Infra PPPs should be an exception: FinMin

The formation of joint ventures (JVs) between the public and private sector entities to implement infrastructure projects under the public-private-partnership (PPP) model should be an exception rather than the rule, according to newly formulated guidelines circulated by the finance ministry.

“The public sector entity intending to form a JV with a private sector entity should carefully explore the possibility of meeting the desired objective through alternate means instead of creating a JV,” according to the guidelines for establishing joint venture companies that came into effect last month.

The guidelines are aimed at curbing the conflict of interest which arises when the entity granting the concession — which is usually a public sector entity — is also a partner in the recipient JV.

This would mean that in addition to a concession agreement, which would typically lay out the entire range of rights, obligations, duties and support, there would be a shareholder’s agreement between the JV partners that “may allow the private sector entity to do forum shopping by raising disputes under the shareholders’ agreement or under the concession agreement, depending on what is beneficial to it,” according to the guidelines.

The move is also aimed at curbing the increasing number of 50:50 joint ventures between the public sector and the private sector where control is ceded to the power sector though the funds used belong to the exchequer.

Since such equal partnerships would be defined as private sector entities (it would be a public sector entity only if the majority control is with the public sector), it is not accountable to the government or the public accounts committee or the comptroller and auditor general, nor does it have to follow government procedures for procurement.

These guidelines are likely to impact the working of companies like Powergrid IL&FS Transmission Pvt Ltd, a 50:50 venture between the government-owned Powergrid Corporation of India and IL&FS.

“The guidelines will end the confusion. All 50:50 public-private ventures will be treated as what they are, private sector companies,” said a senior official.

The guidelines also limit the positions that government officials can take on JV companies. “It is normally not advisable for officials to become chairpersons or hold other offices in a JV where the shareholding of the private sector entities is 50 per cent or more,” the guidelines say.

Such distortions were brought to the notice of the Prime Minister’s Committee on Infrastructure in 2007. The guidelines have been finalised after discussing the issue for more than a year.

These guidelines would apply to all central ministries, department, autonomous bodies and public sector undertakings under the control of the central government.

Any deviation from these guidelines would need to be adequately explained and justified by the concerned ministries/departments, making such a deviation that much tougher.

State governments will also be alerted to the position with regard to such JVs, added the official. There are many 50:50 JVs at the state-level, like the Tamil Nadu Road Development Company (with IL&FS) or the Road Infrastructure Development Company of Rajasthan (with IL&FS).