Infrastructure is a key enabler for any economy to attain competitive and sustainable growth. There is no denying that the last two decades has seen a remarkable expansion of infrastructure in India, both in scale and reach. Ironically, it is the same infrastructure whose underdeveloped state acts as a constraint in the realization of our potential. At the heart of this lies the Public-Private Partnership (PPP) model. Any attempt to know what went wrong must come to grips with how we, as a nation, implemented the PPP model in infrastructure, what were the misses and what needs to be fixed?
A PPP project essentially involves three major stakeholders – the government, the private developer and the bank. Each of these have their fair contribution in carving a failure out of a potentially successful concept. The model was initially developed to leverage the combined strengths of the government and private sector to meet India’s critical infrastructural needs. But a poorly implemented model has led to numerous projects going bust, increased the risk of loans turning into Non-Performing Assets (NPAs) and pushed developers on the brink of bankruptcy.
The Government and the Model Concession Agreement (MCA)
A fundamental mistake committed by the government was narrowing down the scope of PPP to a funding necessity, initially leveraging the model solely to attract private investment. They did not focus on garnering other benefits like the private sector’s ability to bring in latest technology, efficient managerial practices and complementary risk mitigation. Furthermore, the critical need to build institutions that would have enabled the efficient deployment of capital raised was overlooked.
The fact that Governments can often raise funds at lower costs compared to private developers makes this initial digression of approach even more counter-intuitive.
The government also failed to ensure the private sector gets protected from risks it was ill-equipped to handle, such as land acquisition or environmental clearances. These are often critical reasons behind stalled projects. The need to establish an independent regulator to ensure an efficient dispute settlement mechanism was ignored.
The Model Concession Agreement (MCA), which sets the implementation backbone of PPP projects, can be far too rigid. It, in general, applies a ‘one size fits all’ solution to all projects in a sector. It fails to recognize the fact that many projects may face unique technological risks or demands that may go beyond standardized templates. The MCA also sets greater bindings on private developers, thereby limiting the accountability of the state, and fails to ensure an equitable risk allocation. The Kelkar Committee has acknowledged this problem and provided a framework for the renegotiation of MCA under various circumstances.
The Private Developer
A report on PPP projects submitted by Kelkar committee pointed out the practice of deliberate inflation of the Total Project Cost (TPC) by developers. By inflating the TPC, developers source higher debts than required. If the project is then jeopardized, there is virtually no “skin in the game” for the developer, as the funds at risk come from the lenders.
A 2016 submission of a parliamentary standing committee found that the National Highway Authority of India (NHAI) allowed concession agreements with cost estimates different from those used in loan applications. The Committee report suggested that banks and other financial institutions must have the authority to review the MCA along with the concerned ministries.
Banks: Source of Funds
Unlike its international precedents, infrastructure in India was funded to a major extent by commercial banks. Since infrastructure projects have longer gestation periods and banks raise funds from depositors for a tenure ranging from short to medium term, a case of serious asset-liability mismatch gets created.
Ignoring the problem, banks not only went ahead in investing in infrastructure projects but also showed irrational exuberance in terms of lending to the sector. The share of bank loans to infrastructural projects rose from 13% in 2002 to 31% in 2015. The mammoth NPA resolution problem that the commercial banks in India are facing today could have been considerably lower if bankers had acted with some foresight then.
Success of PPP to a large extent depends on optimal risk allocation, an environment of trust among the stakeholders and a robust institutional capacity. To this effect, the government must necessitate the establishment of an independent regulatory institution and the creation of a robust dispute settlement mechanism.
Pricing and accounting reforms are required to improve the fiscal sustainability of projects undertaken, and to have a clearer projection of fund flows.
Apart from a sound regulatory and arbitration framework, a robust PPP enabling ecosystem includes diversified and financial institutions pivoting towards long-term funding such as wholesale banks.
The private fund flow into the infrastructure sector has been rightly streamlined by the establishment of the National Infrastructure Investment Funds (NIIF) by the government and the Infrastructure Debt Fund by the RBI. Further, a green signal to Infrastructure Investment Trusts (InvITs) is a step in the right direction as it would scale down the exposure of commercial banks to the infrastructure sector.
Moreover, the government’s roll out of the Hybrid Annuity Model (HAM) under PPP is a welcome move. The model seeks to balance the risk mitigation needs of private sector by providing c. 40% of the project cost in terms of annual annuities over a five-year time frame and the rest on a revenue sharing model.
Swift action to implement some of the key recommendations of the Kelkar committee such as setting up of a national level PPP institution, a dedicated PPP tribunal and a formal framework of contract renegotiation, is needed.
Building institutional capacity, better regulatory oversight, a diversified source of funding, efficient dispute settlement mechanism, flexible contract negotiation, and accounting and pricing reforms – such initiatives can greatly leverage the PPP model as a powerhouse to India’s growth and infrastructural requirements.
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