Blog Details

Author - Rashi Suri (Managing Partner) and Pradyun (Associate)

A Public-private partnership or PPP involves collaboration between the Government or a government agency and a private-sector entity, which is undertaken to finance, build and operate projects like public transportation (metros, railways), toll plazas and other infrastructure projects like airports etc. Financing a public project through a private partnership allows the project to garner the required funding along with completing the project at an expedited speed. 

Across the world the PPP model faces problems and the performance of which have been very mixed as per studies conducted by various research bodies. In the Indian context, the numerous causes due to which the PPP model has not been a success is as elaborated below.

Reasons for the failure of PPP projects

PPP projects are constantly mired in issues such as disputes in existing contracts, non-availability of capital and regulatory hurdles.

• The issues maybe due to acquisition of land & getting timely environmental clearances, lack of flexibility in the contractual arrangements, court cases that drag on which lead to delay in enforcing contracts. 
• Right from the Request for Proposal (RFP) stages, the PPP contracts face aggressive bidding and manipulation in project costs by the private players. According to the past Economic Survey of 2015, it had been stated that many companies had been “over-leveraging” i.e. they were bidding beyond their capacity to execute and thereafter expecting government to redraw the contracts. It is also reported that the projects become sites of crony capitalism and a means for accumulating land by private companies. One other reason associated is that the, PPP firms use every opportunity to renegotiate a contract by citing reasons like low revenue or rise in costs. In addition to delaying the projects the frequent renegotiations also cause drain of larger share of public resources
• The PPP model faces further constraints by the diminishing appetite of infrastructure majors such as GMR, GVK, L&T, etc. to take up new projects under the PPP. These companies have in the past built world class airports, metros, roads, ports etc. under the model but nearly all of them are incurring rising debts from the projects.
• In the recent years, there has been an exacerbated problem in raising resources from PSB’s (public sector banks) which have turned frugal with lending. The long term finances has dried up for PPP’s due to the excessive and over-dependence on banks for financing and lack of corporate bond market in India. The banks face a big problem as there is lack of security or a guarantee in the PPP projects. Currently, the PSB’s are further stressed due to governance issues and high NPAs (non-performing assets). It is reported that the defaulted loans for infrastructure projects comprise a large part of the NPA’s share of PSB’s in India.
• There is also the issue of the government having a poor regulatory mechanism in place.

There has been some key recommendations by a committee which was constituted for revitalizing the PPP model of Infrastructure Development which was chaired by Dr. Vijay Kelkar. The recommendations states that:

• The Contracts need to focus more on service delivery instead of fiscal benefits.
• There should be better identification and allocation of risks between stakeholders
• There needs to be a prudent utilization of VGF’s (viability gap funds) where charges from users is not able to guarantee a sustained revenue stream.
• Improved fiscal reporting practices and careful monitoring of performance.
• It is also suggested by experts that there should be some provisions in the PPP contracts under which the government agency concerned is able to take over the PPP project in case there is recurring defaults and repeated failure to meet deadlines by the private party.
• For improving the regulatory mechanism - creating an Infrastructure PPP Adjudication Tribunal (“IPAT”) chaired by a Judicial Member with a Technical member. Etc.

Incorporating the above expert Committee’s recommendations would not just help in clearing the deficiencies and the bottlenecks that plague the development of state-of-the art infrastructure in India but will also give a much needed fillip to the various sectors and segments of the economy which would be struggling to contain the scathing effect of Covid-19 on their businesses.