Mains Marathon 2024

Approach Briefly introduce the concept of Public-Private Partnership. Mention key mechanisms involved in promoting PPP and Types of PPP. State the challenges and issues involved in PPP. Suggest a way forward to address the challenges. Conclude suitably.

Introduction

Public-private partnerships (PPPs) are collaborative arrangements between government agencies and private-sector companies aimed at financing, building, and operating infrastructure projects such as public transportation networks, parks, and convention centers. By leveraging the expertise and resources of the private sector, PPPs can expedite project completion and facilitate the realization of projects that might otherwise be infeasible due to financial or logistical constraints.

Body

Key Mechanisms in Promoting PPP in India

• Public Private Partnership Appraisal Committee (PPPAC) :
  • Apex body for evaluating central sector PPP projects.
  • Recommended 77 projects with a total cost of ₹2.4 lakh crore from FY15 to FY24.
• Viability Gap Funding (VGF) Scheme:
  • Supports financially unviable but socially/economically desirable PPP projects.
  • Granted in-principle approval for 57 projects costing ₹64,926.1 crore and final approval for 27 projects costing ₹25,263.8 crore from FY15 to FY24.
  • Total VGF approval of ₹5,813.6 crore (both Union Government & State share) from FY15 to FY24.
• India Infrastructure Project Development Fund Scheme :
  • Provides financial support for the development of PPP projects.
  • Notified in November 2022 with a total outlay of ₹150 crore for FY23 to FY25.
  • Approved 28 proposals.
• Other Supportive Instruments :
  • Developed reference guides for state PPP units, project appraisal, and implementation mode selection.
  • Created web-based toolkits, post-award contract management tools, and contingent liability guidelines for project sponsors.

Models of Public Private Partnership (PPP)

• BOT( Build-Operate-Transfer): It is a conventional PPP model in which a private partner is responsible to design, build, operate (during the contracted period) and transfer back the facility to the public sector. Private sector partner has to bring the finance for the project and take the responsibility to construct and maintain it. Public sector will allow private sector partners to collect revenue from the users.
  • The national highway projects contracted out by NHAI under PPP mode is a major example for the BOT model.
• BOO(Build-own-operate): In this model ownership of the newly built facility will rest with the private party. On mutually agreed terms and conditions the public sector partner agrees to ‘purchase’ the goods and services produced by the project.
• BOOT(Build- Own -Operate-Transfer): In this variant of BOT, after the negotiated period of time, the project is transferred to the government or to the private operator. The BOOT model is used for the development of highways and ports.
• BOLT(Build-Operate-Lease-Transfer): In this approach, the government gives a concession to a private entity to build a facility (and possibly design it as well), own the facility, lease the facility to the public sector and then at the end of the lease period transfer the ownership of the facility to the government.
• DBFO(Design-Build-Finance-Operate): In this model, the entire responsibility for the design, construction, finance, and operation of the project for the period of concession lies with the private party.
• LDO(Lease-Develop-Operate): In this type of investment model either the government or the public sector entity retains ownership of the newly created infrastructure facility and receives payments in terms of a lease agreement with the private promoter. It is mostly followed in the development of airport facilities.

Issues related to PPP

• Disputes in Existing Contracts:
  • PPP projects often face disputes related to contract terms, leading to delays and cost overruns.
  • Frequent renegotiations occur, with firms citing lower revenues or increased costs, resulting in a drain on public resources.
  • The Delhi-Gurgaon Expressway project illustrates these issues in India
• Non-Availability of Capital:
  • Many PPP projects struggle with securing adequate funding, leading to stalled progress and incomplete projects.
  • Public sector banks in India often report a high share of non-performing assets (NPAs) in their infrastructure loan portfolios, impacting financial stability.
• Regulatory Hurdles:
  • Land acquisition for PPP projects is often met with significant regulatory challenges, leading to project delays and increased costs.
  • The Indian government has a poor track record in effectively regulating PPPs, leading to inefficiencies and project failures.
• Political and Crony Capitalism:
  • Metro projects and other large-scale PPPs often become sites of crony capitalism, with private companies using connections to accumulate land and resources.
  • Many PPP projects are run by "politically connected firms" that leverage political ties to secure contracts, raising concerns over fairness and transparency.
• Mixed Performance Globally:
  • Research studies indicate that the performance of PPPs worldwide has been mixed, with varying degrees of success and failure.
  • Critics argue that PPPs are merely a "language game" used by governments to avoid direct privatization, especially when political resistance exists against privatization or contracting out services.
• Moral Hazard and Opportunistic Behavior:
  • The opportunistic behavior of PPP firms creates moral hazards, as they often exploit every opportunity to renegotiate contracts to their advantage.
  • This behavior undermines the intended benefits of PPPs and erodes public trust in the model.

Key Recommendations of the Vijay Kelkar Committee:

• Focus on Service Delivery: Shift contract emphasis from fiscal benefits to service delivery.
• Risk Management: Improve identification and allocation of risks between stakeholders.
• Viability Gap Funds (VGF): Use VGF prudently where user charges are insufficient.
• Fiscal Reporting and Monitoring: Enhance fiscal reporting and performance monitoring.
• PPP Maturity: Advance the PPP model to higher maturity and sophistication.
• Infrastructure PPP Adjudication Tribunal (IPAT): Establish IPAT for dispute resolution with judicial and technical/financial members.
• Project Management: Scrap projects with insufficient progress; resolve issues or use public funds.
• Sector-Specific Frameworks: Develop frameworks for specific sectors and umbrella guidelines for stressed projects.
• Discourage Unsolicited Proposals: Avoid "Swiss Challenge" to prevent transparency issues.
• Legal Reforms: Amend Prevention of Corruption Act to differentiate between errors and corruption.
• Institutional Support: Create institutions for private investment, national PPP policy guidance, and issue resolution.
• Governance and SPV Participation: Promote good governance in SPVs and limit government participation unless essential.
• Financial Instruments: Allow Zero Coupon Bonds to manage user charges.
• Encourage PPPs in Key Sectors: Promote PPPs in railways and urban sectors, with an independent tariff regulator for railways.
• Institute of Excellence: Establish an institute to guide PPPs, provide policy input, and build capacity.
• Integrated Infrastructure Development: Ensure cohesive development with clear project delivery roadmaps.

Conclusion

Public-Private Partnerships (PPPs) have significant potential to enhance infrastructure development, especially in large-scale projects such as transit systems that improve mobility and impact land use. The "Strategy for New India @75" by NITI Aayog aims to increase investment rates, highlighting the need for measures that bolster both public and private investments. A renewed focus on PPP mechanisms, as per the Vijay Kelkar Committee's recommendations, and a robust framework can minimize government involvement in business, fostering private sector contributions to national development.