The main recommendations of the Study include: Strengthening of lending institutions, Greater participation of insurance and pension funds, Establishment of Infrastructure PPP Project Review Committee (IPRC) and the Infrastructure PPP Adjudicatory Tribunal (IPAT), Setting up of 3P India as proposed in the Union Budget for 2014-15, Mechanism to keep a check on aggressive bidding , Need for independent regulators, Passing and enactment of pending Bills, Strong emphasis on performance-based contracts, Better preparation of DPR and Revisiting the Viability Gap Funding (VGF) Scheme.
The following are the recommendations in detail:
Strengthening of lending institutions
Despite the creation of other lending institutions such as IIFCL, IDFs, and IFCs, commercial banks remain a major source of debt financing of PPP projects in India. However, banks are faced with issues such as asset liability mismatch (ALM) and liquidity constraints as they have been funding long-duration infrastructure projects with their short-term deposits. Hence, strengthening of banks and other financial institutions has been long due.
In 2014, RBI attempted to resolve the issue by bringing in the 5:25 scheme, which allows banks to extend long-term loans of 20-25 years to match the cash flow of projects, while refinancing them every five or seven years. At present, the scheme is applicable to projects in which total exposure of lenders is more than INR 500 crore. Therefore, the government should also look into inclusion of projects with less than INR 500 crore of lending exposure in order to expand the scope of the scheme. On the supply side, RBI has relaxed reserve requirements and lending norms for banks so that they can issue long-term bonds with a minimum maturity of seven years to raise resources for lending to long-term projects in infrastructure subsectors.94 However, more such measures are required to augment financing in the sector. The Kelkar Committee has suggested that banks and financial institution be encouraged to issue Deep Discount Bonds or Zero Coupon Bonds (ZCB) in order to lower debt servicing costs during the initial phases of the project. Further, refinancing terms may be streamlined to allow automatic refinancing of infrastructure loans. In addition, there is an urgent need to develop appraisal skills and capacities among banks to evaluate lending proposals.
Greater participation of insurance and pension funds
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Companies need access to long-term funds for infrastructure projects with long gestation periods. Globally, long-term capital is raised via capital markets where major investors are pension and insurance managers. There is an urgent need in India to tap such markets to fund its infrastructure requirement. However, there are regulatory constraints on insurance and pension funds which restricts them to invest in infrastructure sector. It is recommended that investment and exposure norms posed by the Insurance Regulatory and Development Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA) be relaxed in a rational way so as to encourage these funds to actively participate in infrastructure projects.
Further, the government should actively promote and issue rupee denominated Zero Coupon Bonds (ZCB). This will also help promote the general bond market in the country and attract investments from certain categories of investors such as pension funds and insurance companies.
Establishment of Infrastructure PPP Project Review Committee (IPRC) and the Infrastructure PPP Adjudicatory Tribunal (IPAT)
The Kelkar Committees report on Revisiting and Revitalizing the PPP Model of Infrastructure suggested a two-tier framework of the IPRC and IPAT for faster resolution of disputes relating to private sector partnerships and public procurement.
One of the roles of the IPRC would be to screen and identify actionable stress in any infrastructure PPP project in a time bound manner. The detailed evaluation of the underlying technical and financial issues should be considered by the IPRC. Constitution of IPRC by IPAT would ensure that only relevant and deserved cases which involves substantial question of law reaches the tribunal for hearing in order to save time and money during the entire process. It is suggested that IPAT be chaired by a judicial member (former Judge SC/Chief Justice HC) with a technical and/or financial member. Since an independent tribunal for PPP projects in India has been long due and the list of stressed or disputed PPP projects is growing year on year, it is recommended that the a framework for establishment of the tribunal in line with the Kelkar Committee report suggestions be developed and the independent tribunal be set up through an Act of Parliament on priority basis.
Setting up of 3P India
PPPs have so far delivered some of the iconic infrastructure like airports, ports and highways. Once termed as the panacea for infrastructure funding issues in the country, PPPs today face a plethora of challenges including but not limited to lending constraints, lack of equity in the market, poor project preparation activities, and absence of dedicated policy or regulation. There is an imminent need for continuous evolution of the PPP framework in view of the everchanging PPP environment in the country. The absence of a dedicated institution to oversee and guide the sector on the evolutionary path has led to delays in many policy and regulatory decisions.
To resolve the issue, the government in the Union Budget 2014-15 has proposed to set up an institution to provide support to mainstreaming PPPs called 3P India with a sum of INR 500 crore. It is envisaged that the institution would be set up as a Center of Excellence (CoE) for PPPs, facilitating nuanced and sophisticated models of contracting, developing quick dispute redressal mechanism of PPPs, building capacities and providing support to mainstreaming of PPPs in India. Not much progress toward a dedicated institution has been observed till now; nonetheless, there is an urgent need to set up 3P India.
Mechanism to keep a check on aggressive bidding
Aggressive bidding is a major cause of concern in PPP projects. Developers bid aggressively to bag projects on account of booming economy in order to capture the significant portion of the market share. Any adverse situation in the economy results in huge losses to the developers who then become incapable of raising funds and executing projects within the stipulated timelines. Of late, many PPP projects in roads and ports sector have witnessed aggressive bidding.
Today, authorities lack the capacity to assess whether a particular bid is aggressive or not. Hence, it is recommended that the government develop a framework that would enable authorities to analyze the lowest bid with respect to internal estimates. For each project, authorities should be able to decide the range of variation, i.e., the upper and lower limit of variation in bidding parameter (total project cost, revenue share, annuity etc.) to check aggressive bidding. Authorities may be given the power to outrightly reject any bid that is outside the prescribed range. Appropriate mechanism needs to be put in place to create a balance between transparency and safeguarding authorities and its officials. Alternatively, any outlier bid may be evaluated and scrutinized further by the authority or any institution specifically created to do so to assess the viability of the project and validity of the assumptions taken by the developer. Probably, 3P India (if set up) may be assigned the tasks of developing the framework and capacities to check aggressive bidding in PPP projects. Bid capacity of the bidder should be given due consideration during technical bid evaluation.
Need for independent regulators
For long, authorities in the transport sector have played dual roles of regulators and executing agencies. NHAI is a perfect example of this. Besides, there are gaps and overlaps in roles and functions of some of the regulatory authorities. For example, the recently created RDA is not truly independent as it is required to send recommendations to the government for decision making. In ports and airports sectors, the presence of TAMP and AERA is restricting the growth of the sector by imposing unnecessary restrictions and causing delays in certain cases. Overlap in functions of regulatory authorities and executing agencies is also a major cause of concern, resulting in decisions being taken at arms length in many cases. It is understood that creating a truly independent regulatory body would be opposed by existing agencies or department. However, establishment of independent sector regulators is expected to enable faster and smoother implementation of infrastructure projects. Therefore, it is recommended that independent regulators be created in sectors that currently do not have one and roles and responsibilities of existing regulators be refined and streamlined to bridge existing institutional gaps and remove any redundancies in roles.
Passing and enactment of pending Bills
The government has taken steps to amend some existing acts in order to streamline the regulatory framework for PPP projects in the country. Some bills have been drafted and are under different stages of approval system. These bills include: h
The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Bill, 2015 h
The new Major Ports Authority Bill, 2016
The government is taking all possible steps to get these Bills passed by the Rajya Sabha. It is recommended that all genuine differences be resolved and any positive comments or suggestions be incorporated at the earliest so as to turn these Bills into Acts.
Need to put strong emphasis on performance-based contracts
In India, PPPs have mostly been used to tap private sector investment in the infrastructure sector. However, authorities generally miss out on another important aspect of PPPs, which is to tap private sector expertise to gain efficiencies in operations. India has created huge infrastructure assets base in terms of roads, railways, ports, airports, etc. over the last 10-15 years. Maintenance of these assets is going to be a huge challenge for the government in the coming years. Hence, there is a need to develop frameworks for private participation in the operation and maintenance of created assets with an objective to improve service levels and gain efficiencies.
One such new approach to road network management is Output- and Performance-based Road Contracts (OPRC). In this approach, the government can achieve better maintenance and service levels at road for similar or lesser costs. In this model, the government can award the work to a private player for management and maintenance, rehabilitation, improvement and emergency works of a road stretch or network. Similar approaches can be developed for other sectors as well. For example, in railways, project such as mechanization of track maintenance works, implementation of Automatic Block Signaling with Train Management System, and establishment of Centralized Maintenance Control Centres may be explored in the PPP mode. In ports, the government may design a partnership model that will maximize port efficiency in integration with inland transport network.
Better preparation of DPRs
A study of roads sector projects suggests that there is an inverse relation between spending on DPR preparation and cost overruns in a project. It is observed that low investment in planning and engine engineering in India generally leads to high costs of implementation.
Hence, it is recommended that the government adopt a value engineering mind-set to project design by building strong in-house value engineering teams, putting in place the right performance tracking and incentive mechanisms, and enforcing value engineering in all steps of the design process. Focus on attention to detail and quality, field investigation and topographical surveys should be conducted to prevent surprises during construction (subsequent changes in the scope of projects, re-drawing of plans and cost over runs). The scope of consultant should include ways and means of minimizing the land requirement. The design for the project should be thoroughly reviewed to minimize land acquisition to the extent possible.
Revisiting the Viability Gap Funding (VGF) Scheme
At present, the limit of the VGF scheme is 40% of the total project cost. The Government should consider increasing this limit. Further, there is a need to relook at the disbursement mechanism of the VGF fund. State governments may be allowed to disburse funds directly from their own corpus to project SPVs, which could then be reimbursed by the Central Government.
The Government should incentivize innovation for financial support to PPP projects as long as the spirit of PPP is safeguarded. For instance, there is a current no-go in case state governments are willing to extend capital support beyond the threshold 40% of the total project cost in the form of innovative structures, such as deemed shadow toll and EPC for funded works. In light of improving the project economics, these initiatives could be revisited. Further, the basis of calculation of VGF should be as per market rates and not as per Schedule of Rates.
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