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The Indian Experience with PPPs Government Initiatives

Key government initiatives. 19 The Indian Department of Economic Affairs (DEA) has highlighted that the Government of India (GOI) is committed to raising the investment in infrastructure from its existing level of 4.7% of GDP to around 8%. Infrastructure shortages are proving a key constraint in sustaining and expanding India’s economic growth and making it more inclusive for the poor. The government is actively promoting PPPs in the key infrastructure sectors of transport (including railways), power, urban infrastructure, and tourism. PPPs are seen as an important tool for producing an accelerated and larger pipeline of infrastructure investments, and reducing the country’s infrastructure deficit. A PPP department has been established in the DEA to administer various proposals and coordinate activities to promote PPPs.

Viability Gap Funding (VGF) scheme. The GOI has established the VGF scheme as a special facility to support the financial viability of those infrastructure projects which are economically justifiable but not commercially viable in the immediate future. It involves upfront grant assistance of up to 20% of the project cost for state or central level PPP projects that are implemented by a private sector developer who is selected through competitive bidding. An Empowered Committee has been set up for quick processing of cases.

Facilitating Public-Private Partnership. GOI has established India Infrastructure Finance Company Limited (IIFCL) as a wholly government-owned company to provide long-term finance to infrastructure projects, either directly or through refinancing. The IIFCL caters to the growing financing gap in long-term financing of infrastructure projects in the public, private, and PPP sectors. Any government project awarded to a private sector company for development, financing, and construction through PPP will have overriding priority under the scheme. GOI is working on a number of initiatives to assist and encourage capacity-building at the state and central levels. It is identifying the capacity-building needs of state governments and providing assistance for the creation of state-level PPP cells such as a nodal agency, streamlining the PPP approval process, developing PPP toolkits, model concession agreements (MCAs), bidding documents, and project preparation manuals. GOI is also building a central database and website on PPPs to disseminate updated information to the states and the private sector. Arrangements are being finalized under which, state governments would be able to avail themselves of consultancy support for developing PPP projects. Institutions like the ADB have begun supporting the capacity-building process through these workshops and proposed technical assistance projects.

Status of PPPs and States’ perspectives. Eighty-six PPPs have been awarded in India so far, totaling about Rs 340 billion, in twelve states and three central agencies. Roads and port sectors have dominated in the number and size of PPPs. As of October 2006, twelve proposals were given in-principle approval under VGF. State governments have identified a whole range of sectors for PPPs, including roads and highways, ports (air, sea, and container), telecommunication, water supply, waste management, tourism, power, industrial infrastructure, township development, leisure, and health. States have also identified potential PPP projects that could be developed over the next few years. Many of the projects are already in the bidding stage using both memorandum of understanding (MOU) and competitive bidding procedures. Not many of these projects would require VGF funding. No clear link between institutional structure and success of a PPP has become apparent. State/Union Territory (UT) governments have indicated marked differences in the process of PPP development, including variations in existence of infrastructure legislation and policies, institutional arrangements for identifying and approving PPPs, project development funds and companies, financial structuring, and procurement procedures.

Requirements of Central Assistance. The states highlighted a number of areas where guidance, assistance, and technical support are required from GOI. These areas are: VGF(viability gap funding); quicker approval procedures; relaxation of the project details currently required for an in-principle approval; inclusion of projects awarded through the Special Purpose Vehicle (SPV) route and not competitive bidding, like railways; inclusion of rural sector projects and unfinished projects; inclusion of land costs under VGF financing, capacity-building, setting up PPP cells at the state level; access to project development resources; advisory support on infrastructure legislation and regulatory frameworks and detailed PPP policies; model PPP execution cycle; contract monitoring and time scheduling; guidelines on public sector comparator (PSC) and its comparison with the private sector predictor; information on potential sources of long-term debt; and formalization of state PPP plans. The states have also called for streamlining of the statutory clearances on environment, defense, airport authority, land acquisition, etc.

Private Sector Perspectives. The private sector recognizes the enormous business opportunity of PPPs in India and has welcomed the Government of India’s PPP initiatives. The private sector has urged the government to publicize the size of the business opportunity for PPPs in India to the private sector, which is estimated to be much more than has been previously thought. Given the enormous investment requirements in infrastructure development, the need for a sustainable pipeline of PPP projects has become paramount. The private sector remains eager to see more substantive reforms, enabling changes by government in the policy, regulatory provisions, and procurement procedures for PPPs.

Improvements in India’s enabling environment. The private sector has called for changes in India’s enabling environment and suggested measures to foster efficiency and transparency in the bidding process, ensure sanctity of contracts, encourage competition, promote market-driven tariffs, and separate regulatory and adjudication authorities. It has called for developing appropriate legislative framework for PPPs, clarification of entry conditions, suitable contractual structures, and clarification of incentives and concessions.

Standardized procurement procedures. Given the variations in the formats, bidding procedures, agreements, and overall execution of PPPs among the various states and agencies, the private sector has highlighted the need for standardized prequalification and bidding procedures and guidelines for ensuring efficiency, predictability, and ease of approval process.

Transparency. The need for maintaining transparency in the entire PPP project cycle and stakeholder interactions has been noted as a key factor in determining the success of PPPs. The private sector has urged the central and state governments and other public sector project sponsors to be cautious of the “selection by nomination”20 procedure, which is not the same as transparently awarded PPP contracts.

Project development and structuring facility. A major impediment to successful commercialization of projects in India has been the absence of rigorous project development. Many of the projects put out for bidding by GOI have been inadequately structured and unsuitable for a PPP. A project development facility (PDF) that provides project sponsors, the resources to procure consultancy, and expert services for conducting pre-feasibility studies and assessments is required.

Public sector capacity to successfully execute PPPs. The private sector has highlighted its concerns about the absence of a robust pipeline of bankable PPP projects. This is attributed to insufficient capacity of the PPP-sponsoring public entities to identify and implement deals and execute PPPs. Capacity deficit is seen as the crucial bottleneck in achieving a steady flow of successfully negotiated PPP deals.

Public sector reforms, with or without PPPs. The infrastructure sector suffers from supply-side constraints. The PPP experience in various states has shown that procedures and processes have been extremely dilatory. The infrastructure sector needs to urgently implement public sector reforms to address supply-side constraints. Changes in delivery mechanisms, processes, procedures, and institutional structures need to be tailored towards client-focused outcomes and results. Land acquisition and environmental clearances are best obtained by governments. Social and environmental clearances are also best obtained by government and not by the private partner. Several projects have stalled with huge time and cost overruns due to delays in land acquisition and transfer of land possession to the private sector. The private sector could deliver much faster if these clearances were handled by the project sponsor. Building in environmental and social dimensions of PPPs needs to be made part of the project development cycle.

Genuine and mutually rewarding partnerships. PPPs represent partnerships in action with huge stakes for both the public sector and private sector agencies to succeed collectively. It is important that the public and private sector work together, keeping the project and outcomes in focus rather than maximizing their own interests, and collaborating for mutually enduring value. PPPs are a new way of doing business and are not about command and control. Ultimately, the project partners need to remember that PPPs are not about finance, but about improving the quality and efficiency of public services.

6.1. Public-private Partnerships in Pakistan and Sri Lanka

The concept of PPPs in other countries of South Asia, such as Pakistan, Bangladesh, Sri Lanka, and Nepal, is not as well established as it is in India. Though many PPP projects in infrastructure have been implemented in these countries, the total number of projects and total investment in these projects has been negligible. In Pakistan, PPPs were non-existent up until the last two or three years. A few instances of BOT-type PPPs have been found in telecommunication, power generation, and the setting up of an oil terminal at Karachi port by the private sector. No projects have emerged for private participation in water supply and sanitation although there have been attempts to have private sector involvement in solid waste management. The overall lack of investment in infrastructure through PPPs in Pakistan is attributable to the government’s lack of experience and capacity in commissioning and executing PPPs in infrastructure. There is also a lack of resources and packaging projects that could be successfully offered for financing.

In contrast to Pakistan, the experience of Sri Lanka with PPPs has been fairly good. Sri Lanka in recent years has been spending 3.5% of GDP on infrastructure development. The government of Sri Lanka set up the Bureau of Infrastructure Investment with enough funds for private investors to borrow. Success stories include the Colombo port, Sri Lankan Airlines, and telecommunications projects. However, these were not BOT or BOO, though they did involve PPP via divestiture of shares below 50% to the private sector. Sri Lanka has taken the help of the Indian government and emulated in its own country the success of the National Highway PPP project in India. The problem in Sri Lanka is not the lack of private finances for infrastructure projects but managing the transition for private sector involvement.

6.2. Global lessons for India

Though PPPs are a relatively new approach to procurement, lessons may be drawn from the experiences of developed and developing countries on the conditions for successful PPPs. As a relatively late entrant into the PPP development process, India can learn and benefit from the lessons and experiences of countries that have established PPP programs, such as Mexico, Chile, the United States, and the Philippines. These lessons are:

  1. Detailed PPP policy and planning. This is to bolster the confidence and attract the participation of private investors and commercial lenders. Governments need to develop a policy on unsolicited proposals from the private sector. PPPs can succeed only if they are structured and planned in detail, and are managed by expert teams. Governments also need to use technical and financial advisors where needed, to match the advantages of the private sector, particularly in large-scale programs. Project development needs to be done by government, which needs to invest in development by creating dedicated funds.
  2. Proper allocation of risks. Effective PPP models involve sensible division of roles and fair sharing of responsibilities, costs, and risks between the public and private sectors. Optimal, not maximum, assignment of risk is the principle that needs to be adopted.
  3. Provide adequate protection for lenders. Public private partnerships should be designed in such a way so as to provide adequate protection to debt service against non-commercial risks related to force major regulatory changes, contract termination, etc. Avoiding renegotiations and midway changes to save costs and delays will also help secure lenders. A concession agreement should be structured in such a manner as to cover all possible causes of later adjustments, leaving minimum room for renegotiations. A key lesson learned from international experience is that governments often become over-enthusiastic to procure private sector participation by offering excessively concessional terms to the project company. This needs to be avoided.
  4. Development of public sector capacity. Public sector capacity to prioritize, plan, appraise, structure, bid, and financially close PPPs remains the top-most challenge to the mainstreaming of PPPs at the state and central levels.
  5. Full and clear support by government. Support for the PPP program and for specific PPP projects has to come from the highest political level of government. Strong political will is essential in overcoming resistance and needs to be seen as a clear sign of the government’s intention to meet its contractual commitments.
  6. Proactive public communication and stakeholder management. Many PPPs have failed due to strong opposition from civil society, local media, and other stakeholders. Feedback and consultations with citizens, labor unions, relevant government agencies, private investors, civil society organizations, and media will ensure public support, client focus, and improved coordination of the project.
  7. Role of multilateral agencies. Multilateral agencies have welcomed the recent steps taken by GOI with respect to VGF and IIFCL. Agencies like ADB and World Bank could assist GOI in promoting PPPs across sectors and regions of India, through a range of financing, advisory and technical assistance (TA) measures. Most importantly, these agencies would be able to assist GOI in tailoring PPP solutions to specific demands of the individual states, sectors, and projects.
  8. Support capacity-building. State presentations have highlighted the need for central assistance in capacity-building and have underlined this as critical in the longterm success of PPPs at the state level. In response to a request from the DEA and based on the feedback from a workshop series, ADB has agreed to extend TA to governments in order to mainstream PPPs at the central and state levels via capacity-building support, including assistance in the establishment of PPP cells at state levels.
  9. Potential financing options for PPPs. ADB has re-engineered and operationalized new ways of doing business to provide more client-oriented services for state and central level infrastructure development initiatives. ADB may also consider if necessary, extending loans (multi-tranche financing facility, local currency loan) to qualified projects in several forms. These forms include: (i) public sector loans to states/municipalities/executing agencies for financing counter-grants/equity support, land, or engineering design; (ii) public sector loans to IIFCL (financial intermediary loan) which would, in turn, provide funds to project companies; (iii) private sector loans or equity investments by the private sector operation arm of the ADB to project companies; and, (iv) provision of guarantee to commercial lenders.

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