Making PPPs truly work in infra sector

PPP has been the buzzword in the infrastructure sector over the last couple of decades. PPP emerged as a disruptive model of business delivery at a time when governments of the world were struggling to provide access to basic services to citizens on the one hand, and handling severe financial and capacity constraints on the other. With newer ways of delivering public infrastructure, PPPs offered a promise to leverage public money for private investments as also tapping of private sector efficiencies.

Over the years, some projects worked well and garnered interest from the private sector, giving its proponents adequate returns in lieu of their risks. They also helped governments learn faster and evolve their role from a provider to facilitator. In India too, a few sectors like highways, power, ports and airports, matured to different degrees, but brought a set of regulatory challenges to the forefront — from land acquisition and environmental issues, inadequately prepared projects and capacity constraints, to bidder collusion, non-performance, and financing issues, pending dispute resolutions, handling unforeseen economic situations, contract renegotiations, etc. resulting in stalled projects.

Yet others, such as railways and solar rooftops, are experimenting and learning as they go along. Sectors such as urban infrastructure, rural development, water, health and housing, are yet to establish replicable models to step up public-private collaborations.

 

Large market

India has a considerably large PPP infrastructure market with over 1,500 projects worth Rs 1,349,125 crore already under various stages of implementation (as of January 15, 2018). Much of the success in PPP projects has been in the roads and highways segment. The National Highways Authority of India (NHAI) awarded a significant number of projects in PPP formats. While over 200 projects have been awarded in BOT format under National Highways Development Project (NHDP),phase I to phase V, there were significant concerns over the last few years regarding increasing number of stalled projects. Issues of land acquisition and delays in meeting Conditions Precedent such as handing over of the site, getting environmental clearances, and so on, have been some of the most common persistent challenges in the sector.

The NHAI also explored an alternative PPP model- Hybrid Annuity Model (HAM) to better address the commercial realities of Projects. So far, 43 projects with 2,728 lane km and project cost of Rs 43,730 crore, have been awarded on HAM since its inception in 2015-16.The increasing traction that the HAM model is gaining in the market perhaps indicate that there is much space within the PPP market for better ways of allocating commercial risks perceived by the private sector.

Given the long tenure of PPP contracts, unforeseen changes in contractual provisions during construction or operation are not uncommon. Observing the decline in the pace of PPPs, the Kelkar Committee in 2015 made many recommendations to reinvigorate PPPs. These included setting up of independent regulators in sectors that are going in for PPPs, moving away from a “One-size- fits-all” approach of the Model Concession Agreements (MCA), re-negotiation of concession agreements to reflect new project realities, speedier resolution of disputes, addressing legacy issues, and so on.

 

Framework for renegotiation

Considering that some situations may genuinely demand a renegotiation to safeguard the interests of the private entities, the centre developed a framework for renegotiation of PPP concession agreements. The framework suggested amending the MCA to include provisions for renegotiation while also ensuring that the option is not misused. Financing has been a persistent issue in the sector. The debt markets in India haven’t developed on the lines of some of the mature economies in the world. A large part of PPP financing is done by the public sector banks, creating an asset-liability mismatch for the banking system as they are borrowing short-term and lending long-term. As these banks already bear a burden of huge non-performing assets (NPAs) (Rs 3.83 lakh crore as on March 31, 2017), this creates additional pressure. Recent banking reforms are seen as a step in the right direction and will hopefully result in release of the much needed investments for infrastructure projects. Other long-term lending institutions (pension funds, insurance companies, etc.) are still hesitant to invest in infrastructure. The government announced the creation of NIIF (National Investment and Infrastructure Fund) in budget 2015-16, and operationalised it over the next few months. It is finally gaining traction and will possibly help mobilise some of the much needed investments. Perhaps another area that needs to be considered is the ploughing back of funds into infrastructure sector from divestment of PSUs which are primarily in infrastructure domain (such as NTPC, IOC and SAIL).

Having said this, the private sector has had its own set of pitfalls — over leveraging of balance sheets, aggressive bidding, demand forecasts gone wrong, non-transparency in governance of special purpose vehicles (SPVs), and so on. Therefore the role of lenders, investors, and regulators becomes critical, to ensure adequate due diligence, and focus on compliance.

PPPs are not a one-size- fits-all solution to all infrastructure development constraints, and the proponent (government) will need to assess the rationale behind embarking on the PPP route – is it to get the finances off their balance sheet or transfer risks, or is it because the private sector is likely to drive more efficient, long-term outcomes. The answer to these questions will help define a structure to meet the outcome that the sector is seeking. As the PPP landscape matures, new opportunities and challenges will continue to emerge. In the light of new macroeconomic realities, the proponents will need to periodically review PPPs and their structure. Government’s thrust on transparency of regulations and reinvigorating of stressed PPP projects seem to be steps in the right direction; however, various issues remain. Adequate preparation, appropriate model, and prudent regulations are some of the key aspects required to generate desired outcomes. In the absence of these foundation stones, no amount of investment, due diligence or budgetary support is likely to pay off.