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Foreword
FICCI
I am happy to share with you the FICCI-E&Y Report on Accelerating PPP in India to be released at the India PPP Summit 2012 organized by FICCI. Indian infrastructure sector is going through a significant transformation. Investment in infrastructure is envisaged to be doubled to US $ 1 trillion during the Twelfth Five Year Plan and about half of this is targeted to be achieved through private sector investment. Indian Government has taken a number of steps to encourage private investment in infrastructure through public-private-partnerships. However, it has been observed that while PPP projects in some sectors have displayed good progress, several others achieved only limited success. Issues relating to project implementation, monitoring and dispute resolution are among the key concerns of the infrastructure developers. To discuss some of the critical issues, FICCI is organising the India PPP Summit 2012 in New Delhi. The summit will also focus on procedural bottlenecks adversely impacting the ability to implement infrastructure projects and timebound execution of PPP projects. As Knowledge Partner for the event, Ernst & Young has prepared a comprehensive Background Paper covering a large number of important areas. The report has been prepared through detailed analysis of several critical factors influencing PPP projects in India. I take this opportunity to thank them for their efforts. At the summit, the speakers, experts and delegates would discuss a wide range of topics pertaining to this important area. I hope you will find this report useful and as always, your suggestions and feedback are welcome.
Abhaya Krishna Agarwal Executive Director and National Leader Public Private Partnerships Government & Transaction Advisory Services
Contents
1.Public private partnership in India
1.1 Evolution of PPPs 1.2 Current status of PPPs in India 1.3 Common forms of PPP models in India 1.4 PPP policy framework 1.5 Challenges in PPP in India 1.6 State-level experience 1.6.1 Andhra Pradesh 1.6.2 Karnataka 1.6.3 Gujarat 1.6.4 Jharkhand 1.6.5 Chhattisgarh 1.7 International experience 1.7.1 United Kingdom 1.7.2 Australia 1.7.3 Brazil 1.7.4 Philippines
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07 07 08 09 11 12 12 14 15 16 16 17 17 18 19 20
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23 23
2.3 Means of infrastructure funding 2.3.1 Commercial lending 2.3.2 Bonds 2.3.3 External commercial borrowings 2.3.4 Foreign investment funding 2.3.5 Foreign Institutional Investment (FII) 2.3.6 Multilateral agencies lending 2.3.7 Insurance/pension funds 2.4 Grants 2.5 Private sector capabilities
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35 36 37 38
4. Recommendations
4.1 Policy recommendations 4.2 Project development recommendations 4.3 Financing recommendations
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41 41 42
PPP projects take much less time to complete and the Government does not have to bear cost overruns. This will not only enable us to leverage our limited public resources but also improve efficiency of service delivery.
Shri Manmohan Singh, Honorable Prime Minister of India
Source: PM inaugural address at the Conference on Public Private Partnership in National Highways
1.
A public private partnership (PPP) is an agreement between the government and private sector for the purpose of provisioning of public services or infrastructure. With a common vision in place, the public and private sector bring to the table their own experiences and strengths resulting in accomplishment of mutual objectives. The Government of India (GoI) has been focusing on the development of enabling tools and activities to encourage private sector investments in the country through the PPP format. Private investments amounting to US$150 billion is expected to bridge the infrastructure gap of US$500 billion over the period 2007-20121. As a part of meeting this financing gap, the PPP model is increasingly been seen as a means of harnessing private sector investment and seeking operational efficiencies in the provision of public assets and services. The extent to which the GoI envisages a significant role played by PPP in improving the level and quality of economic and social infrastructure services is increasingly evident from the growing reliance on the PPP model in the recent past.
Increasing acceptance of PPP model due to favorable policy reforms and innovative PPP structures Growth in PPP from 450 projects costing INR 2,242 billion in November, 2009 to 758 PPP projects costing INR3,833 billion in July 2011
1 2 3
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Investment in Infrastructure in India, Article base website, http://www.articlesbase.com/investing-articles/investmentin-infrastructure-in-india-4585328.html, accessed 23 December 2011 Facilitating PPP for Accelerated Infrastructure Development in India, Ministry of Finance & Asian Development Bank, December 2006 PPP India Database as of 31 July 2011
[ Accelerating public private partnerships in India
Karnataka, Andhra Pradesh and Madhya Pradesh are the leading states in terms of number and value of PPP projects. At the central level, the National Highway Authority of India (NHAI) is the leading user of the PPP model. PPP projects in India by sector (Total number of projects: 758)*
Airports, 0.7% Urban Development, 20.1% Tourism, 6.6% Education, 2.2% Energy, 7.4% Healthcare, 1.1% Ports, 8.0% Railways, 0.5% Roads, 53.4% Source: PPP India database, *As of July 31, 2011
In order to select a provider/award a contract a competitive bidding process (either national or international) are followed. International competitive bidding projects accounted for 35% of total investment followed by domestic competitive bidding (26%).
Performance based management/maintenance contracts The PPP models that lead to improved efciency are encouraged in an environment that is constrained by the availability of economic resources. The sectors meant for such form of PPP models include water supply, sanitation, solid waste management, road maintenance etc.
While there do exist build-own-operate (BOO) models, they are not supported by the GoI due to its finite resources and the complexities in imposing penalties in case of non-performance and estimation of value of underlying assets in case of early termination. Also, the GoI does not recognize the engineering-procurement-construction (EPC) contracts and asset divestitures as PPPs.
Institutions
Developers
Financiers
Equity providers
Major policy and institutional initiatives taken: Setting up of PPP Appraisal Committee to streamline appraisal and approval of projects Preparation of PPP Toolkit to improve PPP decision making process Establishment of transparent and competitive bidding processes through model bidding documents Extending nancing support through development funds, VGF, user charge reforms, etc.
In the light of growing PPP trends and policy/institutional intervention, the GoI feels it is imperative to have in place a broad policy framework. Following the Finance Ministers budget 201112 speech to come up with a comprehensive policy, the Ministry of Finance drafted a National PPP policy for soliciting suggestions. The draft National PPP Policy proposes to focus on assisting Central and state Government agencies and private investors by: Undertaking PPP projects through streamlined processes and principles Ensuring adoption of value for money approach through optimization of risk-return allocation in project structuring Attaining apt public oversight and monitoring of PPP projects Developing governance structures to facilitate competitiveness, fairness and transparency
Prominent features of the proposed National PPP policy: The GoI plan to formalize PPPs as preferred implementation models based on the existence of strong track record for those models. It has laid down strong procedures to procure a PPP project. In order to instill transparency in PPP, it will publish separate mandatory disclosures and fair practices, set up dedicated dispute resolution mechanism, develop new market-based products (e.g., pre-bid rating), and explore possibilities of setting up web-based PPP market place.
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National Public Private Partnership Policy Draft for consultation, Ministry of Finance, September 2011
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The GoI is likely to establish MIS for continuous monitoring of the performance of PPP projects. The development of a sustainable PPP program requires a strong and well defined institutional structure: Supporting the creation of nodal agencies such as PPP Cells at the state or sector level. Laying down of appraisal mechanism for PPP projects by the PPP Appraisal Committee (PPPAC)
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Lack of information
The PPP program lacks a comprehensive database regarding the projects/studies to be awarded under PPP. An online data base, consisting of all the project documents including feasibility reports, concession agreements and status of various clearances and land acquisitions will be helpful to all bidders.
Project development
The project development activities such as, detailed feasibility study, land acquisition, environmental/forest clearances etc., are not given adequate importance by the concessioning authorities. The absence of adequate project development by authorities leads to reduced interest by the private sector, mispricing and many times delays at the time of execution.
The limited institutional capacity to undertake large and complex projects at various Central ministries and especially at state and local bodies level, hinder the translation of targets into projects.
Financing availability
The private sector is dependent upon commercial banks to raise debt for the PPP projects. With commercial banks reaching the sectoral exposure limits, and large Indian Infrastructure companies being highly leveraged, funding the PPP projects is getting difficult.
While most of the above challenges are being worked upon by the GoI, the limited availability of sources of funding is the biggest bottleneck for the success of the PPP model.
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Infrastructure Challenges in South Asia: The Role of Public-Private Partnerships, ADB, September 2007 Transparency in PPP programme, The Financial Express, October 27 2011 Indian Infrastructure Challenges, IDFC, September 2010
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The top five states account for 58.3% of total value of PPP in India. The major sectors being targeted for PPP format by leading states are roads, ports and airports. Maharashtra, Karnataka and Gujarat average around 11% of the total value of PPP of the country. The bottom 10 states represent only 3.5% of the total value of PPP indicating differences in attractiveness of investment by private sector.
Uttar Pradesh
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PPP India Database as on 31 July 2011 PPP Cell of Andhra Pradesh, PPP Cell AP website, http://ppp.cgg.gov.in/Login.aspx, accessed 16 December 2011 PPP India Database as of July 31, 2011
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Institutional support The state has set up various institutions to promote infrastructure: Andhra Pradesh Industrial Infrastructure Corporation (APIIC) provides estate infrastructure for the development of industrial areas (IT parks, food processing zones, SEZs, etc.) AP Invest promotes Andhra Pradesh as the favored destination AP Tourism Developement Corporation provides tourism infrastructure to attract tourist inflow Infrastructure Corporation of Andhra Pradesh (INCAP) deals with projects that are of critical importance to the states progress AP Road Development procures road projects in the state AP Urban Finance & Infrastructure Development Corporation provides financial assistance, technial assistane and other guidance State PPP cell acts as a nodal agency for all PPP projects for supporting the states PPP initiatives
Policy reforms Andhra Pradesh was the first state to enact the AP Infrastructure Development Enabling Act, 2001 applicable to all infrastructure projects implemented by the state. The act lays down guidelines for developer selection, illustrates various PPP types, and range of state support to infrastructure projects
Funding initiatives The Government of Andhra Pradesh extends support in the following forms: Direct financial support in the form of states share of viability gap funding (VGF) to promote economically viable projects Exemptions in terms of sales tax, stamp duty and seigniorage fees Asset-based support to provide Government-owned land at concessional lease charges, providing linkage infrastructure to projects Administrative support to get clearances, undertake rehabilitation and resettlement, supply power and water at project site, land requirements
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1.6.2 Karnataka9
According to Economic Survey 2010, Karnataka is among the top states in PPP in infrastructure projects. The state has 104 PPP projects of value INR447 billion10. As the knowledge hub of India, it has immense potential for investment in the areas of information technology, biotechnology, textiles, steel and cement. In 2008, the transportation sector bagged the maximum investment on a PPP basis in the state. However, the Government of Karnataka is now targeting new areas for PPP. It has tabled a Bill in Legislative Assembly to develop all ports in the state on a PPP basis and is formulating an integrated energy policy that aims to promote PPP projects in the energy sector. Institutional support The State Government has established the Infrastructure Development Department in 1996. It aims to attract private sector participation in the development of infrastructure projects. The State Government has set up a PPP cell in the Infrastructure Development Department to boost PPP in the state. PPP cell aims at identification, conceptualization and creation of a shelf of projects that can be considered for implementation through the PPP route.
Policy reforms The states New Infrastructure Policy, 2007 aims to provide a fair and transparent policy framework for promotion of PPP in the infrastructure sector in the state. The policy has the provision for consideration of implementing the project first through PPP for all new investments in infrastructure. The State Government decided to establish a single window to facilitate the speedy approval of the projects.
Funding initiatives The State Government has set up a fund called Karnataka Infrastructure Project Development Fund to provide financial assistance to state agencies taking on infrastructure projects under PPP mode. The fund targets investment in railways, airports, ports, roads, urban infrastructure, energy, tourism and industrial infrastructure.
Geert Dewulf, Ashwin Mahalingam, and Stephan Jooste, The Transition Towards a Sustainable PPP Regime, August 2011 Karnataka Special Ppp On Fast Track, 24 October 2011, Project Monitor, via Factiva, 2011 Economic Research India Pvt. Ltd., distributed by Contify.com Infrastructure Development department website, http://idd.kar.nic.in/ppp-go.html, accessed 12 December 2011 10 PPP India Database as of July 31, 2011
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1.6.3 Gujarat
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With around 63 projects valued at INR396 billion12, Two air strips have been developed by Gujarat is among the leading states witnessing high private developers. level of PPP activity especially in the sectors of ports and power. Gujarats vision 2010 envisioned development of robust infrastructure in the state primarily through the PPP mode. Similar planning exercise has been undertaken for future projects in the form of Blueprint for Infrastructure, Gujarat-2020. It envisages investment of INR120 trillion by 2020 across infrastructure sectors. Institutional support Gujarat is the first state to build a regulatory framework for PPP through the passing of Gujarat Infrastructure Development Act in 1999. It defines guidelines for the private sector participation in financing, construction, maintenance and operation of infrastructure projects undertaken on a PPP basis in Gujarat. Gujarat Infrastructure Development Board (GIDB) was set up in 1995 to undertake PPP initiatives in the state. Gujarat Infrastructure Development (GID) Act 1999 provides a mechanism for selection of developers to encourage private sector participation.
Policy reforms GIDB has developed model concession agreements for certain sectors such as ports, urban transport, road and water. In addition, sector-specific policies of the state provide for utilization of PPP.
Funding initiatives The State Government has formulated viability gap funding scheme to provide funds for essential PPP projects. Under this scheme, the State Government provides financial support up to 20% of the cost of PPP project. The funding is provided in the form of a capital grant at the stage of project construction.
11 The Transition Towards a Sustainable PPP Regime, Geert Dewulf, Ashwin Mahalingam, and Stephan Jooste, August 2011 Major Initiatives, Gujarat Official State Portal, http://www.gujaratindia.com/index.htm, accessed 11 December 2011 Public Private Partnership, Gujarat infrastructure Development Board website, http://www.gidb.org/, accessed 12 December 2011 12 PPP India Database as of July 31, 2011
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1.6.4 Jharkhand
Jharkhand witnessed relatively low PPP activity in infrastructure projects. The state has undertaken nine PPP contracts costing INR17 billion13. The BOT has been the preferred form of PPP type applicable in these projects. The sectors such as urban development and roads have drawn more attention towards PPP in the state. The draft Jharkhand Industrial Policy, 2011 lays down significant emphasis on implementation of the concept of PPP in industrialization especially in infrastructure development/industrial area development/industrial park/ human resource development/service sector etc.14
Jharkhand announces plan for PPP hospital The state of Jharkhand announced its plans to operate the newly built 500-bed Sadar Hospital at Ranchi in PPP mode with the view to avail qualified and specialist doctors and trained nursing and paramedical staffs.
(Source: http://www.igovernment.in/site/jharkhand-mootsppp-mode-govt-hospitals)
1.6.5 Chhattisgarh
The state of Chhattisgarh recorded relatively low PPP activity in infrastructure projects with only four PPP contracts costing INR8 billion15. All the projects have been undertaken in the roads sector utilizing the BOT-Toll PPP type. Chhattisgarh formulated an industrial policy for the period of 20092014 to focus on PPP. It allows the industrialist to form their own private industrial park for an area of up to 75 acres resulting in speedy acquisition of land. The state government actively supports the PPP method for development of tourism and infrastructure.
13 PPP India Database as of July 31, 2011 14 Jharkhand Industrial Policy 2011, Jharkhand Industry website, jharkhandindustry.gov.in/Jharkhand%20Industrial%20 Policy%202011%2013.9.11.doc, accessed 19 December, 2011 15 PPP India Database as of July 31, 2011
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Upcoming PPPs16
Setting up of Gems & Jewellery SEZ on PPP Chhattisgarh State Industrial Development Corporation Limited plans to set up a Gems and Jewellery SEZ covering 70 acres. The project will be developed on a PPP basis with M/s Ramky Infrastructure Ltd. The project is expected to be completed by 2014 at a cost of INR17.42 billion.
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Sports City in Naya Raipur Naya Raipur Development Authority is setting up a sports city with facilities for aquatic, tennis and indoor stadium on PPP in Naya Raipur over 137 Acres. The private player will build the sports facilities and hand it back to the authority. A 93 acre residential land parcel will cross-subsidize the sports facilities.
16 Chhattisgarh, Ministry of Foreign Affairs, Kingdom of Thailand website, http://www.mfa.go.th/internet/document/6691. pdf, accessed 19 December 2011 World class education in Chhattisgarh, Dailybhaskar.com website, http://daily.bhaskar.com/article/MP-RAI-soon-worldclass-education-in-chhattisgarh-iiit-likely-to-open-in-state-2142187.html, accessed 19 December 2011 17 Public-Private Partnerships, Government Guarantees, and Fiscal Risk, International Monetary Fund, April 2006, p. 72-76 18 Project Database, PPPForum website, http://www.pppforum.com/projects, accessed 14 December 2011 19 Theorizing Public-Private Partnership Success: A Market-Based Alternative to Government, Paper for the Public Management Research Conference at Syracuse University, June 2011, p. 16
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High level of political commitment: Timely reforms have been introduced by the Government to ensure development of the PPP markets. This includes steps such as PFI, and empowering the National Audit Ofce (NAO) to independently oversee PPPs.
4 Specialized bodies: The creation of specialized bodies such as Partnerships UK (PUK) and the Treasury Taskforce has institutionalized and gave structure to the PPP activities, which has been critical for the success of a PPP program in such a large scale.
Strong policy framework: A proper legal and institutional framework at national, regional and municipal levels is in place, which acts as a safeguard for potential partners. It is ensured that the Government spending is regularly scrutinized and published for the general public. 2
Utilization of taxpayer's money: A proper evaluation tool, along with a program management process, has been put in place. This screening optimizes the project risk, and ensures that they are delivered on time without compromising on the quality.
1.7.2 Australia20
The Australian PPP market is one of the most well developed markets for PPP. The initial phase of PPP pertained to infrastructure projects that were modeled on the BOT and BOOT types. However, the focus of PPP shifted to social infrastructure in 2000s. The projects are diverse and relate to hospitals and schools. The market for social infrastructure is expected to continue to develop as there is need for water and energy infrastructure to meet Australias future sustainability requirements. Australia is witnessing significant growth in infrastructure. The infrastructure market is estimated to procure investments worth US$101 billion by 2016. In addition, the devastation caused by the floods in northern Australia exacerbates the massive task of rebuilding damaged infrastructure. Thus, there is requirement of private investment in the country.
Infrastructure Australia Independent statutory advisory council with 12 members from government and private sector National PPP Forum Facilitates cooperation across Australian regional jurisdictions for infrastructure projects through PPP Key national entities for PPP Australian PPP unit Established by Department of Finance and Administration to provide guidance to government agencies on use of PPP
20 Case Studies of Transportation Public-Private Partnerships around the World, Office of Policy and Governmental Affairs, July 2011 Public Private Partnerships, Infrastructure Australia website, http://www.infrastructureaustralia.gov.au/public_private/, accessed 11 December 2011
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1.7.3 Brazil21
Private investment to build infrastructure has existed in Brazil for a long time. In fact, it was the main form in which majority of the countrys original infrastructure were developed. The first railroads of the country were built by private players under the state licenses. Brazil has one of the longest highway network under private concessions22 in the world indicating co-existence of public and private entities. PPP activities are regulated under the Concessions Law (1995) and the Public Private Partnerships Law (2004). The main drawback of the concession law has been that the users (especially drivers on toll roads) are unwilling to pay for the use of a previously free road. Under the law the contract duration can vary between 5 to 35 years and the contract value should be at least US$11 million.
Investment is recovered from the revenues collected from the users in the terms of concession (Revenue source = user tariffs) Ideal for long-term sustainable projects
Sponsored concession state is allowed to complement concessionaires revenues (Revenue source = user tariffs + public) Administrative concession Government is responsible for the private partners remuneration (Revenue source = public payments)
The adoption of the two model structure in the PPP law has proven to be effective because: The PPP law allows the payments to be partly or totally funded by the Government. This has helped in attracting private investments in projects that cannot be sustained by the fees charged from the users. The Government has to establish a fund to provide warranty of its obligations under the agreement. The law also provides for the use of alternative mechanisms for disputes resolution, including arbitration.
21 Brazilian PPP Program, Lessons and Challenges, Brazil Ministry of Planning website, http://estatico.buenosaires.gov.ar/ areas/hacienda/pdf/8_mesapanel_vanialucia_lins_souto.pdf, accessed 12 December 2011. An Overview of Concessions and Public-Private Partnerships in Brazil, American Bar Association website, March 2011. Public Private Partnership Unit website, www.ppp.mg.gov.br, accessed 12 December 2011 Privatization and Public-Private Partnership, Barbosa, Mssnich & Arago Advogados website, 2008, p. 4 22 A concession is the right to operate public services or facilities for a fixed period of time, at the concessionaires risk.
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Scope for improvement: Despite certain advantages, few PPP projects have been contracted in the country. Many Government officials are not comfortable with the idea of paying taxpayers money to private investors and are hesitant in implementing such contracts. There are major issues are in the areas of policy formulation, regulation and supervision of contracts. According to the law, the Government cannot make any payment until the private partner provides the service to the users. This creates financing difficulties as the private investor may have to make huge investments in building facilities without receiving any cash flow. Brazil launched Phase two of its Growth Acceleration Program, which estimates to incur public and private investments worth US$526 billion to upgrade the countrys infrastructure in the period 2011 to 2014.
1.7.4 Philippines23
Government of Philippines has been promoting participation of private sector not only in traditional infrastructure projects such as power, transportation and water sectors, but also in non-traditional infrastructure and development sectors such as information and communications technology, health and property development since 1987. PPP enabled resolving of the power crisis in the early 1990s and helped improve road network quality, transport linkages and social services in the country. PPP initiatives have bagged approximately US$19.5billion in the country. The countrys PPP program is a vital component of its development plan. The PPP center is at the helm of affairs of the PPP program. It provides various services and assistance to implementing agencies (IAs), government-owned and controlled corporations (GOCCs), state universities (SUCs), local government units (LGUs) and the private sector in the development and implementation of critical infrastructure projects. In addition, the countrys BOT law recognizes the role of private sector in the development of the country by providing various incentives such as tax exemptions. PPP center serves as an efficient nodal agency for PPP projects of the country. Project Development and Monitoring Facility (PDMF) of the center provides funds for PPP activity. Government is proactive in takings steps to build up support for PPP projects. It has allocated US$6.8 million in the 2011 budget to enable structuring and preparation of PPP projects. In addition, it is developing an interim scheme to provide access to long-term financing for PPP projects until a dedicated infrastructure finance facility can be established.
23 Public Private Partnership Projects, Republic of Philippines, March 2011 The Philippine PPP Program, PPP unit, December 2008
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2.
2.1 Overview
The development of a good physical and social infrastructure is characterized by significant investment requirements, low operating costs with repayments from revenues generated from the project. The GoI has traditionally been taking the onus of financing, implementation, operations and maintenance of these projects. However, to avoid cost and time overrun and benefit from innovative project structuring and implementation strategies, private sector participation in development of infrastructure is extremely critical. The GoI, cognizant of the fact, is setting the targets for its Twelfth five year plan such that that 50% of the infra spending is met by the private sector.
Planned year-wise infrastructure spending during the Twelfth FYP (in INR billion)
FY2017, 10,395 FY2013, 6,194
20,496 7,429 13,113 20,496 Twelfth Plan (Projected) FY2016, 9,181 FY2014, 7,127
2,252 6,809
Tenth Plan Eleventh Plan (Actual) (Revised) Public investment Private investment
FY2015, 8,095
Source: Planning Commission projections of Investment in infrastructure during the Twelfth Five Year Plan
The Approach Paper24 to the Twelfth FYP further states that while public investment in infrastructure is needed for the overall societal development and wider reach, the PPP-based development needs to be encouraged in all feasible areas. For this, the institutional mechanisms to support this kind of investment deserve strong support. As a result, the GoI has already taken various measures to enhance availability of funds and meet increased level of private sector participation. The next section describes in detail each of the funding sources and the measures taken by the GoI to encourage the use of such source for infrastructure financing.
24 Faster, sustainable and More inclusive Growth An approach to the Twelfth FYP, Planning Commission, GoI
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Lenders perspective
Bank credit: Commercial banks are facing difficulties as they have already reached their lending exposure limits for the infrastructure sector and face the problems of concentration risks and ALM mismatches. Bonds: The bond market in India is highly underdeveloped. The rate at which the bond market in India is growing is considerably slow in comparison to the rate of growth needed by the GoI to build its infrastructure. External Commercial Borrowings (ECBs): ECB lending is highly dependent on the interest rate scenario. Prominent infrastructure companies such as L&T have been increasingly evincing interest in ECBs as an option for infrastructure funding. Multilateral agencies: The World Bank and the Asian Development Bank have launched programs supporting PPP projects in India. The institutions provide technical and financial assistance to facilitate infrastructure development.
The infrastructure sector has been witnessing rising debt equity ratios in the recent years. The senior debt is contributed by both commercial banks and public sector banks. The use of subordinated debt is limited and is used particularly in the road sector. Apart from lending in form of debt financing, the government grants are devised to support economically unviable but feasible projects. The domestic bank credit has been the prime source of debt financing in case of infrastructure projects.
25 Proposed Multitranche Financing Facility India: India Infrastructure Project Financing Facility, Asian Development Bank, November 2007
Accelerating public private partnerships in India ] 24
However, many Indian banks are now on the verge of reaching their maximum limits for lending toward the infrastructure sector. With significant number of high investments proposals in the pipeline for the infrastructure sector, the banks are finding it difficult to finance infrastructure projects. One of the key problems faced by banks is the asset-liability mismatch problem, typically of infrastructure projects.27 Challenge of asset-liability mismatch and reaching infrastructure exposure limits The asset-liability mismatch problem arises due to the fact that longer duration loans required by the infrastructure projects need to be financed by shorter duration borrowings. The lending banks are finding it increasingly difficult to provide financing to high-value projects with repayments schedules of up to 15 years in comparison with deposits ranging in maturity period of one to three years. With ALM and concentration risks, the loans are not complete reflection of the project risk and loan pricing controls (for liquidity shortfall and refinancing risk). The low deposit rates have further aggravated the situation as the depositors are unwilling to commit themselves to long-term maturities28.
Infrastructure loans are of 10-15 years duration, while most bank deposits have tenure of one-two years. In the last financial year, not much disbursement took place, and now every bank is sitting on huge sanctions waiting to be disbursed. This is going to create a major problem, as we wont have deposits of equal maturity,
Chairman and Managing Director of a public sector bank
(Source: Business Standard)
26 RBI Annual Report 2010-11, pg51 27 Loan-deposit mismatch may hit bank lending to infra sector, Live Mint website, http://www.livemint. com/2011/02/08224328/Loandeposit-mismatch-may-hit.html, accessed on 4 January 2012 28 Bank face asset-liability mismatch on infra lending, Business Standard website, http://www.business-standard.com/india/ news/banks-face-asset-liability-mismatchinfra-lending/393085/, accessed 29 December 2011
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Lenders perspective
The difference between liabilities and assets varies according to their maturity profile buckets. The table indicates that as the maturity time period increases, the liabilities (deposits and borrowings) surpass the assets (loan and advances and investments). It results in asset liability mismatch for banks. The problem accentuates with infrastructure lending as infrastructure loans are long-term in nature. Table: Maturity profile of selected items of liabilities and assets of four public sector banks (in INR million) as on 31 March 2011 SBI Deposits Over 5 years Borrowings Over 5 years Loan and Advances Over 5 years 1,360,204 363,307 264,986 355,125 287,161 409,693 98,139 101,781 43,550 77,986 1,571,656 538,719 714,426 523,464 377,587 Bank of India Punjab National Bank Canara Bank Total
Investments (at book value) Over 5 years Difference Over 5 years 97,898 26,978 2,822 38,610 20,569 1,600,123 543,334 579,436 597,985 374,098
In the absence of a developed corporate bond market, use of refinancing facility has been suggested to mitigate ALM mismatches. Under this facility, the long-term funds will be borrowed and used to refinance infrastructure loans of banks and specialized NBFCs.
Lenders perspective
Many banks are close to exhausting their internal limits set for infrastructure firms. We may not see the same pace of expansion, in terms of credit disbursement to the infrastructure sector, in the next two years that we have seen in the past two years
R. Ramachandran, Chairman and Managing Director of Andhra Bank
Maximum loan proposals are coming from this (infrastructure) sector. All are big-ticket proposalsBanks will have to see their loan book and see what their headroom available for lending
P.K. Anand, Executive director of Punjab and Sind Bank
(Source: Livemint)
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Take-out financing as a solution: The take-out financing scheme has been developed to deal with issues of hitting sectoral limits, concentration risk and asset-liability mismatch. The takeout financing scheme involves three parties project company, lending company and taking over institution (bank/consortium of banks/FI). Under the scheme, the taking over institution enters an agreement by which the lender transfers a part/whole of the outstanding to the taking over institution on a pre-determined basis. The concept of takeout financing has been accepted as a global practice to release long-term funds for financing infrastructure projects. IIFCL, an SPV formed for the purpose of lending funds to infrastructure projects and supplement other loans from banks and financial institutions, has been recognized as a special agency to extend takeout finance scheme in 2010. A tripartite agreement was signed in September 2011 between IIFCL, LIC and IDFC which allows takeout financing to an extent of 50%29 of the project cost. IIFCL has further increased take-out financing disbursement target by INR50 billion as a result of which the banks and infrastructure developers are expected to get attractive takeout financing deals. Under the new concession in PPP projects, the take-out financing rate is likely to vary from 9.90% to 10.85%. The banks will now be able to seek out takeout financing immediately after the commercial operation date. Also, the BOT projects of NHAI will be eligible for the scheme. These changes will enable banks reduce exposure to existing borrowers and free up their capital and operate within the exposure limits.30
Further, the central bank recently eased the norms by allowing banks to lend 20% of its capital funds to Infrastructure Finance Companies (IFCs).
29 IIFCL, LIC, IDFC enter into MoU for takeout financing, Economic Times website, http://articles.economictimes.indiatimes. com/2011-09-19/news/30175667_1_takeout-financing-iifcl-india-infrastructure-finance, accessed 2 January 2012 30 IIFCL raises takeout fin bar by Rs5,000 crore, DNA website, http://www.dnaindia.com/money/report_iifcl-raises-takeoutfin-bar-by-rs5000-crore_1627878, accessed 20 December 2011 31 K C Chakrabarty: Infrastructure finance experiences and the road ahead, BIS Review, February 2010
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2.3.2 Bonds
The bond market in India comprises issuances by both Central and state governments, public sector undertakings, other government bodies, financial institutions, banks and corporates. However, the corporate bond market currently is highly underdeveloped and lacks liquidity and depth.32
India plans to develop a vibrant bond market to facilitate infrastructure financing, as the source of nearly one-third of the targeted $1 trillion investment in the sector during the Twelfth plan period is not known yet..We want to develop and set up a vibrant bond market in the country to facilitate infrastructure financing.
Pranab Mukherjee Honble Finance Minister of India
(Source: Economic Times)
The corporate debt markets have been constrained by detailed primary issue guidelines, lengthy processes, and absence of long-term investors.
Lenders perspective
The success of governments very ambitious infrastructure programme hinges on developing an adequate bond market
D.H.Pai Panandiker, President, RPG Foundation
(Source: Business Week)
The bond market primarily functions as a private placement market as the public issues of bonds have been found to be difficult, slow, expensive as well as risky. A debt private placement amount of INR5.4 billion was raised in the infrastructure sector during FY09 up from INR4.3 billion in FY08.33 Indian companies are allowed to issue bonds in Indian currency for trading on the corporate bond market in the country according to the existing regulations. Foreign institutional investors are permitted to invest in these bonds up to INR935 billion collectively, with a carve out of INR234 billion for infrastructure projects.34
Corporates in specified service sectors such as hotel, hospital and software INR9.3 billion or equivalent as against the current limit of INR4.6 billion or equivalent The corporate entities in the infrastructure sector can now avail of ECBs for interest during construction (IDC) as a permissible end-use, under the automatic/approval route, as the case may be, subject to IDC being a part of project cost and is capitalized.
The GoI approved fund raising worth INR609.5 billion by companies through external commercial borrowing (ECB) or foreign currency convertible bonds (FCCB) for infrastructure projects in the last two financial years.37 Companies such as L&T Finance are mulling the ECB route for its expansion. L&T Infrastructure Finance raised INR4.2 billion through the ECB window this fiscal and is aiming to raise more funds through this route.38
37 http://www.projectsinfo.in/News.aspx?nId=tqS7Qlvq+Qa2afymafoMpg== 38 L&T Infra launches tax-free bonds; mulls ECB route for funds, Business Line website, http://www.thehindubusinessline. com/industry-and-economy/banking/article2656496.ece, accessed 22 December 2011 39 Department of Industrial Policy and Promotion, India FDI Fact Sheet April 2011 Pg4 40 RBI Annual Report 2010-11 pg70 41 http://www.moneycontrol.com/news/business/govt-aims-to-ease-fii-entryinfra-finance-bonds-sources_579707.html 42 Country Operations Business Plan, ADB, December 2010 43 Theoretical Framework, ADB website, http://www.adb.org/India/PPP/about.asp, accessed 2 January 2012
29 [ Accelerating public private partnerships in India
ADBs TA support for the Indian PPP program identified more than 30 pilot projects across challenging sectors such as urban, health, education, power distribution and the rural sector. It is supporting approximately 452 PPP projects across the country through the PPP cells.
World Bank
World Bank support intends to increase the availability of long-term financing for infrastructure PPP projects in India. It will help IIFCL to stimulate the development of a long-term local currency debt financing market for infrastructure in India. The International Bank for Reconstruction and Development (IBRD) has provided a Line of Credit (LoC) of INR58 billion to IIFCL for infrastructure projects. In addition, World Bank project (20092015) regarding IIFCL support is expected to bring around 150 new PPPs to financial closure, resulting in a four-fold increase in the amount of private capital available. Such a financing will support a number of PPP projects, mainly in the roads, power and ports sectors.
The government clears policy impediments to enable life insurance companies and pension funds, which have funds for 20-30 years at their disposal, to invest in the infrastructure sector.
Suggested by KC Chakrabarty, Deputy Governor, RBI (Source: The Times of India)
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2.4 Grants
Grant is the amount, which a project awarding authority provides to the project sponsor in order to support the financial viability of a project. Projects that are not commercially viable on their own require a fund support from the GoI. The GoI introduced Viability Gap Fund to provide catalytic assistance and support, especially for regions and sectors where PPPs are difficult.
Eligible sectors:
Current status: The total Viability Gap Funding (VGF) outlay for the Eleventh Five Year Plan (20072012) had been estimated at INR69.73 billion. In the FY1011 alone, INR4.80 billion was provided as VGF. The total approvals for VGF grant till now are INR82.89 billion for projects that have been granted In-principle/final approval. The actual level of VGF amount of these proposals will be known once the bidding process is completed.
(Source: Outcome budget FY1112, Ministry of Finance, pg 3)
The coverage of VGF scheme is also being considered for expansion in case of education and health sectors. Also, the state governments (such as UP Government) are undertaking development projects through VGF to make them profitable for promoters.
Urban infrastructure: There are significant opportunities for private sector in the fields of urban renewal and management, drinking water supply, waste water recycling, treatment of municipal sewerage wastage and treatment or urban sewerage. Health care services: PPP arrangements can be utilized to finance health care services and to strengthen the secondary and tertiary health care systems in the country.
In India, majority of equity in infrastructure projects is contributed by project developers, with the next-largest contributor being the public sector. The private sector consortium along with public agency contributes equity depending on the terms of contract while debt is sourced from an outside agency. According to World Banks Private Participation in Infrastructure database, India stands second only to China in terms of number of PPP projects and is second to Brazil in terms of investments. PPP projects in India require a minimum shareholding commitment from sponsors of projects amounting to 51% of the equity up to second year of commencement of operations. The equity capital is entirely provided by project sponsors out of their existing balance sheets. There is also placement of minority equity stakes with Engineering Procurement and Construction (EPC)/O&M contractors besides strategic investors who are likely to benefit from the projects operations. A private player in a PPP project can be a private company, a consortium of private interests or a Non Government Organization (NGO). Private sector plays the role of designing, construction, operation and maintenance of the project. Private players are also responsible for providing equity of the PPP project. They, in turn, can tap the primary market to raise capital via an IPO issue. However, private developers have limited amount of capital, tied up for long term in infrastructure projects. They rely on private equity investors to decrease promoters risk. Private equity witnessed around 241 deals worth INR266 billion in the infrastructure sector in 1H11. Table: Capital raising of infrastructure companies and PE investments in infrastructure IPO/FPO Number of issues 4 9 12 21 3 INR billion 62 46 66 206 10 PE Number of deals 7 10 40 77 48 INR billion 4 28 115 341 184
The investment is contributed by both domestic and foreign players. However, the domestic players dominate the scenario of PPP projects in India. Table: Prominent private players in Indian Infrastructure Domestic players Major domestic players Larsen & Turbo Transportation Infrastructure Ltd. Small domestic players DS Constructions Sadbhav Engineering Limited MSK Projects (India) Limited Total
Source: Shodhganga
Number of projects 10 4 11 15 40
32
33
34
3.
PPP format BOT toll
3.1 Highways
Road sector (405 projects valued at INR1,767 billion) accounts for 53% of the total number and 46% of the total value of PPP projects in India45. The road network in India comprises national highways (65,569 km), state highways (1,30,000 km) and district/rural/urban road (31,40,000 km)46. The contracts have primarily been awarded by competitive bidding and are largely in the BOT format (toll or annuity basis). Common forms of PPP in national highways Projects 48 8 24 Value (in INR billion) 93.3 23.5 46.8
National highways: Significant progress has been made in the financing of ambitious National Highway Development Program (NHDP) covering a total length of 45,974 km and investment of INR2,200 billion up to 2012.
Status of State Highways Project status Completed projects Projects under implementation Projects in the bid process Projects where feasibility study has commenced Projects in pipeline for 2011-12 Total
Source: Compendium of PPP projects in state highways, Infrastructure website
State highways: With significant progress being made by the NHDP (in case of national highways) in which approximately 85% of projects are proposed to be under the PPP mode, growth model for state highways also holds potential. The state governments of Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Rajasthan and Madhya Pradesh are taking initiatives to promote PPP-based state highways.
Several government initiatives to enhance private sector participation (including PPP) in roads sector:
Viability Gap Funding in the form of capital grants subsidy of up to 40% of project cost 100% tax exemption in any consecutive 10 years out of 20 years Duty-free import of certain identified high quality construction plants and equipment Allowing FDI up to 100% in the sector and relaxed ECB norms Long concession period of up to 30 years Right to collect and retain toll Model concession agreements for state highways Standardizing of model bidding documents
45 PPP India database as of 31 July 2011 46 Ministry of Road Transport & Highways
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Investment requirements: The national highways constitute just 2% of the entire road network but carry approximately 40% of total road traffic indicating existence of significant potential to be unleashed. The investments worth INR4,902 billion have been planned as a part of the Twelfth FYP (compared to INR2,786 billion for the Eleventh FYP). The contribution of private sector is likely to range from INR1,667 billion to INR2,451 billion during the Twelfth FYP (based on an estimated 34% of private spending in the Eleventh FYP and envisaged 50% private spending in the Twelfth FYP).
3.2 Railways
The railways sector just experienced 4 PPP contracts valued at INR15.7 billion47. The projects have been contracted either by domestic competitive bidding or through negotiated MOUs. Due to the large size of the projects, the PPP projects in railways have to be supplementary or an extension to an existing large railway network. The recent PPP data48 indicates around nine projects being contracted so far in Gujarat (4), Orissa (2), Haryana (1), Andhra Pradesh (1) and Karnataka (1). The nine projects have BOT (or its variants) format (including one on DBFOT) PPP as the preferred BOT model. The INR9 billion metro links from Delhi Metro from Sikanderpur to NH 8, Gurgaon has the highest value of PPP railway contract so far. The PPP experience in the railways sector has proven to be a mixed bag so far. In projects with clear cut demarcation of responsibilities, the model has proven successful such as in the case of last mile port-connectivity (For instance, last mile connectivity to Mundra port with Palanpur-Gandhidham railway line; and rail link from Bhadrak to new port at Dhamra in Orissa). On the other hand, the railways has been facing problems in using the PPP route for manufacturing rolling stock and locomotives (two mega railway projects manufacture of Electric locomotives at Madhepura and Diesel Locomotives at Marhorwa have been on hold).
Some of the PPP project initiatives undertaken by the railways sector include:
Container Corporation of India Limited (CONCOR) for developing multi modal transport logistics infrastructure to support domestic container traffic Pipavav Railway Corporation Ltd. (PRCL) to provide broad gauge rail link to Port of Pipavav in Gujarat Rail Vikas Nigam Limited (RVNL) for Port connectivity works and improvement of the Golden Quadrilateral to meet future transportation needs
Investment requirements: As reported, the Indian railways (IR) require INR5.2 trillion of public investment during the Twelfth FYP (201217) of which the Indian Railway Corporation will raise INR1 trillion and the balance needs to be generated internally or through the form of PPPs. The IR announced its plans of restructuring to attract funding of INR500 billion49 to meet its expansion targets proposed for the Twelfth FYP. In order to carry out this, the railway is currently working out strategies to design and award PPP projects. The railways ministry has reportedly, plans of awarding projects on locomotive and coach factory and construction of a corridor for high-speed rail in Twelfth Plan period to generate the estimated investment.
47 PPP India Database as on 31 July 2011 48 PPP data, PPP in India Database, accessed 9 December 2011 49 In track change, Rly eyes R50k cr pvt investment, The Financial Express website, http://www.financialexpress.com/news/ In-track-change--Rly-eyes-R50k-cr-pvt-investment/840860/ accessed 19 December 2011
Accelerating public private partnerships in India ] 36
The projects proposed for PPP format include: High speed rail corridor Dedicated freight corridor Locomotive and coach factories Multi-modal Logistics hubs
This time around, we will indeed make a difference when it comes to PPP projects. Railways doesnt have enough resources on its own and the government cant keep funding our plans for ever. So, PPP is the only way forward,
Dinesh Trivedi Honble Railway Minister of India
Source: Financial Express (http://www.financialexpress.com/news/in-trackchange-rly-eyes-r50k-cr-pvt-investment/840860/0)
3.3 Power
The GoI has taken several initiatives over the last few years to promote participation from private players in the power sector. With a total of 56 projects valued at INR672 billion, the energy sector accounts for 18% of the overall value of PPP contracts awarded in various sectors.50 Power generation51: Power generation in India takes place primarily at the state level (46%) and Central level (31%), with private sector accounting for the rest. Participation of private players in the power sector is centered on thermal power generation, largely implemented through the BOO and BOOT models. Introduced in 2005, nine Ultra Mega Power Projects (UMPPs) are expected to rope in an investment of around US$3540 billion from the private sector. To increase investor confidence, UMPPs are awarded through competitive tariff-based bidding, and are being developed on a BOO basis. Power transmission: Since January 2011, transmission projects have also been awarded through competitive bidding under the BOO model. For instance, Sterlite has already been awarded three projects (amounting to US$40 million) for building power transmission systems on a Build-Own-Operate-Maintain (BOOM) basis.
50 PPP Project Status Report, Public Private Partnerships India database, 31 July 2011 51 Position paper on the power sector in India, Department of Economic Affairs, MoF (India), December 2009 52 India plans 16 Ultra Mega Power Projects to enhance power generation, Industrial fuels and power website, http://www. ifandp.com/article/0010818.html
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Renewable energy holds significant opportunities in generation as well as manufacturing activities, largely due to underutilized resources and lack of political will. The GoI has an ambitious Power for All plan, which aims for complete electrification by the end of 2012. To implement this initiative, significant participation from the private sector is required. The option of PPP in nuclear power generation is also being explored, though FDI in the sector is not permitted yet.
The scope for investment in the power sector over the next few years is well over $300 billion and given our large expansion programme in this sector, we would definitely need and welcome a large amount of foreign direct investment.
Sushil Kumar Shinde Honble Union Power Minister
Source: IFANDP (dated April, 2011) (http://www.ifandp.com/article/0010818.html)
53 As per PPP in India database (as on 31 July, 2011) 54 Report on Indian Urban Infrastructure and Services, The High Powered Expert Committee (HPEC) for Estimating the Investment Requirements for Urban Infrastructure Services, March 2011, page XXI
Accelerating public private partnerships in India ] 38
One of the most critical issue in urbanization is efficient transport system and a recent study shows that metro rail answers the transit needs of urban areas most effectively and has the potential to bring all round benefits to business, to environment and multiple benefits to people in all walks of life55. A new metro project is being taken up in Hyderabad for 71.16 km., at an estimated cost of INR123.32 billion, besides the ongoing metro projects of Bangalore, Chennai, Kolkata (East-West Metro corridor) and Mumbai. Also, metro rail projects have received in principle approval forJaipur,Patna, Pune, Kochi and Lucknow. Urban infrastructure investment requirement: INR39,186 billion (2012-31)
1% 3% 3% 5% 6% 8% 8% 44% Urban roads Urban transport Renewal and redevelopment including slums Water supply Sewerage Storm water drains Capacity building Trafc support infrastructure Solid waste management 10% 11% Other sectors
The Central and state governments will require funds to fulfill the demand for urban infrastructure. The deficit can only be met through involving private players in the sector. Ministry of Urban Developments strategic plan states that PPP can play a prominent role in the fields of solid waste management functions such as door-to-door collection, street sweeping, transportation and treatment; e-goverenance and strenghtening of urban local bodies (ULBs). The ministry also envisions setting up of a PPP urban infrastructure fund to encourage PPP to supplement government efforts.
Source: Report on Indian Urban Infrastructure and Services, The High Powered Expert Committee (HPEC) for Estimating the Investment Requirements for Urban Infrastructure Services, March 2011, page XXV
Government will encourage PPP model for developing infrastructure like water supply and municipal solid waste management in the cities across the country
Kamal Nath Honble Urban Development Minister of India
Source: The Hindu (http://articles.economictimes.indiatimes.com/201112-20/news/30538042_1_ppp-model-solid-wastemanagement-urban-local-bodies)
55 Study on Urbanizing India & Mega Metro Network Vision for the Emerging Cities of India-2030 http://www.assocham.org/ arb/general/Metro Study_Update.pdf
39 [ Accelerating public private partnerships in India
40
4.
Recommendations
Policy recommendations Setting up independent institutional structure for handling PPP program Development of sector-specific regulatory mechanism Dissemination of Information on PPPs
Project development recommendations Capacity building measures for the Government Role of consultants Project development activities Optimal allocation of risks, authority and accountability Selection of private sector partner
Financing recommendations Developing corporate bond market Encouraging participation by pension funds and insurance companies Stimulating PE investments in infrastructure sector Hedging mechanism for external borrowings and investments
41
Project development activities: The lack of project preparation by the relevant development authority such as, inaccurate scope definition, land acquisition, utilities, environment clearance, no public consultations etc. can result in poor bid response and also at the execution stage delays in commencement of construction, compromises on the design quality to reduce costs or attempt to change scope resulting in abnormal increase in project cost leading to disputes. The authorities should try to get all approvals and latest feasibility reports with technical scope of work before awarding concessions. Optimal allocation of risks, authority and accountability: There is a need for effective distribution of responsibility, costs and risks between the public and private sector. In many cases, due to lack of proper project development, public authorities are not able to fulfill their responsibilities such as land acquisition, environmental clearance, state support etc., due to which project gets delayed. However, even in cases where government is not able to fulfill its part, the private sector has to suffer the losses due to delay, as there is no appropriate framework for compensation. Selection of private sector partner: To get best technical and financial offer, the authorities should start interaction with private sector from the project development activities stage, and concerns of the private bidders should be taken care of in the best possible way. For selection of private partners there is an excessive focus on highest financial bids. The speculative bids can hamper the project in the long run, as the developer will find it difficult to get funding and service the obligations. The authorities should evolve a policy on the speculative bids and other selection methods such as competitive dialogue process for complex projects should also be used.
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Notes
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FICCI contact
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