A new direction for PPPs?

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The case for a super-regulator to oversee private participation in India’s infrastructure sector

By Atul Sharma

Public-private partnerships (PPPs) in India’s infrastructure sector began about 13 years ago and were hailed as a breakthrough. One of the first major projects was the toll bridge between Delhi and Noida, popularly known as the DND flyway, which opened in 2001.

This has been followed by a slew of other developments, including airports, ports, roads, healthcare facilities and educational institutions. Collectively, these projects bear testament to the general viability of the PPP model for Indian infrastructure developments. However, they also highlight many of its shortcomings and pose difficult questions about whether India needs to reform its legislative and regulatory framework for PPP projects.

Current limitations

PPPs are governed by concession agreements – operation, management and development agreements – signed between the public authorities and private entities. The Planning Commission lays down a policy framework for PPP infrastructure projects, but does not provide sector-specific guidelines for concession agreements. This lack of clarity, particularly surrounding the identification of projects and the selection of private partners, leaves much scope for controversy.

Furthermore, no uniform authority is responsible for tariff determination or the setting of performance standards for PPP projects. The agreements that deal with these issues, therefore, vary from sector to sector. For example, in the roads and highways sector, the Ministry of Shipping, Road Transport and Highways generally sets tolls, while for major ports projects, this is done by the Tariff Authority for Major Ports. Tariffs for electricity generation, meanwhile, are set at the central level by the Central Electricity Regulatory Commission and at the state level by the State Electricity Regulatory Commission.

The lack of a uniform system for tariff determination and fears over government or regulator control of the proceeds of a project are factors that may deter private investors.

Barriers to development

Another factor that hampers infrastructure projects in India is the lack of coordinated planning. Projects which have been given the go-ahead often run into difficulties if related projects are cancelled or substantially delayed. An example of this is the numerous litigations triggered by the new international airports in Bangalore and Hyderabad. Many of these disputes centred on insufficient transport connections that resulted, in part, from delays in the completion of high-speed rail and highway projects that were being undertaken by other parties.

The present legal framework (including the policy guidelines of the Planning Commission and statutes in various states) has not resulted in the creation of strong independent authorities that are clearly mandated to promote and regulate private participation in the development of infrastructure projects.

A way forward

Given the growing demand for high quality infrastructure facilities, there is a strong need to develop such authorities both at federal and state levels. At the federal level, there is a need for a central regulatory body to identify and regulate potential PPP projects based on basic guidelines. These guidelines should cover:

• The need for the project;

• The ability of the project to meet existing and future demand, while being commercial viable and also ensuring safety, durability and economy of maintenance; and

• Minimum standards for design and construction.

There is also a need to enact a framework law for private participation in infrastructure projects that addresses the following key issues:

1. The establishment of a central PPP enabling unit that will cater to all sectors;

2. A framework for private infrastructure investments that would enable and cover domestic and foreign financing;

3. Contract rights for private infrastructure projects, including the right to collect tariffs, the right to receive termination payments and the right of authorities to intervene in case of default; and

4. Model contracts and concession agreements, which parties could modify if need be, including fixed guidelines for drawing up contracts.

The new law should be applicable to all private infrastructure projects and should be consistent with current sector-specific regulations. It should facilitate the establishment of an independent and transparent regulator as well as a PPP enabling unit with a well defined structure. The unit should work towards making the approval process transparent and also play an appraiser’s role akin to that of the Public Private Partnership Appraisal Committee.

Standardized approvals

Under the new law, the approval procedures for PPP projects should be standardized and processes like single-window clearances, which are currently available in special economic zones, should be made available for projects all sectors and regions.

A possible model for such an autonomous regulatory body is illustrated in the following diagram:

Diagram_1

This model envisages the establishment of a central PPP enabling unit only. Regulatory authorities that have already been proposed or established under various statutes (for example, the Airports Economic Regulatory Authority, the Telecom Regulatory Authority of India and the National Highways Authority of India) would continue to be responsible for functions like setting tariffs. They would work alongside the central unit to establish and maintain a sound PPP framework.

It is vital that such a framework should govern the manner in which private participation in public projects is sought. It should also outline the nature of concession models for build operate and transfer (BOT), build own operate (BOO) and build operate lease and transfer (BOLT) projects. Furthermore, the framework should contain guidelines on which types of private entities are permitted to sponsor PPP projects and how unsolicited bids are to be dealt with.

Resolving disputes

Finally, the PPP enabling unit should be empowered to set up a strong dispute resolution mechanism that includes both a body that functions within the unit and an appellate tribunal outside.

Together these bodies would settle disputes and dispose of appeals to sort out any differences that arise between the various parties involved in the implementation of projects. This would protect the interests of all the concerned parties, while also promoting and ensuring orderly growth of infrastructure in the country.

Atul Sharma is the managing partner of Link Legal, a Delhi-based law firm that focuses on infrastructure.