UPSC IAS Interview 2017-18

Infrastructure Development Through Public Private Partnerships

by - B.S. Chauhan, Addl. Director General (Finance), PIB, New Delhi

In order to achieve the targeted growth rate of 9 per cent for the 11th Five Year Plan, country requires enormous investment in physical infrastructure. At 2006-07 prices, infrastructure investment requirement has been estimated at over 20,60,000 crores (about US $ 515.5 billion). This amount cannot be met by public sector alone. Moreover, investment in the social sectors is the priority charge on the Government’s own resources as they are not amenable to private investment in a big way.

Therefore, it is necessary to explore avenues for increasing investment in infrastructure through a combination of public investment, Public Private Partnerships (PPPs) and also, exclusive private investments wherever feasible. PPPs offer a number of advantages in terms of leveraging public capital to attract private capital and undertake a larger number of infrastructure projects, introducing private sector expertise and cost reducing technologies and bringing efficiency in operations and maintenance.

While encouraging PPPs main constraints identified are policy and regulatory gaps; inadequate availability of long term finance; inadequate capacity in public institutions and public officials to manage PPP processes; inadequate capacity in the private sector – both in the form of developer/investor and technical manpower; inadequate shelf of bankable infrastructure projects & inadequate advocacy to create greater acceptance of PPPs by the public.

Initiatives to promote PPPs
The Government has taken several initiatives to create an enabling framework for PPPs by addressing issues relating to policy and regulatory environment. Progressively more sectors have been opened to private and foreign investment, levy of user charges is being promoted, regulatory institutions are being set up and strengthened and fiscal incentives are given to infrastructure projects. Approval mechanism for PPPs in the central sector has been streamlined through setting up of Public Private Partnership Appraisal Committee (PPPAC) in the Ministry of Finance headed by Finance Secretary. An Online database on PPP projects in the country is being developed to provide comprehensive information on the status of infrastructure sector PPPs.

Funding of PPP Projects
The Government has taken various steps to address the financing needs of these projects. India Infrastructure Finance Company Limited has been set up to provide long tenor debt to infrastructure projects and a scheme for Financial support to PPPs in infrastructure has been launched to provide Viability Gap Funding to PPP projects. Multilateral agencies such as Asian Development Bank have been permitted to raise Rupee bonds and carry out currency swaps to provide long term debt to PPP projects. Setting up of dedicated infrastructure funds are also being encouraged to increase the flow of equity investments.

The ‘India Infrastructure Finance Initiative’ facilitated by the Ministry of Finance, is one such collaborative effort to deploy approximately US$ 5 billion in capital for infrastructure projects in India. The Fund is structured as a Venture Capital Fund, with about US$ 2 billion in equity capital and US$ 3 billion in long term debt financing with maturities exceeding ten years. Initial steps have been taken to use Foreign Exchange Reserves for building Infrastructure. The Reserve Bank of India has given ‘in principle” approval to invest upto US $ 5 billion in the securities of the SPV and these would be fully guaranteed by the Government.

PPP Projects in India
Analysis based on study of 221 PPP projects in the country reveal that development and use of PPPs for delivering infrastructure services has now at least 10 years of precedence in India, with the majority of projects coming in line in the last five years. Participation as well as innovation with different structures have met with varying degrees of success.

Some sectors like telecommunications, power, ports and roads, have done very good progress compared to limited success in other sectors. Some states have undertaken far more PPPs than others, and a much heavier use of PPPs in some sectors than others. As per the survey of the 221 PPP projects in the main sectors of focus, undertaken at the instance of Department of Economic Affairs for preparation of the Online Database on PPPs, - where a contract has been awarded and projects are underway - the total project cost is estimated to be about Rs. 1,29,575 Crore.

The road projects account for 78 percent of the total number of projects (36 percent by total value) because of the small average size of projects. Ports, with a much larger average size of project, account for 17 percent of the total number of projects (47 percent by total value). It is noteworthy that if ports and central road projects are excluded from the total, there is a relatively small value of deal flow, in basic infrastructure PPPs to-date, suggesting a significant potential upside for PPP projects across sectors where states and municipalities have primary responsibility.

The potential use of PPPs in e-governance, health and education sectors remains largely untapped across India as a whole, though of late there have been some activities shaping in these sectors. Almost all contracts have been of the BOT/BOOT type or close variants. Since its constitution in January 2006, PPPAC has granted approval to 65 projects, with an estimated cost of Rs. 53,284.95 crore. These includes Highways (Fifty-six projects), Ports (six projects), Airports (two projects) and Tourism Infrastructure (one project).

The Central Government is working with the State Governments and all other stakeholders to expand the horizon of PPPs in infrastructure development in the country. It has created a favourable atmosphere, provided fiscal incentives and facilitated funding of PPP projects. The Government now allows FDI in most infrastructure sectors to the extent of 100 percent. The time is ripe for the foreign strategic investors for taking greater interest in PPP Projects for infrastructure development.

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