentum has built up in the government to readily execute infrastructure projects. Rajeev Sethi, MD of Gemini Equipment & Rentals is quite optimistic. He says: “Although critics may say that there are still too many regulatory and institutional challenges to allow the roll out of a PPP program, we have to consider the success of the National Highways Development Project (NHDP) program with size of Rs. 2.41 trillion; it has managed to build around 5,800 km of highways in such a short period.”
Shyamal Asangi is a freelance writer.
The opinions expressed in this column are of the author and not of the publisher.