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.
Greater participation of insurance and pension funds: 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.
Establishment of Infrastructure PPP Project Review Committee (IPRC) and the Infrastructure PPP Adjudicatory Tribunal (IPAT): The Kelkar Committee’s report on “Revisiting and Revitalizing the PPP Model of Infrastructure” suggested a twotier 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 ever-changing 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.
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 arm’s 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:
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.
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.