PPP beyond funding

Private sector role influences projects in multiple ways

The government has announced large programmes like smart cities, industrial corridors, and port-led industrial development. This requires speed and quantum of investments in the infrastructure sector to go up.

The public-private partnership is envisaged as a solution for bridging the funding gap in the sector. The PPP model does bring funding from the private sector and other sources. But the benefits of PPP go well beyond funding.

A key benefit of PPP is gain in the efficiency of implementation. A successful project implementation goes beyond construction, and involves complexities of project management, design, cost optimisation, quality, etc. In the PPP model, private companies bring such skill-sets, backed by business case and incentivised by various mechanisms in the model.

Sometime back the UK had estimated that PPPs had produced average savings of 17-25% across various sectors over a 10-year period. To ensure that such value is generated by PPP projects, many countries use the concepts of Value for Money (VfM) and Public Sector Comparator (PSC). The second concept is not widely used in India because of various reasons, including lack of reliable data, but can be incorporated in the approach towards using PPP models.

In India, PPP projects in some sectors like highways have helped relatively small sized contractors to grow into bigger companies and add more value to the economy. Many companies have also leveraged the experience in India to venture into other countries. There is a positive impact on government also. PPPs have created the need for evolving institutional, regulatory and legal frameworks in various sectors. There is also a need to develop and reform financial markets to address the need of PPP projects.

Recently, the government had announced that about 189 highway PPP projects are stuck because of issues like land acquisition and green concerns. Since PPP projects are based on business principles due to private sector involvement, the issues in execution and other requirements create urgency for the government, which might not have been noticed in normal circumstances.

Optimal and timely maintenance of assets and the quality of public service delivery have been challenging for public agencies in India. PPP provides them the flexibility to award long-term contracts to the private sector, with multiple sources of revenue, while having a robust incentive and penalty mechanism to ensure continued effective and efficient delivery from the private party. PPP projects also provide flexibility for different capabilities in the market to come together to deliver innovative and comprehensive services for projects. This enables government to conceptualise larger and more challenging projects.

PPP enables projects to be structured flexibly so that the maximum number of projects can find suitable competition and eventual bidders. The Greater Noida-Agra expressway is an example of innovative structuring possible through PPP.

However, PPP is not a panacea for all challenges in infrastructure development. There can be projects which are to be handled differently. Also, the capacity of the market, funding agencies and skill availability have to be kept in view. PPP projects that got stuck create an even more challenging situation. NHAI has been awarding more of non-PPP projects in the last two years because of such challenges. Social sector projects pose challenges for PPP in ensuring a lucrative business case for the private sector.

PPPs, planned well with a focus on other aspects like optimal structuring, funding, market capacity and approval processes, can be very beneficial for a country like India, much beyond the generally accepted benefit of addressing the funding gap.

By Vishwas Udgirkar

The author is senior director Deloitte Touche Tohmatsu India. Ashutosh Bhandari, director, contributed to the article