Solutions to PPP challenges in infrastructure sector

By Amit Ronald Charan and Rashi Arora, HSA Advocates
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India is potentially the largest global market for public-private partnerships (PPP) thanks to the growing number of PPP projects in the past 15 years. Policy measures designed to bring about private participation in infrastructure projects have not met with significant success. Infrastructural gaps exist in almost all sectors, posing a serious threat to sustained growth. While the PPP model has been successful in sectors such as roads, ports and electricity generation, it has yet to take off in railways, civil aviation, and social sectors. Further, the geographical distribution of PPPs is not uniform and states such as Madhya Pradesh, Andhra Pradesh and Maharashtra are ahead of others. The Asian Development Bank has estimated that it will cost US$4.36 trillion by 2030 to overcome India’s infrastructure deficit.

Amit Ronald Charan
Partner
HSA Advocates

A combination of factors may have led to the recent slowdown of PPP projects. These include the global economic slowdown, weak regulatory and institutional frameworks, inadequate diligence and appraisal by lenders, delay in the issue of clearances, financing issues, inappropriate risk allocations, one-size-fits-all approaches to model concession agreements (MCAs), aggressive bidding by developers, contractual issues, inadequate dispute resolution mechanisms and environmental issues.

The increasing number of non-performing assets (NPAs) held by domestic lenders, and the Infrastructure Leasing & Financial Services crisis has restricted funding options. While the international credit and financing market is an option, few high-quality sponsors and assets remain. The global economic slowdown and the credit crisis has slowed the demand for goods and services across the spectrum of business activity. This has affected the infrastructure sector significantly, and impacted PPP projects.

Key areas requiring immediate action for revitalizing PPPs include the strengthening of lending institutions such as the India Infrastructure Finance Company, infrastructure debt funds and the International Finance Corporation (IFC), setting up of 3P India (a proposed government institution with a ₹5 billion (US$70 million) corpus to support PPPs), and reforming the viability gap funding (VGF) scheme to meet market challenges.

Rashi Arora
Associate
HSA Advocates

Other steps include providing access to long-term debt from insurance, pension and provident fund companies, expansion of bond markets, the use of credit enhancement measures through government guarantees, refinancing of existing debt, the restructuring non-performing assets of banks, a review of current restrictions on group exposures of banks, and so on.

Foreign investments should be enhanced through innovative instruments and mechanisms to capture capital inflows in the infrastructure sector. Long-term investors, including foreign institutional investors, should be offered equity in completed and successful infrastructure projects. Each sector should prepare long-term investment and financing plans to identify revenue sources as well as the amount of financing available. These will highlight any gap between the increase in capacity that is needed and the increase in capacity that can be provided through available financing sources.

As recommended in the Kelkar Committee Report, the Infrastructure PPP Adjudicatory Tribunal should be established to resolve disputes faster. Independent regulators should be set up in sectors that currently do not have them, and the roles and responsibilities of existing regulators should be streamlined. MCAs for each sector should be reviewed to ensure that they represent the interests of all stakeholders, including users, project proponents, concessionaires, lenders and markets. The government could follow the recommendation of the Kelkar Committee to amend the Prevention of Corruption Act, 1988, which presently does not distinguish genuine errors in decision-making from acts of corruption, thus avoiding witch-hunts against bureaucrats.

PPPs have the potential to deliver infrastructure projects faster and better. Building on India’s 15 years of experience with PPPs, there is a need to correct the deficiencies in their performance that are apparent at every contractual stage. A stable macroeconomic framework, a sound regulatory structure, effective regulation, investor-friendly policies, sustainable project revenues, transparency and consistency of policies, liberalization of labour laws, customized MCAs, environmentally friendly models and good corporate governance are the basic requirements for the success of the PPP model in India.

Amit Ronald Charan is a partner and Rashi Arora is an associate at HSA Advocates.

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