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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