Report of the Committee on Revisiting & Revitalising the PPP Model of Infrastructure Development Chaired by Dr. V.Kelkar Released
Report of the Committee on Revisiting &
Revitalising the PPP Model of Infrastructure Development Chaired by Dr.
V.Kelkar Released
The Report of the Committee on Revisiting &
Revitalising the PPP model of Infrastructure Development chaired by Dr. V.
Kelkar has been issued and also uploaded on the Ministry of Finance’s website (finmin.nic.in).
In the Union Budget 2015-16, the Finance Minister
Shri Arun Jaitley had announced that the PPP mode of infrastructure development
has to be revisited and revitalised. In pursuance of this
announcement, a Committee on Revisiting & Revitalising the PPP model of
Infrastructure Development was set-up which was chaired by Dr. Vijay Kelkar.
The Report of the Committee submitted to the Government has been uploaded on
the Ministry of Finance’s website.
The Executive Summary of the Report is
as follows:
Highlights of the Report
1.Public Private Partnerships (PPPs) in
infrastructure refer to the provision of a public asset and service by a
private partner who has been conceded the right (the “Concession”) for the
purpose, for a specified period of time, on the basis of market determined revenue
streams, that allow for commercial return on investment.
2. PPPs in infrastructure represent a
valuable instrument to speed up infrastructure development in India. This
speeding up is urgently required for India to grow rapidly and generate a demographic
dividend for itself and also to tap into the large pool of pension and
institutional funds from aging populations in the developed countries.
3. India offers today the world’s
largest market for PPPs. It has accumulated a wealth of experience in getting
to this premiere position. As the PPP market in infrastructure matures in
India, new challenges and opportunities have emerged and will continue to
emerge. Periodic review of PPPs, as in the present Committee's remit, are a
must to help address issues before they become endemic and to mainstream
innovations and foster new ones that improve the successful delivery of PPP
projects.
4. India’s success in deploying
PPPs as an important instrument for creating infrastructure in India will
depend on a change in attitude and in the mind-set of all authorities dealing
with PPPs, including public agencies partnering with the private sector,
government departments supervising PPPs, and auditing and legislative
institutions providing oversight of PPP’s.
5. The Government may take early action
to amend the Prevention of Corruption Act, 1988 which does not distinguish
between genuine errors in decision-making and acts Report of the Committee on
Revisiting and Revitalising the PPP Model of Infrastructure. Measures may be
taken immediately to make only malafide action by public servants punishable,
and not errors, and to guard against witch hunt against government officers and
bureaucrats for decisions taken with bonafide intention. The government may
speed up amendment of the Prevention of Corruption Act, Vigilance and Conduct
rules applicable to government officers.
6. Experience has also underlined the
need to further strengthen the three key pillars of PPP frameworks namely
Governance, Institutions and Capacity, to build on the established foundation
for the next wave of implementation.
7. In addition to changing
mind-sets, there is an urgent need to rebuild India’s PPP capacities.
Structured capacity building programmes for different stakeholders including
implementing agencies and customized programmes for banks and financial
institutions and private sector need to be evolved. The need for a national level
institution to support institutional capacity building activities must be
explored. Every stakeholder without exception has strongly emphasised the
urgent need for a dedicated institute for PPPs as was announced in the previous
Budget. The Committee strongly endorses the “3PI” which can, in addition to
functioning as a centre of excellence in PPPs, enable research, review, roll
out activities to build capacity, and support more nuanced and sophisticated
models of contracting and dispute redressal mechanisms (Chapter 6, paragraph
6.1.4). A dynamic 3PI can support a dynamic process of infrastructure design,
build, and operate in India and thereby help deliver on the promise of reliable
infrastructure services for all citizens.
8. The Committee cannot overstate the
criticality of setting up of independent regulators in sectors that are going
in for PPPs. The Committee recommends setting up these independent regulators
with a unified mandate that encompasses activities in different infrastructure
sub sectors to ensure harmonized performance by the regulators (Chapter 6,
paragraph 6.1.8).
9. The Committee welcomes the
current review and amendment of the Arbitration Act, and strongly endorses the
need for time limits on hearings.
10. The dominant, primary concern of
the Committee was the optimal allocation of risks across PPP stakeholders.
Inefficient and inequitable allocation of risk in PPPs can be a major factor in
PPP failures, ultimately hurting the citizens of India. The Committee notes
that the adoption of the Model Concession Agreement (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.
.
11. For the next generation of PPP
Contracts, the Committee suggests the following broad guidelines while
allocating and managing risks: 1) an entity should bear the risk that is in its
normal course of its business; 2) an assessment needs to be carried out
regarding the relative ease and efficiency of managing the risk by the entity
concerned; 3) the cost effectiveness of managing the risk needs to be
evaluated; 4) any overriding considerations/stipulations of a particular entity
need to be factored in prior to implementing the risk management structure.
5) DEA, or preferably the 3PI, should
deploy sophisticated modeling techniques that exist to assess risk
probabilities and the need to provision for them; and (6) there should be
ex-ante provisioning for a renegotiation framework in the bid document itself
(Chapter 4, paragraph 4.1.6).
12. Typically infrastructure PPP
projects span over 20-30 years and a developer often loses bargaining power
related to tariffs and other matters in case there are abrupt changes in the
economic or policy environment which are beyond his control. The Committee
feels strongly that the private sector must be protected against what have been
called “Obsolescing Bargain”-the loss of bargaining power over time by private
player in PPPs-through the four mechanisms discussed in Chapter 4 including the
setting up of Independent Sector Regulators.
13. PPP projects can become distressed
when risks emerge that may not have been contemplated at the time of signing.
This could give rise to a call for amending the terms of the Concession
Agreement to reflect new project realities better (Chapter 4, paragraph 4.3.2).
The Committee has suggested benchmarks in Chapter 4 to be applied to each proposed
renegotiation as well as set out a set of conditions that should not be
accepted as valid reasons for a request for amendment of a concession agreement
(Chapter 4, paragraphs 4.3.6 and 4.3.7).
14. The final decision on a
renegotiated concession agreement must be based on 1) full disclosure of the
renegotiated estimated long-term costs, risks and potential benefits; 2)
comparison with the financial position for government at the time of signing
the concession agreement; and 3) comparison with the existing financial
position for government just prior to renegotiation. This will permit the
authority regulating the Report of the Committee on Revisiting and Revitalising
the PPP Model of Infrastructure xi concession to take a decision based on a
full comparison of the likely outcomes over the future of the concession
(Chapter 4, paragraphs 4.3.8 and 4.3.9).
15. The Committee notes that there a
number of stalled PPP projects need to be kick started. There is an urgent need
to evolve a suitable mechanism that evaluates and addresses “actionable
stress”-using stress and adversity to deal with the underlying systemic
problems (Chapter 5, paragraph 5.3.3). Sector specific institutional frameworks
should be developed to address these stalled infrastructure projects. The
proposed Tribunal and IPAT approach, in the Committee's view are the possible
solution (Chapter 5, paragraphs 5.3.15 and 5.3.16). The Committee is of the
view that only a statutorily established credible empowered multi-disciplinary
expert institutional mechanism may be able to deal with the complex issues
involved (Chapter 5, paragraph 5.3.4).
16. The Committee recognizes the need
for a quick, equitable, efficient and enforceable dispute resolution mechanism
for PPP projects. It is suggested that PPP contracts have clearly articulated
dispute resolution structures that demonstrate commitment of all stakeholders
and provide flexibility to restructure within the commercial and financial
boundaries of the project, (Chapter 8, paragraph 8.2.1).
17. In the wake of new project
proposals emerging in various infrastructure sectors, the Committee recommends
that appropriate legal frameworks be developed against which these can be
evaluated (Chapter 6, paragraph 6.2.1).
18. The authorities may be advised
against adopting PPP structures for very small projects, since the benefits of
delivering small PPP projects may not be commensurate with the resulting costs
and the complexity of managing such partnerships over a long period. The
transaction costs of well-structured PPP projects are significant, including
essential but expensive expert advisory services (Chapter 6, paragraph 6.2.6).
19. Unsolicited Proposals (“Swiss
Challenge”) may be actively discouraged as they bring information asymmetries
into the procurement process and result in lack of transparency and fair and
equal treatment of potential bidders in the procurement process (Chapter 6,
paragraph 6.2.7).
20. Inherent in the concept of PPP is
the role of a “Private Sector Partner” that will implement the project, based
on the need to leverage private sector financing and also the managerial and
operational efficiencies of the private sector party. It is in this context
that the Committee is of the view that since state owned entities SoEs/PSUs are
essentially Government entities and work within the government framework, they
should not be allowed to bid for PPP projects.
21. The authorities should not
treat PPPs as an off-balance sheet funding method for the government’s
responsibility of providing reliable infrastructure services to its citizens.
PPPs should not be used as the first delivery mechanism without checking its
suitability for a particular project. States and other agencies should also not
treat Central PPP VGF as a source of additional grants that can be accessed by
adopting a PPP delivery mode for projects that are not suitable for such a
long-term financing structure (Chapter 6, paragraph 6.2.8).
22. There have been concerns
raised by all stakeholders (Government and Private Sector alike) on the demand
for developer books of account being subjected to government audit and for
access under RTI and Article 12 of Constitution. Conventional audit by
authority of private partner’s books as per standard procurement process risks
delivery of poor quality of service/ public asset provision if there is no
certainty of processes in the medium term. To address this, the Committee
recommends that the government notify comprehensive guidelines on the
applicability and scope of such activities. The laid down process would enable
review only of government internal systems, and not that of SPVs but SPVs would
need to follow best practice in corporate governance systems including those
related to related party transactions, financial disclosures etc as in the
Companies Act, 2013.
23. Monetisation of viable projects
that have stable revenue flows after EPC delivery may be considered. This
should be seen as a monetisation opportunity that can attract risk averse
long-term funding like pension and institutional investors. By providing
O&M PPP opportunities, the authority will be able to free up budgetary
funds for fresh EPC and start a virtuous cycle of fresh investment fed by
additional revenues (Chapter 7, paragraph 7.1.8).
24. Equity in completed, successful
infrastructure projects may be divested by offering to long-term investors,
including overseas institutional investors as domestic and foreign
institutional investors with long-term liabilities are best suited for
providing such long-term financing, but have a limited appetite for risk. Cash
generated out of divestment of equity would be available for the creation of
new infrastructure projects in the country
25. Improving a PPP project’s risk
profile so that it is more suitable for overseas and domestic long-term
investors can be accomplished through partial recourse to credible third-party
institutions. This could be implemented through a partial credit guarantee or
cash flow support mechanisms (Chapter 6, paragraph 6.2.12).
26. It is necessary to explore
options for sourcing long term capital at low cost. Towards this, the Committee
recommends, encouraging the banks and financial institution to issue Deep
Discount Bonds or Zero Coupon Bonds (ZCB) (Chapter 7, paragraph 7.1.15). These
will not only lower debt servicing costs in an initial phase of project but
also enable the authorities to charge lower user charges in initial years.
27. Some countries have a legal
framework for PPPs in the form of PPP Act/Law/Policy. MoF may develop and publish
a national PPP Policy document. Ideally, such a policy Report of the Committee
on Revisiting and Revitalising the PPP Model of Infrastructure xiii document
should be endorsed by the Parliament as a policy resolution to impart an
authoritative framework to implementing executive agencies as well as to
legislative and regulatory agencies charged with oversight responsibilities
(Chapter 6, paragraph 6.2.2). The Committee recommends an assessment of whether
formulating and enacting a PPP Law will facilitate successful expansion of PPP
into new sectors, including health, other social sectors, and urban transport
(Chapter 10, paragraph 10.1.1).
28. In the final analysis, 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. The PPP reflects a paradigm shift involving
the private sector. It means moving away from “transaction to relationship,”
accommodating “give and take” between private and public sector partners, and
finally accepting uncertainties and appropriate adjustments inherent in
implementing long-time contracts. The Committee urges all parties concerned to
foster trust between the private sector and public sector partners in
implementing PPP. As mentioned earlier in the report, PPP is an additional policy
instrument to enable India to save time. Since the “demographic dead-lines” are
staring at us, there is need to accelerate growth. By all accounts, there are
only two or three decades left for India to complete the transition from a
low-income country to a high-income and developed economy by overcoming the
“middle income trap” (Chapter 10, paragraph 10.2.1). a. Contracts need to focus
more on service delivery instead of fiscal benefits (Paragraph 2.5.5, viii). b.
Better identification and allocation of risks between stakeholders (Paragraph
2.5.5, viii). c. Prudent utilization of viability gap funds where user charges
cannot guarantee a robust revenue stream (Paragraph 2.5.5, viii). d. Improved
fiscal reporting practices and careful monitoring of performance (Paragraph
2.5.5, viii). a. Given the urgency of India’s demographic transition, and the
experience India has already gathered in managing PPPs, the government must
move the PPP model to the next level of maturity and sophistication (Paragraph
3.1.7).
B. KEY RECOMMENDATIONS
1. Revisiting
PPPs: Achievements and Challenges
a. Contracts need to focus more on
service delivery instead of fiscal benefits
b. Better identification and allocation
of risks between stakeholders
c. Prudent utilization of viability gap
funds where user charges cannot guarantee a robust revenue stream .
d. Improved fiscal reporting practices
and careful monitoring of performance a. Given the urgency of India’s
demographic transition, and the experience India has already gathered in
managing PPPs, the government must move the PPP model to the next level of
maturity and sophistication.
2. Why it is Urgent for India to get
Infrastructure PPPs.
a.Given the urgency of India’s
demographic transition, and the experience India has already gathered in
managing PPPs, the government must move the PPP model to the next level of
maturity and sophistication (Paragraph 3.1.7).
b. The Committee feels strongly
that maturing the PPP model in India is an urgent priority also to take
advantage of this historical conjunction of India’s infrastructure needs and
the availability of long-term funding
c. PPPs have the potential to deliver
infrastructure projects both faster and better. Building on India’s 15 years of
experience with PPPs, there is need to iron out the difficulties in the
performance of PPP at every stage of the contract (Paragraph 3.5.2).
3. Re-balancing of risk Sharing :
a. An assessment needs to be carried
out regarding the relative ease and efficiency of managing the risks by the
entity concerned (Paragraph 4.1.6).
b. Cost effectiveness of managing the
risk needs to be evaluated (Paragraph 4.1.6).
c. Sophisticated modelling techniques
are prevalent to assess probabilities of risks and the need to provision for
them. DEA may hone its skills in this and provide guidance to project
authorities (Paragraph 4.1.6).
d. The final decision for a
renegotiated Concession Agreement must be based on (Paragraph 4.3.8):
- Full disclosure of long-term costs,
risks and potential benefits;
- Comparison with the financial
position for government at the time of signing the Concession Agreement;
- Comparison with the financial
position for government at the time prior to renegotiation.
4. Resolving Legacy Issues
a. Only a statutorily established
credible empowered multi-disciplinary expert institutional mechanism can deal
with the complex issues involved (Paragraph 5.3.4):
- An Infrastructure PPP Project Review
Committee (“IPRC”) may be constituted to evaluate and send its recommendations
in a time-bound manner upon a reference being made of “Actionable Stress” in
any Infrastructure Project developed in PPP mode beyond a notified threshold
value.
- An Infrastructure PPP Adjudication
Tribunal (“IPAT”) chaired by a Judicial Member (former Judge SC/Chief Justice
HC) with a Technical and/or a Financial member, where benches will be
constituted by the Chairperson as per needs of the matter in question
b. In case procurement of land or
clearance is pending from government authorities for more than prescribed
number of days, the outstanding work should be descoped (under the provisions
of Change in Law of Concession Agreement), and allow rest of activities for
completed work. Balance work could be completed on a cash-contract basis,
provided land and required clearances are in place (Box 6).
c. Cancel projects that have not
achieved a prescribed percentage of progress on the ground. Rebid them once
issues have been resolved or complete them through public funds and if viable,
bid out for Operations and Maintenance (Box 6).
5. Generic, Including Legacy Projects
a. Sector specific institutional
frameworks may be developed to address issues for PPP infrastructure projects
(Chapter 5, paragraph 5.3.15). An entity should bear the risk that is in its
normal course of its business (for instance, acquisition of land is a normal
course of business for public entities).Overriding considerations/ stipulations
of each entity to be factored in prior to implementation of risk management
structure (Chapter 4, paragraph 4.1.6).
b. Learnings from the Highways sector
to be utilized for other sectors to customize and adopt such frameworks
(Chapter 5, paragraph 5.3.15).
c. Umbrella guidelines may be developed
for stressed projects that provide an overall framework for development and
functioning of the sector specific frameworks (Chapter 5, paragraph 5.3.16).
d. DEA to finalize a national PPP
Policy document (Chapter 6, paragraph 6.2.2).
e. Unsolicited Proposals (“Swiss
Challenge”) to be discouraged to avoid information asymmetries and lack of
transparency (Chapter 6, paragraph 6.2.7).
f. PPP structures not to be adopted for
very small projects in view of the transaction costs involved. DEA to issue a
threshold guidance (Chapter 6, paragraph 6.2.6).
5. Chapter 6- Strengthening Policy,
Governance and Institutional Capacity
a. Amend the Prevention of Corruption
Act, 1988 to distinguish between genuine errors in decision-making and acts of
corruption (Paragraph 6.1.6).
b. Build up capacity in all
stakeholders, including regulators, authority, consultants, financing agencies,
developers (Paragraph 6.1.2).
c. Set up an institution for
invigorating private investments in infrastructure, providing guidance for a
national PPP policy and developments in PPP, developing a mechanism to capture
and collate data for decision making, undertaking capacity building activities.
The 3P-I institute for PPPs announced in 2014 may be set-up without delay
(Paragraph 6.1.4).
d. Pre-qualified PPP consultancies
could be empanelled by DEA as earlier which could be tapped at short notice
(Paragraph 6.4.3).
e. Revive the PPP Cells supported by
the DEA over the last decade in Infrastructure Ministries and State Governments
(Paragraph 6.1.5).
f. An institutionalized mechanism like
the National Facilitation Committee (NFC) to ensure time bound resolution of
issues including getting timely clearances/approvals during implementation of
projects for smooth running of such projects (Paragraph 6.2.5).
g. Ministry of Finance to coordinate
with other implementing ministries may develop a policy to promote secondary
market for operational assets (Paragraph 6.1.9).
h. Disallow statutory audit to books of
SPVs governed by the provisions of the Companies Act. Ensure adoption of
principles of good governance by the SPVs (Paragraph 6.2.3). 5) Generic,
Including Legacy Projects 6. Chapter 6- Strengthening Policy, Governance and
Institutional Capacity Report of the Committee on Revisiting and Revitalising
the PPP Model of Infrastructure xvi
i. Standard public authority
requirements of audit till point of award (public books) and post-construction
discharge by Authority of monitoring and oversight of project operations as per
the concession agreement (public books) to be in the purview of
statutory/government audit agencies (Paragraph 6.2.3).
j. Essential to set up independent
Regulators in sectors going in for PPP (Paragraph 6.1.8).
k. Discourage government participation
in SPVs that implement PPP projects unless strategically essential.
7. Scaling- Up Finance
a. Restrict the number of banks in a
consortium (Paragraph 7.2.3).
b. Banks to build up their own risk
assessment/appraisal capabilities (Paragraph 7.2.3).
c. Check list of items listed as a
guidance for lenders.
d. RBI may provide guidelines to
lenders on encashment of bank guarantees in line with ICC norms (Paragraph 7.1.3).
e. Monetisation of viable projects that
have stable revenue flows after EPC delivery should be considered (Paragraph
7.1.8).
f. Equity in completed, successful
infrastructure projects may be divested by offering to long-term investors.
g. Ministry of Finance to allow banks
and financial institutions to issue Zero Coupon Bonds which will also help to
achieve soft landing for user charges in infrastructure sector (Paragraph
7.1.5).
8. Revitalising Contractual
Processes
a) Need for review of the MCAs (Paragraph
8.1.1).
b) Sample suggestions for generic
changes, including for resolution of disputes, and sector-specific changes
(Paragraph 8.1.4 and 8.2.1)
9. Reinvigorating the Sectors:
a. Independent sector regulators
essential (Paragraph 9.2.5).
b. Build upon maturing landscape in
Roads and Ports PPP and move into the next phase: Roads: avoiding delays,
institutionalized dispute resolution, improved project development activity,
monetization of operational assets, efficiency and transparency by electronic tolling,
etc (Paragraph 9.3.6).
c. Ports: review of role and need of
Tariff Authority for Major Ports (TAMP), review of MCA, quicker clearances,
rationalized leases and stamp duties (Paragraphs 9.3.1-9.3.5).
d. Airport: PPPs to be encouraged where
viable in Greenfield and brownfield projects, have policy that addresses
potential demand for airport services in the country, notify a unified
regulatory structure, clarity in delineation of Till policy,
e. Encourage use of PPPs in sectors
like Railways, Urban, etc. Railways to have an independent tariff regulator,
tap potentially useful PPP opportunities including brownfield assets (Paragraph
9.5.1-9.5.4).
10 .Fast Forward PPPs
a. Set up an institute of excellence in
PPP to inter alia guide the sector, provide policy input, timely advice and
undertake sustainable capacity building (Paragraph 10.1.3).
b. Ensure integrated development of
infrastructure with roadmaps for delivery of projects (Paragraph 10.1.5).
c. India’s demographic deadlines are
staring at us. There are only two or three decades left to complete the
transition from a country that has just attained middle-income status to that
of a high-income and developed economy. Besides the basic problems for
provision of adequate infrastructure, the middle-income trap is also to be
averted. Without adequate infrastructure, this will simply not be possible.
India is currently in a global win-win situation with a large young population
that will need good jobs and a huge pool of global savings that can be tapped
for building out our infrastructure. PPPs are an important policy instrument
that will enable India to compress time in this journey towards economic growth
and development. A successful and growing stream of PPPs in infrastructure will
go a long way in accelerating the country’s development process (Paragraph
10.2.1)
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