India: Public Private Partnerships In India

Major Reforms are the Need of the Hour
Last Updated: 28 September 2016
Article by DSK Legal

Public Private Partnerships (PPP) was adapted to auger growth in infrastructure development in the country and thereby giving a positive thrust to the Indian economy. The Government took the PPP route for implementation of projects in roads, ports, airports, railways, power and urban utilities as well as in social sectors. The contribution of PPPs in the infrastructure development across the country has been immense. However, poor planning towards implementation of the PPP model has led to faulty contractual structures and absence of remedial tools. This has created an illness of non-implementation and has proliferated growth of non-performing assets in the books of the project lenders in India. The failure of various PPP projects is a major reason for the books of the banks being saddled with non – performing assets.

This has forced the Government to take corrective measures. In 2014 budget, the Government announced setting up of 3P India institute. Later, the Kelkar Committee was constituted for review and revitalization of PPP model. The Kelkar Committee submitted its report in November 2015. Based on the recommendations of the Kelkar Committee, this year's budget saw announcements for the Public Utility (Resolution of Disputes) Bill, new guidelines for renegotiation of PPP concession agreements and a new credit rating system for infrastructure projects.

SMALL STEPS BEING TAKEN

Delays in issuance of regulatory approvals had become major roadblocks for PPP projects. This led to increase in cost and delays in implementation. Two of these critical approvals were environment clearance and forest clearance. The Ministry of Environment and Forest has converted the entire procedure for these clearances into online processes through web portals. Further, the Ministry has taken various steps for speedy disposal of these applications. Now, the Government is claiming issuance of the environment clearance within a period of 190 days.

In the road sector, in order to reignite interest of the private players in development of highways, the Government has launched a new hybrid annuity model. Under the new model, the life cycle cost (NPV of the quoted project cost and NPV of the O&M cost for operation period) will be the bid parameter for selection of the concessionaire. The project cost will be inflation indexed through a Price Index Multiple which is weighted average of WPI and CPI in the ratio of 70:30. NHAI will pay 40% of the project cost in five equal installments during the project construction. The concessionaire will have to initially bear the balance 60% of the project cost through a combination of equity and debt, which will be paid by the NHAI in semi-annual installments after the completion of the project construction along with an interest at Bank Rate + 3%.

The concessionaire will carry out O&M for the concession period for the fees quoted as part of the bid. The concession period has been fixed at construction period plus 15 years. However, the toll collection will be responsibility of the NHAI. In recently conducted bid in April this year, the model saw increased interest from the private parties. PPP projects are facing financing issues. The Government has created the National Infrastructure Investment Fund (NIIF) for providing additional avenues of financing. NIIF has initial authorized corpus of Rs. 20,000 crore, 49% of which will be funded by the Government.

BIG REFORMS STILL PENDING

Critical reforms as promised in the recent Budget are still pending. Some of these are discussed below:

3P India

3P India institute was planned to provide support to mainstreaming of PPPs. The Budget of 2014 allocated a corpus of Rs. 500 crores for this purpose. However, nothing further has been done since then, in this regard. The Kelkar Committee report has also recommended setting up of this institute. The report states "The Committee strongly endorses the "3PI" which can, in addition to functioning as a centre of excellence in PPPs, enable research, review, roll out activities to build capacity, and support more nuanced and sophisticated models of contracting and dispute redressal mechanisms. A dynamic 3PI can support a dynamic process of infrastructure design, build, and operate in India and thereby help deliver on the promise of reliable infrastructure services for all citizens."

Public Utility (Resolution of Disputes) Bill

This Bill was announced in this year's Budget. The pending disputes relating to PPP projects have become a major reason for delays in implementation. Presently, disputes are only governed by the

mechanisms set out in the concession documents. Lack of uniformity and clarity in the processes has given rise to disputes being dragged for years with no outcome. Therefore, the said Bill has been envisaged as a panacea to this problem.

Guidelines on Renegotiation

The implementation and operation of PPP projects spread over several years. Over this lifetime of a PPP project, sometimes certain risks arise which may not have been factored in or otherwise give rise to situations where the financial overhaul of the project becomes inevitable. Currently, there are no norms or mechanism for such renegotiation of financials in such scenario. In such scenario, if the Government authority enters into renegotiation, it gives rise to suspicions on transparency and corruption. Therefore, this deters the Government authority from renegotiation and leads to disputes or forces the private parties to abandon projects. To tackle this issue, the Government announced creation of Guidelines for Renegotiation of PPP Projects.

New Bill for PPP in Port Projects

The Ministry of Shipping is working on a new Bill to facilitate public private partnership in Port Projects. It is also said to be working on a new model concession agreement.

Public Procurement Bill

Currently, the bidding process and award of the PPP projects is guided by norms scattered in various government resolutions, guidelines and contractual structures. The Planning Commission had framed standard documents for various types of projects. These standard documents are followed by the Central Government and the State Government more as guidance rather than norm. Therefore, there are no binding fundamental norms for conduct of the tender process, bidding process, award of PPP projects or for dealing with private players post the award. This creates an environment for issues relating to transparency and accountability to arise. Earlier, the UPA Government had introduced a Public Procurement Bill in 2012 to deal with all kinds of procurements including PPPs. However, that Bill lapsed long back. There was news of reintroduction of that Bill with necessary tweaking. For this, the Ministry of Finance had invited proposals for changes in that Bill last year. The said Bill seems to be still in the works. The new Bill should cover all kinds of PPPs and should have scope of adoption of the same by the State Governments for state awarded PPPs.

CONCLUSION

The Government has introduced PPP model in various other sector including development of schools and urban areas. Under the 'Modern School Scheme', the Government will set up 2,500 modern schools through PPP. The first modern 'anganwadi centre' on PPP model took off in 2015 at Hasanpur village in Sonepat district of Haryana. In February of this year, the Telecom Regulatory Authority of India has recommended the implementation of rural broadband network by PPP model. Despite various setbacks, PPPs will continue to drive the infrastructure growth in the country. However, in order to maintain the momentum, the big reforms should be taken up on priority basis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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