PUBLIC PRIVATE PARTNERSHIPS IN INFRASTRUCTURE DEVELOPMENT IN INDIA

[Mr. M. GOVINDARAJAN]

Needs of Infrastructure

Infrastructure is the basic physical and organizational structure needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function. It can be generally defined as the set of interconnected structural elements that provide a framework supporting an entire structure of development. It is an important term for judging a country or region's development.  Infrastructure represents those types of capital goods that serve the activities of many industries included paved roads, railroads, seaports, communication networks, financial systems, and energy supplies that all support production and marketing for industries within the country. Besides that, the quality of an Infrastructure directly affects a country's economic growth potential and the ability of an enterprise to engage effectively. Infrastructure provides services that support economic growth by increasing the productivity of labors and capital thereby reducing the costs of production and raising profitability, production, income and employment

Impact of infrastructure

Dr. Jeffrey Delmon, Senior Infrastructure Specialist of The World Bank, begins his book indicating that, “Poor infrastructure impedes a nation’s economic growth and international competitiveness (The World Bank 2006). Insufficient infrastructure also represents a major cause of loss of quality of life, illness and death (Willoughby 2004). This raises infrastructure services from good investment to a moral and economic imperative. In order to stimulate growth and reduce poverty, it is essential to improve the supply, quality and affordability of infrastructure services. The unmet demands are huge, and investments have not matched demand (The World Bank 2008).”

The Global Competitiveness Report 2010-2011 of the 2010 World Economic Forum values “Effective modes of transport, including quality roads, railroads, ports, and air transport, enable entrepreneurs to get their goods and services to market in a secure and timely manner and facilitate the movement of workers to the most suitable jobs. Economies also depend on electricity supplies that are free of interruptions and shortages so that businesses and factories can work unimpeded. Finally, a solid and extensive communications network allows for a rapid and free flow of information, which increases overall economic efficiency by helping to ensure that businesses can communicate and decisions are made by economic actors taking into account all available relevant information.

Infrastructure is vital for emerging economies to realize their aspirations.   It is vital for the mother who hopes that the water coming out of the pipe is clean and available, so here children do not get sick for the informal settlement dweller who wants his children to study but cannot afford an electricity bill; for formers who need all weather roads and reliable shipping to get their goods to market.   There is no doubt that providing support for infrastructure in an environment is challenging and evidence shows that investors in infrastructure are very sensitive to country risk.  In this sense, it is the job of institution such as the World Bank Group to assistant governments to manage such risks, whether through enabling effective regulation and policy, through increased transparency, or risk sharing through instruments such as guarantees.

Economic growth

The importance of infrastructure for sustained economic development is well recognized. High transaction costs arising from inadequate and inefficient infrastructure can prevent the economy from realizing its full growth potential regardless of the progress on other fronts. Physical infrastructure covering transportation, power and communication through its backward and forward linkages facilitates growth, social infrastructure including water supply, sanitation, sewage disposal, education and health, which are in the nature of primary services and has a direct impact on the quality of life. The performance of infrastructure is largely a reflection of the performance of the economy. Infrastructure industries are measured by six key infrastructure and core industries (i.e., electricity, crude oil, petroleum refinery products, coal, steel and cement).

Indian scenario

India is the second fastest growing economy next to China. The development of infrastructure will develop the economic growth of the country.   The projected investment in India in infrastructure for X plan and XI plan is summarized in the table below:
Table 1 - Projected investment in India in Infrastructure for X plan and XI plan

	X plan		XI Plan
Sectors	US $ billion	Share (%)	US $ billion	Share (%)
Electrical (Including NCE)	72.96	33.49	166.63	32.42
Roads and Bridges	36.22	16.63	78.54	15.28
Telecommunication	25.84	11.86	64.61	12.57
Railways (Including MRTS)	29.91	13.73	65.45	12.73
Irrigation (including water shed)	27.88	12.80	63.33	12.32
Water supply and sanitation	16.20	7.44	35.93	6.99
Ports	3.52	1.61	22.00	4.28
Airports	1.69	0.78	7.74	1.51
Storage	1.20	0.55	5.59	1.09
Gas	2.43	1.11	4.21	0.81
TOTAL	217.85	100%	514.03	100
In crores	871,445		2,060,193

 The development of infrastructure in all aspects is required to be fulfilled in India.  The inadequate infrastructure results in the following:

• significant constraint on India’s growth potential;
• retards GDP growth by 1% - 2% per annum (estimates);
• acts as a major barrier to Foreign Direct Investment;
• hinders the objective of inclusive development.

Inadequate investment in infrastructure

The following are the effect of inadequate investment in infrastructure:

• Economic liberalization of 1990s  led to GDP growth of 7 - 9% not accompanied by infrastructure spending;

• Investment in infrastructure was only 5% of GDP in 2002 - 2007 - mainly from the public sector; from private sector  only 22%;
• Infrastructure deficit increased during X plan owing to rapid growth of economy;
• Investment increased by 2.1 times in XI plan; 7.2% of GDP; share of private investment rose to 38%.

Need for Public Private Partnerships

The gap between the existing and required infrastructure is to be filled up.  To improve the availability of the infrastructure is possible only by increased investments in the infrastructure assets.  There is also a need to enhance the quality of service, minimum acceptable standards of service.   The traditional public procurement will not meet the requirement in the development of infrastructure in India which is to develop the economic growth.   The entire privatization is not at all possible in the mixed economy adopted country.   The only option is to adopt PPPs policy.

Definition of PPP

Department of Economic Affairs, Government of India defines ‘Public Private Partnership’ as-

• An arrangement between Government or statutory entity or government owned entity on one side and a private sector entity on the other;
• For the provision of public assets and/or related services for public benefit;
• Through investments being made by and/or management undertaken by the private sector entity for a specified period of time;
• Where there is a substantial risk sharing with private sector; and
• the private sector receives performance linked payments that conform (or are benchmarked) to specified, pre-determined and measurable performance standards.                

Essence of PPPs

The essence is partnership.  The purpose of partnership is to deliver a project or a service traditionally provided by the public sector.   The principle of partnership is to allow each party to do what they do best so as to provide greater value for money for the public at large.  The role of the public sector in PPPs is to act the role of facilitator and enabler, rather than being involved in direct management or delivery of services.   The type of partnership or the choice of PPP structures is limitless and depends on the extent of risk and responsibility transfer to the private party.

Government is actively pursuing PPPs to bridge the infrastructure deficit in the country. Several initiatives have been taken during the last three years to promote PPPs in sectors like power, ports, highways, airports, tourism and urban infrastructure. Under the overall guidance of the Committee of Infrastructure headed by the Prime Minister, the PPP programme has been finalized and the implementation of the various schemes is being closely monitored by the constituent Ministries/Departments under this programme.

Indian experience shows that competition and PPPs can help in improving infrastructure.   The opening of the telecoms sector is a case in point. Opening up the sector has led to massive investments and expansion in supply coupled with improvement in quality. The target of 15 percent tele-density set for the year 2010 was realized in 2007. Further, the cost of service today is lower than that in any other country in the world. Similarly, competition in the aviation sector has resulted in the creation of new capacities and much greater choice for travelers. The annual growth in air traffic has been in excess of 20 percent and fares have dropped significantly. Even in the road sector, PPPs have demonstrated their efficacy wherever they have been used such as on the Jaipur-Kishengarh highway.

Share of Private Investments in XI plan

The share of private investments in XI plan for the development of infrastructure is as shown in the following Table:

Table - 2 - Share of private investments in XI plan

Sector	Percentage
Ports	81%
Telecom	80%
Airports	64%
Electricity (including NCE)	49%
Roads & Bridges	20%
Railways	5%

XII Five year Plan (2012-2017)

As per the XII plan the Planning Commission projected the investment of ₹ 55,74,663 crores.   The object of XII plan is to enhance infrastructure investment to 9% of GDP and to achieve universal road connectivity and access to power for all villages.  XII plan sets ambitious targets for flagship programmes in rural infrastructure.   The sector wise investment in infrastructure for the XII plan is as tabulated below:

Table - 3 - Sector wise investment in infrastructure for XII plan

Sectors	Rs. in crore	US $ billion	Share (%)
Electricity (including NCE)	1,820,292	350.1	32.7
Roads & Bridges	914,536	175.9	16.4
Telecommunications	943,899	181.5	16.9
Railways (including MRTS)	643,379	123.7	11.5
Irrigation (including watershed)	504.371	97.0	9.0
Water supply & sanitation	255,319	49.1	4.6
Ports (including inland waterways)	197,781	38.0	3.5
Airports	87.714	16.9	1.6
Storage	148,933	28.6	2.7
Oil & gas pipelines	58,441	11.3	1.1
TOTAL	5,574,663	1072.1	100

As per the XII plan, the Planning Commission has set targets to achieve 50% of private and PPP funding in total infrastructure investments compared to a little more than 30% in the XI plan.

The following table shows the investment by the Central Government, State Governments and Private sectors for the X plan, anticipated in XI plan and projected in XII plan:

Table - 4 - Investment by Centre, States and Private

	X Plan (Actual)	XI Plan (Anticipated)	XII Plan (Projected)
Centre	3,52,504 $68 bn (42)	8,56,717 $165 bn (35)	16,01,061 $308 bn (29)
States	2,98,633 $57 bn (36)	6,80,056 $131 bn (28)	12,89,762 $248 bn (23)
Private	1,86,023 $36 bn (22)	8,87,504 $171 bn (37)	26,83,840 $516 bn (48)
Total	8,37,159 $ 161 bn (100)	24,24,277 $466 bn (100)	55,74,663 $1072 bn (100)

(Percent in brackets)

PPP Projects in India

                        The following table will show the sectoral representation in the project:

Table - 5 -PPP Projects in India by sector

Sector	Percentage
Road	53%
Urban Development	20%
Ports	8%
Power	7%
Tourism	7%
Education	2%
Health care etc.,	3%

The above table shows that road and highway projects dominated in the PPP projects.   Power and Telecom leads in private investments.  

The power sector has attracted much investment from private.  India is expected to make major investments in the power sector for rapid urbanisation, rural electrification and industries across the country.  Under the Twelfth Plan, the private sector is likely to account for a major share of the additional capacity (55.6 per cent). PPP is likely to be the preferred route for such ventures.

Recent initiatives in India

The Government of India is promoting public-private partnerships (PPP) as an effective tool for bringing private-sector efficiencies in creation of economic and social infrastructure assets and for delivery of quality public services. By end March 2014 there were over 1300 projects in the infrastructure sector with a total project cost (TPC) of ` 6,94,040 crore.

These projects are at different stages of implementation, i.e. bidding, construction, and operational.

• Viability Gap Funding for PPP Projects - Under  this scheme for financial support to PPPs in infrastructure 178 projects have been granted approval with a total project cost of  ₹ 88,697 crores and VGF support  of ₹ 16,894 crores;
• Support for Development Project Development of PPP - The India Infrastructure Project Development Fund (IIPDF) was launched in December 2007 to facilitate quality project development for PPP projects and ensure transparency in procurement of consultants  and projects. 
• National PPP Capacity Building Program - This program was launched in December 2010n and has been rolled out in 16 states and two central training institutes i.e., the Indian Maritime University and Lal Bahadur Shastry National Academy of Administration.  The roll out in the respective institutes commenced in 2011-12.   Many training programs have been conducted to train public functionaries who deal with PPPs  in their domain.
• On line tool kits for PPP projects for five sectors are available on the Department of Economic Affairs, Ministry of Finance website on PPPs.  The PPP tool kit is a web based resource that has been designed to help improve decision making for infrastructure PPPs in India and to improve the quality of infrastructure PPPs that are implemented in India.

Success factors in PPP

In making the PPP a successful the following factors are to be considered as essential:

• Careful planning of PPP project;
• Solid revenue and cost estimations;
• User willingness to pay and communication plan;
• Extensive feasibility study with use of PPP experts;
• Compliance with contractual agreement;
• Strong legal and regulatory framework;
• Strong institutions with appropriate resources;
• Competitive and transparent procurement;
• Mitigation and flexibility in managing macro-risks.

Budget 2015 - 16

The Hon’ble Finance Minister in the Budget for the year 2015 - 16 proposed to revisit and revitalize  the PPP mode of infrastructure development.  The major issue involved in PPP project is rebalancing the risk.  In infrastructure project, the Hon’ble Minister said that the sovereign will have to bear a major part of the risk without, of course, absorbing it entirely.

Conclusion

PPP is only one of the several options available for providing infrastructure.  It should not be seen as a replacement of the traditional public procurement.  It should be applied only where it can provide better value for money for the public at large.  It recognizes that both the public and private sector have their own strength.   It attempts to balance the strengths of both parties to create a win-win situation.  The Planning Commission was scrapped by the new Government during August 2014.  In that place National Institution for Transforming India (NITI Ayog) was established with effect from 01.01.2015.  The Ayog will recommend a national agenda, including strategic and technical advice on elements of policy and economic matters.   It will also develop mechanism for village level plans and aggregate them progressively at higher levels of government.

Reference:

1. Economic Survey - 2013 - 14
2. Infrastructure development in India - By Dr. V. Deepa Nair, Deputy Director & Associate Director,  CUDS, DR MCRHRD IAP
3. Infrastructure Development in India - Prabir De, Research and Information System for developing countries.
4. ORF Occasional paper 49, February 2014 - By Geetanjali Nataraj, Observer Research Foundation
5. www.planningcommission.gov.in
6. www.pppinindia.com
7. www.12thplan.gov.in
8. www.slideshare.net
9. www.thehindu.com
10. India Today.