India’s infrastructure needs can be addressed by enhancing the public-private partnership (PPP) model, which will help attract more private sector investment in sectors such as roads and highways, according to a Moody’s Investors Service report.
“Historical underinvestment and rapid economic growth are straining India’s existing infrastructure,” Abhishek Tyagi, Vice President and Senior Analyst at Moody’s Investors Service said. “While the country’s PPP model has seen reasonable success in some sectors over the last 20 years, PPP activity has been low in the last four fiscal years due to challenges with the PPP model.”
The sharp decline in private investment in PPP projects in recent years is due to delays in project approvals and land purchases by the government, complicated dispute resolution mechanisms in the concession agreements, and lower than expected revenues due to aggressive assumptions, the report said.
Finance Minister Arun Jaitley in 2014 had announced the creation of an institution called 3P India with a corpus of Rs.500 crore to provide support to mainstreaming public-private partnerships (PPPs).
A panel formed for the purpose, headed by former finance secretary Vijay Kelkar, recommended setting up independent sector-wise regulators for PPP projects and also called for amendments to the Prevention of Corruption Act to differentiate cases of graft and genuine errors in decision-making.
The panel also added that the government should encourage the development of airports, ports and railways through the PPP model by ensuring easier funding for longer-term projects.
“Delays in project completion have resulted in cost overruns and revenue losses to private concession owners,” according to the report. “These factors have impacted the financial viability of some projects and their ability to service debt. The poor performance of some infrastructure projects, including PPP, has been a source of stress for both developers and the Indian banking system.”
According to Mr Tyagi, India’s PPP framework would be vastly improved by making a few changes to do with risk allocation and an overhaul of the basis on which projects are awarded.
“As such, India’s PPP framework will benefit if it is developed further to address key issues regarding improved risk allocation, the ability to renegotiate unpredictable factors in the bid documents, and a move away from project awards based on one metric, such as estimated revenues,” Mr. Tyagi said.
Looking at best practices abroad, such as in the U.K., Canada and Australia, the Moody’s report said that more developed PPP markets typically feature well-developed regulatory frameworks, largely standardised project contracts, a large and sophisticated investor base, and predictable project pipelines.