JEL Classification      :  H400, H420, H540, L900, L980.

* The author is Assistant Adviser in the Department of Economic Analysis and Policy of the Reserve Bank of India. He is indebted to Dr. Rakesh Mohan, Deputy Governor for his invaluable suggestions while this paper was submitted to him as an internal note form. He is also grateful to Shri K.U.B. Rao, Adviser for his encouragement and guidance. The responsibility of the views expressed in the paper rests with the author only and the usual disclaimer applies.

Over the years, the basic infrastructure in India has been developed to an extent, which is not sufficient enough while considering India’s geographical and economic size, its population and the pace of overall economic development. Infrastructure bottleneck has been a serious concern in India and basic infrastructure like roads, railways, ports, airports, communication and power supply are not comparable to the standards prevalent in its competitor countries.

To develop the Indian infrastructure to a world class and to remove the infrastructure deficiency in the country, the investment requirements are mammoth, which could not be met by the public sector alone due to fiscal constraints and mounting liabilities of the Government. This would call for participation of private sector in coordination with the public sector to develop the public infrastructure facilities. In this direction, the economic reforms initiated in the country provide forth the policy environment towards public-private partnership (PPP) in the infrastructure development. Sector-specific policies have also been initiated from time to time to enhance the PPP in infrastructure building. While the PPP is spreading to develop basic infrastructure world wide, in India, the participation of private sector in the infrastructure building has not been much encouraging, despite several rounds of policy reforms.

The expression public-private partnership is a widely used concept world over but is often not clearly defined. There is no single accepted international definition of what a PPP is (World Bank, 2006). The PPP is defined as “the transfer to the private sector of investment projects that traditionally have been executed or financed by the public sector” (IMF, 2004). Any arrangement made between a state authority and a private partner to perform functions within the mandate of the state authority, and involving different combinations of design, construction, operations and finance is termed as Ireland’s PPP model. In UK’s Private Finance Initiative (PFI), where the public sector purchases services from the private sector under long-term contracts is called as PPP program. However, there are other forms of PPP used in the UK, including where the private sector is introduced as a strategic partner into a state-owned business that provides a public service.

The PPP is sometimes referred to as a joint venture in which a government service or private business venture is funded and operated through a partnership of government and one or more private sector companies. Typically, a private sector consortium forms a special company called a special purpose vehicle (SPV) to build and maintain the asset. The consortium is usually set up with a contractor, a maintenance company and a lender. It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it.

Thus, the PPP operates at the boundary of the public and private sectors, being neither nationalised nor privatised. Thus, politically, the PPP represents a third way in which governments deliver some public services in conjunction with private sector. Moreover, in a practical sense, the PPP represents a form of collaboration under a contract by which public and private sectors, acting together, can achieve what each acting alone cannot (Michael 2001).

The Indian Case

Global Practices towards PPP in Infrastructure Development

While discussing the infrastructure development, a generic question arises, ‘Why is PPP needed?’ In the face of fiscal and other constraints, governments of most emerging economies have been turning towards the private sector as a means of financing infrastructure development. Many countries have, however, found that it is not always easy to attract the private sector, as the conditions for their participation are, in most cases, different from the traditional method of funding. A closer alliance between various parties involved in the infrastructure development will, however, provide the opportunity to share their views on the risk perspectives, legislative and regulatory environments, which support private investment, project funding packages, project formulation and the means of reducing project preparation and gestation period. It has been empirically proved that “both the public and private sectors have significant effect on each other, the magnitudes of the long-run influence of private production on infrastructure expansion are relatively greater than the reverse for most countries” (Eric C Wang 2002). Review of cross-country experiences while adopting the PPP model in the infrastructure development would provide due solution to the critical question raised at the beginning of this Section.

While focusing on country specific practices, the PFI of the UK is perhaps the best developed government’s PPP programme, which also comprises privatisation and other forms of cooperation between the public and private sectors, including the provision of guarantees. The PFI projects are viewed primarily as being about the provision of services, and not about the acquisition of assets. In this endeavour, the private sector makes a long-term commitment to maintain assets and provide services, and the government makes a long-term commitment to procure those services; significant risk is transferred to the private sector; public sector investment projects are considered for PFI where they are likely to represent value for money, and where it meets the UK government’s criteria for efficiency, equity and accountability (IMF, 2004).

In the case of Ireland, the pick up in enthusiasm for PPP can be summarised that there was quick buy-in on the part of all PPP stakeholders, where the government made it clear that its social partners would be consulted on the approach taken to select PPP projects. Second, the government paid more attention to the efficiency benefits of PPP than to just their fiscal advantages. Third, conclusion was reached that the PPP would be a success despite some institutional challenges that had to be overcome. To facilitate the PPP process, the National Development Finance Agency of Ireland was set up to mobilise resources to finance PPP projects and to provide financial advice to government agencies seeking to form PPPs.

Chile’s experience with PPP has been successful and a significant portion of the sizeable infrastructure gap was fulfilled through this model. Chile’s success with PPP has been underpinned by a solid institutional framework, well developed procedures to identify, evaluate the projects, efforts to ensure adequate sharing of risks between the stake holders, and reforms to ensure the availability of financing for projects. In the case of Mexico, most progress has been made with respect to telecommunications, ports and airports, but this mainly takes the form of privatisation. Empirical evidence suggest that public infrastructure in Mexico has negligible effects on private sector costs.

Section III
Status of Private Participation in Infrastructure
Development – Global Scenario

Till the early 1990s, provision of infrastructure services were the monopoly of the government world over and the private sector participation was very limited. Disenchantment with past approaches to providing infrastructure services, coupled with tightening budget constraints, governments have explored how best to harness the benefits of private participation. Accordingly, the private participation in the infrastructure development has started picking up in various forms. Moreover, the globalisation and opening up of the markets by Emerging Market Economies (EMEs) have provided investment opportunities for the private investors to develop the public infrastructure projects with or without collaboration with the public sector. Multilateral Institutions have also focused their attention towards the progress in the infrastructure development with private participation, as the basic infrastructure would accelerate the pace of overall economic development of a country. The World Bank has stared capturing such details and also a leading data source for private participation in infrastructure development through its Private Participation in Infrastructure (PPI) Project Database2. This database has information on over 3,800 projects in energy, telecommunications, transport, and water and sewerage sectors spread across 150 low and middle-income countries. This database covers the private sector investment/commitment to the development of infrastructure projects and does not include public investment.

² This database records contractual arrangements with and without investments in which private parties assume operating risks in low- and middle-income countries. Projects included in the database do not have to be entirely privately owned, financed or operated. Some have public participation as well.

When we look at the details on country-wise infrastructure projects with private sector participation, China tops in the list of attracting more projects in the developing region followed by Brazil, Russian Federation, India and Argentina. Development of energy infrastructure in China was the leading sector, both in number of projects and investments, followed by construction of toll roads. In case of Brazil, large private investment has flown into the telecom sector. Argentina has attracted more private investment towards the development of their energy sector.

Indian Experience in Private Participation in Infrastructure Development

Before the launching of economic reforms in the country, the infrastructure projects were mainly developed by the Government. Since the initiation of the economic reforms, the development of infrastructure has been given thrust through varied means. Along with the initiation of structural reforms in the country, the Government of India has announced new industrial policy in 1991 to develop the industrial and infrastructure sectors, which gave more emphasis on private participation. Policy announcements relating to sector-specific infrastructure developments with the PPP have also been announced in the subsequent annual Budgets of the Union Government. The coverage of the term infrastructure was expanded from time-to-time to enable the sector to avail of fiscal incentives such as tax holidays and concessional duties during the course of their development.

Since the initiation of the reform process, measures were introduced to strengthen the existing infrastructure and to develop new projects with private participation. The private sector participation in the infrastructure building have broadly been taken place through corporatisation of existing PSUs (e.g. GAIL, ONGC, IOC, etc), greenfield investment for development of new projects, PPP in the form of BOT or BOOT model in the road sector and concession agreements with the private sector such as rehabilitate, operate, and transfer; or rehabilitate, lease or rent and transfer; or build, rehabilitate, operate, and transfer basis. Recently established joint venture structure of institutions to develop and modernise the Delhi and Mumbai airports is an apt form of PPP.

Investment requirements of the infrastructure projects are huge and the private sector contribution to the development of public infrastructure has increased many folds during the recent period due to various policy initiatives by the Government towards more encouragement for private participation. However, when compared to other EMEs, private participation in the infrastructure development in India has gained momentum only recently and its share is not much encouraging. India has attracted only about 6.5 per cent of the total investment among 150 low and middle income nations. The investment has flown mainly into the telecom sector which constituted a share of 49.6 per cent of total investment in India, followed by energy sector at 28.9 per cent and transport sector at 21.3 per cent between 1990 and 2006 (Table 5). Among the developing countries, India stood at fourth position, after China, Brazil and Russian Federation, in terms of

Investment Requirements to bridge the Infrastructure Gap

After analysing the realistic stature of private participation in the infrastructure development in India, it would be more appropriate to look into the quantum of investment requirements to bridge the infrastructure gap and to transform the Indian infrastructure into a world-class. The impact of infrastructure investments on growth depends on the timing of investments, their scale in relation to the existing imbalance between demand and supply of infrastructure, and the location of the projects themselves. Taking into account the infrastructure gap in the country, there is no concrete estimation of requirements for infrastructure development to fill the gap in the country as the requirement will vary from time to time, place to place and project to project.

After the initiation of economic reforms, the first estimation of investment requirements for infrastructure development was attempted by the Expert Group on Infrastructure (The India Infrastructure Report, 1996). The Group estimated that the investment in infrastructure was to be stepped up from 5.5 per cent of GDP in 1995-96 to 8.5 per cent of GDP in 2005-06. But at the same time, the average annual investment was at 4.9 per cent during the 10^th Plan period. Then the Committee on Infrastructure, headed by the Prime Minister, has estimated in 2006 the investment requirements for the 11^th Plan period at Rs.14,50,000 crore or US $320 billion. The 11^th Plan document has identified sector-wise infrastructure gap and accordingly fixed physical target to be completed during the 11^th Plan to achieve overall GDP growth of 9 per cent (Table 6).

In this connection, some basic issues need to be discussed. First, how to step up the investments in infrastructure? Over the past three years, the infrastructure investment was at around 5 per cent of GDP, which is targeted to be increased to 9 per cent at the end of the 11^th Plan period as suggested by the Plan document. Here the question arises, where such a huge investment has to come from? To increase the investment to 9 per cent at the end of the 11^th Plan, each year, additional investments has to increase by at least one per cent of GDP during the Plan period. To fund such additional investments, there are broadly two sources – domestic savings and external savings. Under the domestic sources, household savings forms part of major source, which are to be stepped up from the level of 23.7 per cent of GDP on an average during the 10^th Plan. Then the government savings, which has mainly represent the public sector savings that have started being positive since 2003-04 only. Next comes the private corporate savings that estimated at 6 per cent of GDP on an average during the 10^th Plan is to be increased significantly to cope up with the additional infrastructure requirements during the current Plan. To fill the gap between the investment requirements and the domestic savings, foreign capital inflows is to be channelised from the level of 1.1 per cent of GDP in 2006-07. Then the question arises, how to mobilise such huge investments from different sources? At the Government side, both Centre and States have to borrow about 27 per cent of estimated total investments in addition to budgetary allocations and internal generation.

At the financing side, three major initiatives have been taken to augment the funding for infrastructure projects, viz., (a) setting up of India Infrastructure Finance Company Ltd (IIFCL), a SPV, to meet the long term financing requirements of potential investors; (b) provision of viability gap funding; (c) using of a limited portion of foreign exchange reserves for the development of infrastructure projects through the subsidiaries of IIFCL. But these developments will not serve the purpose fully. Private investments have to flow freely to achieve the desired goal.

The ability to tap private resources - from within the country as well as internationally - for financing infrastructure will strengthen the development. In this regard, the banking system would play a crucial role while transforming the financial savings into investments. But the problem is that, in the post reform era, there has been decline in activities and importance of term lending institutions. In fact, some term lending institutions have converted into banks. Given the huge requirement of funds for investment in infrastructure and increasing role of private players, it is natural to expect them to approach banks to raise funds for investment. As the basic sources of funds for banks are public deposits, mostly of short or medium term in nature, it would create mismatch in the asset-liability management of the banking system while lending to infrastructure on a long term basis, which is to be addressed.

Another major issue is, how to transform corporate and other savings into infrastructure investment? The 11^th Plan document has estimated that the private share in infrastructure development would reach 30 per cent during the 11^th Plan from 20 per cent during the 10^th Plan. Further more, about 48 per cent of the infrastructure financing requirements has to come from debt financing. But the development of corporate debt market is at a nascent stage. A prudent policy to develop the corporate debt market in India will only help to mobilise such huge investment requirements, which would facilitate to achieve the desired development levels in the infrastructure.

Next the foreign investment flows, which requires innovative instruments and mechanisms that are to be devised much attractive to capture such inflows. The international financing of infrastructure could be in the form of greenfield FDI, ADRs, GDRs, asset securitisation, finance through SPV, etc., for which, suitable policy framework are to be devised to utilise economically the increasing capital flows without affecting the domestic monetary and exchange rate stability.

Sector-wise Private Participation – Status and Issues

India has been growing at a level of 9.3 per cent, on an average, during the last three years and the supply of infrastructure has also improved to an extent to cope up with the increasing demand. But gaps are widening. The developments in the infrastructure projects since the introduction of economic reforms could be captured on the basis of two major data bases in addition to respective Ministry sources – one by the Planning Commission on PPP projects and the other by the World Bank on PPI database. As we have already discussed about the PPI database, let us have a brief overview on the status of sector-wise infrastructure projects based on Government of India databases and throw some light on the sector specific issues.

A. Infrastructure Projects under PPP Model

Since most of the infrastructure services are rendered by the Government, commercial approach towards cost recovery has not been adopted, and with the limited resources at Government’s disposal, PPP has been encouraged to fill the infrastructure gap. To support the PPP model projects, a Public Private Partnership Appraisal Committee (PPPAC) was constituted in January 2006. The PPPAC has been adding value by shortening the approval process within the Government, reducing the transaction costs and acting as a central focal point for identifying and disseminating best practices in rolling out PPP across sectors and Ministries of the Government. Since its constitution, it has granted approval to 65 projects, with an estimated project cost of Rs.53,136 crore.

Many of the State Governments have also ventured into PPP model to develop their State infrastructure on the lines of central schemes. Accordingly, about 244 projects are in progress under the PPP model with an estimated investment of Rs.69,893 crore and another 76 projects with an estimated cost of Rs.34,724 crore are in the pipeline. Among the ongoing projects, Rajasthan has more number of PPP projects (42 projects), followed by Madhya Pradesh (28), Gujarat (27), Karnataka (26), Sikkim (24) and Andhra Pradesh (21). However, investment-wise, Gujarat attracted higher share at 26.1 per cent of the total investments, particularly for the development of 13 ports at a cost of Rs.11,730 crore and two urban development projects at Rs.5100 crore. Other states like Sikkim and Maharashtra also have more shares in the PPP projects (Table 9).

facilities offered by the Government for infrastructure development through PPP, there is further potential for PPPs to contribute more and help bridge the infrastructure gap in India.

B. Sector-wise Infrastructure Developments - Major Concerns

has generated about 704 billion units of power in 2007-08. Its road network is the second largest in the world aggregating 3.34 million kilometers (Kms). Indian Railways is the second largest rail network under a single management in the world. India is the third largest telecom services market in the world with 326 million strong telephone networks at the end of June 2008, including mobile phones of around 287 million. Indian ports, both major and minor, have estimated to handle 650 million tonnes traffic during 2006-07. To develop such a huge physical infrastructure, in addition to PPP model, private sector has also been directly involved in the development of public infrastructure, particularly in telecom, power, ports, airports and urban development. Despite various concession agreements, tax holidays and other benefits to develop the public infrastructure with private participation, the infrastructure development so far have said to be not much encouraging due to sector specific policies and other constraints as discussed below.

Power Sector

Given the fiscal constraints, private participation in the power sector development has been considered essential for meeting this capacity addition and to meet the growing demand for power. However, there is no PPP model power project in the central sector and in the states also, it is very limited as the power projects have either been developed by the public sector or by the private sector as Independent Power Producers (IPP), Captive Power Plants (CPP) and Merchant Power Plants (MPP).

Though the power sector reform has encouraged private power project, the response in this regard is not much encouraging. According to Power Ministry sources, about 7366 MW capacity (5 per cent of total installed capacity) consisting of 37 projects has been fully commissioned so far in the IPP segment. Five private power projects have been completed with a capacity of 718 MW and about 5776 MW capacity is under execution. There are about 52 thermal power projects and nine hydro power projects with an installed capacity of 30,825 MW have been cleared/appraised by the Central Electricity Authority (CEA), but there is no sign of their early execution. India has an estimated unutilised hydro power potential of more than 1,50,000 MW. However, only 17.5 per cent of the electricity supply comes from the hydro power sector in 2007-08. A study by the CEA has identified 399 potential hydel projects with an aggregate capacity of 1,07,000 MW. Preparation of pre-feasibility Reports of 162 schemes with aggregate installed capacity of 47,930 MW has already been completed by the CEA. In addition, about 60,000 circuit Kms of transmission network is expected by 2012. Of which, how many projects will be executed through private participation is a big question. Ultra Mega Power Projects with each having a capacity of minimum 4,000 MW through private sector funding have also been considered by the Government to augment the capacity addition to meet the power requirement in the country. However, there are certain issues that come in the way of private sector participation need attention to augment the private investment.

Second, focusing of small projects under private participation may be viable, bankable, and easily executable and above all, the gestation period will also be minimal. On the other hand, big projects like Dabhol, which encountered with many problems, has also been a discouraging factor for the private participation in mega projects. Reducing the risk is a better option than allocating it. Therefore, minor power projects in the private sector or on PPP basis should be encouraged. An important factor which discourages private participation is the reluctance of lenders to finance large IPPs.

Third, using domestically available fuel may reduce the input cost, which is to be explored first before going in for import of fuels by the developers. Captive mining - not only in India but also abroad - by the power producers would ease the fuel constraints. The cost could be reduced by minimising the complexities in the projects instead of shifting the risks to other parties. Better management and appropriate choice of technology for the Indian condition would reduce the capital cost significantly.

Telecommunication Sector

Usually, the Government owned operators play a major role in the development of telecom sector worldwide. In India, private investment and association of the private sector was needed in a big way to bridge the resource gap. Therefore, the telecom sector was opened up for private participation after the announcement of industrial policy in 1991 to bridge the gap. As a result, the private telecom companies have started operations in the Indian soil due to vast availability of market potentials. Slowly, they picked up their market share and currently they outperform the government owned services due to increasing commercial gains.

New mobile phone connections have been increasing substantially during the recent period and as a result, India has 326 million strong telephone networks with 88 per cent share relates to mobile segment at the end of June 2008, which is one of the largest in the world. Due to continuous encouragement for private operators in this sector, their share in the total telephones has increased to about 73.5 per cent as at end-March 2008. India has joined 100 million mobile club of the world during 2006 as the fifth country after China, the US, Japan and Russia. The private sector projects are reported to be working successfully in the cellular segment due to increase in commercial gains and also vast investment opportunities available in this sector.

Roads and Highways

The Committee on Infrastructure has proposed a massive infrastructure developmental programme, of which the road sector projects include (i) Completion of GQ and NS-EW corridors, (ii) Four-laning of 10,000 kms under NHDP Phase-III, (iii) Two-laning with paved shoulders of 20,000 Kms of national highways under Phase-IV, (iv) Augmenting highways in North East under Special Accelerated Programme, (v) Six-laning of selected stretches of National Highways under Phase-V, (vi) Development of 1000 Kms expressways under Phase-VI, and (vii) Construction of ring roads, flyovers and bypasses on selected stretches under Phase-VII. NHDP Phase I and II were mostly funded through Government where the share of BOT highways was only 10 per cent. Under the second phase, financing was through cess and market borrowings in addition to external funding of Rs.7,609 crore by World Bank and Asian Development Bank. Further, a policy decision has been taken that all the projects in NHDP Phase-III to Phase-VII would be taken up on the basis of PPP on BOT model. The development of 1,000 Kms access-controlled Expressways under PPP will be on new alignment and built on Design, Build, Finance and Operate (DBFO) model. The Committee on Infrastructure had mandated the formulation of a Model Concession Agreement (MCA) for PPP projects in national highways to specify the policy and regulatory framework on a fair and transparent basis. Accordingly, a MCA has been released by the Government as a guideline. The MCA unbundles the risks and costs, and allocates them to the partners best suited to manage them. Establishment of Dedicated Road Fund may ease the financial constraints of the Government in view of the large number of projects, which are under various stages of implementation.

Airports

Modernisation and restructuring of Mumbai and Delhi airports at an estimated investment of US $3 billion over next 20 years under PPP model has already been in operation. Construction of new greenfield international airports at Bangalore and Hyderabad on BOOT basis, though delayed, have been completed by April 2008. Modernisation of other major airports like Chennai, Kolkata, etc., is pending due to procedural hassles and land acquisition problems, which are to be addressed urgently to ease the air traffic. Due to the introduction of open sky policy, the air traffic has increased significantly in major airports and the runways in these airports are not in a position to handle the increasing traffic, which resulted in flight delays. This call for expansion and modernisation of existing airports on a priority basis and also new airports of international standard, at least in the metros, are to be developed to accommodate the growing air traffic. Further more, the Committee on Infrastructure has approved the development of 35 non-metro airports. While the AAI will undertake all the development works on the air side, city side developments at most of the viable airports will be undertaken with private sector participation through JVC/private consortium.

In view of worldwide thrust towards corporatisation and privatisation of airports, comprehensive strategy needs to be prepared to capture the best investment opportunities. In case of greenfield projects, the promoter may be required to prepare pre-feasibility study for the smooth functioning of the project. Transparency in the operations and in the revenue and risk sharing would ease the hurdles in the implementation of the projects under PPP model. There will also be need for commercialisation of marginal or loss-making airports by transferring them to private companies, State Governments, urban local bodies etc., for operation and management under negotiated terms and conditions.

Ports and Shipping

There are 12 major ports and about 60 non-major and private ports in the country. With the awarding of infrastructure status for inland waterways and inland ports, the construction of ports under private sector has picked up. At present, 36 private/captive port projects involving capacity addition of about 137 MTPA3 and an investment of about Rs.9,756 crore are at various stages of evaluation and implementation. Out of these, 13 projects with capacity addition of about 47.40 MTPA involving an investment of about Rs.2662 crore have been operationalised and four projects are under implementation through private participation. Development of other ports is under slow progress, which needs attention of all concerned for early execution. The main areas which have been thrown open for private investment under BOT basis include construction of cargo handling berths, container terminals, warehousing facilities, installation of cargo handling equipments, construction of dry-docks and ship repair facilities. There is a plan to develop 54 new berths through PPP model in the next five years, which are to be hastened to relieve the port congestion problem.

³ Million tonnes per annum.

Railways

Urban Development

Over the next 25 years, modernising and expanding the water, electricity, and transportation systems of the cities of the world will require approximately $40 trillion. But the cost of not meeting the challenge could be even greater than $40 trillion (Viren Doshi et al, 2007). In the Indian scenario, there are about 400 cities with more than 100,000 population, which are facing immense problems in terms of financial management, in the provision of public services, and overall city

Despite improvements in physical infrastructure development in the country during the recent years, significant gap exists between demand and supply of critical infrastructure facilities, which has become a binding constraint on the rapid pace of economic progress. As mentioned earlier, infrastructure gap exists in almost all the sectors (Table 6). In the case of power sector, the power shortage stood at around 9.8 per cent and the power shortage during the peak demand period has been much higher at about 16.6 per cent (in 2007-08), which severely affected the industrial production and economic development. The per capita consumption of electricity has increased to 704 kwh in 2007-08, which constantly put pressure on the generation front. In the road sector, among the proposed development of about 5846 Kms of Golden Quadrilateral (GQ), 96.7 per cent of the projects have been completed and the remaining works are pending due to various litigations. In North South-East West corridor of 7142 Kms, only about 1962 Kms have been completed till February 2008 even though the completion target has been fixed by end-December 2009. Employee productivity of railways in India is very low when compared to China, Korea, Brazil and Indonesia. Wagon shortage hinder the movement of industrial raw materials, coal, minerals, etc., which affects the industrial production. Port container and air freight traffic is also very low in India as compared to other Asian economies. India’s weak export infrastructure in the ports, congestion problem and insufficient bulk terminals are major constraints in this sector. Space is a major constraint in big cities to expand the basic infrastructure. In the absence of well defined law to acquire land for public infrastructure development has also lead to slowdown in the urban infrastructure. Poor basic amenities in the rural areas are also a major concern, despite 72 per cent of the population lives in villages.

When we look at the progress of infrastructure development so far, private participation and PPP arrangements in the development of public infrastructure have still faced several implementation challenges. These challenges typically involve tariff setting and adjustment, regulatory independence or dispute over contractual provision and risk sharing. It may be observed from the discussion so far, the PPP in the infrastructure development is picking up during the recent years, particularly in the road sector and to some extent in the airports and ports sectors. Telecom sector is considered to be a successful sector in attracting private participation on a large scale. This may be due to sector-specific policies and other factors such as Government commitment, increased private interest in these sectors, move towards better competitive process, greater availability of information, size of the projects, acceptable price and encouraging developer return, fiscal concessions, etc. However, considering the size and magnitude of the proposed and ongoing projects in the infrastructure sector as a whole, the lacklustre response by the private participation and slow progress in some of the projects need to be reversed through investor friendly policies, transparent procedures and other conducive measures. The PPP model will not be feasible in all types of infrastructure but they are possible in many areas, which are to be exploited fully. The key to making PPP model acceptable is to create an environment where PPPs are seen to be a way of attracting private money into public projects, not putting public resources into private projects. Towards this direction, the following generic issues, therefore, need the attention to make the PPP model as a success storey in the infrastructure development as in the case of some of the developed and developing economies.

Transparency: There is a widespread consensus among economists that transparency is crucial in the case of PPP projects. At present, the process of executing the projects in India involves various stages and each stage is to pass through complicated policies and programmes. Though, the process of bidding and awarding the contract is stated to be much transparent, still there is scope for improvements. The PPPs can sometimes run into controversy if the private partner is seen to have received unduly favourable treatment. This can be overcome by ensuring that the terms of concession agreements are transparent and protective of public interest. Though this approach has been adopted by the Centre through model concession agreement, the State governments should also adopt transparent approach similarly to ensure that the PPP will be a success story.

Risk Allocation: As the projects in the infrastructure sector requires huge investments and involve much time frame for their execution, various risks, viz., construction risk, financial risk, market risk, performance risk, demand risk and residual value risk are to be allocated appropriately among the constituents. The risks should not be passed on to others as and when arise, which would affect the cost and progress of the project and create unnecessary litigations. Too many risks assumed by Government will likely put unjustified pressures on taxpayers. On the other hand, too few will prevent potential private investors from participating in the venture.

Project Appraisal: Execution of infrastructure projects should have a clear choice about its implementation whether by the Government or private or both under PPP. Also, the technicality of the project should be clear regarding its soundness, viability and return. When we look at the PPP programme, while there are a number of successful projects, there have also been a number of poorly conceptualised PPPs brought to the market that stood little chance of reaching financial closure. Clear appraisal of the project before its execution would avoid many litigations. At the same time, it is important to avoid a possible bias in favour of the private sector.

Government Guarantee: Generally, investors look for Government guarantee for their investments and their return before entering into a venture. Constant changes in the procedures for offering Government guarantees discourage the investment opportunities. Though, Government guarantee for private investment is not a preferred option in the fiscal angle, transparent policies and guidelines towards Government guarantee will provide clear perception and encouragement towards the PPP even in the risky areas of investment. But at the same time, the guarantee should not put the Government into pecuniary losses due to lack of clarity as in the case of Dabhol power.

Centre-State Disagreement: Execution of some of the projects like airport development, road, etc., are delayed due to disagreement between the Centre and the State Governments in various aspects, particularly locational choice, cost sharing structure, political disagreement, etc., which are to be avoided with appropriate policies, political will, cooperation, coordination, dedication and determination.

Corporate Governance: Good corporate governance will succeed in attracting a better deal of public interest because of its apparent importance for the economic health of corporates and society in general. The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters. The corporate governance practices of the parties involving in the PPP have to match with the benchmarking corporate governance practices with the best in the rest of the world.

In India, infrastructure gaps exist in all most all the sectors, posing a serious threat to sustenance of the growth momentum. To augment the infrastructure facilities with private participation, the initiated policy measures have not met with significant success. Except for the telecom sector, which has witnessed a revolution and has been able to attract massive private investments, other sectors have faced with lacklustre response. Even in the telecom sector, though the overall tele-density has improved during the recent period, rural tele-density remains low, which needs to be dealt with appropriate policy measures.

The status of the PPP in the infrastructure development in India, both in the Central Government schemes as well as State sponsored schemes, is not encouraging. Stable macroeconomic framework, sound regulatory structure, investor friendly policies, sustainable project revenues, transparency and consistency of policies, effective regulation and liberalisation of labour laws, and good corporate governance are the basic requirements, which define the success of the PPP model. The PPP model in the road sector has experienced with enthusiastic response with the introduction of massive NHDP with structured MCA. However, many of the road projects are faced with cost and time overruns on account of prolonging disputes in land acquisition, hurdles in the material movements, law and order problems, etc.

Power shortage is a serious concern and the quality of the power supply is generally poor, especially in rural and semi-urban areas, which has affected the micro and small enterprises severely. Though the Planning Commission has put in place an ambitious plan to provide power for all by 2011-12 by adding more than 78,000 MW of generation capacity and also facilitate capacity additions in transmission and distribution networks during the 11th Plan period, slow progress in capacity addition needs to be speaded up with a policy thrust. Further, private sector participation in power generation is not forthcoming due to specific issues such as delays in finalising power purchase agreements, high aggregated technical and commercial losses, age-old transmission networks, shortage of fuel supply and policy and procedural barriers while exploring renewable energy sources.

The progress in the development of many of the port projects under private participation is at a sluggish pace, which requires conducive policy environment. Efficiency in cargo handling needs to be enhanced through modernisation of port facilities to facilitate the trade. The PPP model projects in the airport sector are in slow progress and also restricted to major airports. Modernisation of airports like Chennai and Kolkata is yet to take-off due to procedural hassles and land acquisition problems. This brings to the fore a need for constructive and stable policy environment towards land acquisition for public utilities. The urban infrastructure bottlenecks need to be addressed through a development strategy, which encompasses efficient planning and organisation of the project, balancing the public-private interest, reinvigoration of electricity, water supply and transportation system and integration of finance and technology.

International experience suggests that the success of PPP projects requires a single objective of better services for the public at a reasonable cost. This is achievable through realistic and reasonable risk transfer while addressing the public concerns. The Indian PPP model should adhere to such objectives and best practices to march forward on the success path. In this pursuit, easy availability of long-term private capital is an essential requirement. Fostering the greenfield investments in the public infrastructure with appropriate user charges, transparent revenue and risk sharing agreements would transform the international capital inflows into productive ventures. Above all, selection of right PPP model for a right project at a right time through realistic planning would go a long way in providing meaningful and hassle free infrastructure development, which ultimately would increase the infrastructure standards and thereby sustain the overall macroeconomic developments of the country.

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