CHAPTER 2

PUBLIC PRIVATE PARTNERSHIP FINANCING AND CONSTRAINTS

FACED BY PPP

India‘s global competitiveness remains constrained and is adversely affected by

lack of infrastructure, which is critical for improved productivity across all sectors

of the economy. However, achieving the investment targeted for the Eleventh Plan

presents many distinct challenges. These relate not only to scarcity of financial

resources but also to lack of capacity within the government to implement these

ambitious programmes.

In India, government budgetary resources are increasingly constrained in financing

infrastructure projects. In this scenario, Public Private Partnerships (PPP) has

emerged as a viable option for financing infrastructure needs. The trends in PPP

financing highlight several issues with implications for financing the large-scale

PPP program envisaged by Indian government. PPPs have relied heavily on

commercial banks for their debt financing, and it is unclear how sustainable this

dependence will be. Long-term financing exposes the banks to the risk of asset-

liability mismatch. An active bond market can increase the flow of long-term funds

and reduce reliance on banks.

Public Private Partnerships in India face barriers posed by the absence of a

sufficiently sophisticated financial sector, fiscal barriers, red tape and procedural

inefficiencies that have contributed to project delays and discouraged private

investors, and constraints arising from the absence of adequate infrastructure

regulation that aggravates risks and uncertainties for investors. Uttar Pradesh has

lined up many projects for private investment under the Public Private Partnership

mode. These projects have either been launched or awaiting the nod and are spread

over all major sectors like power, transport, education, tourism, infrastructure,

urban development and health.

This chapter discusses infrastructure investment needs of India and how these

needs are fulfilled by PPP financing. It discusses the recent trends and financing

options in PPP financing in India. It further discusses the various environmental

constraints faced by PPP in India and Uttar Pradesh. Finally, it sheds light on

current status of PPP projects in Uttar Pradesh in various sectors.

2.1 PPP Financing

Historically, funding for capital investment in infrastructure has largely depended

on government sources, namely; budgetary allocation, debt against government

guarantees, mandatory financing by institutions or local government funding.

However, Indian government is unable to mobilize the required financial resources

to cope with the rising demand for roads, electricity supply, water supply, etc.

While the infrastructure gap is rising, government budgetary resources are

increasingly constrained in financing this deficit. Rising costs of maintaining and

operating existing assets, inability to increase revenue and cut costs and waste, and

rising constraints on budgets and borrowing, do not allow governments to make the

required investments in upgrading or rehabilitating the existing infrastructure or

creating new infrastructure. In this scenario, Public Private Partnerships (PPP) has

emerged as a viable option for financing infrastructure needs.

2.1.1 Recent trends in PPP financing:

In recent years the role of senior debt has grown while the share of equity has

declined, leading to rising debt-equity ratios. One explanation for this trend is that

commercial banks have become more comfortable with PPPs, particularly in the

road sector, and are therefore willing to have senior debt make up a larger share of

project financing.

There is also evidence suggesting that projects with viability gap grants have

higher gearing than those without them. While the evidence is inconclusive, there

are some indications that lenders and developers view grants as substituting for the

equity infusion needed during construction. The few projects involving a negative

grant—a payment by the PPP to the government—also have a higher ratio of

senior debt to equity, suggesting that these payments are being financed by debt

borrowed by the PPP project.

In India the typical concession terms encourage the use of debt over equity. For

example, in the highway sector, the contracting agency must compensate the

contractor if the contract ends early, even if the termination is due to a breach of

the contractor‘s own obligations or an event of force majeure. In these cases the

compensation is partial, with lenders typically being repaid in full or in large part

while shareholders get nothing. Linking termination payments to debt, while

common around the world, can encourage higher gearing, which in turn may

increase projects‘ financial vulnerability.

Some countries put limits on the ratio of debt to equity. But restricting an

investor‘s ability to choose its capital structure can increase the cost of capital,

prevent companies from reaping tax advantages associated with particular types of

financing, and impose a monitoring burden on the government. Alternatively, India

could consider a different basis for termination payments, reducing the incentive to

use debt embedded in the termination clauses of its model concessions.

Debt financing has become more competitive

The debt financing of PPP projects is on the strength of concessionary agreements.

Since the land and other fixed assets cannot be secured in BOT or BOOT type

projects, the security of revenues and clauses like ‗step-in clause‘ for lenders if the

borrower defaults in concession agreements, form the basis for lending. In the

power sector, power purchase agreements, which are irrevocable, between the

private producer and public sector have formed the basis for lending.

For national highways, annuity payment agreements with national agency, NHAI,

has been the basis for lending. Within the urban sector, however, problems are

evident as lenders have been wary about lending to urban PPP projects. The

problems reside around the low financial strength of urban local bodies and

political resistance to reforms, resulting in ambiguity as to whether the security of

revenue streams for urban projects is through annuity payments or the collection of

user charges. The nature of private players in PPP projects also plays an important

role in their ability to secure funding. Sectors like road, power, ports and airports

comprise large scale projects which have been able to attract large national and

international companies (in terms of their financial net worth). These companies

have the ability to raise commercial debt on the basis of their balance sheet. As a

result, commercial debt for PPP projects is not purely project finance but on the

basis of strengths of balance sheet of borrowers and financial viability of the

project.

Bank lending in India for PPP projects is primarily short term (3–7 years), on a

variable rate basis, with the typical debt to equity ratio a 70:30 arrangement.

Significantly, long term finance for PPP projects, and in general for infrastructure

projects, for longer tenure is not available as institutions like insurance companies

and pension funds do not lend to project companies setting up Greenfield

infrastructure projects. The debt raised through bond markets is another possibility

for PPP projects, but the bond market in general (even for corporate bonds) is in

nascent stages of development in India. Some urban municipal bodies with high

financial strength have attempted to raise debt by issuing general revenue bonds

(tenor 7–15 years) but these are very few. For small and medium municipalities,

pooled fund mechanisms have also been attempted, however their relative success

has been limited as a number of issues from the perspective of investors have

hampered the development of municipal bonds/pooled funds.

Despite some volatility, average spreads on debt to PPP projects have declined

significantly in recent years (Figure 2.1). This does not reflect trends in Indian

corporate bond spreads, which increased in 2006 and 2007. While many factors

may be involved, the decline in spreads is probably due to the financial markets‘

growing acceptance and understanding of PPPs as more projects have come on line

and provided an operational track record, particularly in the road sector. On the

negative side, the tenor of debt has increased little, averaging around 14–15 years

in the past few years. In addition, loans in India have shown a trend toward shorter

reset periods. Although the loans are long term, rates are reset at predefined

intervals. PPP projects generally do not have revenues that are linked to interest

rates. There are concerns that higher rates could affect some projects, particularly

those with higher gearing.

Figure 2.1: Debt-equity ratio of PPP projects in India

Source: PricewaterhouseCoopers, 2007

Figure 2.2 below highlights the distribution and scale of PPP finance in India

between 2005 and 2010. In 2005 PPP finance was equitable between equity and

multilateral and government support (US$0.1bn) with debt finance marginally

higher (US$0.3bn) giving a total of US$0.4bn of PPP finance within infrastructure.

Of this US$0.4bn, debt finance comprised 61% of the total PPP investment based

on two deals reaching financial closure. In 2006 PPP project based finance

witnessed an increase in debt finance by 100% (US$0.3bn to US$0.6bn) increasing

the overall level of debt based finance to 80% of PPP market share. This was

primarily due to the increase in the number of deals and the overall reduction in the

average deal size in the market. Between 2006 and 2007 the PPP market exhibited

a substantial increase of debt structured finance of circa 150% from US$0.6bn to

US$1.5bn comprising 77% of total PPP finance. Significantly in this period the

number of deals decreased illustrating an average deal size of US$0.5bn.A slight

shift in PPP finance occurred between 2007 and 2008 as debt finance marginally

grew by US$ 0.2bn (13.33%) however equity finance increased from US$ 0.3bn in

2007 to US$ 1.0bn in 2008 reducing debt as a percentage of total PPP finance to

63%.

Figure 2.2: India PPP Project Finance

Source: Infrastructure Journal Online (Accessed 15th December 2010)

In 2009 debt structured finance continued to increase (US$ 2.3bn) in line with the

amplification in the number of PPP deals in the market, which reached a peak of

eight. Total PPP finance in 2009 reached US$3.2bn. There was a marginal drop in

equity finance from the previous year however this remained at US$0.9bn, leaving

debt finance as 73% of total finance. PPP finance for 2010 displays a severe

contraction in both debt finance which decreased by US$2.0bn (86.96%) from the

previous year and equity finance of US$0.8bn (88.89%) and the large increase in

debt percentage of total PPP finance to 79%. The substantial decrease in the PPP

finance in 2010 is reflective of the number of deals in the PPP market and the

reduction in the average deal size. In 2009 the total PPP finance in the market was

US$ 3.2bn, comprising eight deals of which the average deal size was US$0.4bn.

However, in 2010 PPP finance totalled US$0.4bn comprising only two deals

averaged at US$0.2bn, bringing the PPP market back to 2005 levels. Significantly,

excluding a capital injection of US$0.1bn in 2007 M&G finance has not been a key

source of funding for PPP projects in India to date.

High equity returns expected

In a survey conducted by PricewaterhouseCoopers in 2007, developers were asked

to state their expected equity returns. Among these, more than 70 percent sought

returns exceeding 16 percent. Analysis suggests, as would be predicted, that

projects with higher gearing had higher expected rates of return. Calculations

indicate that the asset beta for these projects was around 0.6–0.75, depending on

the assumed equity risk premium. This is somewhat higher than other estimates;

for example, Alexander, Estache, and Oliveri (1999) estimated asset betas for road

projects in Latin America and the Caribbean to be 0.31–0.48. The difference could

reflect the high-powered regulatory regime for Indian road projects—but it is also

consistent with the aggressive bidding for road projects in 2006–07. Negative grant

bids were seen for some projects, driven by huge developer interest in road PPPs.

2.1.2 Financing Options for Public Private Partnerships in India:

Recent efforts to encompass commercial finance have been undertaken in urban

service ventures in an attempt to convert service projects into bankable schemes

using commercial loan finance. Indeed, the extent of this commercialisation varies

across different infrastructure sectors and this poses a challenge for structuring of

PPP financing.

Therefore, to counter this challenge, we structure PPP financing in the light of the

extent to which there is a potential for generation of revenue through user charges,

and the capacity of user charges to provide a return on investment and the level of

public sector equity or subsidy in a project. This has culminated in the emergence

of five core PPP financing structures within urban infrastructure (Figure 2.3).

These structures are explained below:

Figure 2.3: Alternative Financing Options for Public Private Partnerships in

India

Source: Infrastructure Journal Online (Accessed 15th December 2010)

Model A - Full cost recovery through user fees, No government guarantee:

At one end of the spectrum, full cost recovery is viable through user fees without

the requirement for government guarantees or subsidies to incentivise private

sector investment. However, this appears to be a theoretical construct in the Indian

scenario, as there are very few examples of projects where the private entity is able

to retrieve their investment through project cash flows without having to increase

the user fee. Nonetheless, the potential to supplement income through advertising

revenue or lease rentals from commercial space has ensured the viability of some

projects for private sector investment. In such cases, project cash flows from the

user fee in combination with alternative revenue sources to provide the return on

investment have potential for tolling. In the case of most urban sector projects such

as water supply, sanitation, education and healthcare (particularly for poor) full

cost recovery even in combination with project related alternative sources of

revenue is not possible or the revenue risks are too high for the private sector to be

interested. Thus, such projects require government financial assistance in the form

of capital grants or revenue guarantees and annuities or a combination of capital

and revenue support.

Significantly, there are no clear distinctions between the form of infrastructure

being procured and the financial PPP model being adopted. The approach is

heterogeneous and determined at project level reflecting the nature of the project,

the capital requirements and the revenue potential. Consequently, public

transportation initiatives encompassing modest capital requirements and the ability

to charge user fees and generate revenues from commercial rents or advertisements

have successfully attracted private funding. Within these approaches the private

sector is responsible for construction, with the return on investment through the

additional fee supplemented by advertising revenue, and rental revenue from

commercial property developed alongside the key infrastructure. Projects located

centrally where land values and commercial lease rentals are high, present

substantial opportunities for using the commercial potential of alternative land use

(such as retail, office) to pay for project cost.

Model B - Combination of user fees and government capital grant:

Within more capital intensive projects, there is a need for capital and operating

subsidies and a supporting regulatory environment in order to attract private sector

funds, as tariffs are often not sufficient to maintain operational costs, let alone

capital costs as evidenced in both MRTS and BRTS schemes. In both schemes, the

public purse has been needed to fund the entire capital cost and a portion of the

operating cost to make these projects attractive to the private sector. They do

however have the capacity to acquire additional sources of revenue including

advertisement revenue and a lease income from commercial properties. The Indore

City Bus Service which became operational in 2006 is an example of public sector

provision of capital infrastructure and private sector provision of assets, which it

fully operates.

Model C - Joint Venture with User fees with or without Capital grant:

In contrast, the airport express link project of Delhi Metro provides a good PPP

model for a capital intensive mass transportation projects. The Delhi Metro Rail

Corporation (DMRC) is in line to build the fixed infrastructure, with the private

sector entity providing the rolling stock and operating the system for a 30 year

period. Paradoxically, the capital cost of the fixed infrastructure and the rolling

stock almost equates on the Delhi Metro project.

Model D - User fee with minimum revenue guarantees:

In this approach the user charges (fare-box revenue) and advertisement revenues

cover the project‘s capital and O&M costs. However, the problem is that only the

commercially lucrative routes have been bid out posing significant challenges, as

this requires a complete system, in that all the routes (even the commercially

unviable) need to be operational in order for it to function efficiently and

effectively. This model does have the capability of generating private sector

interest through investment or direct subsidy. Private investment in financially

non-lucrative routes can be incentivised by bundling these routes with financially

lucrative routes, as limited restrictions placed on the upside revenue potential

coupled with minimum revenue guarantees would provide additional incentives.

Alternatively, the public sector can provide a direct subsidy to the private sector

operators plying on these routes. In the context of urban roads, difficulties in

identifying end-users make imposition of user charges difficult within PPP models.

Model E - Funding through shadow user fee or Annuity scheme:

The toll-based PPP model which is very popular for inter-state roads and highways

in India is difficult to apply to the urban road setting. Therefore, where tolling is

not possible or is insufficient to cover the investment, annuity structures or shadow

user charges offer more viability as these payments to the private sector are

conditioned on performance. For most city roads, PPP take the form where the

private sector bears the construction cost and operational risk but the revenue risk

lies with the public sector (for example Thiruvananthapuram city roads).

Furthermore, highly capital-intensive tariff water and sanitation projects are

insufficient to cover the cost of investment, and comprise limited potential to

generate revenue from other sources. To enhance development, the unbundling of

the ‗value chain‘ presents improved operational efficiency for delivery of WSS

services requiring relatively low capital investment from the private sector, whilst

having the potential to be paid for through tariffs from users or annuity payment by

the public sector. A number of such projects have materialised recently in WSS

sector in India where depending on the project and the extent of the possibility of

unbundling of various activities involved in water and sanitation, a variety of PPP

models are structured based on a combination of capital grant/subsidies, user

charges and government guarantees to enable raising capital from the market by

the Urban Local Bodies (ULBs).

2.1.3 Lessons for going forward:

The trends in PPP financing highlight several issues with implications for

financing the large-scale PPP program envisaged by Indian government. PPPs have

relied heavily on commercial banks for their debt financing, and it is unclear how

sustainable—or how desirable—this dependence will be. Long-term financing

exposes the banks to the risk of asset-liability mismatch: the main source of funds

for Indian banks is savings deposits and term deposits, whose maturity profile

ranges from less than six months to five years. Over much of the period developers

were comfortable with shorter reset periods, perhaps because this had been a

period of declining or low rates. But as interest rates began to increase, concerns

arose about the impact on PPPs, because the concession contracts have no

provisions for passing on higher interest charges. Continued increases in rates as

well as a tightening of credit could have adverse effects on some projects.

An active bond market can increase the flow of long-term funds and reduce

reliance on banks. The Indian corporate bond market, though one of the largest in

Asia, is still at an early stage of development, and its growth is hampered by

institutional, legal, and regulatory constraints that make bonds a more expensive

way of financing debt. These problems, as well as potential solutions, are

highlighted by the Patil Committee (2005), established by the government.

Following the suggestions of the committee, the government has set up reporting

and trading platforms for corporate bonds. Many other important suggestions still

await implementation. But implementing bond market reforms is a difficult

challenge in the best of times, and in the light of the current global financial crisis

the government would have to explore other innovative ways to ensure adequate

flows of (private) financing to infrastructure PPPs.

On the equity side, participation by foreign players, particularly strategic investors,

has been low even though PPP projects are allowed to have 100 percent foreign

direct investment. Foreign direct investment accounted for only 11 percent ($322

million) of the total investment. The port sector had the largest share (51 percent)

of this foreign investment, followed by airports (32 percent) and roads (16

percent). Only nine projects were reported to have strategic investor participation:

four in ports, three in airports, and one each in water supply and railways. Few

pure equity providers are willing to invest directly in special-purpose vehicles

because many concession agreements put restrictions on the sale of developers‘

equity. Encouraging pure equity providers to do so will require more liberal norms

allowing them to participate at the time of bidding or to enter later with a majority

stake.

2.2 Constraints Faced by Public Private Partnerships in India and Uttar

Pradesh

2.2.1 Environmental constraints faced by PPPs:

Public Private Partnership entails compromise and a change in the usual way of

doing things, therefore it is only natural that certain barriers will exist. It is

important to recognize these likely impediments and to build in strategies to cope

with them in order for the partnership to function effectively. This should be done

early in the process to allow time to implement the necessary changes.

The evidence from developing countries indicates that actual or perceived rise in

tariffs, macroeconomic fluctuations in currency or purchasing power, inadequate

regulatory and institutional environments, societal discontent against the private

sector and political reneging are some of the key reasons for the failure of PPP

projects (Harris, 2003; Gomez-Ibanez et al, 2004; Vernon, 1971).

Public Private Partnerships in India face barriers posed by the absence of a

sufficiently sophisticated financial sector, fiscal barriers, red tape and procedural

inefficiencies that have contributed to project delays and discouraged private

investors, and constraints arising from the absence of adequate infrastructure

regulation that aggravates risks and uncertainties for investors.

PPP carries investments and costs; it must be thoroughly efficient and managed in

terms of planning, monitoring, and acceptance of loss of some control. Private and

public sectors often have different goals, and organizational philosophies and

cultures.

The environmental constraints faced by PPPs in India and specially, Uttar Pradesh

are described under the following headings:

1. Political and bureaucratic constraints

2. Legal and regulatory constraints

3. Financial constraints

4. PPP policy framework constraints

5. Social constraints

These constraints are described below in detail:

2.2.1.1 Political and bureaucratic constraints:

Political and bureaucratic constraints, such as fragmented decision making due to

the involvement of multiple public agencies, the prevalent emphasis on

administrative procedures (rather than on strategies and results) that stem from the

traditional, lengthy tendering process (normally split in three or four phases, from

planning to final operation) are major hurdles to PPP implementation.

Progress in PPP development has been limited due to the frequent political

reluctance (often originated in public opinion) to give up control of infrastructure

assets which had been in public hands for a long period of time. Perhaps the

primary constraint to the development of a Public Private Partnership is the lack of

political will. Often the situation related to service provision to the poor citizens is

complex and the proportion of the population that this disadvantaged group

comprises could be too low to provide sufficient political motivation – either to

take the poor into consideration in the first place, or to redesign the contract later

on.

In addition, governments or coalitions in several states such as Tamil Nadu, Kerala

and West Bengal that have representations from left-wing factions are often

strongly opposed to the entry of the private sector to provide essential services. A

lack of support from the political machinery is therefore also a reason for the lack

of PPPs at the state levels.

Often political limitations exist on the development of more pro-poor attitudes

within urban governments. These constraints include: the complex political

struggles that often take place between national and local government; overlapping

responsibilities between different authorities or agencies; and unrealistic

expectations about what local authorities can actually do with their very limited

technical and institutional capacity.

The political and bureaucratic constraints faced by PPP are:

(i) Multiple clearances:

Infrastructure projects require multiple clearances at centre, state and local levels.

This is a time consuming process not only due to the sheer number of approvals

but also because clearances are sequential, and not concurrent. For example, when

Sify was setting up internet cafes in different states, it involved over 50 different

clearances.

According to most developers and financiers, the time taken to obtain all the

requisite approvals for an infrastructure project can vary between a low of 18

months to as much as four to five years. For example, it took more than two years

for the Gujarat Pipavav port project to receive the necessary clearances after

achieving financial closure on the project. Delays like these in getting government

approvals, places India very unfavorably compared to China and South-East Asia.

In spite of the theoretical concept of a single window clearance in many states,

when most projects apply for approvals at the state-level, these have to go through

multiple clearances from local panchayats, municipalities, forest, environment

board etc. which cause huge delays in completion. In many cases, the concession

agreements entered into by individual departments do not have pre-approved

clearances from the Finance Department, leading to further delays. The lack of a

‗single window system‘ to obtain project clearances considerably increases the

transaction costs of a project and often necessitates the exchange of bribes in order

for the project to move forward. Although these institutional arrangements differ

from project to project, the overall effect is to hamper the participation of the

private sector.

(ii) Lack of coordination between government ministries /departments:

Most infrastructure projects involve dealing with multiple ministries. One of the

key reasons for projects not taking off at the pre-financing stage is that the actions

and policies of different ministries are not coordinated and are often at variance

with each other. This is particularly true for the power sector, where even if the

developer obtains the requisite permission for setting-up of a generation facility, he

finds it difficult to start operations because of lack of clearance for fuel supply,

which involves some two other ministries. Similar problems exist regarding the

Ministry of Environment. There are no IIGs except in power. The recently set up

IIG for power has proved to be an effective way to expedite PPP investments in the

sector. Such groups have not been formed for other sectors, and their absence has

impeded the developers‘ ability to achieve financial closure and complete the

necessary formalities on time.

(iii) Lack of effective political commitment to eradicate public sector

corruption:

In most of the states, reaction to corruption is resignation and acceptance. This

makes it very difficult to find those who are willing to investigate corruption, and

especially difficult to punish it when it is found. This kind of reluctant attitude acts

as a deterrent to private sector to invest and participate in Public Private

Partnership projects in India. A strong commitment and lack of acceptance of

corruption is necessary in order to fight it.

(iv) Problems in contract negotiations and delays in the award of contracts:

This is pervasive across all infrastructure sectors. For instance, it took Kakinada

port four years to achieve financial closure. In the power sector, four gas-based

power projects30, which had achieved financial closure in early 2004 with an

investment of over Rs.50 billion, are today on the verge of closing down due to

flawed fuel supply contracts. While the gas supplier Gas Authority of India

Limited (GAIL) has said that it has no gas to offer to these plants, project sponsors

find it impossible to penalize GAIL due to one-sided fuel supply contract that they

were forced into. Even a well run, relatively efficient organization like the NHAI is

now causing delays. To give an example, the bids for the first lot of NHDP III

projects were received in March 2004; not one of these has been awarded till date.

2.2.1.2 Legal and regulatory environment:

Enabling legislation must be in place before PPP programmes can be embarked on

in a country. The government has to demonstrate a clear, long-term political

commitment to the use of PPP. Such commitment may manifest itself in a variety

of practical ways. PPP inevitably involve highly complex commercial and financial

structures. This is attributable to, firstly, the many stakeholders involved and,

secondly, the wide range of risks associated with the project which has to be

allocated properly. A third factor is the long-term nature of PPP schemes, which

means the arrangements must be flexible and responsive to circumstances

changing over time. To meet these requirements will necessitate the existence of a

reliable and well-developed legal framework.

Various aspects of the broader legal and regulatory environment for services can

act as significant barriers to the PPP, like the presence of vague responsibilities

among (independent) regulatory agencies and ministerial, unclear regulatory

procedures, the lack of a dispute-resolution framework. In addition, accounting

laws and practices, laws governing construction contracts, public works laws and

conventions and so on may be inappropriate for private sector participation.

Therefore, before a particular partnership opportunity for the implementation of a

project is approved, the service must be examined in detail to ensure that there are

no legislative or regulatory barriers to the PPP. If this step is ignored, significant

investment in time and money can be spent developing a partnership only to find

that it cannot proceed in the current environment.

The following are the legal and regulatory barriers faced by infrastructure players:

(i) Lack of a clearly defined legal basis for private sector participation in

PPP:

The legal framework for PPP in India lacks a clearly defined basis for private

sector participation. In this case, individual sector legislation may have to be

modified. For example, some countries do not allow private provision of

telecommunications, or of water, etc. The target sectors chosen for PPP need to

have explicit legal provision enabling private participation.

Several PPP proposals for projects at the state level face roadblocks due to the lack

of enabling PPP legislation. In some cases, the existing legislations mandate that

only the public sector be allowed to provide a given set of infrastructure services.

Even when there is no explicit law that prevents the private sector from

participating in infrastructure, the lack of enabling legislation on PPPs also implies

that state government officials and bureaucrats who encourage private sector

participation are doing so at their own discretion due to their own personal beliefs

of the advantages of partnering with the private sector. This in turn leaves such

personnel open to investigation from anti-corruption agencies, which acts as a

further deterrent towards soliciting involvement from the private sector. On the

other hand the presence of pro-PPP legislation would provide considerable

reassurance and recourse to the public officials.

Some states have framed policies for PPPs, but unless these policies are enshrined

as laws, they always run the risk of being re-written by succeeding governments.

Furthermore when legislation is enacted, it is enacted in a piecemeal manner, to

accommodate a particular project. This then leads to several legislations that need

to be enacted periodically across other sectors. A more holistic approach that

anticipates concerns across sectors and can lead to the enactment of broader

legislation could therefore be an asset. The institutional bottlenecks outlined above

result in a considerable increase in transaction costs to plan, approve and execute

PPP projects which in turn leads to extended delays, changes in project viability

and in some cases, project cancellations.

(ii) Restriction on participation of foreign investors in PPP projects:

Even though Indian regulatory framework enables private sector companies to

provide basic services, it limits foreign participation in such efforts. These

limitations include limitations on land ownership and other natural resource use,

greater restrictions on employment and special requirements such as technology

transfer. Openness to foreign participation usually accompanies a policy emphasis

on effectiveness of private participation. Many countries like Australia and United

Kingdom have signed treaties concerning the treatment of foreign investors,

providing a more predictable and secure environment for these investors. These

kinds of treaties are not present in Indian context.

(iii) High customs duties on infrastructure equipment:

While there are import duty concessions available to imports used for

infrastructure development, such as in the case of mega power projects, certain

telecom equipment etc., these are largely selective in nature. For instance, while

equipment for mega-power projects can be imported against zero or low duties, the

same facility is not available for capital goods used in roads. It has been suggested

that the government creates a masterlist of all key capital goods and machinery

used for roads, power, ports, airports, telecom and water supply and distribution,

and make these available at zero duty. In large measure, this is what China has

done in the recent past, which has significantly reduced its cost of setting up

infrastructure.

(iv) Section 10(23G) of the Income Tax Act:

This clause exempts tax on income from dividends, interest and long term capital

gains from any investment made in an enterprise engaged in the business of

developing, maintaining and operating an infrastructure facility — and has been of

great help in facilitating infrastructure investments. However, three issues still

cause problems.

(a) First, the borrowing infrastructure company needs to get annual approval and

certification of its ―infrastructure status‖ from the Central Board of Direct Taxes

(CBDT) before the lender can claim the fiscal benefits under this section. The

process is not automatic and often takes considerable time — which has on several

occasions led to delays in getting the concessions.

(b) Second, there is an issue of escalation. In essence, if the surplus of an

infrastructure SPV that falls under section 10(23G)is reinvested in another

infrastructure SPV —both of which belong to the same umbrella company —

could the latter also obtain the fiscal benefits under this provision? As of now, the

opinion runs counter to this. According to this view, an enterprise qualifies for the

benefits under section10 (23G) if it is wholly engaged in the business of

developing, maintaining and operating any infrastructure facilities. The catch lies

in the word ―wholly‖. This apparently precludes any infrastructure enterprise to

invest or lend its investible surplus in another infrastructure entity — for that

would be an act of financing, and not amount to developing, maintaining or

operating of infrastructure. Thus, according to this interpretation, it will not get the

benefits of section 10(23G). This problem can be resolved by either eliminating the

word ―wholly‖ or substituting it with ―substantially‖.

(c) Third, the benefits of section 10(23G) do not flow down to retail investors. Had

that been possible, the tax benefits of this provision could have been leveraged to

create more dedicated infrastructure mutual funds where the retail investors would

have been additionally attracted by the tax incentive.

(v) Tax holidays under section 80IA:

Section 80IA of the Income Tax Act relates to infrastructure projects and provides

for 100 percent tax deduction on profits for 10 years and 50 percent for the next

five. There are two issues with this seemingly beneficial provision.

First, most infrastructure projects, especially those in roads, power and ports, take

up to 7-8 years before starting to show profits. Therefore, providing for a 100

percent tax holiday over the first 10 years does not actually amount to a serious

fiscal incentive.

Second, even this limited fiscal incentive is overridden by the Minimum Alternate

Tax (MAT), which is levied at 7.5 percent on book profits. Consequently, the fiscal

benefits from section 80IA get significantly diluted at the ground level.

(vi) Priority sector status:

At present, the RBI rules state that 40 percent of a domestic scheduled commercial

bank‘s loans and advances (and 32 percent of a foreign bank‘s)should be directed

to the so-called ‗priority sectors‘, which comprise agriculture, small scale

industries, khadi and village industries and a classified list of other small scale

businesses. Infrastructure sectors fall outside the definition of priority sector. It has

been argued by several banks that, given the critical importance of infrastructure, it

too should be considered as a priority sector.

(vii) ‘Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)

requirements on infrastructure bonds:

At present, scheduled commercial banks are required to maintain with RBI on a

fortnightly basis an average cash balance or CRR amounting to a certain percent of

the total of the Net Demand and Time Liabilities (NDTL) in India. SLR is peculiar

to India, which mandates that scheduled commercial banks must keep a certain

percent of their total demand and time liabilities in India in cash, gold or approved

government securities. The reason for both is to maintain a safe liquidity in

banking system, although the SLR requirement makes it easier for the central

government to pre-empt depositors‘ funds. It has been suggested by many banks

that since 15-20 year AAA rated infrastructure bonds are of long maturity and

carry no short term liquidity risks, liabilities on account of the sale of such

instruments should be considered outside the purview of SLR and CRR.

2.2.1.3 Financial constraints

Financial constraints measure the ability to find funding for PPP projects through a

variety of mechanisms. They include indicators that measure the overall strength

and capacity of the financial system. Handling finances domestically will be

greatly facilitated if the country has a well developed banking system, with a

variety of financial products and instruments intermediating between depositors

and borrowers. Financial regulation is critical to a financial system, partly to avoid

illegal behavior and partly to help manage corporate and systemic risk. Having an

effective financial regulatory regime in place reduces risk for the PPP firm and the

government. The following constraints need special attention:

(i) Under developed Pension and Insurance markets:

It is widely accepted that insurance companies and pension funds are ideal

candidates for supplying long tenor financing given the long tenor nature (15 years

or more) of their liabilities. But with a few notable exceptions, in recent times,

most insurance companies and pension funds have not focused on funding

infrastructure.

Among the various term-lending institutions, LIC (the largest insurance company

in India that is also state-owned) has emerged as the biggest player, with its

disbursements for infrastructure projects exceeding the combined disbursements of

IDBI, IFCI, IDFC, IIBI and SIDBI. However, most of the involvement of the state-

owned insurance companies, including LIC, is in infrastructure projects of the

central and state governments‘ SOEs backed by government guarantees. These are

often not based on credibility or the detailed economics of the project. In fact, in

the past, state governments have raised funds from the insurance SOEs ostensibly

for financing infrastructure, which have then been diverted to the state‘s

consolidated finances. Commercial banks have only been marginal players in terms

of their share of infrastructure financing in the recent past, though this segment has

registered strong growth in the last two years.

Within the sectors, FIs have a much higher appetite to lend for power projects than

others. Power generation accounts for 62 percent of the value of infrastructure

loans sanctioned and 55 percent of disbursals. Telecommunication comes second,

accounting for 20 percent of total infrastructure sanctions, and 24 percent of

disbursals.

(ii) An underdeveloped corporate bond market and the lack of longer term

financing:

Most infrastructure projects fructify into profit making entities 10 to 15 years after

the initial investment and hence require longer tenor financing (with long drawn

out repayments) to ensure financial viability of the project. The availability of a

developed bond market is an important backbone to project financing for

infrastructure as it increases the prospects for project finance banks to eventually

off-load their assets, and for project companies to lock in fixed interest rates at

lower margin when the project has stabilized after a few years of operation.

Moreover, functional bond markets are important for funding existing

infrastructure utilities/companies, as well as certain types of projects with no or

low construction risk and an established revenue pattern. Unfortunately, India still

does not have a wide or deep enough corporate bond market for such paper.

According to the estimates of the Bank for International Settlement (BIS), the size

of India‘s corporate bond market was 0.3 percent of nominal GDP in December

2003—much lower than that of Malaysia (43.3 percent) or South Korea (27.7

percent). Trading on the Indian corporate bond market is limited.

The lack of size and depth in India‘s corporate bond market may be attributed to

three broad sets of issues viz., development of government securities market, lack

of market infrastructure and innovations in the corporate debt market and

regulatory issues.

(iii) Constraints to equity and quasi-equity financing:

Raising adequate equity finance tends to be the most challenging aspect of

infrastructure project financing, as equity typically shoulders the greatest level of

operational, financial and market risk. Equity can be provided by project sponsors

(those who have an operational interest in the contract) or financial investors (those

who have only an investment interest). In India, as in many other countries, the

early phase of private financing of infrastructure has shown a predominance of

sponsor equity. But the ability of sponsors to raise equity from the primary market

remains limited. First, infrastructure companies or project sponsors typically have

much higher gearing than other corporate, which makes them unattractive

candidates in the securities market. Second, not only are the projects operationally

complex but also, they involve complexities in terms of contracts, legal structures,

right of first charge on assets etc. Consequently, investors, especially retail

investors, find it difficult to understand the true risks involved — and are wary of

investing in such issues.

In the longer-term, equity finance from financial investors – including private

equity funds such as venture capital funds and other institutional investors such as

dedicated infrastructure funds sponsored by a consortium of insurance companies,

pension funds, Government sponsored funds, commercial banks, development

banks, private fund managers and other privately-held companies, can prove to be

critical.

However, at present, equity financing and quasi-financing by financial investors is

constrained by the following factors:

(a) Limited exit options constrain equity participation: The best route for

financial investors to exit from an infrastructure project is to sell their stake to the

sponsors, through a ‗put option‘, which involves an upfront agreement between the

financial investor and sponsor, including agreement on the minimum price at

which the financial investor could sell the equity stake to the sponsor at a future

date. However, in India, the regulations do not allow such agreements to be

reached upfront between financial investors and sponsors of an unlisted company.

For one thing, the approval to exercise the ‗put‘ has to be obtained from the

Reserve Bank of India (RBI) at the time of the exercise, and cannot be obtained

up-front. For another, put option agreements with sponsors of unlisted companies

cannot guarantee a minimum price on the sale of shares to the sponsors. The sale

price in such transactions is subject to pricing requirements of the RBI, which

requires an independent valuation to determine a ―fair‖ price for the shares at the

time the option is exercised. This leaves a lot of uncertainty in the minds of

investors and prevents them from negotiating a floor to their return and ensuring a

suitable exit prior to investing.

(b) Additional constraints: Additional constraints to equity investment include a

shallow capital market (albeit continuously improving), and corporate governance

issues (primarily minority shareholder protection rights).

For construction companies and equipment suppliers, revenues from these

activities exceed the returns provided by equity. Many times, this is their primary

motivation for venturing into infrastructure projects, rather than the returns

provided by the project itself. For a financial investor, the only return on equity is

provided by the revenues generated by the project. Therefore, there is a severe

conflict of interest between the project developer and the financial investor. A

project developer may act in a way which maximizes his return from the secondary

activities, at the cost of project revenues. The financial investor, who is in a

minority position in such projects, loses out in such situations.

To improve corporate governance, and to protect minority shareholders rights

infrastructure projects must go for competitive bidding for the EPC contracts,

equipment supply contract, management contract and user contracts. The project

promoters may participate in such bidding processes, but must emerge a winner

from such a process to obtain the contract for providing such services.

(c) Limited mezzanine financing: In the developed world, many infrastructure

projects are part-funded through ‗mezzanine finance‘, which is a hybrid of debt

and equity. Mezzanine finance is debt capital with fixed payment or repayment

requirements, but with the right to convert to an equity interest in a company. It

carries two advantages: first, it attracts investors by offering a rate of return which

is higher than that of senior debt and second, on the balance sheet of a company, it

is treated like quasi-equity, which makes it easier to increase the component of the

usual bank or financial institution loans. Unfortunately, there is no infrastructure

funding entity that has actively explored mezzanine financing in India in any

sizeable amounts. The reasons for this include the following:

First, an impediment to the use of mezzanine financing is the lack of a sufficiently

large and varied pool of infrastructure projects. When projects and financiers are

few and far between, and when modern infrastructure financing is in its nascent

stages, there is a preference for funding institutions to opt for more straightforward

loans than hybrids.

Second, interest rate caps on external commercial borrowing (ECBs) constrain the

use of mezzanine financing by foreign investors. The interest rate caps make no

provision for pricing different debt or quasi-equity instruments commensurately

with the risks associated with them.

Third, regulatory norms and premium pricing are also factors that weigh against

mezzanine financing. The norms for provisioning against Non-Performing Assets

(NPA) do not make a distinction between senior debt and subordinated debt; the

latter deserves more liberal treatment given its quasi-equity nature. Also, sponsors

with projects that are at the margin in terms of profitability find the ‗premium‘

demanded for subordinated debt over senior debt by a host of risk-averse lenders

far too excessive—enough to turn a potentially profitable venture into an unviable

one.

(iv) Restrictions on External Commercial Borrowings (ECBs):

Given the risk aversion and/or relative inexperience of many financial

intermediaries in India in the area of infrastructure financing, external financial

resources (ECBs, mezzanine, equity, etc.) can potentially play an important role in

meeting funding gaps.

Revised ECB guidelines now allow (i) companies to access ECB for undertaking

infrastructure investment activity in India, (ii) borrowings under the approval route

by FIs dealing exclusively with infrastructure.

Despite the welcome increase in ECB for infrastructure, the fact still remains that

external funds are significantly inadequate compared to the needs. This may be

attributed to the following:

(a) One concern raised by investors is the interest rate cap on ECBs. According to

the ECB guidelines, interest rates are capped atLibor+200 basis points for loans

with an average maturity of 3-5 years, and at Libor+350 basis points for loans with

an average maturity of more than five years. It has been argued that, while these

caps may be adequate for ‗normal‘ industrial projects, they are too low to attract

funds for riskier infrastructure projects.

(b) An even greater constraint in utilizing foreign currency loans is the lack of a

sufficiently deep forwards-market in foreign exchange. Infrastructure projects

require long tenor loans, and if financed through foreign currency borrowings these

need to be adequately hedged against currency risks since few infrastructure

projects have forex earnings to serve as a natural hedge. Inability to hedge long

term currency risk in a market which is limited to one year‘s forward cover poses a

big challenge to the use of foreign currency loans in these projects.

(v) Limited use of takeout financing:

Commercial bank funding of infrastructure projects runs the risk of asset-liability

mismatch. An innovative method is to encourage the use of ‗take-out‘ finance.

Here, a bank which is funding an infrastructure project gets into an arrangement

with a financial institution, where the institution commits to buying the bank‘s

loans after a certain period. There are two versions to this arrangement:

unconditional and conditional take-out finance. The unconditional version involves

full or partial credit risk with the institution agreeing to take over the finance from

the original lender. Under conditional take-out finance, the institution commits to

taking over the finance from the lending institution only if it is satisfied with

certain stipulated conditions.

Hence, it is only unconditional takeout financing that helps bank resolve the asset-

liability mismatch since under the conditional takeout financing model, the long-

term risk still remains on the books of the banks until the take out actually

happens. Take-out financing is ideally suited for annuity and BOT type road and

housing projects. While there are some recent examples of institutions like IDFC

and Housing and Urban Development Corporation (HUDCO) trying takeout

financing as a method, this has not found much favor in India.

While unconditional takeout financing is not very common, it can give a fillip to

infrastructure financing by addressing both the unwillingness and the lack of

experience of institutional investors to participate in infrastructure financing. The

main factors limiting the use of takeout financing include the following:

(a) First, the presence of excess liquidity in the system reduces the need for banks

to quickly circulate their funds, and hence, the appetites for instruments like

takeout financing. With limited number of ‗bankable‘ projects in the fray and no

liquidity crunch, banks have no inclination to sell out these good assets from their

portfolio.

(b) Second, high stamp duties reduce the attractiveness of takeout financing and

securitization. Being a state government subject, stamp duties vary considerably

across the country. Excessive rates of stamp duties in some states have stymied the

growth in innovative financial instruments such as take-out financing and also

securitization.

(vi) Restrictive government policies and regulatory guidelines:

The investment guidelines of insurance companies specified by IRDA require them

to invest not less than 15 percent of their investments in infrastructure and social

sectors. It is understood that most of the investments by insurance companies in

infrastructure are made to State-owned specialized FIs such as National Thermal

Power Corporation (NTPC), Power Finance Corporation (PFC) (which have a

AAA rating) as also to housing sector which qualifies under infrastructure

investments. This clearly indicates the low risk-taking outlook of the insurance

companies. The guidelines also lay down a minimum credit rating of ‗AA‘ for

investments in debt paper which would automatically exclude investment by

insurance companies in debt paper of private infrastructure sponsors.

(vii) Poor state government finances:

Nearly all states suffer from serious fiscal imbalances and are ridden with huge

debt obligations. The debt to GDP ratio of states has increased by over 7 percent in

the last five years to 29.1 percent (31 March 2004). In 2003-04 interest payments

on debt accounted for over 25 percent of revenue receipts. Apart from the

increasing level of debt, the outstanding guarantees of state governments have also

recorded a sharp increase from 4.4percent of GDP in March 1996 to 7.5 percent of

GDP, or Rs.1,842 billion. Clearly, in such a situation, states are not the most

bankable business partners for private sector participation in infrastructure.

2.2.1.4 PPP policy framework constraints

An imbalance in the capacities of the public, private and community partners is the

most common limitation on successful PPP arrangements. Capacity deficiencies

affect ongoing partnership arrangements, as well as any reforms that may be

necessary due to lack of confidence. There are important potential constraints

related to project selection and contracting; however, they can be resolved or at

least mitigated through well-specified contract design.

The following issues need special attention:

(i) Lack of clearly allocated authority and responsibility in PPP policy:

In India, there is confusion and tension between different parts of government, who

naturally have very different perspectives. This is a major source of difficulty for

PPP projects. It is important to clearly define the respective authority and

responsibility between central and state government and between central and line

agencies. Full consideration must be given to adequacy of the resources required.

(ii) Predictable staging of project identification, selection and contracting:

In India, the process of identifying projects and moving forward to contract does

not follow a predictable pattern. It is difficult to predict how long it will take to

process a proposal and to finish further steps. The stages do not have well defined

procedures and the workload is not managed by efficient planning and adequate

resources. The government should define ―time bound‖ steps of the authorization

process, so that officials must meet the schedule or account for not meeting the

schedule.

(iii) Policy framework generates commercially viable project proposals:

In India, the private sector does not find many projects lucrative for bidding and

investment. The perspective of the private sector needs to be fully recognized, and

risks should be effectively managed, so that the PPP framework consistently

generates proposals that pay for themselves (with governmental support if justified

by social priorities).

(iv) Competitive tendering process is transparent in practice:

Lack of transparency in tendering is one of the greatest challenges to the PPP

process in India. Less established firms are reluctant to bid, non-competitive efforts

to win bids are encouraged, and quality standards are more difficult to uphold.

Private firms need to be assured that their performance, and the financial

attractiveness of their bid, will be the main factor determining whether they get the

contract. In addition to monitoring the transparency of the selection process,

government needs to vigilantly enforce rules for bidder behaviour, to exclude any

coordination or manipulation of the bidding process.

(i) Lack of tendering and contracting capacity:

Two of the obstacles to the wide adoption of contracting arrangements are lack of

experience in development of contract conditions and lack of data and guidelines

upon which contract specifications should be based. In order to overcome these

difficulties, governments in several countries provide their officers with advice

about different contractual arrangements, such as a list of standard specifications

that should be built into contracts.

The basic principle of PPP – the provision of value for money for public services –

can only be satisfied when a fair and transparent procurement process is in place.

Many government officials have little experience in negotiating and managing

concession contracts, which can lengthen the contract award process and increase

the costs of bidding. Decision-makers might also lack the confidence to renegotiate

the contract such that it meets the redefined objectives of the municipality.

Lack of action on the part of officials might also be attributed to lack of detailed

provision for renegotiation in the contract; imbalance in perceived negotiating

skills; lack of access to ―objective‖ support; and/or fear over the implications of

decisions made. Capacity development in negotiation is essential if the public

sector partner is unwilling to accept the support of skilled specialists.

2.2.1.5 Social constraints:

Social constraints measure the ability to administer PPP projects in a fair and

sustainable way that supports all groups in society. It includes indicators that

measure government success in promoting the PPP concept. Providing basic

services to the marginalized/poor should be one of the central aims of the

government, and should have an active role in the design of new projects and the

choice of projects. If past projects have shown interest in marginalized groups, it

will be easier to assemble systematic information about the possibilities for

effective action.

Social pressures lead to impasses and difficulties in implementing PPP projects. In

some cases, social activists protest against the displacement of poor people,

environmental degradation, loss of jobs and income, inequitable resettlement plans,

distributional inefficiencies that result from the projects and so on. In other cases,

the intended users of the project may resist tariff increases that result through

privatization. In the case of the Coimbatore bypass road, the government of Tamil

Nadu decided to toll a neighbouring bridge and include the toll revenues as part of

the financial equation for the bypass road project. However users of the bridge

were upset at a toll being charged for a facility that they had used for free

previously, and refused to pay. In particular, state-run buses that were subsidized

by their governments lobbied for and won a decision to lower the tariff rates,

which in turn placed enormous pressure on the concessionaire to break-even on

this project. The potential for societal protests and economic weaknesses in project

structuring deters the private sector and further inhibits the use of PPPs at the state

level.

The following social constraints need special attention:

(i) Perception of PPPs as a viable means of providing infrastructure and basic

services:

PPP projects face a lot of opposition and misunderstanding. The public needs to be

educated about the positive aspects and benefits of PPP to improve standard of

living. If PPP firms are already accepted as a possible way to achieving

government aims in infrastructure and basic services, it will greatly simplify the

adoption of new PPP projects.

The local government‘s policy for the provision, financing and cost recovery of

services will be a key factor in assessing whether or not it views public-private

partnerships as an acceptable approach to service delivery.

If, based on the government‘s fundamental values and policies, public-private

partnerships are not seen as a viable or accepted approach to service delivery; it is

clearly not in the community‘s best interest to proceed with individual public-

private partnerships. More commonly, local governments will establish policies

that identify the circumstances (for example, the type of service, or a particular

component of the service system) under which public-private partnerships may be

considered.

(ii) Awareness in public concerning the need for user-pays principle:

Many PPP projects rely on the user-pay principle, which says that additional

services are provided, but for a price. Stakeholders are used to the government

providing services without direct charges and may be resistant to user-pays

programs. Education is required to explain to them that the services could not be

provided unless a fee is charged, and then they are better offered.

(iii) Strategic understanding of public-private partnerships:

The most significant capacity constraint is usually with respect to the strategic

understanding of public-private partnerships. Training in PPPs and exposure to the

development of PPPs is likely to result in a broader understanding of their potential

in terms of social and institutional aspects in the municipal context; such training

will also aid understanding of the implications of long-term partnership

arrangements.

2.2.2 Sector specific constraints faced by PPPs:

The constraints faced by PPP in India vary considerably across sectors. In some

sectors, such as telecom, the obstacles and contradictions during the initial phase of

the1990s are things of the past. Through learning by-doing, the Telecom

Regulatory Authority of India (TRAI) has established itself as an efficient, fair,

expeditious and independent regulator which is respected as a body for creating a

level playing field and fostering the rapid growth of telecom in India. In sharp

contrast, the regulatory environment in power leaves much to be desired; and as

yet there is no independent regulatory institution in place for ports or airports.

Progress in the infrastructure sector during 2010–11 has been lacklustre, both in

terms of physical progress as well as in terms of policy and regulatory

developments. While 2009–10 saw policy and regulatory changes, attempts at

improving the pace of award and execution of infrastructure projects, revival of

investor interest, and more definitive future plans, 2010–11 saw a slackening in the

pace of reforms as well as development activity in almost all the sectors.

The telecom sector was mired in controversies associated with licences and the

process followed for the 2G spectrum which were allotted in 2007–08. The roads

sector saw irregularities and enquiries about the National Highways Authority of

India (NHAI), and slower than expected project award activity. The Government

of India (GoI) revised its target of building roads downwards from 20 km a day to

12–13 km a day. The ports sector did not see significant capacity addition and the

finances of the power distribution utilities worsened, with utilities starting to resort

to higher load shedding to avoid the burden of extra power purchase costs (Power

Finance Corporation Limited 2011) and to prevent their financial position from

worsening further. What stands out in almost all the sectors is the poor level of

monitoring and accountability for completing programmes and projects (Planning

Commission 2010a). Not surprisingly, the World Economic Forum (WEF) in its

Global Competitiveness Report-2010 ranked India‘s basic infrastructure at the 86th

position amongst 139 countries; a fall of 10 places compared to that in 2009. This

fall was largely attributable to the poor quality of roads, ports, and electricity

supply.

To understand the extent of constraints faced by PPP, therefore, one needs to

analyze the different sectors. The significant constraints faced by PPP across

different sectors are given below:

1. Roads

Major constraints in a highway PPP project usually include the acquisition of right-

of way, construction, environmental, Operation and Maintenance (O&M), traffic,

collection of tolls, competing roads, political intervention (policy reversals),

inflation, forex (in cases involving foreign currency financing) and force majeure.

Of these, constraint related to time and cost overruns during the construction phase

as well as traffic volume and user fees (tolls) are of particular significance from the

standpoint of private operators, as they are normally expected to absorb these risks.

By and large, the National Highways Development Program has been a success.

There has been significant learning by both government and the private sector.

Through wide-spread consultation and its own experiences, the NHAI has

stabilized a robust Model Concession Agreement (MCA) for its BOT as well as

annuity projects. Standard bidding documents have also been prepared for the

Pradhan Mantri Gram Sadak Yojana (PMGSY) contracts. Till now, there have

been no major cases of the government reneging on BOT or annuity agreements,

which has served to maintain and enhance the credibility of these contracts -

something that is lacking in the power sector.

Moreover, there has been a clear financial commitment on the part of the

Government of India in the form of setting-up a long-term ring fenced source of

finance, namely the Central Road Fund (CRF). Not only does it secure significant

long-term funds but it also helps project executing agencies such as NHAI to use it

as quasi-equity to leverage market borrowings. Despite its successes, there are

some issues that need to be addressed.

The major one relates to the small size of NHAI projects. The average size of PPP

projects (BOT, annuity and through pure contracting SPVs) is 44.6 km; that of

BOT projects is 50.4 km; and of annuity-based projects is 59.4 km. This piece-

meal approach adopted by NHAI towards awarding contracts has three negative

consequences:

(i) Entry of smaller players: First, it encourages the entry of smaller players with

limited technical and financial abilities in the bidding process — often leading to

as many as 30 bids in response to a single tender floated by NHAI. Though this

could be construed as healthy competition, it has sometimes resulted in the

selection of firms with unrealistically low bids, who later have not been able to

deliver.

(ii) Higher per unit capital cost: Smaller projects inflict higher per unit capital costs

to the contractors. As the size of the project increases the per unit cost of

mobilizing requisite physical and financial capital goes down more than

proportionally. Scaling-up project sizes will incentivize bigger domestic and

foreign players to make competitive bids and also make it economic for them to

source the requisite capital in a timely manner.

(iii) Non-lucrative for large players: Small project sizes have discouraged large

players, who can access both capital and expertise and deploy these more

effectively than fragmented operators. Diseconomies of scale have also prevented

more widespread use of annuity and BOT. Although the thrust of the NHAI‘s

NHDP program is to encourage private sector involvement in road creation,

operation and maintenance, in reality more than 80 percent of the Golden

Quadrilateral (GQ) has been completed through EPC contracts, i.e. civil works

implemented through contracts on a cash payment basis. Till date, only 9 BOT and

8 Annuity based schemes have materialized under GQ program, and none in the

NS-EW project.

The other regulatory issue relates to the Central Road Fund. Although the CRF is

ring-fenced in the technical sense of the word, the timing and quantum of

allocations to the CRF from the Consolidated Fund of India are still dependent

upon the central government. For a program as important as improvement and

modernization of roads, it is more advisable to have a statutorily independent body

administering the CRF.

2. Power

Nearly 60% of India‘s population in rural areas does not have access to electricity.

TATA Power is considering 4–5 options for addressing rural electrification needs

in a sustainable manner. For sustainable operations and supply of power in rural

areas, transparent and targeted subsidy delivery mechanisms need to be developed

so as to ensure the financial viability of the distribution business.

More than any other sector, the power sector suffers from a wholly inadequate and

non-credible regulatory regime at both the central and state government levels.

Given below are some key deficiencies:

(i) State Electricity Regulatory Commissions (SERCs) do not act in a

predictable and consistent manner in most states: The State Electricity Boards

(SEBs) have been unbundled into three distinct entities: generation, transmission

and distribution. Also in theory, with the enactment of the Electricity Act, 2003,

these entities are supposed to be monitored and regulated by independent SERCs.

However, in practice, no investor can be sure if the regulator will adjust prices, or

when, or the extent to which non-action (or injurious action) will be defended on

the grounds that social factors (especially, ―affordability‖) need to be taken into

account. Unpredictable behavior of the SERCs relates in large part to their lack of

autonomy and the fact that they are under pressure from many directions. Most, if

not all, SERC members in any state are former employees of the SEBs that they

are now expected to regulate. Moreover, the funding of SERCs comes from the

state government. Consequently, the stage gets set for serious regulatory capture by

both the state government and its SEB. In most cases, SERCs are weakened from

inception, which allows large state utilities to remain unresponsive to their

regulations.

It should be pointed out however, that the above-mentioned issues stem

predominantly from a fundamental structural flaw in the current operational and

regulatory structure of the power sector. Since the reforms in the sector have

progressed only to the extent of unbundling and establishing regulatory bodies

without actually changing ownership, the effectiveness of the regulator to regulate

the utility (which is another arm of the government) is obviously limited. The

policy maker, the regulator and the utility are all different parts of the government.

In this scenario, at the very least, there needs to be operational autonomy for the

utilities and functional and financial autonomy for the SERCs.

(ii) Access charges: The Electricity Act, 2003, which is supposed to be

adopted by all states, provides for non-discriminatory open access to transmission

and distribution lines. There are serious regulatory concerns about state owned

transmission companies stifling competition by levying prohibitively high access

charges between private sector generating companies and end-consumers. This has

often been cited as one of the major regulatory risks that could prevent an active

private sector market for the wheeling of power.

(iii) Credibility of fuel supply agreements: Every power generation

project is based upon fuel supply agreements — be it for coal or gas.

Unfortunately, neither source of fuel falls within the domain of the Ministry of

Power, and there have been serious delays in power projects because the promised

fuel supply agreement has not materialized. Moreover, fuel that is promised to be

supplied often does not arrive on time. In September 2004, one of the bigger units

of NTPC had to be shut down for five and a half days because of coal shortages.

The shortage of gas has also been quite severe in the past, which has adversely

affected the Plant Load Factor (PLF) of many plants. For example, it is estimated

that around 1,600MW of gas-based power capacity in the private sector is not

being made operational on account of fuel shortage. The Ministry of Power

estimates that but for the fuel shortages, the growth in actual generation for the first

nine months of FY06 would have been five percentage points higher. Fuel supply

poses serious concern with new plants, which even after achieving financial

closure are not able to move on to the construction phase because of their inability

to garner requisite fuel supply.

(iv) State government guarantees: Some observers believe that guarantees

could play an important role in catalyzing private investment in the power sector.

Unfortunately, the financial credibility of most state government guarantees is

clearly suspect in light of the weak fiscal position of states. By March 2004,

outstanding guarantees of all state governments were as high as Rs.1,842 billion or

7.5 percent of GDP. In addition to this, the estimated commercial losses of the

SEBs in 2005-06 were approximately Rs.226 billion (excluding subsidies). Such

financial penury does not augur well for PPPs in power. Other observers, however,

argue that in states where the fiscal situation is relatively better, state government

guarantees in fact create the wrong incentives. In Rajasthan, for example, the

state‘s transmission company can borrow (essentially, to cover losses in the

distribution sector) from commercial banks and issue bonds at surprisingly good

interest rates, despite annual financial losses of over Rs.2000 crore, as long as it

has a state guarantee. Its ability to borrow at tenors of up to 15 years may be a

factor in delaying more fundamental reform of pricing and creates an uneven

playing field against private operators who do not enjoy similar government

guarantees.

(v) Slow operationalization of the Electricity Act, 2003: Without doubt, the

Electricity Act, 2003, is good in theory. However, progress by states to frame the

rules to operationalize the Act has been slow. Consequently, it does not serve as a

guidepost for structuring projects and making investment decisions.

3. Ports

The ports sector in India has seen substantial entry by the private sector. The

introduction of the private sector has resulted in greater efficiencies as well as

competition for services. According to an estimate, by 2011–12, India requires to

step up its ports capacity to 800 million tonnes, which requires additional

investment of about US$11 billion.

On the efficiency front, although berth productivity has improved substantially

since the advent of private participation — from 20 moves per hour in the 90‘s to

70–80 moves per hour — it is far below the global benchmarks. The government

should not view private participation in ports as a revenue earning opportunity, and

instead should opt for models that would result in efficient services for the end-

users of ports.

While there is a Tariff Authority for Major Ports (TAMP) which regulates and

supervises tariffs of private sector service providers, it is not a regulator in the

wider sense of the term.

4. Airports

The rapid growth in airline services began several years ago, with the result that

the infrastructure in the metro and major non-metro airports is under considerable

strain. The recent Delhi and Mumbai airport deals had created a very high visibility

internationally for the Government‘s airport reform process.

The development of physical infrastructure in the Airways sector is inadequate to

sustain the growth momentum. Progress on existing projects has been slow and has

been substantially costlier than initial estimates. The latter is true for privatized

airports as well as airports being developed by the Airports Authority of India

(AAI). Of the 35 non-metro airports identified for modernization in June 2006,

work has been completed at 20 with another 10 under progress and the remaining

5in the planning stages.

The development of sectoral regulatory frameworks is required along with striking

a balance between competition and regulation so as to meet consumer demands

and expand infrastructure.

Airports have yet to have an independent regulator, although this was an important

recommendation of the Naresh Chandra Committee.

5. Railways

The recent turnaround achieved by Indian Railways was based on a strategy

founded on a clear understanding that the railways is not a natural monopoly, its

cost structures are highly rigid, its main competitive advantage is economies of

scale, and it needs to blend both social and commercial objectives. For instance,

Indian Railways faces competition from road transport in general, and from low-

cost airlines in the premium passenger services segment. The key for business

growth, hence, lies in offering a compelling value — a value superior to the one

offered by the other modes of transport — to the railway users.

In a similar vein, a closer examination of its cost structures reveals that, at the

current level of tariffs, its train operations would break even with 20 coaches,

whereas it has been operating trains, on an average, with only 14 coaches. Armed

with this understanding, Indian Railways is gradually shifting to 24-coach trains so

that it can make profits without altering tariffs. Already, Indian Railways has

invested Rs. 400 crore in increasing the length of both passenger platforms and

sidings at goods terminals, and earned over Rs. 6,000 crore by hauling longer and

heavier trains. As part of its efforts to blend social and commercial objectives,

Indian Railways is pursuing the ―fortune at the bottom of the pyramid‖ through

initiatives such as Garib Raths, fully air-conditioned trains at tariffs that are less

than 40% of the existing fares.

As a result, Indian Railways has succeeded in increasing its internal revenue

generation from US$ 0.5 billion in 2000–01 to US$ 4.5 billion in 2006–07. During

the same period, it managed to bring the operating ratio — expenses divided by

traffic earnings— down from 98% to 78%.

However, Indian Railways has refused to have a regulator despite the

recommendation of the Rakesh Mohan Expert Group. In Railways, the lack of a

regulator has allowed the Container Corporation of India (CONCOR), a subsidiary

of Indian Railways, to exercise complete monopoly rights of managing and linking

up inland container depots (ICDs) with container freight stations (CFSs) at ports, to

the detriment of port-side container terminals although this monopoly is now being

ended by allowing private sector to offer linkages to ICDs. The lack of

independent regulators in these critical sectors creates problems for future

deregulation, and fails to provide comfort to potential investors in terms of

predictability and stability.

6. Telecom

The telecom sector made commendable progress during 2010–11 on physical

parameters. With 811.59 million connections at the end of Fiver Year 2010–11

(Telecom Regulatory Authority of India 2011a), the Indian telecom network

became the second largest wireless network in the world after China.

On the policy and regulatory front, the sector was embroiled in controversies on

issues relating to the allotment of new unified access services (UAS) licences and

the 2G spectrum in 2007–08. A report of the Comptroller and Auditor General

(CAG) of India concluded that the government exchequer incurred a loss of

between Rs 67,364–176,645 crore on account of such allotment. The UAS licences

had been issued at a price discovered in 2001 when the market was at a nascent

stage of development as opposed to an appropriate market price in 2008 when the

sector had undergone substantial transformation and manifold growth. Moreover,

the licences were issued on a single day. These actions prompted questions

regarding transparency in the licence allocation process and the failure in

maximizing revenue generation for the government from the allocation of

spectrum. Another controversy in the sector was related to spectrum hoarding and

exaggeration of subscriber numbers to garner additional spectrum.

These controversies coupled with the other pressing issues facing the sector (such

as availability of spectrum, impending strategy for penetration of broadband, and

security issues regarding telecom equipment procurement, messenger services, and

subscriber verification) are acting as barriers to Public Private Partnership Projects

in the telecom sector.

2.3 Public Private Partnerships (PPPs) in Uttar Pradesh

2.3.1 Status of Public Private Partnership projects in Uttar Pradesh

According to World Bank Report (2006), across states and central agencies, the

leading users of PPPs by number of projects have been Madhya Pradesh and

Maharashtra, with 21 and 14 awarded projects respectively, all in the roads sector,

and the National Highways Authority of India (NHAI), with 16 projects. The other

states or central agencies that have been important users of PPPs are Gujarat (9

projects) and Tamil Nadu (7), Karnataka (4) and Ministry of Shipping, Road

Transport and Highways (MOSRTH) (4).

However, looking at a breakdown by estimated project size, we see that MP

becomes significantly less prominent due to the large number of relatively small-

sized projects in its portfolio, falling to 3 percent of total project costs. Gujarat

accounts for 48 percent of total project costs due to its four large port projects.

NHAI (17%) and MOSRTH (12%) are the other significant players. Karnataka

accounts for 7 percent of total project costs given that its one awarded PPP project,

the Bangalore-Mysore road corridor (currently under construction) had a reported

project cost of Rs 22.5 billion.

If we look at the World Bank report (2006), we find that Uttar Pradesh constituted

only 2% of the total PPP projects in India worth Rs.4.074 bn. This is a very

pathetic situation and the state government needs to take serious measures to

attract private investment in infrastructure projects.

The figure 2.4 and figure 2.5 below shows the status of Uttar Pradesh in Public

private partnership projects with rest of the country:

Figure 2.4: Number of PPP projects across states and central agencies

(Total = 86 projects)

Source: PricewaterhouseCoopers Report, 2006

Figure 2.5: PPP projects across states and central agencies according to

project size (Total= Rs. 339.5 billion)

Source: PricewaterhouseCoopers Report, 2006

At the end of year 2009, Uttar Pradesh had lined up Rs 125,000 crore projects for

private investment under the public-private partnership mode. These projects have

either been launched or awaiting the nod and are spread over all major sectors like

power, transport, education, tourism, infrastructure, urban development and health.

Major projects include Greater Noida-Ballia Ganga Expressway, Noida-Agra

Yamuna Expressway, power plants in Allahabad, Fatehpur, Anpara and Lalitpur,

proposed international airport at Kushinagar and setting up of super specialty

hospitals in seven towns/cities.

However, in Uttar Pradesh, there is no specialized institutions and legal framework

like other states. The project development responsibility is with state level

government agencies and departments. After realizing that private investment is

necessary for the development of Uttar Pradesh, the government machinery has

offered tax, fee and levy exemptions for setting up industry to make it an attractive

investment destination. However, the response from private players is slow

because of lack of confidence among investors and constant complaints regarding

obstructions and delays while executing projects in the Uttar Pradesh. During a

survey to find the reason for the low level of interest among investors in the state,

it was found that the risk of their money getting stuck up was the major deterrent

for the private sector.

2.3.2 Public Private Partnership projects in Uttar Pradesh in various sectors:

1. EXPRESSWAYS:

(i) Yamuna Expressway

The project was inaugurated by Chief Minister Akhilesh Yadav on 9th August,

2012. This 165 km long 6-lane access controlled concrete pavement expressway

between Greater Noida and Agra has opened new avenues of development for the

towns of the area through which it is passing. It provides hassle free connectivity

with major towns of the area i.e. Aligarh, Hathras and Mathura. Adequate

provision of interchanges shall facilitate the exit and entrance from the expressway

to/from other important roads. The travel time on the expressway shall be less than

2 hours from Greater Noida to Agra.

The project has been completed under Public Private Partnership (PPP) model. The

players in this project are Yamuna Expressway Industrial Development Authority

(Government agency) and Jaypee Infratech Pvt. Ltd. (Private company). The

estimated cost of the project is Rs.10,374 crores. The construction work of the

expressway has been completed. The construction work of all 3 Toll Plazas is in

progress. Overall progress of the project has been registered at 93.46% in

February, 2013.

(ii) Ganga Expressway

The Ganga Expressway project was launched by Uttar Pradesh Chief Minister

Mayawati after coming to power in 2007. The 1047 km long 8-lane access

controlled Ganga Expressway costs Rs.30,000 crores and is proposed to run from

Greater Noida to Ballia. This Expressway has been planned along the river Ganga

and has been designed as a flood control embankment. The Ganga Expressway is

expected to considerably reduce the travel time across the state. When completed,

it would be amongst the biggest infrastructure projects implemented through PPP

mode in the country. The Expressway will pass through Districts Gautam Budh

Nagar, Bulandshahr, Aligarh, Badaun, Kanshiram Nagar, Farrukhabad,

Shahjahanpur, Hardoi, Unnao, Raebareli, Pratapgarh, Allahabad, Sant Ravidas

Nagar, Mirzapur, Varanasi, Ghazipur and Ballia. Links from Fatehgarh, Lucknow

and Mirzapur are to be constructed to provide access from these districts to the

Expressway. Toll free service road shall also be constructed along the Expressway

for the convenience of local people.

The construction of the expressway is going to be done under a Public Private

Partnership (PPP) model. The state government of Uttar Pradesh accepted bids

from various infrastructure companies. A total of 18 developers submitted proposal

to build the expressway. Some of the companies which submitted the bids included

DLF Universal, GMR Group, Jaypee Group, Larsen & Toubro, Omaxe-GVK-

Nagarjuna, Reliance Energy, Unitech Group. The Uttar Pradesh government

awarded the Ganga Expressway contract to Jaypee Infratech Pvt. Ltd. According to

the contract, Jaypee will build the expressway at no cost to public finance, in

exchange for the right to maintain, operate and collect tolls on the expressway for a

35-year period and right to procure and develop a few land parcels for commercial

activity along the 1047 kilometer expressway. The construction was anticipated to

be started by April 2008. However, a series of land acquisition issues, legal

challenges and judicial motions have prevented construction work on the Ganga

Expressway.

To address the land acquisition issues, the government of Uttar Pradesh announced

a revised land acquisition policy in June 2011. This policy is part of what the state

government calls ―Karar Niyamavali,‖ the guiding policy for land acquisition by

the government from the citizens of its state. This policy‘s section 6 provides

certain protections to any farmer whose land has been fraudulently transacted. The

rules require that any fraudulent transaction be considered for appeal and

cancelled. The farmer whose land has been fraudulently transacted has a right to

compensation and damages from the state government whenever fraud is

discovered and reported.

Construction work on Ganga Expressway has not yet started because of a stay

order from the High Court of Uttar Pradesh. The order instructed that the state and

the concessionaire complete a full environmental study and obtain permission from

the central government before embarking on the construction. The concessionaire

completed the study and submitted its proposal with Ministry of Environment and

Forests in New Delhi, in April 2011, to obtain environmental clearances, as

required by recently enacted Indian environmental laws. However, the proposal

has been rejected by the Ministry. It has directed that UPEIDA being project

promoter, is required to file application for clearance. UPEIDA is in the process of

submitting application for obtaining NOC to Ministry of Environment and Forests.

The future of this project is uncertain.

(iii) Upper Ganga Canal Expressway

This proposed 148 km long 8-lane access controlled Expressway starting from

Sanouta Bridge in Greater Noida is passing through western Uttar Pradesh and will

connect National Capital Region (NCR) to Uttarakhand border near Purkazi. This

unique multi-dimensional project includes development of Expressway, 7 Hydro

Electric Power Stations (HEPS) and navigation facilities, besides the ancillary

works of rehabilitation of Upper Ganga Canal, construction of service road

and access road, raising of NH bridges and railway bridges and connecting roads

and interchanges. The state government has selected consultant M/s IL & FS IDC.

The project cost of 147.8 km long Expressway and 68.5 km long link Expressway

including 7 hydro electric power stations and navigation facilities has been

estimated approximately Rs.8, 911 crores.

Request For Qualification (RFQ) for selection of Developer was issued on 24th

January 2010. As many as 7 bids were received against the RFQ issued for

selection of Developer. Request For Proposal (RFP) has been issued to 6 short

listed bidders. Bid parameter shall be Highest Negative Grant or Lowest Value of

Land Parcels opted for Development Rights. Due to slow response, the date of

receiving of RFP document has been postponed till further notice.

(iv) Development of 06-Lane Access Controlled Expressway on the Right

Bank of Upper Ganga Canal from Sanouta Bridge (Greater Noida) to

Kanpur-Fatehpur

Uttar Pradesh government has entrusted this project to UPEIDA for the study of

the technical and financial viability of the project, owing and execution. Consultant

for preparation of concept report has been selected.

(v) Agra to Lucknow Green Field Expressway

This 08 lane access controlled Expressway from Agra to Lucknow is to be built on

PPP mode. This green field expressway shall be based on minimum distance

formula having the potential of providing a smooth link from Greater Noida to

Lucknow. Hence the journey time from Greater Noida to Lucknow via Agra

covering about 530 km, which presently consumes around 9 hours would now

drastically be reduced to 5 hours. Likewise the 6 hours journey of 365 km between

Agra and Lucknow would reduce to around 3.30 hours through this proposed

Expressway. UPEIDA has been nominated as nodal agency. The selected

consultant, M/s Redicon (India) Private Ltd. has prepared Concept Report for this

Expressway. The revised E.O.I.-cum- R.F.P. for selection of consultant was issued

on 24.11.2012 and its submission from interested parties is awaited.

(vi) Jhansi-Kanpur-Lucknow-Gorakhpur-Kushi Nagar Expressway

Pre-feasibility study for this project is to be conducted. Vide G.O. no. 695A/77-3-

2008-34M/07TC dated Feb.28.2008 issued by Industrial Development

Department-3, GoUP, UPEIDA has been entrusted the expressway ―Jhansi –

Kanpur – Lucknow – Gorakhpur – Kushinagar (on the bank of river Betwa &

Gaghra) connecting Southern to Eastern boundaries of the State‖ for development

under PPP Model. Concept report/proposed alignment of Expressway is under

preparation/Finalization. Environmental Impact Assessment (EIA) study of the

Expressway is also under progress.

2. TOURISM

(i) Leasing & Management Contract of Tourism Properties

The Department of Tourism, Government of Uttar Pradesh has proposed to

develop the properties through leasing out to private sector parties with the

objective of promoting tourism, providing upgraded facilities to users, better

management and unlocking of the commercial values of properties. Department

has invited Request for Proposal (RFP) for design, finance, development,

construction, up-gradation, maintenance and management of 68 properties through

Private Public Partnership. RFP for selection of developer has been issued on

25.10.2011. Due to slow response, the last date of submission of RFP bid has been

postponed till further order.

(ii) Kushinagar International Airport & Buddhist Circuit

Site survey has been done by Directorate General of Civil Aviation (DGCA), Govt.

of India on 02.09.2009 for granting NOC from Civil Aviation Ministry. RFQ-cum-

RFP being prepared by consultant for selection of developer. Viability Gap

Funding (VGF) proposal is to be sent to Ministry of Finance, GoI for sanction. 32

bids were received against (Expression of Interest) E.O.I. issued on 04.05.2012

after in principal approval for VGF.

(iii) Development of Passenger Ropeways

The Government of Uttar Pradesh has decided to develop Passenger Ropeways at

the following three places through Public Private Partnership mode as an added

attraction to the tourists:

Radha Rani Temple (Ladlee ji Temple) in Barsana, Mathura in Braj Region

From Ashtabhuja to Kalikhoh in Mirzapur in Vindhyachal Region

Devangana in Chitrakut in Buldelkhand Region

M/s UDIC, M/s UDFC, M/s Innovest Dehradun (Consortium) have been selected

as consultant and Letter of Intent (LOI) was issued on 16.08.2012. The Consultant

is required to carry out the entire bidding process management for selection of

developer and also to carry out the preliminary assessment of social and

environment impact assessment etc.

(iv) Development of Waysides Public Amenities

The Government is keen to provide better facilities to road users especially clean

toilets and potable drinking water and also to the tourists. In this context, Director

General, Department of Tourism, Government of Uttar Pradesh has invited

Expression of Interest from Private Sector Parties to develop Waysides Amenities

along the major transport corridors of the State under PPP mode.

The last date of submission of EOI was fixed as 14.08.2012, wherein 75 proposals

were received. Initially, a committee has been constituted for deliberation on 20

proposals.

3. POWER

The PPP projects in Power sector include power generation projects, power

transmission projects and power distribution projects. These are discussed in detail

below:

(i) Generation Projects

The following power generation projects are under PPP

(a) Bara Thermal Power Project

This project has been proposed at Tehsil Bara in Allahabad. The capacity of this

project is 3 x 660 MW. The estimated cost of project is Rs. 11,500 crores. Letter of

intent has been issued and Shell Company is transferred to developer. The

environmental clearance has been obtained and the first unit is expected to

commence operation by July 2014.

(b) Karchana Thermal Power Project

This project has been proposed at Tehsil Karchana in Allahabad. The capacity of

this project is 2 x 660 MW. The estimated cost of project is Rs. Rs. 7,600 crores.

Letter of intent has been issued and Shell Company is transferred to developer. The

environmental clearance has been obtained and the first unit is expected to

commence operation by January 2014.

(c) Jawaharpur Thermal Power

The capacity of this project is 2 x 660 MW. The estimated cost of project is Rs. Rs.

6,600 crores. Jawaharpur Vidyut Utpadan Limited has been incorporated by Uttar

Pradesh Power Corporation Ltd. as SPV (Shell Company). Request For

Qualification (RFQ) is received from 19 bidders out of which 17 bidders have been

shortlisted. Request for Proposal (RFP) has been issued to 17 shortlisted bidders

Power Project.

(d) Yamuna Expressway Thermal Power Project

The capacity of this project is 2000 MW. Yamuna Power Generation Company

(SPV) (A joint venture of Noida Authority, UPPCL, Greater Noida Authority and

Yamuna Expressway Authority) has invited tenders for appointment of consultants

for preparation of Feasibility report and DPR for establishing this thermal power

project in Gautam Budha Nagar/NCR region.

(e) Dopaha Thermal Power Project - 3 x 660 MW

The capacity of this project is 2000 MW. The estimated cost of project is Rs.

10,000 crores. Consultant has been selected for preparation of feasibility report,

DPF and Environment clearance for MOEF.

(ii) Transmission Projects

For strengthening the power transmission network across the State and to enhance

reliability, Govt. of U.P has decided to adopt the PPP mode for execution of the

transmission project. Consultant has been selected. The process of selection of

Developer for two packages for transmission work is in progress. This would be

the first major private participation in transmission. Uttar Pradesh Power

Transmission Corporation Ltd. (UPPTCL) would facilitate acquisition of land

along with various clearances and technical surveys. The details of the projects are

given in Table 2.1 below:

Table 2.1: Power Transmission projects under PPP mode

Packages Particulars

Package-I

Transmission Sub Station (Package-I) - South East

UP Power Transmission Company.

765 KV sub station and related lines.

M/s Isolux consortium selected as Developer. LoI

issued. Bank guarantee deposited.

Signing of Share Purchase Agreement with

Developer is in process.

Package-II

Transmission Sub Station (Package-II) – Western

UP Power Transmission Company.

400 KV sub station and related lines.

M/s Cobra MELI consortium selected as

Developer. LoI issued. Bank guarantee deposited.

Share Purchase Agreement signed with Developer.

Source: http://udyogbandhu.com

(iii) Distribution Projects

UPPCL is implementing Input Based Franchisee models in urban areas. Agra city

has already been handed over to the franchisee (Torrent Power) and for Kanpur

city franchisee has been finalized and the distribution system is yet to be handed

over.

4. TRANSPORT

(i) Engagement of Bus Operators/ Private Investors

This project aims to select private operators / Investors to run the buses on the

roads of State of UP. The Deloitte Touhe Tohmatsu India Pvt. Ltd. is selected as

consultant. The process for preparation/issuance of Request For Qualification

(RFQ) document is delayed due to stay granted by High Court.

(ii) Project for Development of modern bus stations by UPSRTC

The original project of UPSRTC i.e. Modernisation, Redevelopment and

Management of bus stations of UPSRTC under PPP mode was reviewed during

Uttar Pradesh Chief Minister Akhilesh Yadav‘s meeting held on 27.04.2012. In

compliance thereof, UPSRTC has appointed consultant / transaction advisor for

selection of bus stations, who have started study in this regard.

5. UTTAR PRADESH STATE HIGHWAYS AUTHORITY (UPSHA)

The upgradation of State Highways has been proposed under Public Private

Partnership model. The detail of projects along with their present status is given in

Table 2.2 below:

Table 2.2: State Highway projects under PPP mode

S.

N

o

Name of

Roads

Lengt

h in

Km

Estimate

d cost

(Rs. Cr.)

Status

1.

Delhi-

Saharanpur-

Yamunotri

Road (SH57)

206.09 1718.35

M/s SEW - Prasad Consortium

Infrastructure Limited, Hyderabad

selected as a developer. Concession

agreement signed on

01.08.2011.Independent Engineer

selected, agreement signed on

28.02.2012.

2.

Bareilly-

Almora-

Bagheshwar

Road (SH-37)

54 354.07

M/s PNC Infratech Ltd., Agra selected

as developer. Concession agreement

signed on 01.08.2011. Independent

Engineer selected, agreement signed

on 08.02.2012.

3.

Varanasi-

Shaktinagar

Road(SH-5A)

115 1211.96

M/s APCO Chetak - Patel Ltd.,

Lucknow selected as a developer.

Letter of award issued on 15.11.2011.

Concession agreement signed on

08.12.2011. RFQ cum RFP issued on

16.03.2012 for selection of

Independent Engineer. Bids opened on

20.04.2012, 7 bids received which are

under evaluation.

4.

Akbarpur-

Tanda-

Jaunpur-

Mirzapur-

Dudhi Road

(SH-5)

207.47 829

Consultant selected, feasibility report

has been prepared by the consultant is

being examined. Proposal for VGF

under preparation.

5.

Sahjahanpur-

Hardoi-

Lucknow

Road (SH-25)

162 1039.83

Consultant selected, proposal for VGF

submitted to GOI on 31.01.2011. RFQ

issued for selection of developer on

22.11.2011. Bids opened on

28.03.2012. 12 bids received which

are under evaluation.

6. Meerut- 87.155 583.23 M/s Abhijeet Road Ltd. Nagpur

Karnal Road

(SH-82)

selected as developer. Concession

agreement signed on 08.12.2011.

Further RFQ cum RFP for selection of

IE issued on 16.03.2012. Bids opened

on 20.04.2012, 8 bids received, which

are under evaluation.

7.

Gorakhpur-

Maharajganj

Road (SH-81)

53.160 159

Consultant selected, feasibility report

has been prepared by the consultant is

being examined.

8.

Basti-

Mehndwal-

Kaptanganj-

Tamkuhi

Road (SH-64)

166.12 303.05

Consultant selected, feasibility report

has been prepared by the consultant.

Proposal for VGF submitted to GOI

on 20.05.2011. RFQ issued for

selection of developer on 22.11.2011.

Bids opened on 28.03.2012. 10 bids

received which are under evaluation.

9.

Moradabad-

Chandausi-

Badaun Road

(SH-43)

164.17 656

Consultant selected, feasibility report

has been prepared by the consultant is

being examined. Proposal for VGF

Under preparation.

10.

Farenda-

Naugarh-

Barhni-

Tulsipur-

Balrampur-

Gonda Road

(SH-1-A)

230 690

Consultant selected, feasibility report

has been prepared by the consultant is

being examined. Proposal for VGF

under preparation.

11.

Garh-Meerut-

Baghpat-

Sonipat Road

(SH-14)

90.42 900

Consultant selected, feasibility report

has been prepared by the consultant is

being examined. In the BEC meeting

dated 25.04.2011, it has been decided

that clarification should be shout out

regarding land near Meerut Bye Pass

before releasing the RFQ. Proposal for

VGF under preparation.

12.

Etawah-

Mainpuri

(SH 83)

52.82 370 Consultant selected. Feasibility report

is being prepared by the consultant.

13. Aligarh 38.96 300

Mathura (SH-

80)

Consultant selected. Feasibility report

is being prepared by the consultant.

14. Etah Tundla

(SH-31) 57.16 400

Consultant selected. Feasibility report

is being prepared by the consultant.

15.

Etah

Shikohabad

Marg (SH-85)

52.5 368 Consultant selected. Feasibility report

is being prepared by the consultant.

16.

Varanasi

Bhadohi-

Gopiganj

(SH-87)

60.12 375 Consultant selected. Feasibility report

is being prepared by the consultant.

17.

Tarighat -

Bara Road

(SH-99)

40 280 Consultant selected. Feasibility report

is being prepared by the consultant.

18.

Kalwari-

Barhalganj-

Lal-Ghuthni

(SH-72)

189.82 580 Consultant selected Feasibility report

is being prepared by the consultant.

19.

Muzaffarnaga

r Saharanpur

via Deoband

(SH-59)

52.70 369

M/s Krishna Techno committee (P)

Ltd. has selected as Consultant,

agreement signed on 05.12.2012,

feasibility report is being prepared by

the consultant.

Total 2079.7 11486.49

Source: http://udyogbandhu.com

6. HOUSING & URBAN PLANNING

(i) Inner Ring Road project, Agra

This project has been proposed under Public Private Partnership model. The

consultant and developer for the project are to be selected. Land acquisition is

under process by Agra Development Authority. The last date of submission of bids

for consultant was 12.11.2012. Four bids have been received and they are being

examined.

(ii) Northern Peripheral Road, Ghaziabad

The construction of 4 lane 20 Km. length road starting from Vazirabad (Delhi

Border) to Hapur Road has been proposed under Public Private Partnership model.

The Ghaziabad Development Authority has been nominated as nodal agency for

the project. M/s Feedback Venture & Services Pvt. Ltd. has been selected as

consultant and TEFR is being prepared.

(iii) International Cricket Stadium

The construction of an International Cricket Stadium has been proposed under

Public Private Partnership model. M/s Innovest Advisory Services Pvt. Ltd. and

M/s IDFCUDEC, Gurgaon have been selected as consultant.

7. TECHNICAL EDUCATION

(i) Medical Education Department

The State government has decided to run the two newly established State

Medical Colleges at Azamgarh and Banda and one Para Medical College in Safai

on PPP Model. M/s Crisil Risk and Infrastructure Solution was selected as

consultant. The details are given below:

8. URBAN DEVELOPMENT DEPARTMENT

(i) Solid Waste Management plant Project:

The solid waste management plant has been launched in 26 cities of the state to

provide better amenities in the Urban Areas. The cities are Lucknow, Varanasi,

Allahabad, Meerut, Gorakhpur, Moradabad, Aligarh, Jhansi, Mathura, Agra,

Kanpur, Muzaffar Nagar, Firozabad, Etawah, Rae Bareily, Mirzapur, Loni

(Ghaziabad),Mainpuri, Basti, Barabanki, Kannauj, Ballia, Fatehpur, Badaun,

Sambhal (Moradabad) and Jaunpur. The project comprises of door to door

collection, primary storage, secondary collection, transportation up to processing

State Medical Colleges:

1) Azamgarh – The bids from private players were opened on 07.03.2011, 5 bids

were received. The evaluation is under process.

2) Banda - The bids from private players were opened on 07.03.2011, 6 bids were

received. The evaluation is under process.

Para Medical Colleges:

1) Saifai – Request For Qualification (RFQ) was issued on 15.01.2011. Pre bid

conference was held on 11.02.2011. The bids opening date was 07.03.2011.

No bid has been received so far.

As per decision of BEC held on 11.11.2011 the services of M/s Crisil Risk and

Infrastructure Solution has been terminated. Action for appointment of consultant

is being taken.

plant, installation of processing plant and development of sanitary engineered land

fills. Out of 26 projects, 10 projects viz Kanpur, Kannauj, Muzaffarnagar,

Moradabad, Etawah, Mainpuri, Mathura, Aligarh, Barabanki and Raebareli have

been completed. The plants at Fatehpur, Agra and Allahabad are almost (85-90%)

competed. Speedy land acquisition process / physical work is in progress

in other cities.

(ii) Establishment of New Modern Slaughter House at Meerut, Jhansi and

Moradabad:

To ensure slaughtering under hygienic conditions and to provide healthy meat to

the public, the project for establishing a new slaughter house under PPP mode with

modern mechanised system of slaughtering and handling of slaughtered bye-

products has been undertaken at Meerut, Jhansi and Moradabad. The details are

given below:

(a) New Modern Slaughter House at Meerut:

The estimated cost of the project is Rs. 101.76 crores. M/s Abacus Legal Group,

Delhi has been selected as the consultant. During selection process (2nd time) of

developer, only one bid was received. In the mean time, the decision of High Court

on W/P No. 71568/2010 was released, which was in the favour of bidder from

whom only bid was received earlier. Nagar Nigam, Meerut has refered the matter

to Supreme Court. Subsequently, Chief Minister Akhilesh Yadav has given

instructions, during PPP projects review meeting held on 27.04.2012, to put up a

detailed note before the Chief Secretary for obtaining necessary directions.

(b) New Modern Slaughter House at Jhansi

The estimated cost of the project is Rs. 82 crores. M/s Abacus Legal Group, Delhi

has been selected as consultant. Process for selection of developer started in

December 2010 but it could not be materialised. Now the process is to be started

afresh as per direction given by the government. Accordingly action has to be

taken by Nagar Nigam, Jhansi.

(c) New Modern Slaughter House at Moradabad

The estimated cost of the project is Rs. 55 crores. M/s Abacus Legal Group, Delhi

has been selected as consultant. Process for selection of developer has been

started. The BEC under chairmanship of IIDC on 25.04.12 approved the Request

for Qualification (RFQ) and directed the Nagar Nigam, Moradabad to issue RFQ

for obtaining bids, which is delayed due to local bodies election.

(iii) Operation of city bus service in selected cities

This project relates to Financing, Operations & Maintenance of city bus services in

selected cities of state under JNNURM of Govt. of India. The selected cities are

Lucknow, Kanpur, Meerut, Varanasi, Allahabad, Agra and Mathura. UMTC, New

Delhi has been selected as consultant. The process for selection of developers was

undertaken twice by the department, but it could not be materialized. The project

was put up before Chief Minister Akhilesh Yadav during PPP project review

meeting held on 27.04.2012. It was directed to run the project under PPP. To

implement the scheme under PPP mode, matter is being considered afresh. At

present, the city buses in mission cities are being operated through SPV by

UPSRTC.

(iv) Upgradation, Operation & Maintenance of street lights in city zone

Ghaziabad

The project relates to upgradation, operation and maintenance of street lights in

Ghaziabad city zone by replacing existing lighting system. Besides saving energy

as well revenue, it is also proposed to obtain carbon credits by implementing this

project. M/s Deloitte, New Delhi has been selected as the consultant. Preparation

of Request for Qualification (RFQ) for developers is under process. The project

was put up before Chief Minister Akhilesh Yadav during PPP project review

meeting held on 27.04.2012 and it was directed to undertake the project and also

explore the possibilities of solar energy based lamps.

2.4 References:

1. Alexander, I., Estache, A. and Oliveri, A. (1999), ―A Few Things Transport

Regulators Should Know about Risk and the Cost of Capital.‖ Policy

Research Working Paper 2151, World Bank, Washington, DC.

2. Committee on Infrastructure Financing (2007), ―The Report of the

Committee on InfrastructureFinancing‖, Government of India, New Delhi,

India.

3. Compendium of PPP Projects in Infrastructure, (2007), Secretariat for

Infrastructure, Planning Commission, Government of India.

4. DEA, MoF, GoI (2007), ―Meeting India‘s Infrastructure Needs with Public

Private Partnerships - The International Experience and Perspective‖,

International Conference Report, Ministry of Finance, New Delhi, India.

5. Economic Survey 2007-08, Ministry of Finance, New Delhi.

6. Eleventh Five Year Plan, Volume I, II and III (2007), Planning Commission,

New Delhi.

7. Gomez-Ibanez, J.A., D. Lorrain, M. Osius (2004), The Future of Private

Infrastructure Taubman Center for State and Local Government. Kennedy

School of Government, Cambridge, MA.

8. Harris, C. (2003), ―Private Participation in infrastructure in Developing

Countries - Trends, Impacts and Policy Lesson”, IMF Working Paper, IMF

Institute, 33-65

9. Harris, S., (2004), Public Private Partnership: Delivering Better

Infrastructure Services, World Bank, India-Country Framework Report for

Private Participation in Infrastructure, March 2000, Washington DC.

10. Harris, C. (2008), ―India Leads Developing Nations in Private Sector

Investment.‖ Gridlines series, no. 30, PPIAF, Washington, DC.

11. Infrastructure Development Finance Company Limited. (2006). India

Infrastructure Report 2006. Anupam Rastogi, Ed. New Delhi: Oxford

University Press

12. Kochhar, Kalpana (2008), IMF Asia and Pacific Department, Business

Standard, May 4, 2008.

13. Michael B. Gerrard (2001), Public-Private Partnerships, Finance

and Development, IMF, Vol. 38, No.3, September 2001, Washington.

14. Ministry of Finance (2005), Scheme for support to PPP in Infrastructure,

New Delhi.

15. Mohan Rakesh (2006), Economic reforms in India – where are we and

where do we go? Public Seminar by the Institute of South Asia Studies,

Singapore, November 2006

16. Patil Committee (2005), Report of the High Level Expert Committee on

Corporate Bonds and Securitization, New Delhi: Ministry of Finance.

http://www.sebi.gov.in/debt/expertreport.pdf.

17. PricewaterhouseCoopers (2007), ―Infrastructure Public-Private Partnership

(PPP) Financing in India.‖ Draft report prepared for the World Bank with

support from PPIAF, Washington, DC.

18. Ramamurthi, R. (2003). ―Can governments make credible promises?

Insights from infrastructure projects in emerging economies‖. Journal of

International Management. 9, 253-269

19. Union Budget 2006-07, Ministry of Finance, New Delhi.

20. Vernon, R. (1971), Sovereignty at Bay: The Spread of U.S. Enterprises. New

York: Basic Books.

21. World Bank Report (2006), ―Financing Infrastructure: Addressing

constraints and challenges‖, Finance and Private Sector Development Unit,

South Asia Region

22. World Bank Report (2006), ―India – building capacities for Public Private

Partnership‖, Energy and Infrastructure Unit and Finance and Private Sector

Development Unit, South Asia Region.

23. World Economic Forum, (2010), ―The Global Competitiveness Report‖

24. www.rbi.org.in/scripts/BS_VIEWContent.aspx?ID=1912

25. www.udyogbandhu.com/topics.aspx?mid=Expressways