NEWS

Public-Private Partnerships in India

July 12, 2012

In the coming years, the Indian government hopes a total of nearly $5 trillion will be invested in infrastructure, including water, power, rail, and other forms of transportation, to meet the needs of its growing and increasingly prosperous population. The intended vehicles for financing many of these investments will be public-private partnerships (PPP), which allow the government to tap into the resources and expertise of the private sector for public benefit. Understanding the concept of PPPs in India will be critical for businesses hoping to join this monumental effort to lay the foundation for India’s future growth through efficient and widespread infrastructure.

The term “Public Private Partnership” in India is generally used to refer to all models of private sector involvement in infrastructure development. However, the formal definition by the Indian government is “a partnership between a public sector entity (sponsoring authority) and a private sector entity (a legal entity in which 51 percent or more of equity is with the private partner(s)) for the creation and/or management of infrastructure for public purpose for a specified period of time (concession period) on commercial terms and in which the private partner has been procured through a transparent and open procurement system.”

The concept of PPP has been in existence in India for many years, but gained significance in the 1990s with the opening up of electricity generation to private players in 1991, which set up the structure of Independent Power Producers (IPPs). This was followed by the amendment of the National Highways Act in 1995 to encourage private participation in transportation infrastructure. Similarly, in 1994, licenses to provide service were granted to private mobile telephone operators in four metro cities and 18 state circles.

But the real landmark development in PPP came in 1997 with the incorporation of the Infrastructure Development Finance Company (IDFC) under the initiative of the then Finance Minister P Chidambaram. The company, promoted by the Government of India, was set up on the recommendation of the “Expert Group on Commercialization of Infrastructure Projects” under the Chairmanship of Rakesh Mohan. This initiative signaled the government’s commitment to channeling private investment and participation into India’s infrastructure development.

Fifteen years later, India has made significant progress as indicated in the table below:

Key policies that have helped create an environment for PPP to succeed in India are:

• The Electricity Act, 2003, which enabled greater private participation in generation, distribution, and transmission of electricity and trading in the power sector;
• The amended National Highways Authority of India Act, 1995, which allowed greater private participation in highway projects;
• The Special Economic Zone (SEZ) Act, 2005, which made possible large private investment on fast track mode and made PPP even more popular for infrastructure development;
• In the pipeline is also the Land Acquisition Bill, which seeks to facilitate the acquisition of land for PPP projects.

These policies were supported by the formation of new regulatory institutions, such as:

• The Telecom Regulatory Authority of India (TRAI), an independent regulator of the telecommunications business in India. Its mission is to create and nurture an environment that will enable the quick growth of the telecommunications sector in the country;
• The Central Electricity Regulatory Commission (CERC), the key regulator of the power sector in India. CERC seeks to promote competition, efficiency and economy in bulk power markets, improve the quality of supply, promote investments, and advise government on the removal of institutional barriers to bridge the demand-supply gap, thus promoting the interests of consumers;
• The Airports Authority of India (AAI), an organization formed under the Ministry of Civil Aviation, which manages and operates 126 airports and 329 airstrips, including 16 international airports, 89 domestic airports and 26 civil enclaves.

Similarly, the formation of implementing agencies or authorities like the National Highways Authority of India (NHAI), and financial institutions like the Infrastructure Development Finance Company and the India Infrastructure Finance Company (IIFC) greatly facilitated PPP in India.

The introduction of a number of fiscal incentives announced by the government across different sectors also created the framework for greater private participation. Some of these incentives include the introduction of innovative financial interventions, such as Viability Gap Funding, Annuity Model, Stimulation of Debt for Infrastructure, and the creation of several Special Purpose Vehicles[1] (SPVs) that have added the much needed fiscal punch. Key departments in the government that have played an important role in this success are the Planning Commission, the Department of Economic Affairs in the Ministry of Finance, and the Prime Minister’s Office.

However, several challenges remain. Some of the key drawbacks encountered in the PPP projects in India include:

1. Poorly drafted contracts and lack of understanding of the complexity, context and dependencies of the contract;
2. Lack of experience in the private sector as well as in the government for managing large-scale PPPs;
3. Lack of measurement of performance;
4. Difficulty in managing stakeholder returns, which involve long term deals including the life cycle of asset infrastructure;
5. The market’s inability to provide the needed financial instruments and to undertake long-term equity.

The government has launched several initiatives to address these challenges. For instance, standardized contractual documents for establishing terminologies related to risks, liabilities and performance standards have been devised. The government has also streamlined approval schemes for PPPs through a Public Private Partnership Appraisal Committee (PPPAC). The committee has to date approved 246 proposals worth US$ 25 billion.

While India still has a long way to go, much progress has been made in recent years. There have been instances of large-scale corruption in sectors like telecom and mining, however the upside is that a robust Indian media has created a new “transparency alertness” among all stakeholders. This, we hope, will create a more transparent environment conducive to private participation in infrastructure development in the 12^th Five Year Plan that begins this year.