Main recommendations of Kelkar panel  on PPP Projects

A committee headed by former finance secretary Vijay Kelkar was set up for reviewing public-private partnership (PPP) in infrastructure and suggesting measures for the revival of a defunct proposal to establish 3P India to support PPP projects. The panel submitted its report to the Finance Minister on November 19, 2015. The Committee said, “PPPs are an important policy instrument that will enable India to compress time in its journey towards economic growth. A successful and growing stream of PPPs in infrastructure will go a long way in accelerating the country’s development process.” It added, “The success of deploying PPP as an additional policy instrument for creating infrastructure in India will depend on the change in attitudes and mindsets of all the authorities, including public agencies partnering the private sector, government departments supervising the PPPs, and auditing and legislative institutions providing oversight of the PPPs.” .According to Kelkar, every stakeholder, without exception, strongly emphasised the urgent need for a dedicated institute for PPPs, as was announced in the previous budget. It said, “There is an urgent need to evolve a suitable mechanism that evaluates and addresses actionable stress. Sector-specific institutional frameworks should be developed to address these stalled infrastructure projects.” The committee recognised the need for a quick, equitable, efficient and enforceable dispute-resolution mechanism for PPP projects. The Committee suggested that PPP contracts have clearly articulated dispute-resolution structures that provide flexibility to restructure within the commercial and financial boundaries of the project. The panel also said, “The adoption of the MCA has meant that project-specific risks are rarely addressed by project implementation authorities in this one-size-fits-all approach. A rational allocation of risks can only be undertaken in sector- and project-specific contexts.” The main proposals of the panel include:

General Recommendations

  • The report noted that there was an urgent need to evolve a suitable mechanism to restart stuck PPP projects, taking lessons from the highways sector, where such projects have resumed.
  • The report stated that the PPP structure should not be adopted for small projects.
  • It also said there was a need to attract viable long-term investors and to explore options for sourcing cheap long-term capital.
  • It recommended setting up independent regulators for PPP projects in various sectors and pushed for amendment to the Prevention of Corruption Act to clarify the difference between cases of graft and genuine errors in decision-making.
  • It has also called for a rational allocation of risks among various stakeholders in a project, and moving away from the one-size-fits-all approach to PPP model concession agreements (MCAs).
  • . It said that tthe private sector must be protected against the loss of bargaining power over long time spans. It
  • It added that the government should encourage development of airports, ports and railways through PPP, by ensuring easier funding for projects with long gestation periods.
  • The committee strongly endorsed the 3PI, which can function as a centre of excellence, enable research, and review and roll out activities to build capacity. Finance Minister Arun Jaitley had announced the setting up of 3PI in his maiden budget for 2014-15 with a corpus of Rs 500 crore.
  • For future PPP contracts, the panel suggested proper assessment of managing risk and that there should be a renegotiation framework in the bid document itself.
  • Committee opined that MCAs for each sector be reviewed to capture the interests of all participating stakeholders — users, project proponents, concessionaires, lenders and markets.
  • The Committee claimed that the Finance Ministry is expected to allow banks and financial institutions to issue zero-coupon bonds, which will also help to achieve soft landing for user charges in the infrastructure sector.
  • Other suggestions include restrictions on the number of banks in a consortium, building up of risk assessment and appraisal capabilities by banks, and specific guidelines to lenders for encashment of bank guarantees.
  • It also suggested there should be a provision for monetisation of viable projects that had stable revenue flows after engineering, procurement and construction delivery.

Specific Recommendations

Roads: Increase concession period for BOT projects

  • Introduce hybrid models, viable gap funding, part annuity, operation and maintenance grants, etc for non-BOT project
  • Relax exit norms
  • Dispose pending cases between developers and NHAI
  • Shift to electronic tolling in time-bound manner

Ports: Move from pre-TAMP (tariff authority for major ports) to current-TAMP

  • Strengthen and accelerate environmental clearance
  • Provide support infrastructure (including land, reliable access to utilities, dredging, rail, roads) to developer
  • Strengthen and accelerate environmental clearance
  • Provide support infrastructure (including land, reliable access to utilities, dredging, rail, roads) to developer

Railways: Take up simpler projects first to build credibility

  • Such projects can be brownfield — monetisation of existing stations — or, greenfield —development of new stations
  • Set up regulatory authority to settle technical issues such as track-access charges
  • Power: Not many power projects are under PPP. But the sector has a far-reaching impact on infrastructure PPPs
  • Immediately address power sector finances as they are hurting bank loans

Airports: Prepare a policy that addresses the expected growth parameters of the sector and promotes PPPs

  • Concession agreement should stipulate important commercial parameters like return on equity, treatment of land for non-commercial purposes
  • Develop brownfield and greenfield airports with defined structure, revenue sharing mechanisms

Here is the response of Kelkar Committee against the problems pointed out by the CAG with regard to PPP projects in infrastructure sector.

PORTS
CAG

  • Delays in majority of projects due to time taken in finalization of tenders, security clearances, concession agreement and tender process
  • Delays in obtaining environmental clearance
  • Delays in handing over of project sites and back up area

KELKAR COMMITTEE

  • Urgent need to focus on strengthening the systems to speed up the overall environmental clearance process
  • More institutions  are required to  be given authorization for conducting Coastal Regulation Zone demarcation
  • Need to provide support  infrastructure facilities including land, utilities,  dredging, rail and road  evacuation infrastructure through enforceable obligations

ROAD
CAG

  • Inconsistency in adopting carrying capacity/tollable traffic as yardstick for determining the Concession Period by NHAI resulted in fixing higher concession period and higher toll burden on road users
  • Projects were approved despite the known late realization of minimum threshold traffic
  • The Total Project Cost (TPC) worked out by the concessionaires was higher as compared to TPC worked out by the NHAI. In 25 projects, TPC worked out by  concessionaire was higher by 50%

KELKAR COMMITTEE

  • In  the  case  of  BOT toll  projects,  focus  on  projects  with  longer concession period. NHAI, concessionaire can opt for revenue  share on a case to case basis
  • In case of projects that are not viable on BOT toll basis, options to fund through hybrid models, grant of VGF, part annuity, O&M grants, and debt instruments, maybe explored.
  • The concessioning authority may undertake detailed project development activities including demand assessment, soliciting stakeholder views on project structure and financial viability analysis to estimate a shadow bid, which could be used to compare actual bids received

Experts have welcomed the recommendations and sought timely implementation from the government. It is to be seen now how these suggestions are implemented and how truly independent sector regulators are set up. More than 50 per cent of PPP projects come up for renegotiation. So it is important to form an independent body, like a renegotiation commission, which can oversee the renegotiation of model concession agreements across sectors. It is also realized that 3P India evolves as an umbrella body for PPP projects at central and state level.

Basics of PPP Projects

A public–private partnership (PPP or 3P or P3) is a government service or private business venture that is funded and operated through a partnership of government and one or more private sector companies. PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In some types of PPP, the cost of using the service is borne exclusively by the users of the service and not by the taxpayer. In other types (notably the private finance initiative), capital investment is made by the private sector on the basis of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government. Government contributions to a PPP may also be in kind (notably the transfer of existing assets). In projects that are aimed at creating public goods like in the infrastructure sector, the government may provide a capital subsidy in the form of a one-time grant, so as to make the project economically viable. In some other cases, the government may support the project by providing revenue subsidies, including tax breaks or by removing guaranteed annual revenues for a fixed time period. In all cases, the partnerships includes a transfer of significant risks to the private sector, generally in an integrated and holistic way, minimizing interfaces for the public entity. An optimal risk allocation is the main value generator for this model of delivering public service.

There are usually two fundamental drivers for PPPs. Firstly, PPPs are claimed to enable the public sector to harness the expertise and efficiencies that the private sector can bring to the delivery of certain facilities and services traditionally procured and delivered by the public sector. Secondly, a PPP is structured so that the public sector body seeking to make a capital investment does not incur any borrowing. Rather, the PPP borrowing is incurred by the private sector vehicle implementing the project. On PPP projects where the cost of using the service is intended to be borne exclusively by the end user, the PPP is, from the public sector’s perspective, an “off-balance sheet” method of financing the delivery of new or refurbished public sector assets. On PPP projects where the public sector intends to compensate the private sector through availability payments once the facility is established or renewed, the financing is, from the public sector’s perspective, “on-balance sheet”; however, the public sector will regularly benefit from significantly deferred cash flows. Generally, financing costs will be higher for a PPP than for a traditional public financing, because of the private sector higher cost of capital. However extra financing costs can be offset by private sector efficiency, savings resulting from a holistic approach to delivering the project or service, and from the better risk allocation in the long run.

Typically, a private sector consortium forms a special company called a “special purpose vehicle” (SPV) to develop, build, maintain and operate the asset for the contracted period. In cases where the government has invested in the project, it is typically (but not always) allotted an equity share in the SPV. The consortium is usually made up of a building contractor, a maintenance company and equity investor(s). It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it. In the infrastructure sector, complex arrangements and contracts that guarantee and secure the cash flows make PPP projects prime candidates for project financing. A typical PPP example would be a hospital building financed and constructed by a private developer and then leased to the hospital authority. The private developer then acts as landlord, providing housekeeping and other non-medical services while the hospital itself provides medical services.

It was estimated that projects worth over Rs 7 lakh crore were held up by 2014 in India due to the absence of environmental and forest clearances, land and fuel, putting strain on the creaky infrastructure in the country and becoming an obstacle for an economy striving to get into a high growth trajectory. During the time of the UPA government, the amount is locked up in 215 projects spread across power, roads, ports, cement and steel, each with an estimated cost of Rs 250 crore or more and the public sector banks had already disbursed loans amounting to Rs 54,000 crore. Recently (2015), 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. The solution to the stuck up PPP projects is very important for India’s development and improving the health of the financial institutions. 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.