chapter 1 introduction to public private partnerships...
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CHAPTER 1
INTRODUCTION TO PUBLIC PRIVATE PARTNERSHIPS (PPP)
1.1 Background
The concept of Public Private Partnerships (PPPs) has emerged as a viable option
for infrastructure development especially in the context of developing countries.
PPPs are emerging as an innovative policy tool for remedying the lack of
enthusiasm in traditional public service delivery. They represent a claim on public
resources that needs to be understood and assessed. They are often complex
transactions, needing a clear specification of the services to be provided and an
understanding of the way risks are allocated between the public and private sector.
In the context of developing countries, the recent increase in PPPs has been
attributed to several reasons such as the desire to improve the performance of the
public sector by employing innovative operation and maintenance methods;
reducing and stabilizing costs of providing services; reinforcing competition; and
reducing government budgetary constraints by accessing private capital for
infrastructure investments.
Private sector involvement in the delivery of public services is not a new concept;
PPPs have been used for over three decades, predating the contracting out
initiatives of 1970s in the USA. Initially focussing on economic infrastructure,
PPPs have evolved to include the procurement of social infrastructure assets and
associated non-core services. In Asia, countries like China, Malaysia and Thailand
started some projects with private participation in mid 1980s in one sector or so,
but later on in the 1990s most of the countries in the region involved private sector
in the provision of one or more of the infrastructure facilities.
This chapter sheds light on the PPP concept and the rationale for increasing use of
PPP projects in developing countries. It also discusses the evolution of PPP at the
international level as well as in Asia and India. Finally, this chapter discusses the
current status of PPP projects in India at the central and state level as well as in
various sectors.
1.2 Introduction to Public Private Partnerships (PPP)
1.2.1 Introduction:
Indian economy is growing at a very fast pace and it has a dynamic and robust
financial system. A stable policy environment is ensured by its democratic status
and its independent institutions guarantee the rule of law. This highly diversified
economy has shown rapid growth and remarkable resilience since 1991, when
economic reforms were initiated with the progressive opening of the economy to
international trade and investment.
The most significant criteria for a continued growth rate of an economy is the
provision of a quality infrastructure. According to the Planning Commission, an
approximation of 8 percent of the Gross Domestic Product needs to be invested.
This would help in acquiring a prospective economy as stated in the 11th Five
Year Plan. Fund investment of over US $ 494 billion has been conceived of
according to the 11th Five Year Plan with effective from 2007 to 2012. The
investment sectors under consideration are inclusive of telecommunications,
electric power, transport, road, rail, air, water supply as well as irrigation.
In order to meet such demands, various Public Private Partnerships or PPPs are
being promoted for implementation of infrastructure projects. PPP is often
described as a private business investment where two parties comprising
government as well as a private sector undertaking form a partnership. The deficit
can be overcome by ensuring much more private capital investment. Expert
guidance is the only way out for enabling efficiency through subsequent reduction
in cost.
Governments embarking on PPP programs have often developed new policy, legal
and institutional frameworks to provide the required organizational and individual
capacities. These go beyond that needed to originate and financially close PPP
deals, as they must also ensure that these deals are affordable to users and the
public sector and provide ex-post evaluation of the success of PPPs in meeting
their objectives. This framework needs to be in place in India to ensure a robust
and successful PPPs program.
1.2.2 Definition:
Most countries embarking on PPP programs have attempted to provide some form
of definition of a Public Private Partnership.
Brazil‟s new PPP law defines, in its Article 2, that Public Private Partnership
contracts are agreements entered into between government or public entities and
private entities that establish a legally binding obligation to manage (in whole or
part) services, undertakings and activities in the public interest where the private
sector is responsible for financing, investment and management.
Ireland defines PPPs as any arrangement made between a state authority and a
private partner to perform functions within the mandate of the state authority, and
involving different combinations of design, construction, operations and finance.
In South Africa, a PPP is defined in law as a contract between a government
institution and a private party where the latter performs an institutional function
and/or uses state property, and where substantial project risks are passed to the
third party.
The UK‟s Private Finance Initiative (PFI), where the public sector purchases
services from the private sector under long-term contracts is the best known
component of that country‟s PPP program.
From above definitions, it is clear that there is no single definition of PPPs. They
broadly refer to long-term, contractual partnerships between the public and private
sector agencies, specifically targeted towards financing, designing, implementing,
and operating infrastructure facilities and services that were traditionally provided
by the public sector.
According to the Department of Economic Affairs, Ministry of Finance,
Government of India, 2007, PPP is defined as „A partnership between a public
sector entity (sponsoring authority) and a private sector entity (a legal entity in
which 51% or more of equity is with the private partner/s) for the creation and/or
management of infrastructure for public purpose for a specified period of time
(concession period) on commercial terms and in which the private partner has been
procured through a transparent and open procurement system‟.
Thus, in Indian context we can say that “Public Private Partnership (PPP) Project
means a project based on a contract or concession agreement, between a
Government or statutory entity on the one side and a private sector company on the
other side, for delivering an infrastructure service on payment of user charges”.
PPPs do not mean reduced responsibility and accountability of the government.
They still remain public infrastructure projects committed to meeting the critical
service needs of citizens. The government remains accountable for service quality,
price certainty, and cost-effectiveness (value for money) of the partnership.
Government remains actively involved throughout the project‟s life cycle. Not all
projects with private sector participation are PPP projects. Essentially, PPPs are
those ventures in which the resources required by the project in totality, along with
the accompanying risks and rewards/returns, are shared on the basis of a
predetermined, agreed formula, which is formalized through a contract. PPPs are
different from privatization. While PPPs involve private management of public
service through a long-term contract between an operator and a public authority,
privatization involves outright sale of a public service or facility to the private
sector. A typical PPP example would be a toll expressway project financed and
constructed by a private developer.
Typically, a PPP project involves a public sector agency and a private sector
consortium which comprises contractors, maintenance companies, private
investors, and consulting firms. The consortium often forms a special company or
a „special purpose vehicle‟ (SPV). The SPV signs a contract with the government
and with the subcontractors to build the facility and then maintain it. This
partnership could take many contractual forms, which progressively vary with
increasing risk, responsibility, and financing for the private sector.
Thus, the PPP combines the development of private sector capital and sometimes,
public sector capital to improve public services or the management of public sector
assets (Michael, 2001). The PPP may encompass the whole spectrum of
approaches from private participation through the contracting out of services and
revenue sharing partnership arrangement to pure non-recourse project finance,
while sometime it may include only a narrow range of project type. The PPP has
two important characteristics. First, there is an emphasis on service provision as
well as investment by the private sector. Second, significant risk is transferred
from the Government to the private sector. The PPP model is very flexible and
discernible in variety of forms. The various models/ schemes and modalities to
implement the PPP are set out in Table 1.1 below:
Table 1.1: Schemes and Modalities of PPP
Schemes Modalities
Build-own-operate (BOO)
Build-develop-operate (BDO)
Design-construct-manage-finance
(DCMF)
The private sector designs, builds,
owns, develops, operates and
manages an asset with no obligation
to transfer ownership to the
government. These are variants of
design-build-finance-operate
(DBFO) schemes.
Buy-build-operate (BBO)
Lease-develop-operate (LDO)
Wrap-around addition (WAA)
The private sector buys or leases an
existing asset from the Government,
renovates, modernises, and/ or
expands it, and then operates the
asset, again with no obligation to
transfer ownership back to the
Government.
Build-operate-transfer (BOT)
Build-own-operate-transfer (BOOT)
Build-rent-own-transfer (BROT)
Build-lease-operate-transfer (BLOT)
Build-transfer-operate (BTO)
The private sector designs and builds
an asset, operates it, and then
transfers it to the Government when
the operating contract ends, or at
some other pre-specified time. The
private partner may subsequently
rent or lease the asset from the
Government.
Source: Public Private Partnership, Fiscal Affairs Department of the IMF.
Typically, the PPP is not a privatization. At the same time, it cannot be described
as partial privatization also. Privatization has generally been defined as a process
of shifting the ownership or management of a service or activity, in whole or part,
from the government to the private sector. The privatization may be of many
forms, which include outsourcing, management contracts, franchise, service
shedding, corporatization, disinvestment, asset sales, long-term lease, etc. The key
difference between the PPP and privatization is that the responsibility for delivery
and funding a particular service rests with the private sector in privatization. The
PPP, on the other hand, involves full retention of responsibility by the government
for providing the services. In case of ownership, while ownership rights under
privatization are sold to the private sector along with associated benefits and costs,
the PPP may continue to retain the legal ownership of assets by the public sector.
The nature and scope of the services under privatization is determined by the
private provider, while it is contractually determined between the parties in PPP.
Under privatization, all the risks inherent in the business rest with the private
sector while, under the PPP, risks and rewards are shared between the government
and the private sector.
Under the PPP format, the government role gets redefined as one of facilitator and
enabler, while the private partner plays the role of financier, builder, and operator
of the service or facility. PPPs aim to combine the skills, expertise, and experience
of both the public and private sectors to deliver higher standard of services to
customers or citizens. The public sector contributes assurance in terms of stable
governance, citizens‟ support, financing, and also assumes social, environmental,
and political risks. The private sector brings along operational efficiencies,
innovative technologies, managerial effectiveness, access to additional finances,
and construction and commercial risk sharing.
PPPs often involve complex planning and sustained facilitation. Infrastructure
projects such as roads and bridges, water supply, sewerage and drainage involve
large investment, long gestation period, poor cost recovery, and construction,
social, and environmental risks. When infrastructure is developed as PPPs the
process is often characterized by detailed risk and cost appraisal, complex and long
bidding procedures, difficult stakeholder management, and long-drawn
negotiations to financial closure. This means that PPPs are critically dependent on
sustained and explicit support of the sponsoring government. To deal with these
procedural complexities and potential pitfalls of PPPs, governments need to be
clear, committed, and technically capable to handle the legal, regulatory, policy,
and governance issues.
1.2.3 Importance of Infrastructure development:
Rapidly growing economy, increased industrial activity, burgeoning population
pressure, and all-round economic and social development have led to greater
demand for better quality of roads, seaports, power supply, railways, airport, water
and sanitation services. This increase in demand has put the existing infrastructure
under tremendous pressure and far outstripped its supply.
Upgradation of transport (roads, railways, airports, and ports), power, and urban
infrastructure is therefore seen as critical for sustaining India‟s economic growth,
along with improved quality of life, increase in employment opportunities, and
progress towards the elimination of poverty. India‟s global competitiveness
remains constrained and is adversely affected by lack of infrastructure, which is
critical for improved productivity across all sectors of the economy. Poor
infrastructure is also a major barrier to foreign direct investment (FDI).
Infrastructure is now seen as the necessary condition for growth and poverty
alleviation. Studies by the Asian Development Bank and others have confirmed a
strong linkage between infrastructure investments, economic growth, and reduction
of poverty.
Infrastructure development is the key to sustainable growth in India in the
following ways:
(i) It makes India globally competitive
(ii) It raises standard of living
(iii) It means enhanced profits for government
(iv) It bridges rural-urban divide
(v) Increases level of employment
Figure 1.1: Significance of Infrastructure Development in economic growth
(Source: Compiled by Research Scholar)
India has had policies in favor of attracting private participation in the
infrastructure sectors since economic reforms were introduced in 1991. These
initiatives have met with varying degrees of success, but real progress has been
made in some sectors, first in telecommunications, and now in ports and roads, and
with individual projects in other sectors. The central government and the states are
hoping to build on this progress, both in sectors where few private projects have
been realized as well as scaling up their use in sectors where progress has already
been made.
The Public Private Partnerships (PPPs) can help meet the infrastructure gap in
India, but are not a panacea. They represent a claim on public resources that needs
to be understood and assessed. They are often complex transactions, needing a
clear specification of the services to be provided and an understanding of the way
risks are allocated between the public and private sector. Their long-term nature
means that the government has to develop and manage a relationship with the
private providers to overcome unexpected events that over time can disrupt even
well designed contracts.
Since the early 1990s, India has been looking to the private sector to fill investment
gaps in infrastructure. Investment here did not initially grow as rapidly as in Latin
America or East Asia, as policy reforms here were slower. However, with the
increasing emphasis, over time, on Public Private Partnerships in key sectors, such
as telecom and transport, India has seen an increase in investment with none of the
corrections seen elsewhere. The years 2004 and 2005 saw the highest levels of
investment to date. This success in attracting investment has meant that over the
period 1990–2005, India attracted US$57.5 billion of investment in infrastructure
projects with private participation. Since 2001, India has attracted approximately
9% of all investment in these projects for low and middle-income countries, and is
second only to Brazil, and above China (Figure 1.2 below).
Figure 1.2: Investment Trends in Brazil, China and India (2005 US$ mn)
Source: World Bank/PPIAF Private Participation in Infrastructure (PPI) Project
Database, http://ppi.worldbank.org/
While India‟s performance in increasing investment is encouraging, it is also worth
noting that since 2001, about two thirds of this investment has gone into the
telecommunications sector. Investment in energy has not picked up noticeably.
This reflects differing success in reforming these two sectors, with the structural
and competitive reforms introduced in telecommunications leading to a rapid
market expansion and surge in investments. In the transport sector, thanks to
successful PPPs in roads, airports and ports, India realized more investments in
2004 and 2005 than had been realized from 1990–2003.
1.3 The Rationale for PPP projects usage
Globally, governments were increasingly constrained in mobilizing the required
financial and technical resources and the executive capacity to cope with the rising
demand for roads, electricity supply, water supply, etc. Rapid economic growth,
growing urban population, increasing rural–urban migration, and all-round social
and economic development had compounded the pressure on the existing
infrastructure, and increased the demand–supply gap in most of the developing
world. In the developing world, countries and governments were experiencing
increasing pressure from their citizens, civil society organizations, and the media to
provide accessible and affordable infrastructure and basic services. While the
infrastructure gap was rising, government budgetary resources were increasingly
constrained in financing this deficit. Rising costs of maintaining and operating
existing assets, inability to increase revenue and cut costs and waste, and rising
constraints on budgets and borrowing, did not allow governments to make the
required investments in upgrading or rehabilitating the existing infrastructure or
creating new infrastructure.
Furthermore, fiscal crisis (an outcome of poor economic performance) had a
deteriorating impact on the already existing demand and supply gap in basic
infrastructure facilities in these countries. The infrastructure services were
monopolized by the public sector in most of these developing countries with the
track record of operating inefficiently. The fiscal crises in these countries led to
cuts in public expenditure, under-maintenance of infrastructure, and under-
investment in the new infrastructure. Moreover, in the absence of effective
regulation, public sector monopolies had weak incentives to improve, innovate and
to be responsive to the increasing consumer demand.
The role of physical infrastructure in the process of economic growth is a well
established fact (Calderón and Servén, 2004). Many researchers and studies have
established a strong correlation between economic growth and infrastructure
development (e.g. Queiroz, 1994). The development practitioners have also
emphasized the importance of reliable and affordable infrastructure for reducing
poverty. In other words, investments to maintain and improve physical
infrastructure are central to sustained economic development.
The significance of investments in infrastructure for the long-term economic
growth forced governments in developing countries to find alternative ways to
finance infrastructure facilities (Hammami et. al, 2006). Therefore, since the early
1990s, developing countries across the globe including Asia have embarked upon
public sector reforms and have introduced private investment in physical
infrastructure - telecommunication, transport, energy and water and sewage
sectors. This private participation took the form of Public Private Partnership
(PPP). The objective behind this policy change was to exploit the benefits of
private participation, as it was believed that this would improve managerial
efficiency as well as efficiency in the provision of services (Pargal, 2003). This
new trend also led the governments to re-examine their dominant role in the
provision of infrastructure and move away from being the sole financiers,
managers, and operators of infrastructure to being facilitators and regulators of
services provided by private firms.
Over the past few years, the Indian economy, as measured by its GDP, has been
growing at the rate of 8% per annum. In order to sustain this growth, a recent study
done by the Committee on Infrastructure Financing, constituted by the Government
of India, has indicated that India must invest close to US$ 400 Billion in
infrastructure development and maintenance over the period ranging from 2006-
2011 (Committee on Infrastructure Financing, 2007). Given the large sum of
money involved as well as the vast amount of infrastructure that is to be built, it is
clear that the participation of the private sector will be necessary, both in terms of
financing and in terms of implementation of infrastructure.
The political economy of infrastructure shortages, constrained public resources,
and rising pressure from citizens and civil society have combined to push
governments and policymakers to explore new ways of financing and managing
these services. Governments have been pushed to exploring new and innovative
financing methods in which private sector investment can be attracted through a
mutually beneficial arrangement. Since neither the public sector nor the private
sector can meet the financial requirements for infrastructure in isolation, the PPP
model has come to represent a logical, viable, and necessary option for them to
work together.
In the context of developing countries, the recent proliferation of PPPs has been
attributed to several explicitly stated reasons, including: the desire to improve the
performance of the public sector by employing innovative operation and
maintenance methods; reducing and stabilizing costs of providing services;
improving environmental protection by ensuring compliance with environmental
requirements; reinforcing competition; and reducing government budgetary
constraints by accessing private capital for infrastructure investments (Miller,
2000; Savas, 2000). The latent reasons for contemplating a PPP lie in the inherent
differences between the public and private sectors. These differences imply that
PPPs can, under the right conditions, provide an effective mechanism for
capitalizing on the peculiarities and strengths of each sector in the pursuit of
common objectives.
Public agencies and private organizations can indeed seek mutual advantages in
developing a PPP, particularly when the latter is characterized by trust, openness,
fairness and mutual respect. For the public agency, the main rewards from
partnering with the private sector are improvement of program performance, cost-
efficiencies, better service provisions and appropriate allocation of risks and
responsibilities (Pongsiri, 2002). The good faith approach indeed takes as proven
that private participation results in a combination of lower cost and less risk for the
public sector (Miller, 2000; Leitch and Motion, 2003). The private sector on the
other hand expects to have a better investment potential, to make a reasonable
profit, and to have more opportunities to expand its business interests. A good
return on investment is definitely an essential consideration from the private
partner perspective (Scharle, 2002).
The respective roles of the private and the public partner are therefore neither
antagonistic nor identical, but complementary. The public sector controls several
key legal and regulatory assets to implement a project within the context of an
overall development program. The private sector brings outside capital, technical
expertise and an incentive structure. The essence is the cooperative and mutually
supporting nature of the relationship. Actual partnering therefore involves
collaboration and leveraging the strengths of both the private sector (more
competitive and efficient in economic terms) and the public sector (more
responsible and accountable to society). PPPs may therefore, under the right
conditions, bring the discipline of the market into public administration and
promote a synergistic combination of the strengths, resources and expertise of the
different sectors.
The emergence of PPPs is seen as a sustainable financing and institutional
mechanism with the potential of bridging the infrastructure gap. The foremost
benefit of adopting the PPP route is the ability to access capital funding from the
private sector. PPPs deliver efficiency gains and enhanced impact of the
investments. The efficient use of resources, availability of modern technology,
better project design and implementation, and improved operations combine to
deliver efficiency and effectiveness gains which are not readily produced in a
public sector project. PPP projects also lead to faster implementation, reduced
lifecycle costs, and optimal risk allocation. Private management also increases
accountability and incentivizes performance and maintenance of required service
standards. PPPs result in improved delivery of public services and also promote
public sector reforms. Since the private sector assumes the risk of nonperformance
of assets and realizes its returns if the assets perform, the PPP process involves a
full-scale risk appraisal. This results in better cost estimation and better investment
decisions. Finally, it helped in promoting social and economic policy objectives
like poverty reduction (Bellier and Zhou, 2003).
1.4 Evolution of Public Private Partnerships (PPP):
1.4.1 Evolution of PPP at International level:
Private sector involvement in the delivery of public services is not a new concept;
PPPs have been used for over three decades, predating the contracting out
initiatives of 1970s in the USA.
Initially focussing on economic infrastructure, PPPs have evolved to include the
procurement of social infrastructure assets and associated non-core services. PPPs
have extended to housing, health, energy, water and waste treatment. PPP policy
has also evolved globally as public sectors develop the necessary skill base to
procure infrastructure by way of PPP, including the capacity to create and maintain
a regulatory framework. The private sector has also become increasingly
innovative in several experienced countries, thereby adding significant value to
public procurement.
The UK has been a modern instigator of this wave of private sector involvement,
with the introduction of the Private Finance Initiative. PFIs have been used to
develop and deliver all manner of infrastructure and services. The growing use of
PFIs has inspired governments worldwide to adopt PPP arrangements. The
Australian government has used PPPs to deliver several social infrastructure
projects; Ireland has used them for transport infrastructure; in the Netherlands,
social housing and urban regeneration programs have been delivered through PPP
arrangements; India is investing heavily in highways through PPPs; Japan has
many new PPPs in the pipeline; in Canada, many of the new infrastructure are
designed, built and operated by the private sector; the USA is a pioneer with
contracting out and has started experimenting with other forms of PPPs; emerging
democracies from central Europe are also following suit.
During the past two decades, PPPs have become the main route for delivering
public services in both developed and developing countries. Between 1985 and
2004, there was a total of 2096 PPP projects worldwide with a total capital value of
nearly US$ 887 billion. Countries worldwide with PPP experience include
Australia, Germany, Hungary, Italy, Japan, Korea, Spain, the USA, and the UK.
Among these countries, the UK is widely viewed as the one with the most
extensive PPP (or PFI, which is the equivalent term used in the UK) experiences.
For instance, during 2003 and 2004, the UK was the country with the largest PPP
investments. Although PPPs have been implemented in many countries, they are
not applied equally to all infrastructure sectors. In most countries, PPP projects
focus on transportation projects such as roads, bridges, tunnels, railroads, and
airports. However, the use of PPPs has been expanded across various sectors in
recent years. For example, in Korea, PPPs are used in the development of schools,
hospitals,
and public housing; in the U.S., PPPs are found in sectors such as prisons and
water supply and wastewater treatment.
In developing countries, contracting out was introduced in the mid 1980s during
the first wave of governmental privatisation of state enterprises, under structural
adjustment programs. Policies were adopted to address the perceived lack of
managerial capacity in government, as well as the need to stop the continued
dependence of state enterprises on state subsidies.
In Africa, between 1990 and 2004, approximately 14% of public sector
infrastructure was provided through PPP, the most common sectors being water,
energy and transport.
The PPP trend is global, accelerating and encompassing a broad range of
infrastructure sectors. Applying PPPs in social infrastructure sectors has to some
extent reduced the concentration of PPP projects at the central government level.
Increasing number of local authorities are engaging in PPP arrangements to
procure much needed local infrastructure.
1.4.2 Evolution of PPP in Asia and India:
In Asia, the key infrastructure services in most of the countries are not only in
short supply but are of poor quality. No doubt the problem is more severe in low-
income countries of Asia; infrastructure facilities in the middle-income countries in
the region are also not adequate. The countries in this region have long recognized
the need to improve the quality and quantity of their physical infrastructure;
realizing the fact that infrastructure plays a crucial role in facilitating economic
growth and international competitiveness.
Given various financial constraints, the governments in the region have changed
their policies to create an environment conducive to sustainable private sector
involvement in their infrastructure sectors. This public policy change has
introduced private sector‟s participation in their infrastructure sectors. The
significance of investments in infrastructure for the long-term economic growth
forced governments in these countries to find alternative ways to finance
infrastructure facilities (Hammami et. al, 2006). According to the World Bank‟s
Private Participation in Infrastructure (PPI) Project Database, although few
developing countries started infrastructure projects with private participation in the
mid-1980s, but in the 1990s the trend turned into a wave that swept the whole of
the developing world. In Asia, countries like China, Malaysia and Thailand started
some projects with private participation in mid 1980s in one sector or so, but later
on in the 1990s most of the countries in the region involved private sector in the
provision of one or more of the infrastructure facilities. Since the early 1990s,
developing countries across the globe including Asia have embarked upon public
sector reforms and have introduced private investment in physical infrastructure.
The table 1.2 below shows trends in private investment in the selected group of
Asian countries from 1990 to 2007. The analysis is based on World Bank PPI
Database.
Table 1.2: PPI in South and East Asia (1990-2007)
Source: World Bank PPI Database and 2007 World population Datasheet and Population
Reference Bureau.
Bangladesh
In Bangladesh total projects that reached financial closure from 1990 to 2007 were
23 worth US $ 5367 million (Table 1.2). Most of these projects were green-field
and in the telecom (12 projects) and energy (7 projects) sectors. In the transport
sector, 4 projects were initiated but the type of private participation was
management and lease contract. In Bangladesh, telecom sector was the first one to
attract private investment in 1990 and one project reached financial closure
attracting investment equal to US $ 110 million. Investment in this sector picked
up in 1995, however, maximum investment in the sector came in 2007 equal to US
$ 1349 million. In the energy (power, oil & gas) sector, it was between 1997 to
2001 that private investment (US $ 1056 million) was introduced.
Figure 1.3: Investment in Infrastructure Projects with Private Participation in
South Asia by Sector (1990-2007)
Source: World Bank PPI Database
Figure 1.4: Investment in Infrastructure Projects with private participation in
South Asia by Type (1990-2007)
Source: World Bank PPI Database
India
India is among those countries which attracted a major chunk of private investment
in the region. In the period under consideration (1990-2007), 306 projects worth of
US $ 96130 million reached financial closure (Table 1.2). 97 of these projects were
in the energy sector, 34 in the telecom, 166 in the transport and only 9 in the water
and sewerage sector. Although in terms of total projects telecom was at number
three but in terms of investment it attracted almost 45% of total investment
followed by the energy sector which attracted 35 percent of the total investment
(Figure 1.3). While in the transport sector 166 projects attracted only 19.7 percent
of the total investment. In terms of project type, green-field again takes the lead as
182 projects were initiated in this category (for investment by type see Figure 1.4).
In fact, in 2006, India has had the success of attracting more private investment in
infrastructure than any other developing country (Harris, 2008).
Nepal
Nepal is at the lowest end in terms of attracting private investment as only 8
projects (5 in the energy and 3 in the telecom) reached financial closure in this
period, with the worth of only US $ 404 million (Table 1.2). All the projects were
green-field projects.
Pakistan
In Pakistan 47 projects (34 in the energy, 6 in the telecom and 7 in the transport)
reached financial closure in seventeen years with the worth of US $ 21715 million
(Table 1.2). The telecom sector attracted almost 57.4 % of total investment while
energy and transport attracted 36.6 % and 6 % of the total investment respectively
(Figure 1.3). In the energy sector, peak time of investment was from 1994-1997
when energy sector reforms were introduced, while investment in the telecom
sector jumped upwards tremendously in 2004 and reached a peak of US $ 4365
million in 2005. These investments were mostly in the green-field projects (83 %)
and only 11 % were divestitures and 6 % in concession contracts (Figure 1.4).
Sri Lanka
In Sri Lanka during 1990 to 2007, 22 PPI projects (20 green-fields, 1 divestiture
and 1 concession) reached financial closure. 14 of these projects were in the energy
sector, 7 in the telecom sector and 1 in the transport sector with a total worth of US
$ 2640 million (Table 1.2). In value terms the telecom sector attracted 73 % of the
total investment, the energy sector attracted 18 % of the total investment and the
transport sector attracted only 9 % of the total investment (Figure 1.3).
Overall these five countries representing South Asia began private activity in
infrastructure in the 1990s. This region attracted almost US$ 126 billion in
investment commitments for infrastructure projects with private participation in
1990-2007. In this period, Bangladesh, India, Nepal, Pakistan and Sri Lanka were
awarded 406 such projects. Annual investment in private infrastructure projects
were driven mainly by the green-field projects for independent power producers
(IPPs) in India and Pakistan and the granting of telecommunication licenses in the
same two countries. Annual investment dropped in 1998 but recovered later on and
remained so generally for the rest of the period.
The private activity in India dominated both in terms of investment and number of
projects in the region. But when private activity is measured in terms of per capita
investment, Sri Lanka rises to the top.
The countries in East Asia & Pacific have attracted the second highest private
activity in infrastructure in the world. Private activity in the region began early,
with major programs in Malaysia and the Philippines in the second half of the
1980s, and grew rapidly in the mid-1990s, but declined 1997 onwards (for two to
three years) as a consequence of „East Asia Financial Crisis‟. China is at the top in
terms of investment commitments and number of projects. These countries
together attracted almost US$ 265 billion in investment commitments for
infrastructure projects with private participation from 1990-2007. In this sub-
region of Asia, China dominated both in terms of investment and number of
projects in the region as far as the private participation in infrastructure (PPI) is
concerned. But when private activity is measured in terms of per capita investment,
Malaysia took the lead.
Figure 1.5: Investment in Infrastructure projects with Private Participation in
East Asia and Pacific by Sector (1990-2007)
Source: World Bank PPI Database
Figure 1.6: Investment in Infrastructure Projects with Private Participation in
East Asia and Pacific by Type (1990-2007)
Source: World Bank PPI Database
China
China awarded 805 projects to the private sector and attracted investment
equivalent to US $ 99969 million during 1990 to 2007 (Table 1.2). This investment
peaked in 1997 and declined later on but again picked up in 2005. Mostly these
projects were in the energy sector (304 projects) followed by water & sewerage
(258 projects), transport (209 projects) and telecom (4 projects). However,
the transport sector attracted maximum investment which was about 42.5 % of the
total investment in infrastructure projects, the energy sector attracted 35.6 %, the
telecom sector attracted 14.5 % and the water & sewerage sector attracted 7.5 % of
the total investment respectively (Figure 1.5). As far as the PPI project type is
concerned, again green-field projects take the lead with 497 projects, concession
has 200 projects, divestiture has 99 projects and management and lease contract
have 9 projects (for investment by type see Figure 1.6)
Indonesia
From 1990 to 2007, Indonesia awarded 87 projects (30 each in the energy and
transport sectors, 17 in the telecom sector and 10 in the water & sewerage sector)
to the private investors who invested almost US $ 40676 million (Table 1.2). In
value terms, the telecom sector attracted maximum investment (54 %), energy
(33%), and transport (9.8%) and water & sewerage (2.5%) of the total investment
(Figure 1.5). Maximum investment was committed in 1996 both in the energy and
telecom sectors. Most of these projects were green-field (49 projects); while 39
were of the type concession, 6 divestitures, and 1 project type was management
and lease contract (Figure 1.6).
Malaysia
In Malaysia, 96 projects worth US $ 50204 million reached financial closure from
1990 to 2007 (Table 1.2). The transport sector occupies the highest share in terms
of number of projects awarded (48 projects), while 26 projects were awarded to the
private sector in the energy sector, 7 in the telecom and 16 in water & sewerage
sector respectively. Investment commitments were highest in the transport sector
which accounted for 33 % of the total investment. Compared to this, the energy
sector attracted 29 % of the total investment, telecom 18 % and water & sewerage
sector 20 % respectively (Figure 1.5). Just like other countries in the region green-
field projects were maximum (58), 7 projects came in the category of divestitures,
28 in concession and 3 in management and lease contract (Figure 1.6). In the
energy sector maximum investment came in 1994 when 5 projects reached
financial closure. In the transport sector investment commitments picked up
slightly later, 6 projects reached financial closure and investment commitments
were also at their peak.
Philippines
In Philippines, 88 projects were awarded to the private sector from 1990 to 2007,
with a total investment commitment equal to US $ 42243 million (Table 1.2). Out
of these 88 projects, 62 projects were in the energy sector with investment share of
almost 43 %. 10 projects reached financial closure in this period in the telecom
sector and occupy investment share equal to 30%.
In this period, transport and water & sewerage sectors have 7 % and 19% share in
the total investment respectively, and the number of projects that reached financial
closures are 11 and 5 respectively (Figure 1.5). Out of these 88 projects, 56 were
green-field projects, 19 were concession projects, 12 divestitures and 1 was of the
type management and lease contract (Figure 1.6). As in the case of rest of the
countries in the sample peak time of investment was in the mid-1990s.
Thailand
In Thailand, 96 projects worth of US $ 31954 million reached financial closure
during 1990 to 2007 (Table 1.2). Sector-wise maximum projects were awarded in
the energy sector (55 projects), 8 projects in the telecom sector, 17 projects in the
transport sector and 16 projects in the water & sewerage sector. But in terms of
investment commitments telecom attracted 48 % of the total investment, energy
sector attracted 38 % of the total investment, transport sector attracted 11 % of the
total investment and 3 % of the total investment was attracted by water & sewerage
sector (Figure 1.5). 73 projects were the green-field, 13 projects were concession, 6
projects were divestiture and 4 projects were management and lease contract type
(Figure 1.6).
PPP markets across the globe are at very different stages in the maturity cycle
(Figure 1.7). Consequently, cross-jurisdictional evaluation is problematic and is
compounded by subtle differences in legislative frameworks and tendering
processes. In new/emerging PPP markets, for example, there is a tendency to
focus, initially at least, on „horizontal‟ infrastructure such as roads. The PPP model
has a proven track record in the delivery of road infrastructure in many countries
around the world and combined with the „tried and tested‟ engineering required to
deliver „conventional‟ road infrastructure, risk and uncertainty is considered to be
reduced. As applied knowledge and sophistication within jurisdictions
subsequently expands, the PPP model can then be rolled out to more complex
infrastructure projects such as airports, hospitals, schools, prisons and more latterly
renewable technologies.
The figure 1.7 below shows that countries like UK and Australia have achieved
high level of sophistication in Public Private Partnership projects. Countries like
Ireland, Spain, France, Canada, US, Italy, Japan, etc. have developed an average
level of sophistication in PPP projects.
In terms of PPP activity, countries like UK, Australia, US, Canada, Spain, France
lead the way with a high level of activity in PPP projects followed by Japan,
Ireland, Germany, South Africa and Ireland. Most of the Asian countries like
China, India, Russia, Slovakia lie very low and have a low level of activity in PPP.
Figure 1.7: Public Private Partnerships Market Maturity Curve
Source: Deloitte (2009)
1.5 Public Private Partnerships (PPPs) in India: Current status of PPP
projects
1.5.1 Public Private Partnerships in India:
India had a few notable PPPs as early as the 19th century. The Great Indian
Peninsular Railway Company operating between Bombay (now Mumbai) and
Thana (now Thane) in the year 1853, the Bombay Tramway Company running
tramway services in Bombay in the year 1874, and the power generation and
distribution companies in Bombay and Calcutta (now Kolkata) in the early 20th
century are some of the earliest examples of PPP in India. Also, prior to obtaining
independence from British rule in 1947, 65% of power generation was done by
private companies. Post independence, a wave of nationalization swept across the
country, and the role of the private sector in infrastructure provision was soon
marginalized. At that time, private firms were limited to being contractors, and in
some cases operators of infrastructure services, particularly in key infrastructure
segments such as transportation, power, telecommunications and urban
infrastructure.
As India continues to try and build a sustainable road and transport networks for
the future, Public Private Partnerships (PPP) are expected to play a very vital role
in this growth story. It is well known that PPP in the road infrastructure is the
largest PPP segment in India till date. The PPP segment in this area has an
opportunity to bank more than US$ 25-30 billion covering 3.3 million kilometers
of road network.
Anecdotal comments from the private sector suggest that a considerable number of
un-bankable and unrealistic PPP projects are brought to the market by state
governments. Data from surveys show that there were many projects that have not
moved forward past the award stage either because they have been abandoned or
remained dormant. Of these, several had no good offers forthcoming in response to
successive requests for expressions of interest. Although this number is not
obviously high compared to the number of projects underway, it nonetheless
suggests that there may be significant benefits from capacity building in
identification and preparation of PPPs to ensure that more bankable projects are
brought to market.
There is a well-established need for infrastructure investments in road construction
in India. In recent years India‟s economy has experienced a period of rapid
economic growth, following steps toward economic liberalization made in 1991. In
the Tenth Five Year Plan period (between 2002-03 and 2006-07), the average
growth rate in India was 7.6 percent in comparison to 5.5 percent achieved in the
Ninth Plan period of 1997-98 and 2001-02. The estimates in the Eleventh Five
Year Plan‟s (2007-2012) were for even higher growth at 9 percent.
This level of growth necessitates rapid improvements and additions to the capacity
of economic infrastructure. However, the ability of infrastructure to keep up with
the economy‟s fast expansion has been constrained by the availability of
investment. The actual investment by 1999 was only 3.7% of GDP, with private
investment contributing just 0.9% of GDP.
Realizing that the share of private investment needed to increase manifold, the
Government of India initiated a strategy for encouraging private investment in
infrastructure through Public Private Partnerships (PPP). The Government of India
envisaged that the investment in infrastructure would increase to 8% of GDP by
2011-12 and that of this the investment from private sources would contribute
approximately 1.2% of GDP.
The following figure 1.8 shows the increasing trend of investments in
infrastructure through PPPs, during the period 1990 to 2008.
Figure 1.8: Private Investment in Infrastructure ( Rs Crore)
Source: PPI Database, World Bank Group
The challenge of sustaining this level of growth has brought to centre-stage the
issue of deficient infrastructure in the country. India‟s infrastructure spending for
2006-07 was estimated at about 5 percent of GDP. By contrast, this is far behind
some of the other fast growing economies such as China, which has an
infrastructure spending of 9 percent of GDP. Within the context of India‟s own
growth path the current rate of investment is thought to be too slow.
Therefore need for capacity expansion and also replacement of existing assets in
infrastructure sectors including transport, urban infrastructure, water and
sanitation, ports and several others, cannot be overemphasized.
The Eleventh Plan estimates infrastructure spending in the region of USD 514
billion (24 lakh crore) to overcome infrastructure bottlenecks. Given the limited
capacity of the Government to provide infrastructure services, about 30 percent of
the total infrastructure investment in the Eleventh Plan is envisaged to be made by
the private sector. The PPP policy initiative is a key enabler and driver of private
investment in India‟s infrastructure.
1.5.2 Current Status of PPP projects in India:
According to a report published by Secretariat for Infrastructure Planning
Commission, Government of India in March, 2010, whereas 241 projects with an
investment of Rs. 66,627 crore had been completed, 292 projects with an
investment of Rs. 2,41,111 crore were under implementation. Another 412 projects
involving an investment of Rs. 3,76,561 crore were in the pipeline. Evaluation of
sectoral distribution of PPP projects in India at both central and state government
level highlights that the growth in Public Private Partnership is more pronounced
in some sectors than others.
1.5.2.1 Status of PPP projects at Central level:
The Constitution of India has defined the subjects on which the Centre and the
States can legislate and frame policies. The key infrastructure sectors such as
railways, national highways, airports and major ports are Central subjects and,
therefore, the Central Government has been initiating measures to meet the
growing demand for infrastructure in these sectors. Apart from public sector
projects, numerous PPP projects have also been awarded, and in many cases, these
PPP projects are in operation. In the Central sector, a total of 65 PPP projects
involving an investment of Rs. 25,343 crore had been completed up to December
2009, 83 PPP projects with an investment of Rs. 75,914 crore were currently under
implementation and another 160 PPP projects with an estimated investment of Rs.
1,84,807 crore were in the pipeline.
Completed projects: Up to December 2009, 39 PPP projects of national highways
with an investment of Rs. 13,698 crore and 23 PPP projects in the port sector with
an investment of Rs. 5,762 crore have been completed. In the civil aviation sector,
airports involving a total investment of Rs.5,883 crore have been completed
through PPP mode at Cochin, Bangalore and Hyderabad airports. Over 200
projects have achieved financial closure between 2008-2010 alone with total
estimated project cost of US$18 billion.
Projects Closed Across Selected Sectors
The table 1.3 below shows projects that have achieved financial closure in the year
2008-2010:
Table 1.3: Completed projects across sectors
Sector Number of
Projects
Estimated Cost
($ equivalent)
Medical & Health 6 63.6
Ports 10 7082.0
Road 50 4367.1
Industrial Infrastructure 6 1456.7
Power 8 199.2
IT, ITES, Science
Technology 4 175.3
Metro Rail 2 2356.9
Urban Infrastructure 91 2521.9
Tourism 8 75.8
Water 2 41.3
Other 14 465.4
Total 201 18805.26
Source: State PPP Cells, Government of India
Projects under implementation: In March 2010, 64 projects with an investment
of Rs. 41,911 crore were under implementation in the road sector while in the port
sector, 13 projects involving an investment of Rs. 10,509 crore were under
implementation. The airports at Delhi and Mumbai were being upgraded with
investment of Rs. 18,777 crore. In railways, private entities were investing Rs.
2,387 crore in rolling stock for container trains. In the rail sector, two loco factories
were also being set up with an investment of Rs. 1,500 crore while port
connectivity and other projects of Rs. 830 crore were also under implementation.
In sum, projects with an estimated investment of Rs.4,717 crore were under
implementation in railway sector.
Projects in the pipeline: It is expected that another 81 national highways projects
envisaging an investment of Rs. 76,341 crore would be awarded soon. 29 port
projects with an estimated investment of Rs. 18,466 crore are also in the pipeline.
The Ministry of Railways plans to redevelop 50 railway stations in the PPP mode
at an estimated cost of Rs. 90,000 crore.
1.5.2.2 Status of PPP projects at State level:
In a federal country like India, active participation of State Governments is
essential for development of world class infrastructure, especially in the sectors
assigned to the States by the Constitution. These include state highways, state ports
and urban infrastructure. Power is a concurrent subject where distribution and
intra-state transmission is entirely with the states while bulk of the generation is
also with the states. The State Governments are implementing several
infrastructure projects through the PPP mode in all these sectors.
Information received from States/UTs in March 2010 includes 176 completed PPP
projects in different sectors with a total investment of Rs. 41,284 crore while 209
PPP projects were under implementation with an estimated investment of Rs.
1,65,197 crore. In addition, 252 PPP projects were in the pipeline involving an
estimated investment of Rs. 1,91,754 crore.
Completed projects: Upto March 2010, 96 road projects with an investment of
Rs. 6,384 crore and 20 non-major ports with an investment of Rs. 19,704 crore had
been completed through PPP in the state sector. 51 urban infrastructure projects
had been executed through the PPP mode involving an investment of Rs. 6,105
crore. Of the total of 176 projects completed by the States, Rajasthan had
completed a maximum number of 41 projects, followed by Gujarat with 37
projects and Andhra Pradesh with 31 projects. The largest number of projects had
been completed by the States in the road sector followed by urban infrastructure
projects.
Projects under implementation: In the road sector, 69 projects with an
investment of Rs. 60,865 crore and in non-major ports, 37 projects with an
investment of Rs. 51,549 crore were under implementation in March 2010. 74
urban infrastructure projects with an investment of Rs. 19,738 crore were also
under implementation.
Projects in pipeline: 86 PPP projects in the road sector requiring an investment of
Rs. 39,482 crore are in the pipeline. Another 18 PPP projects with an estimated
investment of Rs. 17,436 crore in non-major ports and 67 PPP projects in urban
infrastructure sector requiring an investment of Rs. 45,838 crore are also in the
pipeline.
Figure 1.9: Sectoral Distribution of PPP Projects Initiated by State
Governments in India
Source: Planning Commission (2010b)
A key indicator of the success of the initiative can be seen from the PPP projects
pipeline being developed across each of the states and the sectors across the
country. With support from initiative-supported PPP Cells and facilities in most
cases, a large pipeline of projects has emerged across the states. Project-specific
data received from the state PPP Cells is presented in table 1.4 below.
Table 1.4: PPP projects in Central and State
Sector
Source: State PPP Cells, Government of India, 2009
In a survey conducted by World Bank in 2006 across states and central agencies,
there were at least 86 PPP projects in our main sectors of focus where a contract
had been awarded and projects were underway. Over 70% of these were in the
roads sector. The other transport sectors have seen much fewer projects, with 8
ports (4 major and 4minor ports), 2 airport and 2 rail projects underway. In the
urban infrastructure sector, 11 PPP projects had been awarded, with 8 solid waste
management, 2 water and sanitation and one bus terminal projects.
When looking at the total estimated project cost of PPPs, we see that road projects
account only for 36 percent of the total because of the small average size of
projects. Ports, with a much larger average size of project, account for 56 percent
of the total. It is noteworthy that if ports and central road projects are excluded
from the total, there is in fact a relatively small value of deal flow, at only Rs 30 bn
in basic infrastructure PPPs to-date, suggesting a significant potential upside for
PPP projects across sectors where states and municipalities have primary
responsibility.
According to World Bank Report (2006), across states and central agencies, the
leading users of PPPs by number of projects have been Madhya Pradesh and
Maharashtra, with 21 and 14 projects awarded respectively, all in the roads sector,
and the National Highways Authority of India (NHAI), with 16 projects. The other
states or central agencies that have been important users of PPPs are Gujarat (9
projects) and Tamil Nadu (7), Karnataka (4) and Ministry of Shipping, Road
Transport and Highways (MOSRTH) (4).
However, looking at a breakdown by estimated project size, we see that MP
becomes significantly less prominent due to the large number of relatively small-
sized projects in its portfolio, falling to 3 percent of total project costs. Gujarat
accounts for 48 percent of total project costs due to its four large port projects.
NHAI (17%) and MOSRTH (12%) are the other significant players. Karnataka
accounts for 7 percent of total project costs given that its one awarded PPP project,
the Bangalore-Mysore road corridor (currently under construction) had a reported
project cost of Rs 22.5 billion. This is shown in figure 1.10 and figure 1.11 below:
Figure 1.10: Number of awarded PPP’s by sector (Total=86)
Figure 1.11: Project cost of awarded PPP’s by sector (Total= Rs. 339.5 bn)
Anecdotal comments from the private sector suggest that a considerable number of
unbankable and unrealistic PPP projects are brought to the market by state
governments. Data from the survey presented in the Annex show that there were
15 projects that have not moved forward past the award stage either because they
have been abandoned or remained dormant. Of these, several had no good offers
forthcoming in response to successive requests for expressions of interest.
Although this number is not obviously high compared to the number of projects
underway, it nonetheless suggests that there may be significant benefits from
capacity building in identification and preparation of PPPs to ensure that more
bankable projects are brought to market.
In terms of approach to provider selection, 93 percent of the projects in the sample
were competitively bid (of which four-fifths used national competitive bidding),
with only 7 percent procured either through Memorandums of Understanding
(MOUs) or negotiated. However, it is worth noting that in value terms 42 percent
of the projects were awarded on a negotiated/MoU basis.
Some states have undertaken far more PPPs than others, and there has been a much
heavier use of PPPs in some sectors. As per the Database of Department of
Economic Affairs, Ministry of Finance on July 31, 2011, there have been 758 PPP
projects in our main sectors of focus where a contract has been awarded and
projects are underway – in the sense that they are either operational, have reached
construction stage, or at least construction/implementation is imminent. The total
project cost is estimated to be about Rs. 383,332.06 Crore. This is evident from
table 1.5 below:
Table 1.5: Completed projects across various states
Source: Department of Economic Affairs, Ministry of Finance, Government of
India (July 31, 2011)
Across states and central agencies, the leading users of PPPs by number of projects
have been Karnataka, Andhra Pradesh, and Madhya Pradesh, with 104, 96 and 86
awarded projects respectively and the National Highways Authority of India
(NHAI), with about 155 projects. In terms of main types of PPP contracts, almost
all contracts have been of the BOT/BOOT type (either toll or annuity payment
models) or close variants.
1.5.2.3 Status of PPP projects in various sectors:
When we assess the overall physical infrastructure development in the country,
India has the fifth largest electricity generation capacity and has generated about
704 billion units of power in 2007-08. Its road network is the second largest in the
world aggregating 3.34 million kilometers (Kms). Indian Railways is the second
largest rail network under a single management in the world. India is the third
largest telecom services market in the world with 326 million strong telephone
networks at the end of June 2008, including mobile phones of around 287 million.
Indian ports, both major and minor, have estimated to handle 650 million tonnes
traffic during 2006-07. To develop such a huge physical infrastructure, in addition
to PPP model, private sector has also been directly involved in the development of
public infrastructure, particularly in telecom, power, ports, airports and urban
development. Despite various concession agreements, tax holidays and other
benefits to develop the public infrastructure with private participation, the
infrastructure development so far have said to be not much encouraging due to
sector specific policies and other constraints as discussed below.
Table 1.6: Sector-wise PPP Projects in the States
Sector
Ongoing Projects Projects in Pipeline
No. of
Projects
Estimated
Cost
(Rs. Crore)
No. of
Projects
Estimated
Cost
(Rs. Crore)
Roads 114 14265 48 14668
Ports 24 24091 10 16676
Airports 4 2358 2 250
Railways 3 812 .. ..
Power 35 16409 6 795
Urban
Infrastructure
64 11958 10 2335
Total 244 69893 76 34724
Source: The Committee on Infrastructure web site, Planning Commission, GoI
Power Sector
India has a huge installed power generation capacity of 1,43,061 MW (end-
March 2008), of which the private sector projects constituted at 14.0 per cent only
(Table 1.7). Government of India has, earlier, envisaged a mammoth capacity
addition plan of 100,000 MW through 2012 to meet its mission of power for all.
The 11th Plan has targeted additional power generation capacity at 78,577 MW,
which is more than the total capacity added in the previous three Plans. Even
among the proposed capacity additions, the private sector would have a share of
only 13.7 per cent, which is very low when compared to power requirements. This
huge capacity addition may not be feasible viewing from the pace of development
of ongoing and proposed new projects.
Table 1.7: Status of Private Power Capacity (As on March 31, 2008)
(MW)
Item Thermal Hydro Nuclear RES*
Total
Total Installed Capacity 91907 35909 4120 11125 143061
Of which Private Sector 9772 1230 0 9009 20011
Share in Total Capacity
(%)
10.6 3.4 0.0 81.0 14.0
RES*: Renewable Energy Sources.
Source: Central Electricity Authority, Ministry of Power, GOI.
Given the fiscal constraints, private participation in the power sector development
has been considered essential for meeting this capacity addition and to meet the
growing demand for power. However, there is no PPP model power project in the
central sector and in the states also, it is very limited as the power projects have
either been developed by the public sector or by the private sector as Independent
Power Producers (IPP), Captive Power Plants (CPP) and Merchant Power Plants
(MPP).
Though the power sector reform has encouraged private power project, the
response in this regard is not much encouraging. According to Power Ministry
sources, about 7366 MW capacity (5 per cent of total installed capacity) consisting
of 37 projects has been fully commissioned so far in the IPP segment. Five private
power projects have been completed with a capacity of 718 MW and about 5776
MW capacity is under execution. There are about 52 thermal power projects and
nine hydro power projects with an installed capacity of 30,825 MW have been
cleared/appraised by the Central Electricity Authority (CEA), but there is no sign
of their early execution. India has an estimated unutilized hydro power potential of
more than 1,50,000 MW. However, only 17.5 per cent of the electricity supply
comes from the hydro power sector in 2007-08. A study by the CEA has identified
399 potential hydel projects with an aggregate capacity of 1,07,000 MW.
Preparation of pre-feasibility Reports of 162 schemes with aggregate installed
capacity of 47,930 MW has already been completed by the CEA. In addition, about
60,000 circuit Kms of transmission network is expected by 2012. Of which, how
many projects will be executed through private participation is a big question.
Ultra Mega Power Projects with each having a capacity of minimum 4,000 MW
through private sector funding have also been considered by the Government to
augment the capacity addition to meet the power requirement in the country.
However, there are certain issues that come in the way of private sector
participation need attention to augment the private investment.
The initial response of the domestic and foreign investors to the private
participation in the power sector was extremely encouraging. However, many
projects have encountered unforeseen delays. There have been delays relating to
finalization of power purchase agreements, guarantees and counter-guarantees,
environmental clearances, matching transmission networks and legally enforceable
contracts for fuel supplies. Continuous losses by State Electricity Boards (SEBs)
arising both from inadequate tariff and from Aggregated Technical and
Commercial losses of as high as 40 per cent discouraged the private investors in
power generation as they faced insecurity of payment and hence expansion of
private investment in this sector was constrained. In this regard, policy issues such
as inability of SEBs and State Governments to provide acceptable payment
security to the private power suppliers, delay in finalization of power purchase
agreement (PPA), fuel supply agreement, fuel transportation agreement and
problems in sourcing coal supply to thermal power stations need a relook to
encourage private participation.
Second, focusing of small projects under private participation may be viable,
bankable, and easily executable and above all, the gestation period will also be
minimal. On the other hand, big projects like Dabhol, which encountered with
many problems, has also been a discouraging factor for the private participation in
mega projects. Reducing the risk is a better option than allocating it. Therefore,
minor power projects in the private sector or on PPP basis should be encouraged.
An important factor which discourages private participation is the reluctance of
lenders to finance large IPPs.
Third, using domestically available fuel may reduce the input cost, which is to be
explored first before going in for import of fuels by the developers. Captive mining
- not only in India but also abroad - by the power producers would ease the fuel
constraints. The cost could be reduced by minimizing the complexities in the
projects instead of shifting the risks to other parties. Better management and
appropriate choice of technology for the Indian condition would reduce the capital
cost significantly.
Fourth, the disappointing aspect of the reform process could be the slow tangible
progress on competition and open access to grid in the sector. The Electricity Act
2003 provides for an enabling framework to stimulate private investments for
capacity augmentation and also for private licensees in transmission and
distribution through an independent network. However, private participation in
transmission and distribution system has not been an easy task. It is widely debated
that the captive unit have found it difficult to transmit excess power through the
national grid, while putting private grid is a costly affair and unviable option at the
initial stage.
Fifth, renewable energy should play a major role in the supply of power. However,
using of renewable energy sources in India is very limited at around 25 per cent of
hydro power and another 7.7 per cent of other renewable energy out of total
installed capacity, which is to be encouraged in the wake of their availability, cost
and environmental friendly features. Gross wind power potential in the country has
been estimated at over 45,000 MW, based on the areas having wind power density
of 200 Watt per square meter or more, which is to be explored fully to optimize the
power generation at a lower cost. When renewable energy sources are used, the
demand for fossil fuels will be reduced. Unlike fossil fuels, most renewable
sources do not directly emit greenhouse gases. In view of aforesaid issues, power
sector reform has to go a long way, although the legislative and institutional pre-
requisites are now in place. If implemented properly, it would create a user
competition in wholesale as well as retail power supply.
Telecommunication Sector
Usually, the Government owned operators play a major role in the development of
telecom sector worldwide. In India, private investment and association of the
private sector was needed in a big way to bridge the resource gap. Therefore, the
telecom sector was opened up for private participation after the announcement of
industrial policy in 1991 to bridge the gap. As a result, the private telecom
companies have started operations in the Indian soil due to vast availability of
market potentials. Slowly, they picked up their market share and currently they
outperform the government owned services due to increasing commercial gains.
Adoption of unified access service, accepting the intra-circle mergers and
acquisitions, licensing regulations and announcement of broadband policy, the
private sector has continued to play a significant role in the growth of the telecom
sector and their participation has increased significantly during the recent period.
The total telephone connections have increased substantially from 45 million at the
end of March 2003 to over 300 million at the end of March 2008 (Table 1.8). The
Government continues to provide incentives to the telecom sector and reduced the
license fees significantly. Due to acute competition in this sector, the tariffs for
various services have experienced a downward movement apart from
harmonization. As at end March 2008, 134 private licensees have been providing
mobile telephony services with a total investment of Rs.95,000 crore. Besides, 120
new private licensees are yet to commence their service.
Table 1.8: Private Sector Performance in Telecommunication Sector
Description
Sector
Position as at the End of
Mar-02 Mar-06 Mar-07 Mar-08
Wireline Phones (In Lakh) Public 379.44 419.79 374.61 352.28
Private 5.93 309.15 33.13 41.85
Total 385.37 728.94 407.74 394.13
Wireless Phones
(GSM+CDMA*) (In Lakh)
Public 2.18 191.05 339.3 443.21
Private 62.13 500.93 1321.24 2167.58
Total 64.31 691.98 1660.54 2610.79
Total Telephones (Fixed +
Cellular)
449.68 1420.92 2068.28 3004.92
Tele-density (%) 4.29 12.74 18.31 26.22
Switching Capacity (In Lakh) Public 474.25 792.14 888.17 959.76
VPTs [PSUs+Private] Total 468862 547111 564610 532281
OFC Route Kms (Inclusive of
MTNL)
326271 490437 519155 564166
TAX Lines (In Lakh) 34.27 69.53 82.2 86.85
Rural Phones (in Lakh) - 147.68 233.07 765.0
* CDMA : WLL (Wireless+Mobile)
Source: Department of Telecommunications, GoI.
New mobile phone connections have been increasing substantially during the
recent period and as a result, India has 326 million strong telephone networks with
88 per cent share relates to mobile segment at the end of June 2008, which is one
of the largest in the world. Due to continuous encouragement for private operators
in this sector, their share in the total telephones has increased to about 73.5 per cent
as at end-March 2008. India has joined 100 million mobile club of the world
during 2006 as the fifth country after China, the US, Japan and Russia. The private
sector projects are reported to be working successfully in the cellular segment due
to increase in commercial gains and also vast investment opportunities available in
this sector.
Though it appears to be a major success story in private sector participation in the
telecom sector, some of the issues deserve attention. Issues such as spectrum
allocation, tariff rationalization, etc., need to be addressed to encourage further
healthy competition in this sector. Since April 2008, one of the major issues
concerning the private operators, viz., the access deficit charges have been
removed, which may lead to a downward tariff revision. Though the overall tele-
density has improved to 28.3 per cent at the end of June 2008, the slow progress in
rural tele-density is to be addressed to improve the communication facilities across
the country.
Roads and Highways
The PPP model may be considered as a successful one not only in the world over
but also in India in the development of road sector as majority of the on-going
highways development projects have been taken up under this model. With a view
to attract private investment in road development, maintenance and operation,
National Highways Act (NH Act) 1956 was amended in June 1995 to facilitate
private participation in road infrastructure projects. While there are a number of
forms of PPP, the common forms that have been used for development of National
Highways are Build Operate and Transfer (BOT) on Toll basis, BOT on Annuity
basis and SPV basis. At present, the Government has embarked upon a massive
programme to develop highways through the National Highways Development
Project (NHDP), Phase-I to Phase-VII. Under these projects, 13,146 Kms of
National highways have been proposed at an estimated cost of Rs.54,000 crore. So
far 82 projects valued about Rs.23,104 crore have been taken up on BOT (Toll)
basis. Of this, 34 projects have been completed and remaining 48 projects are
under progress. Under annuity basis, 25 projects covering a length of 1376 Kms
have been taken up, of which eight projects have been completed and the
remaining projects are under progress (Table 1.9). Another 12 projects have been
taken up under SPV funding, of which five projects have been completed. Given
the unmatched investment opportunity, contractors and supervision consultants
consisting of 46 firms from 27 countries have been implementing about 80 projects
with a cost of about Rs.22,000 crore in India.
Table 1.9: Projects Undertaken through PPP in Road Sector
Item BOT (Toll) BOT (Annuity)
Number of Projects 82 25
Value of the projects
(Rs.Cr)
23104 7695
Projects Completed 34 8
Projects Under
Progress
48 17
Source: Annual Report 2007-08, Department of Road Transport and Highways,
GoI. (As at end-March 2008)
Another issue in the road sector is that many of the projects have been delayed due
to problems in land acquisition, hurdles in material movements, law and order
problem. A clear mandate to acquire land for public use is to be conceived and to
be operationalised to speed up the public projects. In case of toll roads, levying of
user charges at a higher rate at the initial stage may dampen the road users, which
could be rationalized through gradual increase in the later stage. Risk and revenue
sharing arrangements should be clearly dealt with for smooth passage of project
implementation. Excessive commercialization may affect the common man, who
may be protected with some element of subsidy at the initial stage. Above all, the
confidence of the local people is to be gained for smooth implementation of the
project.
Airports
There are 449 airports/airstrips in the country. Among them, the Airport Authority
of India (AAI) owns and manages 92 airports and 28 civil enclaves at defense
airfields, which provides air traffic services over the entire Indian airspace and
adjoining oceanic areas. The legislative framework for privatization of airports
already exists in India. Some airports have already been owned by State
Governments, private companies and even individuals. However, the financing of
airport infrastructure has some inherent problems. These projects have a large
element of cost, very long gestation period and highly uncertain returns on
investment based on several assumptions of traffic growth that may not
materialize. It has been estimated by the Task Force on Financing Plan for Airport
constituted by the Planning Commission that private sector investment for the
modernization and development of various airports under PPP model would be
Rs.31,100 crore (Table 1.10).
Table 1.10: Projected Investments from PPP in Airports
Airport Private Investment (Rs. Crore)
Delhi & Mumbai 11,400
Bangalore & Hyderabad 4,000
Chennai & Kolkata 5,700
Five Greenfield Airports 8,500
City side Development 1,500
Total 31,100
Source: Report of the Task Force on Financing Plan for Airports, Planning
Commission, GoI.
Modernization and restructuring of Mumbai and Delhi airports at an estimated
investment of US $3 billion over next 20 years under PPP model has already been
in operation. Constructions of new Greenfield international airports at Bangalore
and Hyderabad on BOOT basis, though delayed, have been completed by April
2008. Modernization of other major airports like Chennai, Kolkata, etc., is pending
due to procedural hassles and land acquisition problems, which are to be addressed
urgently to ease the air traffic. Due to the introduction of open sky policy, the air
traffic has increased significantly in major airports and the runways in these
airports are not in a position to handle the increasing traffic, which resulted in
flight delays. This call for expansion and modernization of existing airports on a
priority basis and also new airports of international standard, at least in the metros,
are to be developed to accommodate the growing air traffic. Furthermore, the
Committee on Infrastructure has approved the development of 35 non-metro
airports. While the AAI will undertake all the development works on the air side,
city side developments at most of the viable airports will be undertaken with
private sector participation through JVC/private consortium.
In view of worldwide thrust towards corporatization and privatization of airports,
comprehensive strategy needs to be prepared to capture the best investment
opportunities. In case of Greenfield projects, the promoter may be required to
prepare pre-feasibility study for the smooth functioning of the project.
Transparency in the operations and in the revenue and risk sharing would ease the
hurdles in the implementation of the projects under PPP model. There will also be
need for commercialization of marginal or loss-making airports by transferring
them to private companies, State Governments, urban local bodies etc., for
operation and management under negotiated terms and conditions.
Ports and Shipping
There are 12 major ports and about 60 non-major and private ports in the country.
With the awarding of infrastructure status for inland waterways and inland ports,
the construction of ports under private sector has picked up. At present, 36
private/captive port projects involving capacity addition of about 137 MTPA3 and
an investment of about Rs.9,756 crore are at various stages of evaluation and
implementation. Out of these, 13 projects with capacity addition of about 47.40
MTPA involving an investment of about Rs.2662 crore have been operationalised
and four projects are under implementation through private participation.
Development of other ports is under slow progress, which needs attention of all
concerned for early execution. The main areas which have been thrown open for
private investment under BOT basis include construction of cargo handling berths,
container terminals, warehousing facilities, installation of cargo handling
equipments, construction of dry-docks and ship repair facilities. There is a plan to
develop 54 new berths through PPP model in the next five years, which are to be
hastened to relieve the port congestion problem.
India‟s weak export infrastructure in the ports such as congestion problems,
insufficient bulk terminals and age old Coastal Regulatory Zone Act, need to be
addressed. More encouragement for PPP model and captive ports for development
of minor/intermediate ports will improve the port infrastructure in the country. In
addition, efficiency in cargo handling is to be improved to reduce the dwelling
time of ships, which is higher when compared to international standards.
Railways
The demand for railway containers has grown rapidly due to increasing
containerization of cargo during the recent period. Since the beginning of the year
2006, container movement has been thrown open to competition and private sector
entities would be eligible for owning and operating container trains. The rapid rise
in international trade and domestic cargo has placed a great strain on the Delhi-
Mumbai and Delhi-Kolkata rail track. Government has, therefore, decided to build
a dedicated freight corridor on these high density routes. This corridor would be
constructed, operated and maintained by a corporate entity on commercial
principles. Part of eastern, western and dedicated fright corridors would be
undertaken through PPP model. The approach to be adopted for the dedicated
freight corridor would herald the ownership and operation of a large number of
freight trains by competing private entities. It is expected that the proposed
separation of rail from wheels would initiate a paradigm shift in the functioning of
Indian railways.
Urban Development
Over the next 25 years, modernizing and expanding the water, electricity, and
transportation systems of the cities of the world will require approximately $40
trillion. But the cost of not meeting the challenge could be even greater than $40
trillion (Doshi et al, 2007). In the Indian scenario, there are about 400 cities with
more than 100,000 population, which are facing immense problems in terms of
financial management, in the provision of public services, and overall city
management. Government or local bodies alone could not develop the cities and
solve the problems. Development of urban infrastructure should be an integral part
of development strategy, which includes mass rapid transport system, drinking
water, sewage system, solid waste management, urban roads and
lightings, etc. However, investment in these areas has been inadequate.
Development of this sector with the PPP may have a changing pace in the overall
economic development, which requires an investor friendly environment with
commercial viability of the projects. Overall, the solution to overcome the urban
infrastructure bottlenecks is to organize the infrastructure more effectively, balance
the public-private interest, reinvigorate electricity, water and transportation system
by integrating finance, governance, technology and proper designing of the
projects.
Figure 1.12: Sectoral Distribution of PPP Projects Initiated by Central
Government in India
Source: Planning Commission (2010b)
Development and use of PPPs for delivering infrastructure services has now at
least 11 years of precedence in India, with the majority of projects coming in line
in the last 5 – 7 years. Policies in favor of attracting private participation as well as
innovation with different structures have met with varying degrees of success. As
per the Database of Department of Economic Affairs, Ministry of Finance on July
31, 2011, some sectors like telecommunications, power, and ports and roads, have
done very good progress compared to limited success in other sectors.
We see that from table 1.11 below that road projects account for 53.4% of the total
number of projects and 46% by total value because of the small average size of
projects. Ports though account for 8% of the total number of projects have a larger
average size of project and contribute 21% in terms of total value. It is noteworthy
that if ports and central road projects are excluded from the total, there is in fact a
relatively small value of deal flow, at only Rs 125,568.93 crores in basic
infrastructure PPPs to date, suggesting a significant potential upside for PPP
projects across sectors where states and municipalities have primary responsibility.
It is observed that the potential use of PPPs in e-governance and health and
education sectors remains largely untapped across India as a whole, though off-late
there have been some activities shaping in these sectors.
Table 1.11: Completed projects across various sectors
Source: Department of Economic Affairs, Ministry of Finance, Government of
India (July 31, 2011)
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