Infravisioning: What Next For PPP After A Quarter Of A Century

Vinayak Chatterjee's Infravisioning video series analyses and explains developments in India’s infrastructure sector to the BQ Prime audience.

Edited transcript of the video:

As India celebrates 75 years of independence, we also have a quarter century of public-private partnership.

It is not that India did not have a history of private capital in its infrastructure development. Railways in the latter part of the 19th century were largely built by Sterling Capital. Electricity distribution companies in Mumbai, Kolkata and Ahmedabad existed under private control, as did private generation, in pockets in different parts of the country. The green shoots of PPP largely emerged in the early 90s with eight fast-track power projects cleared by the government in 1992. These included GMR’s Kakinada and GVK’s Jegurupadu power plants. Also, IL&FS’s 12-kilometre Rao Pitampura Road in Madhya Pradesh, which was a precursor of the very large Highway Development Programme that was to follow with private capital.

However, why do we say it's a quarter century of PPP in 2022? Because it is in the fiscal year 1996-97 or 1997 that can be reckoned to be the official starting year of PPP. That year, an expert group on commercialisation of infrastructure projects chaired by Rakesh Mohan submitted a pathbreaking report, strongly advocating a significant role for private capital in India's infrastructure development. Following this report, the year 1997-98 saw a whole set of activities coming together. The Infrastructure Development Finance Corporation or IDFC was set up and that was expected to play a key role in leading private capital to infra projects. It was also the year when the Telecom Regulatory Authority of India Act or TRAI Act was passed by Parliament; the year a tariff authority for major ports TAMP was set up; an ordinance was introduced to bring in apex regulators in electricity sector both at the centre and the state. And while the National Highways Authority was technically set up in 1995, it was in 1997-98 that it really came of age and its capital base was expanded to Rs 500 crore to play a major role in attracting private capital into roads.

The erstwhile Planning Commission, recognising a significant infra deficit, planned to raise gross capital formation in infrastructure from 3% of GDP historically to 9% by the terminal year of the 11th plan, which was 2012. The strategy crafted under Montek Singh Ahluwalia had had an aggressive PPP thrust. The India Infrastructure Finance Company Ltd. was set up in 2006 to provide long-term financial assistance to PPP projects. Simultaneously, a series of model concession agreements rolled out from the Planning Commission. With all of this, the share of private capital in India's infrastructure development did move up from 22% in the 10th plan period to about 37% in the 11^th plan period. Aspirations to raise PPP to 48% of total infra investments were there, had there been a 12th plan. But the five-year planning process got put into the backburner and NITI Aayog came in with its own vision.

In current times, PPP has been stagnating at about Rs 3 lakh crore per annum, less than 20% of total infra investments. The fact that PPP started dipping from 2012 onwards was due to reasons which have been thoroughly analysed and documented. They included inappropriate risk allocation, over-aggressive bidding, twin balance sheet problems, stalled projects, policy conundrums, mounting NPAs and lack of dispute resolution.

Thus, when the NDA came to power in July 2014, they saw a devastated PPP playing field and quickly changed tack to public funding of infrastructure projects. It did make some attempts to tackle the root cause of the problem as evidenced in the late Arun Jaitley’s maiden budget speech in July 2014. They proposed the setting up of an overarching institution called PPP India, with a Rs 500 crore allocation for that new institution. In May 2015, the NDA government constituted a nine-member committee, headed by former Finance Secretary Vijay Kelkar. The committee submitted its path-breaking report titled revisiting and revitalising PPP model of infrastructure development in November 2015. The committee strongly endorsed setting up PPP India once again, picking up from Jaitley’s budget suggestion and it even laid out the mandate for such an institution which would include coming to grips with complex PPP issues like renegotiation, independent regulation, equitable risk allocation, amendments to the Prevention of Corruption Act 1988, and expeditious redressal of disputes and capacity building for the sector, particularly at the state level.

During this period, from 2014 onwards, PPP version 2.0 soldiered on in a limited manner, with the adoption of the annuity and hybrid annuity models that sought to substantially reduce the risk of private investment. New sectors like ropeways, effluent treatment plants for Ganga Cleaning project etc., and railways were brought into the PPP ambit.

Now, PPP is back in the reckoning. 100% of the National Monetisation Plan, which has a target of Rs 6 lakh crore over five years; and 40% of the National Infrastructure Pipeline with a target of Rs 111 lakh crore over the five years is envisaged to come in through PPP formats. That is a large target of Rs 50 lakh crore of private capital in India's infrastructure development over five years. Can these fresh targets be achieved without significant reform of the institution of PPP? It is certainly a challenge.

Almost all Indian corporates and commercial lending institutions are extremely wary of investing in greenfield PPP projects and foreign investors prefer operating brownfield investments. Although, it has to be recognised that in the middle of all these difficulties, for sectors like telecom, ports, airports, electricity transmission and renewable energy, PPP has continued to grow and deliver overcoming many adversities on the way.

In her latest budget speech on Feb. 1, 2022, the finance minister emphasised capacity building measures. Following this up, the ministry in July 2022 announced setting up of a new body called the Infrastructure Finance Secretariat under the Department of Economic Affairs. It’s expected to play an integrated role in the revival of the PPP ecosystem. The IFS comes on the back of two special financial institutions that were set up by the NDA government to support infrastructure development with an eye on PPP. One was the National Investment and Infrastructure Fund, set up in 2015, to provide equity support; and in 2021, India got a new development financial institution called the National Bank for Financing Infrastructure and Development, which along with its development mandate, is also to spur PPP investments in India's infrastructure.

Under the current mantra of public funds to build greenfield projects and private capital to monetise brownfield operating assets. PPP may well be set to see a revival in a modified manner. That would be version 3.0 of PPP and mark a quarter century.

Vinayak Chatterjee is founder & managing trustee, The Infravision Foundation; and chairman, CII Mission On Infra, Trade & Investment.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.