Measures to rejuvenate public-private partnerships

Public-private partnership, or PPP, is back in the reckoning with numerous new projects from ropeways to logistics parks being offered under this format. This renewed importance is underscored by the huge expectations from these projects. Hundred per cent of the National Monetisation Pipeline, or NMP, target of Rs 6 trillion and 40 per cent of the National Infrastructure Pipeline, or NIP, target of Rs 111 trillion is expected to be funded under PPP. That totals an expectation of Rs 50 trillion over the next five years. In recent times, private investment in infrastructure has been stagnating at Rs 2.5 trillion per annum (see chart).

Can these fresh targets be achieved without significant reform of the institution of PPP? It is certainly a challenge. Almost all Indian companies and commercial lending institutions are extremely wary of investing in greenfield PPP projects, and foreign investors prefer operating brownfield assets. The recent responses to PPP bids have also not inspired confidence.

The Railways recently invited bids for passenger-train operations. It generated significant initial interest and 103 parties were qualified to submit their bids. But a detailed examination of the bid conditions gave most bidders cold feet; and finally, in August 2021, only two players came forth. The bid was subsequently cancelled. In February 2022, state-owned Bharat Broadband Nigam Ltd cancelled a Rs 19,000 crore tender that was floated for connecting villages across 16 states with an optical fibre-based high-speed broadband network, following the lack of participation of eligible bidders. Build-operate-transfer, or BOT, is the classic “pure-play” PPP, and it declined from its dominant 85 per cent share in road investments in 2013 to almost zero in 2020. Here is a situation where India regressed to engineering, procurement and construction, also known as “thekedari”, after over a decade of intense involvement with the BOT model.

Getting the PPP model right is never easy, as even international experience shows. On May 20, 2021, Britain announced the “renationalisation” of British Rail, after a 25-year run on what was believed to be an iconic PPP initiative. The need for rejuvenation of the PPP institution has been acknowledged, but not yet seriously acted upon; though in the Indian context, it has to be recognised, that in sectors like telecom, ports, airports, electricity transmission and renewable energy, PPPs have continued to deliver, overcoming many adversities on the way.

The earliest that this government officially recognised the need to reset PPP was in Arun Jaitley’s maiden Budget in July 2014 where he had proposed the setting up of an over-arching institution called 3P India and allocated a whopping Rs 500 crore for it. Following this up, on May 26, 2015, the National Democratic Alliance government constituted a nine-member committee headed by former finance secretary Vijay Kelkar. This committee submitted its report “Revisiting and Revitalizing PPP Model of Infrastructure Development” on November 19, 2015. The committee strongly endorsed setting up “3P India”, which, it held, in addition to functioning as a centre of excellence in PPPs, would enable research, review and roll-out activities to build capacity. 3P India’s charter should include coming to grips with complex issues like renegotiation, independent regulation, equitable risk-allocation, amendments to Prevention of Corruption Act, 1988, and expeditious redressal of disputes. Such an intellectually robust and centralised institution is clearly required as otherwise the fear is that we will have a multiplicity of agencies, each in their own way trying to structure and implement PPPs. There is the possibility of 100 such PPP-involved institutions — 20 at the Centre, and possibly four each in 20 of the advanced states.

To address the need for capacity for administering PPPs, various bodies have been created in different countries. There is the Infrastructure Concessions Regulatory Commission in Nigeria, the PPP Advisory Unit in Ghana, the PPP Centre in the Philippines and the PPP Unit in South Africa. The National Infrastructure Commission of the United Kingdom, set up in October 2015, holds some lessons for India. As an operationally independent agency under the UK Treasury, it functions as a think-tank focused on the long-term infrastructure priorities of the country and provides advice and recommendations to the government on infrastructure challenges and strategy. It has a secretariat of approximately 50 staff led by a chief executive.

Two innovations in PPP structures can be straightaway brought in. The first is “plug and play”. This removes development risk by simply creating a 100 per cent government-owned special purpose vehicle, or SPV, for the PPP project to start. It performs the sovereign role of land acquisition and securing all permissions and linkages required. The shares of the SPV are then sold to the highest private bidder. The government earns in multiples for a “de-risked” project. The second is the least present value method or LPVM. This simply means that the time-period of a concession is kept open-ended and flexible to enable the concessionaire who bid the lowest amount of revenue share for itself to reach that goal in present value reckoning. This, at one stroke, removes substantially the revenue risk attached in long PPP contracts.

In addition, a bespoke credit-rating system has been a long-standing demand of infra developers. It requires a move from the established “probability of default” approach to the “expected loss” (EL) approach. Though the EL scale was launched more than four years ago, very few projects have got rated on this basis.

In her latest Budget speech, the finance minister emphasised capacity-building measures. It is reliably understood that the Department of Economic Affairs in the Ministry of Finance is finalising a fresh approach for “capacity building” for PPPs. It is a complex task, and one fervently hopes that some of the more challenging aspects will get due attention.

Unless PPP is made to succeed, the road ahead for infrastructure investments, and therefore for economic growth, will be uncertain.

The writer is an Infrastructure Sector expert. He is also Chairman of CII’s National Council on Infrastructure. The views are personal