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November 08, 2019

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PPP Regulator - Need Of The Hour


- Anuja Tiwari, Partner [ DSK Legal ]
- Mallika Anand, Senior Associate [ DSK Legal ]
- Amoolya Khurana, Associate [ DSK Legal ]

Anuja-Tiwari-Mallika-Anand-Amoolya-Khurana

A PPPRA will be required to be established under a statute passed by the Parliament which could also provide a comprehensive central PPP legislation and set out the functions, powers, and the number of members of the PPPRA and the broad framework for the creation of the PPPRA...

Development through public-private partnerships (PPP), in an ever-growing economy and correspondingly infrastructure deficit country like India, is an effective tool employed by the Government for undertaking capital intensive public projects such as development of urban infrastructure, healthcare, roads, rail, ports, airports etc.

PPP projects have been defined by the Department of Economic Affairs, Ministry of Finance, (DoE), “as an arrangement between a Government/statutory entity/Government-owned entity on one side and a private sector entity on the other, for the provision of public assets and/or public services, through investments being made and/or management being undertaken by the private sector entity, for a specified period of time, where there is well defined allocation of risk between the private sector and the public entity and the private entity who is chosen on the basis of open competitive bidding, receives performance linked payments that conform (or are benchmarked) to specified and pre-determined performance standards, measurable by the public entity or its representative.”

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Overview

Investment through the PPP route saw unprecedented growth in 2004-20111. During this period, the Government of India streamlined the appraisal and Government approval process, introduced the viability gap funding scheme and set up national level funds to stabilize the financial flexibility of private investors. However, in recent years, the PPP mode has witnessed rapid decline in being able to keep the private players’ interests alive. The decline is due to various reasons which include, aggressive bidding due to inadequate risk assessment by private players which has led to increased failure of projects during operation stage, financing issues specially lack of equity leading to stalled projects and an overall slowdown in roll out of PPP projects by the Government. Additionally, an important factor which continues to discourage the long-term investments in capital intensive projects is the uncertain regulatory regimes in India.

Private investors are uncomfortable in venturing into sectors with high regulatory risks such as multiple levels of scrutiny by various Government regulators backed with a web of overlapping legislation, with no clear demarcation of responsibility and compliances which are to be followed. This discourages the investor from undertaking investment in unprecedented sectors. Further, the infrastructure sectors are politically driven by a populist approach which increases the probability of the Governments being inclined towards changing the rules of operation in the industry after investments are made, imposing extra costs on project companies, or imposing additional obligations that have substantial resource costs, creating uncertainty on the return of revenue and leading to high risk premium, high prices of the services, stalled projects, low bid turnouts etc.

Lack of institutional PPP framework

India is yet to have a national level PPP policy, however, states such as Andhra Pradesh, Gujarat, Bihar, and Punjab have developed legal frameworks to enable PPPs in certain sectors and other states like Karnataka, Odisha, Maharashtra and Assam have developed policy frameworks for private sector participation. At the Centre, the DoE has set up the PPP cell as well as the PPP approval committee for central sector PPP projects. The NITI Aayog (erstwhile Planning Commission) has also prepared and issued model concession agreements for various sectors to standardize the terms of contract. The DoE has developed a PPP tool kit, PPP guide for practitioners and dossiers in certain sectors like healthcare. Thus, while there is piecemeal research and documentation available to assist the PPP sector in India, there is no umbrella policy or legislation to govern and stabilise the PPP model of development.

Kelkar Report

The Kelkar Committee submitted its report on “Revisiting and Revitalising Public Private Partnership Model” in November 2015 to the Ministry of Finance (Kelkar Report). The Kelkar Report identified various roadblocks which are being faced by PPP projects in India. One of the prominent impediments identified was the lack of a national policy and a central regulator for the PPP projects. The Kelkar Report recommended the need to: “(a) set up an institution for invigorating private investment in infrastructure; (ii) prepare and provide guidance for a national PPP policy; (iii) develop a mechanism to capture and collate data for decision-making; and (iv) undertake capacity building activities, including preparation of knowledge modules for different stakeholders.”

It is interesting to note that not just countries with mature PPP ecosystems like United Kingdom, Australia, Germany etc., have implemented and operationalized agencies that support PPP project implementation, even developing nations like Indonesia and Pakistan are also in the process of setting up such an institution to monitor and enhance participation in PPP projects.

While one could argue that the PPP cell of the DoE has roles similar to the roles of a PPP regulatory authority, the inadequacies of the PPP cell and its inability to cater to the growing demand and responsibility is in fact observed in the Kelkar Report.

Functions of PPPRA

The functions of the PPP regulatory authority (PPPRA) may be divided across the following major themes:

  • Project identification functions by way of a preliminary assessment study.
  • Project review functions by conducting independent financial viability studies not only assessing the revenue models, bid parameters etc. but also the capabilities of the concessioning authority of meeting its obligations.
  • Contract management functions for monitoring the development of the project as an independent body.
  • Coordination between various ministries for smooth implementation.
  • Resolution functions providing a roadmap for projects that have reverted to the state i.e. whether they should be bid out again for only operation and management services or if they should be retained and operated by the concessioning authority. Additionally, the PPPRA can also provide guidance to the concessioning authority for jumpstarting projects that may be on the verge of becoming non-performing assets or may have stalled.
  • PPP resource functions creating guidelines, dossiers and publications to assist the development of the sector.
  • Dispute resolution functions adjudicating on disputes between the concessionaire and the authority in a time bound manner if the alternate dispute resolution mechanisms fail.
  • Capacity building functions liaising with concession authorities to familiarize them with the PPP framework, concession agreements and typical issues arising under such agreements.

The actual functions of individual regulatory authorities in a country would depend on the overall structure of the regulatory regime, empowerment of authorities’ administrative arrangements and autonomy, and technical capacity.

A PPPRA will be required to be established under a statute passed by the Parliament which could also provide a comprehensive central PPP legislation and set out the functions, powers, and the number of members of the PPPRA and the broad framework for the creation of the PPPRA.

Conclusion

The benefits of the PPP model are visible in various infrastructure projects; however, the decline in PPP activities is indicative of the need to implement a robust change which strengthens the relationship between Government authorities and private players, while benefiting the public at large and attracting long-term investments in the country in a steady manner. A centre-wide PPP policy and formulation of the PPPRA could be a solution which may be adopted to boost the uncertain PPP in India.

Anuja-Tiwari-Profile

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.

 

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