Public Private Partnership model of Growth

Public Private Partnership model of growth and how India can benefit from PPP for infrastructure development

Infrastructure development through PPP-The road to better future

Infrastructure can be defined as basic activities that provide society with the services necessary to engage in productive activities and to conduct daily life.

Development of infrastructure is sin quo non for economic growth. Despite becoming the second fastest growing economy, India continues to face large deficits in the demand and supply of essential economic and social infrastructure services. This massive deficit is preventing regional, sectoral and socio-economic broadening of the economy and its benefits impeding inclusive growth and poverty reduction.

Huge infrastructure deficit is because of low investment in infrastructure development. There are several reasons for this such as

  • limitations of government resources,
  • limited availability of funds with government,
  • long gestation period which require sustainable financial and operational capacity,
  • high commercial and socioeconomic risks in development and its operation,
  • low returns from investments

 

The Eleventh Plan (2007-2012) had laid considerable emphasis on increasing the investment to bridge the gap in infrastructure development. The Plan had, therefore, emphasized on the need for massive expansion on investment in infrastructure based on a combination of public and private investment, the latter through various forms of PPPs.

The Twelfth Plan (2012-2017) had tried to continue its push on accelerating the pace of investment in infrastructure. However, experience of first two years of this plan suggest that investment had slowed down.

Since the infrastructure development requires huge investments, the government of India has started on a policy of promoting Public Private Partnership (PPP) as a means of augmenting investment in infrastructure. The PPPs provide an opportunity to exploit the efficiencies of private sector in project implementation besides adding to the public resources.

 A public private partnership (PPP) is an agreement between the government and private sector for the provision of public services or infrastructure.

PPPs do not imply reduced responsibility and accountability of the government in terms service quality, price certainity and cost effectiveness. There is active participation of the government throughout the project’s life but the role of government gets redefined as one of facilitator and enabler whereas the private partner assumes the role of financer, operator and builder of the service.

PPPs aim to bring together the skills, expertise and experience of both private and public sector.

In a PPP venture the total resources required along with the accompanying risks and returns are shared between the two parties. PPPs are different from privatization.

 

FORMS OF PUBLIC PRIVATE PARTNERSHIP

The PPP model in which the ownership of the underlying asset remains with the private unit during the contract period and gets transferred back to the public entity on termination of contract.The final decision on the form of PPP is taken based on the cost and return of money analysis.The various forms are as follows:-

  1. Modified design-build (turnkey )Contracts

 This model gives benefit in the form of cost and time savings,efficient risk sharing and better quality.The model is associated with milestone-linked payments or incentives

 

  1. BOT (build-operate-transfer) models

It stands for ‘build operate transfer’ and is the most common model used in India in which a private entity builds the asset ,operates it for the contract period and then the asset gets transferred back to the government upon the expiration of the contract.Generally used in building of airports,highways.

The two major forms of BOT models are:

  • User-fee based BOT model
  • Annuity-based BOT model

 

  1. Performance based management/maintenance contracts

 The sectors in which there are constraints on economic resources, models leading to improved efficiency are encouraged such as PPP models o f water supply,sanitation,solid waste management, road maintenance..

 

Some of the major PPPs undertaken are:

  • Delhi, Mumbai, Hyderabad and Bengaluru airports.
  • Ultra-mega power projects at Sasan (Madhya Pradesh), Mudra (Gujarat), Krishnapatnam

(Andhra Pradesh), and Tilaiya ( Jharkhand).

  • Container terminals at Mumbai, Chennai, and
  • Tuticorin ports.
  • 15 concessions for operations of container trains.
  • Jhajjar power transmission project in Haryana.
  • 298 national and state highway projects.

 

 India has created specialized institutions for long-term infrastructure financing. Firstly, the government established the IIFCL in 2006 to provide long term debt up to 20% of the project costs in infrastructure projects. Secondly, the viability gap funding scheme. This scheme was notified in 2006 to enhance the financial viability in infrastructure projects.  A grant assistance up to 20 per cent of project cost is provided by the Central Government to PPP projects undertaken by the Central Ministry, State Government, statutory entity or local body. The before mentioned bodies can also provide grants out of its own budget but not exceeding a further 20 percent of the total project cost. The VGF is normally in the form of a capital grant at the stage of project construction.

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