Though Public-Private Partnership contracts are the mainstay of infra projects, evidence of PPP performance in terms of value-for-money and efficiency is mixed and often unavailable, says Sangeeta Lakhi, Senior Partner, Rajani Associates.
Infrastructure is a key driver for the Indian economy. Increased spending in this sector has a multiplier effect on overall economic growth as it necessitates industrial growth and manufacturing which in turn boosts aggregate demand and improves living conditions. The wide-ranging sector when developed will help raise the countryÂ´s economic productivity, which has led to the Indian government promoting investing in infrastructure, providing benefits such as easing of tax restrictions and multiple financing alternatives.
Forging relationships with private and foreign investors has additionally introduced long-term sustainability and global best practices in the infrastructure industry. Important government initiatives to ensure policy stability, ease of financing, transparency, and various legal and regulatory reforms project a healthy outlook for investing in the sector.
Â´Difficult roads often lead to beautiful destinations.Â´ Well, this may be true for India, where difficult roads are remodelled and beautified leading to a pleasing journey.There are certain misconceptions about the word Â¨partnershipÂ¨. It is not a Â¨warm and fuzzyÂ¨ relationship between public and private parties working towards a common objective. Public and private partners have distinct objectives. The challenge for the public sector is to design sufficient incentives so that private profit seeking attains broader public interest objectives. The rewards are performance related, with mechanisms for continuous monitoring by the public agency over the life of the contract – not fire and forget proposition.
Where governments face shortfall in providing state-of-the-art public services, they rope in corporates in the same business and remodel the service for the benefit of the residents of that state or country; this is through a public-private partnership. A public-private partnership (PPP) is a co-operative arrangement between one or more public and private sectors, typically of a long-term nature. Governments around the world have used such a mix of public and private endeavours throughout history. Common themes of PPPs are sharing of risk and the development of innovative, long-term relationships between the public and private sectors. The use of private finance is another key dimension of many PPPs. The PPP phenomenon has been controversial. Evidence of PPP performance in terms of value-for-money and efficiency, for example, is mixed and often unavailable.
A PPP typically involves a private entity financing, constructing, or managing a project in return for a promised stream of payments directly from the government or indirectly from users over the projected life of the project or some other specified period of time.
Currently, there are neither any PPP-specific regulations in India nor any regulations that grant a separate treatment to PPPs compared to other private entities operating in the economy. The Government of India recognises several types of PPPs, including user-fee based BOT models, performance-based management/maintenance contracts and modified design-build (turnkey) contracts.
The PPP model has established itself as a preferred mode of project implementation, especially in infrastructure projects such as highways, airports, urban transit systems, ports, etc. It is seen as one of the practicable means to combine private sector efficiencies and public sector safeguards in delivering governmental services.
However, PPPs are not immune from the dichotomy that traditional privatisation initiatives are fraught with, i.e., of potential efficiency gains in production and management on one hand and a possible dent to some of the public law safeguards and benefits available to their employees, stakeholders and consumers.
Masala bonds and the infrastructure sector
In September 2015, RBI allowed corporates, body corporates, REITs and InvITs to issue masala bonds, with no end-use restrictions, other than the usual, real estate, capital market and on-lending (negative list). In August 2016, RBI allowed banks to issue masala bonds to meet their capital needs and to finance infrastructure projects.
Thus, while a corporate may use the proceeds of masala bonds for any purpose, except for the negative list, banks are only allowed to use the proceeds of masala bonds to meet their capital needs and to finance infrastructure projects.
With allowing banks to issue masala bonds to finance infrastructure projects, the infrastructure sector will receive an additional boost, which will in turn improve economic growth.
Masala bonds could prove to be a viable source of corporate finance as they shift the exchange rate risk to investors and also serve the RBIÂ´s policy objectives of integration of the Indian economy into the global economic system and internationalisation of the Indian rupee. They also serve as a good instrument to diversify the investor base for entities whose balance sheets are largely rupee-oriented, such as small- and mid-sized banks and non-banking financial companies (NBFCs).
Hybrid and New financing mechanisms
A company undertaking infrastructure projects has many avenues to raise capital, some of which are internal accrual, equity, term loans, project finance, external commercial borrowings and now, masala bonds. Companies use one or a hybrid of these mechanisms to raise funds to finance their projects. Even the new masala bonds focus on financing the infrastructure sector and with infrastructure being a key driver for the Indian economy, we may see much more focus on different avenues to finance the infrastructure sector.
Impact of investments in infrastructure projects
Infrastructure in India is poor when compared to similarly developed nations. The Government of India identified PPP as a way of developing the countryÂ´s infrastructure. In the 1990s, during IndiaÂ´s first liberalisation wave, there were various attempts to promote PPPs. However, in some sectors – such as water and sanitation – it failed. India was perceived as too risky and there was significant opposition to private sector involvement. It is only in the first half of the 2000s that the first PPPs were signed and implemented. Construction of infrastructure in India requires large capital outlays and there is a deficit in supply. Over 50 per cent of major infrastructure development projects in Maharashtra state are based on PPP.
Road PPP Infrastructure
Sixty per cent of PPP projects are for road building and they represent 45 per cent of PPP monetary value. They are a part of the National Highways Development Project (NHDP). Examples of PPP road-building projects are the Golden Quadrilateral and the North-South and East-West Corridor.
Port PPP Infrastructure
Port building projects also benefit from the PPP model and account for 10 per cent of projects and 30 per cent of the value of PPP. Examples of port building projects include the Jawaharlal Nehru Port Trust (JNPT) in Mumbai and Chennai Port in association with P&O.
Water PPP Infrastructure
In India, no city yet offers continuous (24/7) water supply. The quality of the water supply service is low with non-revenue water being as high as 40 per cent in most cities. The poor are particularly affected by this situation and end up paying more for a litre of water than their wealthier counterparts. With the objective of widening access to water services and making water services more sustainable, the Government of India promoted PPPs in the water sector in the 1990s. Now the 2015 National Water Policy recognises the importance of PPPs to solve water issues in urban areas.
Indian Railways PPP Infrastructure
The Indian Railways is considered the lifeblood of the nation and, hence, the onus of carrying the economy on its shoulder lies with the railways. The boom in the economy has resulted in a dire need of improvement and enhancement of rail infrastructure in the country. As part of the overall strategy of restructuring the railway infrastructure, a major thrust has been given to PPP.
The Indian Railways, itself, has undertaken more than 20 projects worth Rs 14,000 crore during the 12th Five-Year Plan, including those for laying new lines, doubling the existing ones, enhancing port connectivity and electrifying its network under the PPP model.
Faced with a resource crunch for its mega-investment plans, the public transporter is exploring various channels for raising funds, and PPP is one of them, through which it expects to execute a sizable chunk of projects through PPP in collaboration with the states. During 2002 and 2014, eight port connectivity projects worth about Rs 3,153 crore were implemented. These covered the linking of Mundra Port and Pipavav-Surendranagar, Hassan-Mangalore, Gandhidham-Palanpur and Bharauch-Dahej gauge conversion projects.
The growth of population has put urban infrastructure and services under severe strain. Smaller cities have found it particularly difficult to cope with increasing demands on services because of inadequate financial resources. Urban areas in India present a grim picture with regard to availability of basic infrastructure. The Indian government has initiated policies that would ensure time-bound creation of world-class infrastructure in the country. There has been considerable progress in the last 10 years in attracting private investment into the infrastructure sectors; first in telecommunications, then in ports and roads, and in individual projects in other sectors.
India is also witnessing significant interest from international investors in the infrastructure space. Many Spanish companies are keen on collaborating with India on infrastructure, high speed trains, renewable energy and developing Smart Cities. The Government of India has made a record allocation of Rs 221,246 crore ($33.07 billion) for several infrastructure projects in the Union Budget 2016-17, which is expected to provide a significant boost to the Indian infrastructure sector.
The infrastructure sector requires significant intervention accompanied by an overhaul of the current way of doing business across various participants – developers, EPC players, government, etc. Although the current economic scenario has slowed down the development of the sector, the government would need to explore ways of keeping the sector moving. The government has made some progress on key issues, but much still needs to be done.