Public Private Participation in India – Issues & Challenges

Infrastructure development had been identified as a critical prerequisite for sustaining the growth momentum of the Indian economy. Given the huge infrastructure deficit that India is facing, government has increased the target for infrastructure outlay during the twelfth plan period (2012 – 2017) to one trillion dollars, about half of which is envisaged to come from the private sector, including an annual $30 billion in foreign direct investment (FDI) inflows. Attracting such astronomical sum of investments will require the government to create a conducive environment with robust institutions and improved governance standards to ensure consistency and predictability of returns for the investors and to mitigate the risks of financing. Ensuring improved governance standards has so far emerged as the main challenge in meeting the country’s infrastructure shortages.

The infrastructure projects, though significant for the economic development, are highly capital intensive, require investments with a long time frame and hence are fraught with uncertainty. So Public Private Participation (PPP) are being seen as an efficient way to bridge the country’s infrastructure deficit, by engaging both the public and private sector and thereby distributing the associated risks.  PPP projects are basically implemented in Project Finance mode where the liabilities of the company are non-recourse. The projects are usually undertaken by a consortium of developers who execute the project and a consortium of lenders who provide debt. Such projects may require a number of rounds of financing during its life time. The greatest challenge in PPP projects is to understand the risks and adequately distribute and manage them to make it beneficial for all the key stakeholders involved in it.

A series of events bring out the flaws in execution of PPP projects in India.

  1.  Independent Power Producers/ Ultra Mega Power Producers including those promoted by powerhouse like Tatas and ADAG have appealed for upward revision of power off take price much before the contracts are due for renewal. The steep increase in tax introduced by major coal exporters like Australia and Indonesia, have severely impacted the cost of operations of the power plants using imported coal. It is apparent that the project developers had failed to reasonably assess this risk at the time of submission of their proposals.
  2. There have been reports of violation of Concession agreements in toll road projects including few cases where the concession agreements were terminated. Many such cases have gone into litigation. In highway development, most of the disputes have arisen due to controversies in payment and collection of toll for finished projects and rolling of credit and interim payments as concessionaires missed completion deadlines in projects under execution. According to the National Highways Authority of India (NHAI), the Gurgaon Expressway Project, that was supposed to be the showcase for tolled highways in India has everything going wrong with it — corruption in toll collection, substandard construction and maintenance, chaotic traffic management and unsafe ride.
  3. The Airports Economic Regulatory Authority (AERA) approved an increase of 346 per cent in airport charges by Delhi International Airport Limited (DIAL), to help them recover the cost of operating the airport. This has adversely impacted thousands of passengers and resulted in Delhi being the most expensive airport in the Asia-Pacific region. Both domestic as well as major international airlines operating out of India have challenged the steep increase in airport charges and dragged DIAL to court.
  4. Airport Metro Line in Delhi, used by over 15,000 commuters daily, was suspended after safety concerns of the elevated tracks were raised by Reliance Infrastructure-led consortium, which operates the line. As a public-private project, Delhi Metro Rail Corporation (DMRC) has built the civil structure on the Line and Reliance Infrastructure is responsible for operations and maintenance. There operations have been incurring losses; this has led to the speculation if financial losses are the reason for suspension of services. .

While the concerned parties do have a right to protect their interest, repeated disagreements and litigations point to basic faults in the way PPP is being implemented in the country. So one would obviously ask- why the project developing consortiums were unable to predict the turn of events and did not provide for it in their bids and why did the Government accept their overtly ambitious and faulty bids.

In the next section, we will further analyze the issues facing the infrastructure sector in India.

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