With Budget 2019-20 indicating a staggering Rs 100 trn as India’s infrastructure investment ask if it is to become a $5-trn economy over the next 5 years, at a time the government has resolved to maintain strong fiscal discipline, the need for PPPs in infrastructure assumes even greater significance. However, the actual performance of infrastructure sector PPPs has been mixed. While a few sectors like roads & highways and airports have been able to attract significant private investments, most others like ports, water treatment & recycling, health and education have seen limited traction.
Over the last few years, a number of important steps have been initiated by the government to provide a boost to infrastructure PPPs. One of the most significant has been the setting up of the National Investment and Infrastructure Fund (NIIF), an alternate investment fund for infrastructure projects, with the government contributing around Rs 20,000 crore. A number of policy-related measures aimed at improving liquidity in infrastructure investments have also been taken, including the announcement of Infrastructure Investment Trust guidelines by SEBI in September 2015, promulgation of the Insolvency & Bankruptcy Code, 2016 and the November, 2018 directive by SEBI to large corporates to fund at least 25% of their borrowings through the corporate bond market with effect from FY19-20.
Budget 2019-20 has added to this list by announcing the setting up of a nodal Credit Guarantee Enhancement Corporation for infrastructure projects, with an authorised capital of Rs 20,000 crore. The guarantees extended by the Corporation would help individual projects improve their risk rating and meet the threshold requirements of long-term investors like pension funds and insurance companies. While these initiatives are steps in the right direction, there are a few other areas which need to be addressed on a priority basis given the global experience in public private partnerships.
Firstly, there is a need to consolidate and update the existing PPP guidelines based on the experience gained across individual sectors over the last few years as well as best practices in other countries. The consolidated policy, parts of which may also be in the form of a binding legislation, should clearly specify the sectors wherein PPPs are being considered, the various types of PPP arrangements which can be used, the steps to be followed for selecting the private partner, timelines for decision-making, guidelines for risk-sharing, etc. The policy should clearly specify the institutional eco-system for PPPs. It would be important to have a designated nodal agency to provide technical and implementation support, with the body being the single-point repository for all PPP-related process guidelines as well as contract templates across individual sectors.
Formulating an enabling framework to renegotiate concession agreements is the second area which merits attention. Most concession arrangements extend over 20-25 years and face significant uncertainties around interest rates, traffic volumes, potential changes in technology-impacting costs, and larger macro-economic and policy-related issues. Such issues can impact project cash flows both positively and negatively. For example, a scenario of decreasing interest rates may represent a potential opportunity to refinance a project at lower cost, thereby enabling higher returns for investors. Similarly, a shortfall in traffic volumes vis-a-vis originally estimated levels may result in a shortage in cash flows for servicing existing borrowings in certain years. Both these situations can be addressed only if the concession can be renegotiated. Most of the countries with relatively mature PPP ecosystems like South Korea, the UK, and Australia have well-defined guidelines for such renegotiation. To maximise benefits and build confidence with private partners, the provision for renegotiation should apply to both existing as well as upcoming concessions.
Finally, there is an urgent need for a dispute-resolution process for PPP arrangements, as long-pending disputes have significantly adverse financial impact and act as a deterrent for private partners. Any such dispute-resolution mechanism would need to factor in issues like the current load on the judicial system and its proposed role in PPP dispute resolution; use of non-judicial dispute resolution options like high-level negotiations, mediation, expert determination & arbitration; and issues around the jurisdiction and sovereign impunity of the public partner, etc.
It is expected that the aforementioned measures, together with the initiatives already rolled out, would help increase its attractiveness and position India as one of the largest and most mature PPP markets.
The writer is Partner, Deloitte India