(Sample Material) Gist of Important Articles from IIPA Journal

Topic: Public Private Partnership in India (Policy, Strategies and Operationalisation Issues) T.N. Dhar

Reform Process and Early Pitfalls

In-house capabilities, experience-and world class knowledge were not available within governments and public institutions in the early 90s for operationalising reforms and develop public private partnerships (PPPs) in the needed measure. These had to be tapped from the corporate world and from new management techniques and methods developed abroad and in India. At the same time it required to be ensured that private capital tapped for the development of public services served public interests in equitable and sustainable modes. Liberalisation had to be accompanied by a proper ‘and enabling regulatory, legal and institutional framework. Without that the goals of inclusive and equity informed growth, specially in infrastructure areas, could not be achieved, A telling example may be briefly cited here. Reform process in the power sector began in 1991 when the Electricity Act was amended permitting private investors to establish, operate and maintain generating plants’ and enter into long-term power purchase agreements (PPAs). This initiative did not yield the expected dividends. Clear regulations, procedures and systems ‘were not in place that would have enabled to achieve the intended results in real terms and’ within specified time lines. Power purchase payments could not be assured. Credit enhancement mechanisms, firm escrow arrangements and counter guarantees could not materialize in most cases. Power projects to the tune of 1.50 lakh MW were proposed under this arrangement; only 5000 MW capacity installation materialized.

Recant Initiatives in PPP Contexts

Investment requirements for infrastructure development (both physical- like roads, power, ports, airports, communications, railways and urban development, and social-like education, health, etc.) are generally massive. Government of India realized that, for ensuring time-bound creation of world class infrastructure and “delivery of services that would be comparable to international benchmarks, it was’ necessary to tap the financial resources” talent, technologies and experience of private entrepreneurs and corporate from within and outside of the country. Since infrastructure related assets: facilities and delivery systems are mostly public services not mere profit centres, need was felt to set up a top level institutional arrangement to guide the PPP policy and its instrumentalities as also identify regulatory, institutional and other requirements, Thus was set up; in August 2004, a national level Committee on Infrastructure-Coll headed by the Prime Minister which is appropriately serviced by the Planning Commission. Further, to provide greater focus to mainstreaming PPPs, both in the Central and state sectors, a PPP Cell was established in the Department of Economic Affairs.

According to the Economic Survey of India (2007-08), while encouraging PPPs, Government of India has identified six constraints. These are:

(i) Policy and Regulatory Gaps-specially relating to specific sector policies and regulations.
(ii) Inadequate availability of long-term finance (ten years plus tenor), both equity and debt;
(iii) Inadequate capacity in public institutions and public officials to manage PPP processes,
(iv) Inadequate capacity in the private sector, both in the form of developer investor and technical manpower,
(v) Inadequate shelf of bankable, infrastructural projects that can be bid’ out to the private sector, and
(vi) Inadequate advocacy to create greater acceptance of PPPs, by the public.

The, constraints mentioned above are only a short illustrative listing. There could be others. All these have to be identified and addressed through policy mechanisms, institutional arrangements, legal and regulatory framework, capacity building, oversight, transparency and properly worked out sets of incentives and disincentives. It is true that there is marked potential for PPPs to contribute very substantially to economic development and help meet infrastructure gaps in the country. But, as the Central Government itself concedes, “PPPs are not a panacea, They represent a claim on public resources that needs to be understood and assessed by, the Government, and are often complex and long term transactions in which mistakes in design can be costly” (www.pppinindia.com). The Dabhol experience in the past has amply demonstrated how this apprehension can become stark reality. In all PPP projects and arrangements the unexceptional requirements are to provide high and reliable service standards and, at the same time, ensure value for money (VFM) to users. Such partnerships must yield savings in costs through adoption of appropriate and frontline technologies, innovative designs, timely project implementation, higher operational efficiencies, providing of good quality services to users as a result of adopting better managerial practices, and, importantly, development of cost-effective solutions.

Institutional Arrangements and Enabling Framework

Once it was realized that sound PPP offers were advantageous in terms of cost saving, access to specialised expertise and proprietary technologies, sharing of risks with the private sector, and the possibility of taking up a larger shelf of infrastructure investments, steps began to be taken from 2004 onwards to set up various types of institutional arrangements and enabling framework which, inter alia, included:

(a) to initiate policies for ensuring speedy and time-bound creation of top quality infrastructure and delivery of services and-develop structures that maximise the role of PPPs, at the national level the Col was set up;

(b) PPP Cell was created in the Department of Economic Affairs which is understood to have taken several initiatives in matters relating to policy, schemes, programmes, capacity building, legal framework requirements, coordination needs, guidelines development, etc.

(c) a high level appraisal mechanism for PPP projects has been evolved, streamlined and notified in the form of the PPP Appraisal Committee (PPPAC) for Central projects. The PPPAC has developed and prescribed detailed guidelines for submitting proposals for approval within a predetermined time frame;

(d) a dedicated website, has been launched to serve as a ‘virtual market place’ for PPP projects (www.pppinindia.com) and an online data base is being developed to provide updated status information about such projects. It, however, needs regular updating for becoming useful,

(e) To step up the numbers and reach of PPPs, Government of India set up the India Infrastructure Finance Company (IIFC) as an SPV, in January 2006, for meeting long term requirements of infrastructure finance through direct lending of refinance for some specified sector projects such as roads, ports, airports, tourism, etc. The IIFC is, in turn setting up, with the approval of RBI an off-shore Spy to utilise part of foreign exchange reserves of the country for infrastructure development; and

(f) a Scheme for Financial Support to PPPs in selected infrastructure sectors was launched to provide Viability Gap Funding (YOP) to such projects. Funding under this scheme is to be disbursed contingent upon agreed milestones and performance levels attained as detailed in a funding agreement. The project would then be put to bid through a transparent, open and competitive process, The result of bidding would indicate the extent of viability funding required. The scheme covers roads, railways, seaports, airports, inland waterways, power, infrastructure projects in SEZs, tourism and urban infrastructure (like transport, water supply, sewerage, solid waste management, etc). Some of the salient conditions laid down are that the asset created is publicly owned, that it is built and maintained by the private sector entity, that VGF can be in the form of one time or deferred grant and will not exceed 20 per cent of the total project cost, and that pre-determine tariffs or user charges will be collected from users.

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