CHAPTER 1 INTRODUCTION TO PUBLIC PRIVATE PARTNERSHIPS (PPP)

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1 CHAPTER 1 INTRODUCTION TO PUBLIC PRIVATE PARTNERSHIPS (PPP) 1.1 Background The concept of Public Private Partnerships (PPPs) has emerged as a viable option for infrastructure development especially in the context of developing countries. PPPs are emerging as an innovative policy tool for remedying the lack of enthusiasm in traditional public service delivery. They represent a claim on public resources that needs to be understood and assessed. They are often complex transactions, needing a clear specification of the services to be provided and an understanding of the way risks are allocated between the public and private sector. In the context of developing countries, the recent increase in PPPs has been attributed to several reasons such as the desire to improve the performance of the public sector by employing innovative operation and maintenance methods; reducing and stabilizing costs of providing services; reinforcing competition; and reducing government budgetary constraints by accessing private capital for infrastructure investments. Private sector involvement in the delivery of public services is not a new concept; PPPs have been used for over three decades, predating the contracting out

2 initiatives of 1970s in the USA. Initially focussing on economic infrastructure, PPPs have evolved to include the procurement of social infrastructure assets and associated non-core services. In Asia, countries like China, Malaysia and Thailand started some projects with private participation in mid 1980s in one sector or so, but later on in the 1990s most of the countries in the region involved private sector in the provision of one or more of the infrastructure facilities. This chapter sheds light on the PPP concept and the rationale for increasing use of PPP projects in developing countries. It also discusses the evolution of PPP at the international level as well as in Asia and India. Finally, this chapter discusses the current status of PPP projects in India at the central and state level as well as in various sectors. 1.2 Introduction to Public Private Partnerships (PPP) Introduction: Indian economy is growing at a very fast pace and it has a dynamic and robust financial system. A stable policy environment is ensured by its democratic status and its independent institutions guarantee the rule of law. This highly diversified economy has shown rapid growth and remarkable resilience since 1991, when economic reforms were initiated with the progressive opening of the economy to international trade and investment. The most significant criteria for a continued growth rate of an economy is the provision of a quality infrastructure. According to the Planning Commission, an approximation of 8 percent of the Gross Domestic Product needs to be invested.

3 This would help in acquiring a prospective economy as stated in the 11th Five Year Plan. Fund investment of over US $ 494 billion has been conceived of according to the 11th Five Year Plan with effective from 2007 to The investment sectors under consideration are inclusive of telecommunications, electric power, transport, road, rail, air, water supply as well as irrigation. In order to meet such demands, various Public Private Partnerships or PPPs are being promoted for implementation of infrastructure projects. PPP is often described as a private business investment where two parties comprising government as well as a private sector undertaking form a partnership. The deficit can be overcome by ensuring much more private capital investment. Expert guidance is the only way out for enabling efficiency through subsequent reduction in cost. Governments embarking on PPP programs have often developed new policy, legal and institutional frameworks to provide the required organizational and individual capacities. These go beyond that needed to originate and financially close PPP deals, as they must also ensure that these deals are affordable to users and the public sector and provide ex-post evaluation of the success of PPPs in meeting their objectives. This framework needs to be in place in India to ensure a robust and successful PPPs program Definition: Most countries embarking on PPP programs have attempted to provide some form of definition of a Public Private Partnership.

4 Brazil s new PPP law defines, in its Article 2, that Public Private Partnership contracts are agreements entered into between government or public entities and private entities that establish a legally binding obligation to manage (in whole or part) services, undertakings and activities in the public interest where the private sector is responsible for financing, investment and management. Ireland defines PPPs as any arrangement made between a state authority and a private partner to perform functions within the mandate of the state authority, and involving different combinations of design, construction, operations and finance. In South Africa, a PPP is defined in law as a contract between a government institution and a private party where the latter performs an institutional function and/or uses state property, and where substantial project risks are passed to the third party. The UK s Private Finance Initiative (PFI), where the public sector purchases services from the private sector under long-term contracts is the best known component of that country s PPP program. From above definitions, it is clear that there is no single definition of PPPs. They broadly refer to long-term, contractual partnerships between the public and private sector agencies, specifically targeted towards financing, designing, implementing, and operating infrastructure facilities and services that were traditionally provided by the public sector. According to the Department of Economic Affairs, Ministry of Finance, Government of India, 2007, PPP is defined as A partnership between a public

5 sector entity (sponsoring authority) and a private sector entity (a legal entity in which 51% or more of equity is with the private partner/s) for the creation and/or management of infrastructure for public purpose for a specified period of time (concession period) on commercial terms and in which the private partner has been procured through a transparent and open procurement system. Thus, in Indian context we can say that Public Private Partnership (PPP) Project means a project based on a contract or concession agreement, between a Government or statutory entity on the one side and a private sector company on the other side, for delivering an infrastructure service on payment of user charges. PPPs do not mean reduced responsibility and accountability of the government. They still remain public infrastructure projects committed to meeting the critical service needs of citizens. The government remains accountable for service quality, price certainty, and cost-effectiveness (value for money) of the partnership. Government remains actively involved throughout the project s life cycle. Not all projects with private sector participation are PPP projects. Essentially, PPPs are those ventures in which the resources required by the project in totality, along with the accompanying risks and rewards/returns, are shared on the basis of a predetermined, agreed formula, which is formalized through a contract. PPPs are different from privatization. While PPPs involve private management of public service through a long-term contract between an operator and a public authority, privatization involves outright sale of a public service or facility to the private sector. A typical PPP example would be a toll expressway project financed and constructed by a private developer.

6 Typically, a PPP project involves a public sector agency and a private sector consortium which comprises contractors, maintenance companies, private investors, and consulting firms. The consortium often forms a special company or a special purpose vehicle (SPV). The SPV signs a contract with the government and with the subcontractors to build the facility and then maintain it. This partnership could take many contractual forms, which progressively vary with increasing risk, responsibility, and financing for the private sector. Thus, the PPP combines the development of private sector capital and sometimes, public sector capital to improve public services or the management of public sector assets (Michael, 2001). The PPP may encompass the whole spectrum of approaches from private participation through the contracting out of services and revenue sharing partnership arrangement to pure non-recourse project finance, while sometime it may include only a narrow range of project type. The PPP has two important characteristics. First, there is an emphasis on service provision as well as investment by the private sector. Second, significant risk is transferred from the Government to the private sector. The PPP model is very flexible and discernible in variety of forms. The various models/ schemes and modalities to implement the PPP are set out in Table 1.1 below:

7 Table 1.1: Schemes and Modalities of PPP Schemes Build-own-operate (BOO) Build-develop-operate (BDO) Design-construct-manage-finance (DCMF) Buy-build-operate (BBO) Lease-develop-operate (LDO) Wrap-around addition (WAA) Build-operate-transfer (BOT) Build-own-operate-transfer (BOOT) Build-rent-own-transfer (BROT) Build-lease-operate-transfer (BLOT) Modalities The private sector designs, builds, owns, develops, operates and manages an asset with no obligation to transfer ownership to the government. These are variants of design-build-finance-operate (DBFO) schemes. The private sector buys or leases an existing asset from the Government, renovates, modernises, and/ or expands it, and then operates the asset, again with no obligation to transfer ownership back to the Government. The private sector designs and builds an asset, operates it, and then transfers it to the Government when the operating contract ends, or at some other pre-specified time. The private partner may subsequently rent or lease the asset from the Government. Build-transfer-operate (BTO) Source: Public Private Partnership, Fiscal Affairs Department of the IMF. Typically, the PPP is not a privatization. At the same time, it cannot be described as partial privatization also. Privatization has generally been defined as a process of shifting the ownership or management of a service or activity, in whole or part, from the government to the private sector. The privatization may be of many forms, which include outsourcing, management contracts, franchise, service shedding, corporatization, disinvestment, asset sales, long-term lease, etc. The key

8 difference between the PPP and privatization is that the responsibility for delivery and funding a particular service rests with the private sector in privatization. The PPP, on the other hand, involves full retention of responsibility by the government for providing the services. In case of ownership, while ownership rights under privatization are sold to the private sector along with associated benefits and costs, the PPP may continue to retain the legal ownership of assets by the public sector. The nature and scope of the services under privatization is determined by the private provider, while it is contractually determined between the parties in PPP. Under privatization, all the risks inherent in the business rest with the private sector while, under the PPP, risks and rewards are shared between the government and the private sector. Under the PPP format, the government role gets redefined as one of facilitator and enabler, while the private partner plays the role of financier, builder, and operator of the service or facility. PPPs aim to combine the skills, expertise, and experience of both the public and private sectors to deliver higher standard of services to customers or citizens. The public sector contributes assurance in terms of stable governance, citizens support, financing, and also assumes social, environmental, and political risks. The private sector brings along operational efficiencies, innovative technologies, managerial effectiveness, access to additional finances, and construction and commercial risk sharing. PPPs often involve complex planning and sustained facilitation. Infrastructure projects such as roads and bridges, water supply, sewerage and drainage involve large investment, long gestation period, poor cost recovery, and construction, social, and environmental risks. When infrastructure is developed as PPPs the process is often characterized by detailed risk and cost appraisal, complex and long

9 bidding procedures, difficult stakeholder management, and long-drawn negotiations to financial closure. This means that PPPs are critically dependent on sustained and explicit support of the sponsoring government. To deal with these procedural complexities and potential pitfalls of PPPs, governments need to be clear, committed, and technically capable to handle the legal, regulatory, policy, and governance issues Importance of Infrastructure development: Rapidly growing economy, increased industrial activity, burgeoning population pressure, and all-round economic and social development have led to greater demand for better quality of roads, seaports, power supply, railways, airport, water and sanitation services. This increase in demand has put the existing infrastructure under tremendous pressure and far outstripped its supply. Upgradation of transport (roads, railways, airports, and ports), power, and urban infrastructure is therefore seen as critical for sustaining India s economic growth, along with improved quality of life, increase in employment opportunities, and progress towards the elimination of poverty. 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. Poor infrastructure is also a major barrier to foreign direct investment (FDI). Infrastructure is now seen as the necessary condition for growth and poverty alleviation. Studies by the Asian Development Bank and others have confirmed a strong linkage between infrastructure investments, economic growth, and reduction of poverty.

10 Infrastructure development is the key to sustainable growth in India in the following ways: (i) It makes India globally competitive (ii) It raises standard of living (iii) It means enhanced profits for government (iv) It bridges rural-urban divide (v) Increases level of employment Figure 1.1: Significance of Infrastructure Development in economic growth (Source: Compiled by Research Scholar) India has had policies in favor of attracting private participation in the infrastructure sectors since economic reforms were introduced in These

11 initiatives have met with varying degrees of success, but real progress has been made in some sectors, first in telecommunications, and now in ports and roads, and with individual projects in other sectors. The central government and the states are hoping to build on this progress, both in sectors where few private projects have been realized as well as scaling up their use in sectors where progress has already been made. The Public Private Partnerships (PPPs) can help meet the infrastructure gap in India, but are not a panacea. They represent a claim on public resources that needs to be understood and assessed. They are often complex transactions, needing a clear specification of the services to be provided and an understanding of the way risks are allocated between the public and private sector. Their long-term nature means that the government has to develop and manage a relationship with the private providers to overcome unexpected events that over time can disrupt even well designed contracts. Since the early 1990s, India has been looking to the private sector to fill investment gaps in infrastructure. Investment here did not initially grow as rapidly as in Latin America or East Asia, as policy reforms here were slower. However, with the increasing emphasis, over time, on Public Private Partnerships in key sectors, such as telecom and transport, India has seen an increase in investment with none of the corrections seen elsewhere. The years 2004 and 2005 saw the highest levels of investment to date. This success in attracting investment has meant that over the period , India attracted US$57.5 billion of investment in infrastructure projects with private participation. Since 2001, India has attracted approximately 9% of all investment in these projects for low and middle-income countries, and is second only to Brazil, and above China (Figure 1.2 below).

12 Figure 1.2: Investment Trends in Brazil, China and India (2005 US$ mn) Source: World Bank/PPIAF Private Participation in Infrastructure (PPI) Project Database, While India s performance in increasing investment is encouraging, it is also worth noting that since 2001, about two thirds of this investment has gone into the telecommunications sector. Investment in energy has not picked up noticeably. This reflects differing success in reforming these two sectors, with the structural and competitive reforms introduced in telecommunications leading to a rapid market expansion and surge in investments. In the transport sector, thanks to successful PPPs in roads, airports and ports, India realized more investments in 2004 and 2005 than had been realized from The Rationale for PPP projects usage Globally, governments were increasingly constrained in mobilizing the required financial and technical resources and the executive capacity to cope with the rising demand for roads, electricity supply, water supply, etc. Rapid economic growth, growing urban population, increasing rural urban migration, and all-round social and economic development had compounded the pressure on the existing infrastructure, and increased the demand supply gap in most of the developing world. In the developing world, countries and governments were experiencing

13 increasing pressure from their citizens, civil society organizations, and the media to provide accessible and affordable infrastructure and basic services. While the infrastructure gap was rising, government budgetary resources were 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, did not allow governments to make the required investments in upgrading or rehabilitating the existing infrastructure or creating new infrastructure. Furthermore, fiscal crisis (an outcome of poor economic performance) had a deteriorating impact on the already existing demand and supply gap in basic infrastructure facilities in these countries. The infrastructure services were monopolized by the public sector in most of these developing countries with the track record of operating inefficiently. The fiscal crises in these countries led to cuts in public expenditure, under-maintenance of infrastructure, and underinvestment in the new infrastructure. Moreover, in the absence of effective regulation, public sector monopolies had weak incentives to improve, innovate and to be responsive to the increasing consumer demand. The role of physical infrastructure in the process of economic growth is a well established fact (Calderón and Servén, 2004). Many researchers and studies have established a strong correlation between economic growth and infrastructure development (e.g. Queiroz, 1994). The development practitioners have also emphasized the importance of reliable and affordable infrastructure for reducing poverty. In other words, investments to maintain and improve physical infrastructure are central to sustained economic development.

14 The significance of investments in infrastructure for the long-term economic growth forced governments in developing countries to find alternative ways to finance infrastructure facilities (Hammami et. al, 2006). Therefore, since the early 1990s, developing countries across the globe including Asia have embarked upon public sector reforms and have introduced private investment in physical infrastructure - telecommunication, transport, energy and water and sewage sectors. This private participation took the form of Public Private Partnership (PPP). The objective behind this policy change was to exploit the benefits of private participation, as it was believed that this would improve managerial efficiency as well as efficiency in the provision of services (Pargal, 2003). This new trend also led the governments to re-examine their dominant role in the provision of infrastructure and move away from being the sole financiers, managers, and operators of infrastructure to being facilitators and regulators of services provided by private firms. Over the past few years, the Indian economy, as measured by its GDP, has been growing at the rate of 8% per annum. In order to sustain this growth, a recent study done by the Committee on Infrastructure Financing, constituted by the Government of India, has indicated that India must invest close to US$ 400 Billion in infrastructure development and maintenance over the period ranging from (Committee on Infrastructure Financing, 2007). Given the large sum of money involved as well as the vast amount of infrastructure that is to be built, it is clear that the participation of the private sector will be necessary, both in terms of financing and in terms of implementation of infrastructure. The political economy of infrastructure shortages, constrained public resources, and rising pressure from citizens and civil society have combined to push

15 governments and policymakers to explore new ways of financing and managing these services. Governments have been pushed to exploring new and innovative financing methods in which private sector investment can be attracted through a mutually beneficial arrangement. Since neither the public sector nor the private sector can meet the financial requirements for infrastructure in isolation, the PPP model has come to represent a logical, viable, and necessary option for them to work together. In the context of developing countries, the recent proliferation of PPPs has been attributed to several explicitly stated reasons, including: the desire to improve the performance of the public sector by employing innovative operation and maintenance methods; reducing and stabilizing costs of providing services; improving environmental protection by ensuring compliance with environmental requirements; reinforcing competition; and reducing government budgetary constraints by accessing private capital for infrastructure investments (Miller, 2000; Savas, 2000). The latent reasons for contemplating a PPP lie in the inherent differences between the public and private sectors. These differences imply that PPPs can, under the right conditions, provide an effective mechanism for capitalizing on the peculiarities and strengths of each sector in the pursuit of common objectives. Public agencies and private organizations can indeed seek mutual advantages in developing a PPP, particularly when the latter is characterized by trust, openness, fairness and mutual respect. For the public agency, the main rewards from partnering with the private sector are improvement of program performance, costefficiencies, better service provisions and appropriate allocation of risks and responsibilities (Pongsiri, 2002). The good faith approach indeed takes as proven

16 that private participation results in a combination of lower cost and less risk for the public sector (Miller, 2000; Leitch and Motion, 2003). The private sector on the other hand expects to have a better investment potential, to make a reasonable profit, and to have more opportunities to expand its business interests. A good return on investment is definitely an essential consideration from the private partner perspective (Scharle, 2002). The respective roles of the private and the public partner are therefore neither antagonistic nor identical, but complementary. The public sector controls several key legal and regulatory assets to implement a project within the context of an overall development program. The private sector brings outside capital, technical expertise and an incentive structure. The essence is the cooperative and mutually supporting nature of the relationship. Actual partnering therefore involves collaboration and leveraging the strengths of both the private sector (more competitive and efficient in economic terms) and the public sector (more responsible and accountable to society). PPPs may therefore, under the right conditions, bring the discipline of the market into public administration and promote a synergistic combination of the strengths, resources and expertise of the different sectors. The emergence of PPPs is seen as a sustainable financing and institutional mechanism with the potential of bridging the infrastructure gap. The foremost benefit of adopting the PPP route is the ability to access capital funding from the private sector. PPPs deliver efficiency gains and enhanced impact of the investments. The efficient use of resources, availability of modern technology, better project design and implementation, and improved operations combine to deliver efficiency and effectiveness gains which are not readily produced in a

17 public sector project. PPP projects also lead to faster implementation, reduced lifecycle costs, and optimal risk allocation. Private management also increases accountability and incentivizes performance and maintenance of required service standards. PPPs result in improved delivery of public services and also promote public sector reforms. Since the private sector assumes the risk of nonperformance of assets and realizes its returns if the assets perform, the PPP process involves a full-scale risk appraisal. This results in better cost estimation and better investment decisions. Finally, it helped in promoting social and economic policy objectives like poverty reduction (Bellier and Zhou, 2003). 1.4 Evolution of Public Private Partnerships (PPP): Evolution of PPP at International level: Private sector involvement in the delivery of public services is not a new concept; PPPs have been used for over three decades, predating the contracting out initiatives of 1970s in the USA. Initially focussing on economic infrastructure, PPPs have evolved to include the procurement of social infrastructure assets and associated non-core services. PPPs have extended to housing, health, energy, water and waste treatment. PPP policy has also evolved globally as public sectors develop the necessary skill base to procure infrastructure by way of PPP, including the capacity to create and maintain a regulatory framework. The private sector has also become increasingly innovative in several experienced countries, thereby adding significant value to public procurement.

18 The UK has been a modern instigator of this wave of private sector involvement, with the introduction of the Private Finance Initiative. PFIs have been used to develop and deliver all manner of infrastructure and services. The growing use of PFIs has inspired governments worldwide to adopt PPP arrangements. The Australian government has used PPPs to deliver several social infrastructure projects; Ireland has used them for transport infrastructure; in the Netherlands, social housing and urban regeneration programs have been delivered through PPP arrangements; India is investing heavily in highways through PPPs; Japan has many new PPPs in the pipeline; in Canada, many of the new infrastructure are designed, built and operated by the private sector; the USA is a pioneer with contracting out and has started experimenting with other forms of PPPs; emerging democracies from central Europe are also following suit. During the past two decades, PPPs have become the main route for delivering public services in both developed and developing countries. Between 1985 and 2004, there was a total of 2096 PPP projects worldwide with a total capital value of nearly US$ 887 billion. Countries worldwide with PPP experience include Australia, Germany, Hungary, Italy, Japan, Korea, Spain, the USA, and the UK. Among these countries, the UK is widely viewed as the one with the most extensive PPP (or PFI, which is the equivalent term used in the UK) experiences. For instance, during 2003 and 2004, the UK was the country with the largest PPP investments. Although PPPs have been implemented in many countries, they are not applied equally to all infrastructure sectors. In most countries, PPP projects focus on transportation projects such as roads, bridges, tunnels, railroads, and airports. However, the use of PPPs has been expanded across various sectors in recent years. For example, in Korea, PPPs are used in the development of schools, hospitals,

19 and public housing; in the U.S., PPPs are found in sectors such as prisons and water supply and wastewater treatment. In developing countries, contracting out was introduced in the mid 1980s during the first wave of governmental privatisation of state enterprises, under structural adjustment programs. Policies were adopted to address the perceived lack of managerial capacity in government, as well as the need to stop the continued dependence of state enterprises on state subsidies. In Africa, between 1990 and 2004, approximately 14% of public sector infrastructure was provided through PPP, the most common sectors being water, energy and transport. The PPP trend is global, accelerating and encompassing a broad range of infrastructure sectors. Applying PPPs in social infrastructure sectors has to some extent reduced the concentration of PPP projects at the central government level. Increasing number of local authorities are engaging in PPP arrangements to procure much needed local infrastructure Evolution of PPP in Asia and India: In Asia, the key infrastructure services in most of the countries are not only in short supply but are of poor quality. No doubt the problem is more severe in lowincome countries of Asia; infrastructure facilities in the middle-income countries in the region are also not adequate. The countries in this region have long recognized the need to improve the quality and quantity of their physical infrastructure;

20 realizing the fact that infrastructure plays a crucial role in facilitating economic growth and international competitiveness. Given various financial constraints, the governments in the region have changed their policies to create an environment conducive to sustainable private sector involvement in their infrastructure sectors. This public policy change has introduced private sector s participation in their infrastructure sectors. The significance of investments in infrastructure for the long-term economic growth forced governments in these countries to find alternative ways to finance infrastructure facilities (Hammami et. al, 2006). According to the World Bank s Private Participation in Infrastructure (PPI) Project Database, although few developing countries started infrastructure projects with private participation in the mid-1980s, but in the 1990s the trend turned into a wave that swept the whole of the developing world. In Asia, countries like China, Malaysia and Thailand started some projects with private participation in mid 1980s in one sector or so, but later on in the 1990s most of the countries in the region involved private sector in the provision of one or more of the infrastructure facilities. Since the early 1990s, developing countries across the globe including Asia have embarked upon public sector reforms and have introduced private investment in physical infrastructure. The table 1.2 below shows trends in private investment in the selected group of Asian countries from 1990 to The analysis is based on World Bank PPI Database.

21 Table 1.2: PPI in South and East Asia ( ) Source: World Bank PPI Database and 2007 World population Datasheet and Population Reference Bureau. Bangladesh In Bangladesh total projects that reached financial closure from 1990 to 2007 were 23 worth US $ 5367 million (Table 1.2). Most of these projects were green-field and in the telecom (12 projects) and energy (7 projects) sectors. In the transport sector, 4 projects were initiated but the type of private participation was management and lease contract. In Bangladesh, telecom sector was the first one to attract private investment in 1990 and one project reached financial closure attracting investment equal to US $ 110 million. Investment in this sector picked up in 1995, however, maximum investment in the sector came in 2007 equal to US $ 1349 million. In the energy (power, oil & gas) sector, it was between 1997 to 2001 that private investment (US $ 1056 million) was introduced.

22 Figure 1.3: Investment in Infrastructure Projects with Private Participation in South Asia by Sector ( ) Source: World Bank PPI Database Figure 1.4: Investment in Infrastructure Projects with private participation in South Asia by Type ( ) Source: World Bank PPI Database

23 India India is among those countries which attracted a major chunk of private investment in the region. In the period under consideration ( ), 306 projects worth of US $ million reached financial closure (Table 1.2). 97 of these projects were in the energy sector, 34 in the telecom, 166 in the transport and only 9 in the water and sewerage sector. Although in terms of total projects telecom was at number three but in terms of investment it attracted almost 45% of total investment followed by the energy sector which attracted 35 percent of the total investment (Figure 1.3). While in the transport sector 166 projects attracted only 19.7 percent of the total investment. In terms of project type, green-field again takes the lead as 182 projects were initiated in this category (for investment by type see Figure 1.4). In fact, in 2006, India has had the success of attracting more private investment in infrastructure than any other developing country (Harris, 2008). Nepal Nepal is at the lowest end in terms of attracting private investment as only 8 projects (5 in the energy and 3 in the telecom) reached financial closure in this period, with the worth of only US $ 404 million (Table 1.2). All the projects were green-field projects. Pakistan In Pakistan 47 projects (34 in the energy, 6 in the telecom and 7 in the transport) reached financial closure in seventeen years with the worth of US $ million (Table 1.2). The telecom sector attracted almost 57.4 % of total investment while energy and transport attracted 36.6 % and 6 % of the total investment respectively (Figure 1.3). In the energy sector, peak time of investment was from when energy sector reforms were introduced, while investment in the telecom

24 sector jumped upwards tremendously in 2004 and reached a peak of US $ 4365 million in These investments were mostly in the green-field projects (83 %) and only 11 % were divestitures and 6 % in concession contracts (Figure 1.4). Sri Lanka In Sri Lanka during 1990 to 2007, 22 PPI projects (20 green-fields, 1 divestiture and 1 concession) reached financial closure. 14 of these projects were in the energy sector, 7 in the telecom sector and 1 in the transport sector with a total worth of US $ 2640 million (Table 1.2). In value terms the telecom sector attracted 73 % of the total investment, the energy sector attracted 18 % of the total investment and the transport sector attracted only 9 % of the total investment (Figure 1.3). Overall these five countries representing South Asia began private activity in infrastructure in the 1990s. This region attracted almost US$ 126 billion in investment commitments for infrastructure projects with private participation in In this period, Bangladesh, India, Nepal, Pakistan and Sri Lanka were awarded 406 such projects. Annual investment in private infrastructure projects were driven mainly by the green-field projects for independent power producers (IPPs) in India and Pakistan and the granting of telecommunication licenses in the same two countries. Annual investment dropped in 1998 but recovered later on and remained so generally for the rest of the period. The private activity in India dominated both in terms of investment and number of projects in the region. But when private activity is measured in terms of per capita investment, Sri Lanka rises to the top.

25 The countries in East Asia & Pacific have attracted the second highest private activity in infrastructure in the world. Private activity in the region began early, with major programs in Malaysia and the Philippines in the second half of the 1980s, and grew rapidly in the mid-1990s, but declined 1997 onwards (for two to three years) as a consequence of East Asia Financial Crisis. China is at the top in terms of investment commitments and number of projects. These countries together attracted almost US$ 265 billion in investment commitments for infrastructure projects with private participation from In this subregion of Asia, China dominated both in terms of investment and number of projects in the region as far as the private participation in infrastructure (PPI) is concerned. But when private activity is measured in terms of per capita investment, Malaysia took the lead. Figure 1.5: Investment in Infrastructure projects with Private Participation in East Asia and Pacific by Sector ( ) Source: World Bank PPI Database

26 Figure 1.6: Investment in Infrastructure Projects with Private Participation in East Asia and Pacific by Type ( ) Source: World Bank PPI Database China China awarded 805 projects to the private sector and attracted investment equivalent to US $ million during 1990 to 2007 (Table 1.2). This investment peaked in 1997 and declined later on but again picked up in Mostly these projects were in the energy sector (304 projects) followed by water & sewerage (258 projects), transport (209 projects) and telecom (4 projects). However, the transport sector attracted maximum investment which was about 42.5 % of the total investment in infrastructure projects, the energy sector attracted 35.6 %, the telecom sector attracted 14.5 % and the water & sewerage sector attracted 7.5 % of the total investment respectively (Figure 1.5). As far as the PPI project type is concerned, again green-field projects take the lead with 497 projects, concession has 200 projects, divestiture has 99 projects and management and lease contract have 9 projects (for investment by type see Figure 1.6)

27 Indonesia From 1990 to 2007, Indonesia awarded 87 projects (30 each in the energy and transport sectors, 17 in the telecom sector and 10 in the water & sewerage sector) to the private investors who invested almost US $ million (Table 1.2). In value terms, the telecom sector attracted maximum investment (54 %), energy (33%), and transport (9.8%) and water & sewerage (2.5%) of the total investment (Figure 1.5). Maximum investment was committed in 1996 both in the energy and telecom sectors. Most of these projects were green-field (49 projects); while 39 were of the type concession, 6 divestitures, and 1 project type was management and lease contract (Figure 1.6). Malaysia In Malaysia, 96 projects worth US $ million reached financial closure from 1990 to 2007 (Table 1.2). The transport sector occupies the highest share in terms of number of projects awarded (48 projects), while 26 projects were awarded to the private sector in the energy sector, 7 in the telecom and 16 in water & sewerage sector respectively. Investment commitments were highest in the transport sector which accounted for 33 % of the total investment. Compared to this, the energy sector attracted 29 % of the total investment, telecom 18 % and water & sewerage sector 20 % respectively (Figure 1.5). Just like other countries in the region greenfield projects were maximum (58), 7 projects came in the category of divestitures, 28 in concession and 3 in management and lease contract (Figure 1.6). In the energy sector maximum investment came in 1994 when 5 projects reached financial closure. In the transport sector investment commitments picked up

28 slightly later, 6 projects reached financial closure and investment commitments were also at their peak. Philippines In Philippines, 88 projects were awarded to the private sector from 1990 to 2007, with a total investment commitment equal to US $ million (Table 1.2). Out of these 88 projects, 62 projects were in the energy sector with investment share of almost 43 %. 10 projects reached financial closure in this period in the telecom sector and occupy investment share equal to 30%. In this period, transport and water & sewerage sectors have 7 % and 19% share in the total investment respectively, and the number of projects that reached financial closures are 11 and 5 respectively (Figure 1.5). Out of these 88 projects, 56 were green-field projects, 19 were concession projects, 12 divestitures and 1 was of the type management and lease contract (Figure 1.6). As in the case of rest of the countries in the sample peak time of investment was in the mid-1990s. Thailand In Thailand, 96 projects worth of US $ million reached financial closure during 1990 to 2007 (Table 1.2). Sector-wise maximum projects were awarded in the energy sector (55 projects), 8 projects in the telecom sector, 17 projects in the transport sector and 16 projects in the water & sewerage sector. But in terms of investment commitments telecom attracted 48 % of the total investment, energy sector attracted 38 % of the total investment, transport sector attracted 11 % of the total investment and 3 % of the total investment was attracted by water & sewerage sector (Figure 1.5). 73 projects were the green-field, 13 projects were concession, 6

29 projects were divestiture and 4 projects were management and lease contract type (Figure 1.6). PPP markets across the globe are at very different stages in the maturity cycle (Figure 1.7). Consequently, cross-jurisdictional evaluation is problematic and is compounded by subtle differences in legislative frameworks and tendering processes. In new/emerging PPP markets, for example, there is a tendency to focus, initially at least, on horizontal infrastructure such as roads. The PPP model has a proven track record in the delivery of road infrastructure in many countries around the world and combined with the tried and tested engineering required to deliver conventional road infrastructure, risk and uncertainty is considered to be reduced. As applied knowledge and sophistication within jurisdictions subsequently expands, the PPP model can then be rolled out to more complex infrastructure projects such as airports, hospitals, schools, prisons and more latterly renewable technologies. The figure 1.7 below shows that countries like UK and Australia have achieved high level of sophistication in Public Private Partnership projects. Countries like Ireland, Spain, France, Canada, US, Italy, Japan, etc. have developed an average level of sophistication in PPP projects. In terms of PPP activity, countries like UK, Australia, US, Canada, Spain, France lead the way with a high level of activity in PPP projects followed by Japan, Ireland, Germany, South Africa and Ireland. Most of the Asian countries like China, India, Russia, Slovakia lie very low and have a low level of activity in PPP.

30 Figure 1.7: Public Private Partnerships Market Maturity Curve Source: Deloitte (2009) 1.5 Public Private Partnerships (PPPs) in India: Current status of PPP projects Public Private Partnerships in India: India had a few notable PPPs as early as the 19th century. The Great Indian Peninsular Railway Company operating between Bombay (now Mumbai) and Thana (now Thane) in the year 1853, the Bombay Tramway Company running tramway services in Bombay in the year 1874, and the power generation and distribution companies in Bombay and Calcutta (now Kolkata) in the early 20th

31 century are some of the earliest examples of PPP in India. Also, prior to obtaining independence from British rule in 1947, 65% of power generation was done by private companies. Post independence, a wave of nationalization swept across the country, and the role of the private sector in infrastructure provision was soon marginalized. At that time, private firms were limited to being contractors, and in some cases operators of infrastructure services, particularly in key infrastructure segments such as transportation, power, telecommunications and urban infrastructure. As India continues to try and build a sustainable road and transport networks for the future, Public Private Partnerships (PPP) are expected to play a very vital role in this growth story. It is well known that PPP in the road infrastructure is the largest PPP segment in India till date. The PPP segment in this area has an opportunity to bank more than US$ billion covering 3.3 million kilometers of road network. Anecdotal comments from the private sector suggest that a considerable number of un-bankable and unrealistic PPP projects are brought to the market by state governments. Data from surveys show that there were many projects that have not moved forward past the award stage either because they have been abandoned or remained dormant. Of these, several had no good offers forthcoming in response to successive requests for expressions of interest. Although this number is not obviously high compared to the number of projects underway, it nonetheless suggests that there may be significant benefits from capacity building in identification and preparation of PPPs to ensure that more bankable projects are brought to market.

32 There is a well-established need for infrastructure investments in road construction in India. In recent years India s economy has experienced a period of rapid economic growth, following steps toward economic liberalization made in In the Tenth Five Year Plan period (between and ), the average growth rate in India was 7.6 percent in comparison to 5.5 percent achieved in the Ninth Plan period of and The estimates in the Eleventh Five Year Plan s ( ) were for even higher growth at 9 percent. This level of growth necessitates rapid improvements and additions to the capacity of economic infrastructure. However, the ability of infrastructure to keep up with the economy s fast expansion has been constrained by the availability of investment. The actual investment by 1999 was only 3.7% of GDP, with private investment contributing just 0.9% of GDP. Realizing that the share of private investment needed to increase manifold, the Government of India initiated a strategy for encouraging private investment in infrastructure through Public Private Partnerships (PPP). The Government of India envisaged that the investment in infrastructure would increase to 8% of GDP by and that of this the investment from private sources would contribute approximately 1.2% of GDP. The following figure 1.8 shows the increasing trend of investments in infrastructure through PPPs, during the period 1990 to 2008.

33 Figure 1.8: Private Investment in Infrastructure ( Rs Crore) Source: PPI Database, World Bank Group The challenge of sustaining this level of growth has brought to centre-stage the issue of deficient infrastructure in the country. India s infrastructure spending for was estimated at about 5 percent of GDP. By contrast, this is far behind some of the other fast growing economies such as China, which has an infrastructure spending of 9 percent of GDP. Within the context of India s own growth path the current rate of investment is thought to be too slow. Therefore need for capacity expansion and also replacement of existing assets in infrastructure sectors including transport, urban infrastructure, water and sanitation, ports and several others, cannot be overemphasized. The Eleventh Plan estimates infrastructure spending in the region of USD 514 billion (24 lakh crore) to overcome infrastructure bottlenecks. Given the limited capacity of the Government to provide infrastructure services, about 30 percent of

34 the total infrastructure investment in the Eleventh Plan is envisaged to be made by the private sector. The PPP policy initiative is a key enabler and driver of private investment in India s infrastructure Current Status of PPP projects in India: According to a report published by Secretariat for Infrastructure Planning Commission, Government of India in March, 2010, whereas 241 projects with an investment of Rs. 66,627 crore had been completed, 292 projects with an investment of Rs. 2,41,111 crore were under implementation. Another 412 projects involving an investment of Rs. 3,76,561 crore were in the pipeline. Evaluation of sectoral distribution of PPP projects in India at both central and state government level highlights that the growth in Public Private Partnership is more pronounced in some sectors than others Status of PPP projects at Central level: The Constitution of India has defined the subjects on which the Centre and the States can legislate and frame policies. The key infrastructure sectors such as railways, national highways, airports and major ports are Central subjects and, therefore, the Central Government has been initiating measures to meet the growing demand for infrastructure in these sectors. Apart from public sector projects, numerous PPP projects have also been awarded, and in many cases, these PPP projects are in operation. In the Central sector, a total of 65 PPP projects involving an investment of Rs. 25,343 crore had been completed up to December 2009, 83 PPP projects with an investment of Rs. 75,914 crore were currently under

35 implementation and another 160 PPP projects with an estimated investment of Rs. 1,84,807 crore were in the pipeline. Completed projects: Up to December 2009, 39 PPP projects of national highways with an investment of Rs. 13,698 crore and 23 PPP projects in the port sector with an investment of Rs. 5,762 crore have been completed. In the civil aviation sector, airports involving a total investment of Rs.5,883 crore have been completed through PPP mode at Cochin, Bangalore and Hyderabad airports. Over 200 projects have achieved financial closure between alone with total estimated project cost of US$18 billion. Projects Closed Across Selected Sectors The table 1.3 below shows projects that have achieved financial closure in the year : Table 1.3: Completed projects across sectors Sector Number of Estimated Cost Projects ($ equivalent) Medical & Health Ports Road Industrial Infrastructure Power IT, ITES, Science Technology Metro Rail Urban Infrastructure Tourism Water Other Total Source: State PPP Cells, Government of India

36 Projects under implementation: In March 2010, 64 projects with an investment of Rs. 41,911 crore were under implementation in the road sector while in the port sector, 13 projects involving an investment of Rs. 10,509 crore were under implementation. The airports at Delhi and Mumbai were being upgraded with investment of Rs. 18,777 crore. In railways, private entities were investing Rs. 2,387 crore in rolling stock for container trains. In the rail sector, two loco factories were also being set up with an investment of Rs. 1,500 crore while port connectivity and other projects of Rs. 830 crore were also under implementation. In sum, projects with an estimated investment of Rs.4,717 crore were under implementation in railway sector. Projects in the pipeline: It is expected that another 81 national highways projects envisaging an investment of Rs. 76,341 crore would be awarded soon. 29 port projects with an estimated investment of Rs. 18,466 crore are also in the pipeline. The Ministry of Railways plans to redevelop 50 railway stations in the PPP mode at an estimated cost of Rs. 90,000 crore Status of PPP projects at State level: In a federal country like India, active participation of State Governments is essential for development of world class infrastructure, especially in the sectors assigned to the States by the Constitution. These include state highways, state ports and urban infrastructure. Power is a concurrent subject where distribution and intra-state transmission is entirely with the states while bulk of the generation is also with the states. The State Governments are implementing several infrastructure projects through the PPP mode in all these sectors.

37 Information received from States/UTs in March 2010 includes 176 completed PPP projects in different sectors with a total investment of Rs. 41,284 crore while 209 PPP projects were under implementation with an estimated investment of Rs. 1,65,197 crore. In addition, 252 PPP projects were in the pipeline involving an estimated investment of Rs. 1,91,754 crore. Completed projects: Upto March 2010, 96 road projects with an investment of Rs. 6,384 crore and 20 non-major ports with an investment of Rs. 19,704 crore had been completed through PPP in the state sector. 51 urban infrastructure projects had been executed through the PPP mode involving an investment of Rs. 6,105 crore. Of the total of 176 projects completed by the States, Rajasthan had completed a maximum number of 41 projects, followed by Gujarat with 37 projects and Andhra Pradesh with 31 projects. The largest number of projects had been completed by the States in the road sector followed by urban infrastructure projects. Projects under implementation: In the road sector, 69 projects with an investment of Rs. 60,865 crore and in non-major ports, 37 projects with an investment of Rs. 51,549 crore were under implementation in March urban infrastructure projects with an investment of Rs. 19,738 crore were also under implementation. Projects in pipeline: 86 PPP projects in the road sector requiring an investment of Rs. 39,482 crore are in the pipeline. Another 18 PPP projects with an estimated investment of Rs. 17,436 crore in non-major ports and 67 PPP projects in urban

38 infrastructure sector requiring an investment of Rs. 45,838 crore are also in the pipeline. Figure 1.9: Sectoral Distribution of PPP Projects Initiated by State Governments in India Source: Planning Commission (2010b) A key indicator of the success of the initiative can be seen from the PPP projects pipeline being developed across each of the states and the sectors across the country. With support from initiative-supported PPP Cells and facilities in most cases, a large pipeline of projects has emerged across the states. Project-specific data received from the state PPP Cells is presented in table 1.4 below.

39 Table 1.4: PPP projects in Central and State Sector Source: State PPP Cells, Government of India, 2009 In a survey conducted by World Bank in 2006 across states and central agencies, there were at least 86 PPP projects in our main sectors of focus where a contract had been awarded and projects were underway. Over 70% of these were in the roads sector. The other transport sectors have seen much fewer projects, with 8 ports (4 major and 4minor ports), 2 airport and 2 rail projects underway. In the urban infrastructure sector, 11 PPP projects had been awarded, with 8 solid waste management, 2 water and sanitation and one bus terminal projects. When looking at the total estimated project cost of PPPs, we see that road projects account only for 36 percent of the total because of the small average size of

40 projects. Ports, with a much larger average size of project, account for 56 percent of the total. It is noteworthy that if ports and central road projects are excluded from the total, there is in fact a relatively small value of deal flow, at only Rs 30 bn in basic infrastructure PPPs to-date, suggesting a significant potential upside for PPP projects across sectors where states and municipalities have primary responsibility. 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 projects awarded 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 smallsized 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. This is shown in figure 1.10 and figure 1.11 below:

41 Figure 1.10: Number of awarded PPP s by sector (Total=86) Figure 1.11: Project cost of awarded PPP s by sector (Total= Rs bn) Anecdotal comments from the private sector suggest that a considerable number of unbankable and unrealistic PPP projects are brought to the market by state governments. Data from the survey presented in the Annex show that there were 15 projects that have not moved forward past the award stage either because they

42 have been abandoned or remained dormant. Of these, several had no good offers forthcoming in response to successive requests for expressions of interest. Although this number is not obviously high compared to the number of projects underway, it nonetheless suggests that there may be significant benefits from capacity building in identification and preparation of PPPs to ensure that more bankable projects are brought to market. In terms of approach to provider selection, 93 percent of the projects in the sample were competitively bid (of which four-fifths used national competitive bidding), with only 7 percent procured either through Memorandums of Understanding (MOUs) or negotiated. However, it is worth noting that in value terms 42 percent of the projects were awarded on a negotiated/mou basis. Some states have undertaken far more PPPs than others, and there has been a much heavier use of PPPs in some sectors. As per the Database of Department of Economic Affairs, Ministry of Finance on July 31, 2011, there have been 758 PPP projects in our main sectors of focus where a contract has been awarded and projects are underway in the sense that they are either operational, have reached construction stage, or at least construction/implementation is imminent. The total project cost is estimated to be about Rs. 383, Crore. This is evident from table 1.5 below:

43 Table 1.5: Completed projects across various states Source: Department of Economic Affairs, Ministry of Finance, Government of India (July 31, 2011) Across states and central agencies, the leading users of PPPs by number of projects have been Karnataka, Andhra Pradesh, and Madhya Pradesh, with 104, 96 and 86

44 awarded projects respectively and the National Highways Authority of India (NHAI), with about 155 projects. In terms of main types of PPP contracts, almost all contracts have been of the BOT/BOOT type (either toll or annuity payment models) or close variants Status of PPP projects in various sectors: When we assess the overall physical infrastructure development in the country, India has the fifth largest electricity generation capacity and has generated about 704 billion units of power in Its road network is the second largest in the world aggregating 3.34 million kilometers (Kms). Indian Railways is the second largest rail network under a single management in the world. India is the third largest telecom services market in the world with 326 million strong telephone networks at the end of June 2008, including mobile phones of around 287 million. Indian ports, both major and minor, have estimated to handle 650 million tonnes traffic during To develop such a huge physical infrastructure, in addition to PPP model, private sector has also been directly involved in the development of public infrastructure, particularly in telecom, power, ports, airports and urban development. Despite various concession agreements, tax holidays and other benefits to develop the public infrastructure with private participation, the infrastructure development so far have said to be not much encouraging due to sector specific policies and other constraints as discussed below.

45 Sector Table 1.6: Sector-wise PPP Projects in the States Ongoing Projects No. of Projects Estimated Cost (Rs. Crore) Projects in Pipeline No. of Projects Estimated Cost (Rs. Crore) Roads Ports Airports Railways Power Urban Infrastructure Total Source: The Committee on Infrastructure web site, Planning Commission, GoI Power Sector India has a huge installed power generation capacity of 1,43,061 MW (end- March 2008), of which the private sector projects constituted at 14.0 per cent only (Table 1.7). Government of India has, earlier, envisaged a mammoth capacity addition plan of 100,000 MW through 2012 to meet its mission of power for all. The 11th Plan has targeted additional power generation capacity at 78,577 MW, which is more than the total capacity added in the previous three Plans. Even among the proposed capacity additions, the private sector would have a share of only 13.7 per cent, which is very low when compared to power requirements. This

46 huge capacity addition may not be feasible viewing from the pace of development of ongoing and proposed new projects. Table 1.7: Status of Private Power Capacity (As on March 31, 2008) (MW) Item Thermal Hydro Nuclear RES * Total Total Installed Capacity Of which Private Sector Share in Total Capacity (%) RES * : Renewable Energy Sources. Source: Central Electricity Authority, Ministry of Power, GOI. Given the fiscal constraints, private participation in the power sector development has been considered essential for meeting this capacity addition and to meet the growing demand for power. However, there is no PPP model power project in the central sector and in the states also, it is very limited as the power projects have either been developed by the public sector or by the private sector as Independent Power Producers (IPP), Captive Power Plants (CPP) and Merchant Power Plants (MPP). Though the power sector reform has encouraged private power project, the response in this regard is not much encouraging. According to Power Ministry sources, about 7366 MW capacity (5 per cent of total installed capacity) consisting of 37 projects has been fully commissioned so far in the IPP segment. Five private power projects have been completed with a capacity of 718 MW and about 5776 MW capacity is under execution. There are about 52 thermal power projects and nine hydro power projects with an installed capacity of 30,825 MW have been

47 cleared/appraised by the Central Electricity Authority (CEA), but there is no sign of their early execution. India has an estimated unutilized hydro power potential of more than 1,50,000 MW. However, only 17.5 per cent of the electricity supply comes from the hydro power sector in A study by the CEA has identified 399 potential hydel projects with an aggregate capacity of 1,07,000 MW. Preparation of pre-feasibility Reports of 162 schemes with aggregate installed capacity of 47,930 MW has already been completed by the CEA. In addition, about 60,000 circuit Kms of transmission network is expected by Of which, how many projects will be executed through private participation is a big question. Ultra Mega Power Projects with each having a capacity of minimum 4,000 MW through private sector funding have also been considered by the Government to augment the capacity addition to meet the power requirement in the country. However, there are certain issues that come in the way of private sector participation need attention to augment the private investment. The initial response of the domestic and foreign investors to the private participation in the power sector was extremely encouraging. However, many projects have encountered unforeseen delays. There have been delays relating to finalization of power purchase agreements, guarantees and counter-guarantees, environmental clearances, matching transmission networks and legally enforceable contracts for fuel supplies. Continuous losses by State Electricity Boards (SEBs) arising both from inadequate tariff and from Aggregated Technical and Commercial losses of as high as 40 per cent discouraged the private investors in power generation as they faced insecurity of payment and hence expansion of private investment in this sector was constrained. In this regard, policy issues such as inability of SEBs and State Governments to provide acceptable payment security to the private power suppliers, delay in finalization of power purchase

48 agreement (PPA), fuel supply agreement, fuel transportation agreement and problems in sourcing coal supply to thermal power stations need a relook to encourage private participation. Second, focusing of small projects under private participation may be viable, bankable, and easily executable and above all, the gestation period will also be minimal. On the other hand, big projects like Dabhol, which encountered with many problems, has also been a discouraging factor for the private participation in mega projects. Reducing the risk is a better option than allocating it. Therefore, minor power projects in the private sector or on PPP basis should be encouraged. An important factor which discourages private participation is the reluctance of lenders to finance large IPPs. Third, using domestically available fuel may reduce the input cost, which is to be explored first before going in for import of fuels by the developers. Captive mining - not only in India but also abroad - by the power producers would ease the fuel constraints. The cost could be reduced by minimizing the complexities in the projects instead of shifting the risks to other parties. Better management and appropriate choice of technology for the Indian condition would reduce the capital cost significantly. Fourth, the disappointing aspect of the reform process could be the slow tangible progress on competition and open access to grid in the sector. The Electricity Act 2003 provides for an enabling framework to stimulate private investments for capacity augmentation and also for private licensees in transmission and distribution through an independent network. However, private participation in transmission and distribution system has not been an easy task. It is widely debated that the captive unit have found it difficult to transmit excess power through the

49 national grid, while putting private grid is a costly affair and unviable option at the initial stage. Fifth, renewable energy should play a major role in the supply of power. However, using of renewable energy sources in India is very limited at around 25 per cent of hydro power and another 7.7 per cent of other renewable energy out of total installed capacity, which is to be encouraged in the wake of their availability, cost and environmental friendly features. Gross wind power potential in the country has been estimated at over 45,000 MW, based on the areas having wind power density of 200 Watt per square meter or more, which is to be explored fully to optimize the power generation at a lower cost. When renewable energy sources are used, the demand for fossil fuels will be reduced. Unlike fossil fuels, most renewable sources do not directly emit greenhouse gases. In view of aforesaid issues, power sector reform has to go a long way, although the legislative and institutional prerequisites are now in place. If implemented properly, it would create a user competition in wholesale as well as retail power supply. Telecommunication Sector Usually, the Government owned operators play a major role in the development of telecom sector worldwide. In India, private investment and association of the private sector was needed in a big way to bridge the resource gap. Therefore, the telecom sector was opened up for private participation after the announcement of industrial policy in 1991 to bridge the gap. As a result, the private telecom companies have started operations in the Indian soil due to vast availability of market potentials. Slowly, they picked up their market share and currently they outperform the government owned services due to increasing commercial gains.

50 Adoption of unified access service, accepting the intra-circle mergers and acquisitions, licensing regulations and announcement of broadband policy, the private sector has continued to play a significant role in the growth of the telecom sector and their participation has increased significantly during the recent period. The total telephone connections have increased substantially from 45 million at the end of March 2003 to over 300 million at the end of March 2008 (Table 1.8). The Government continues to provide incentives to the telecom sector and reduced the license fees significantly. Due to acute competition in this sector, the tariffs for various services have experienced a downward movement apart from harmonization. As at end March 2008, 134 private licensees have been providing mobile telephony services with a total investment of Rs.95,000 crore. Besides, 120 new private licensees are yet to commence their service. Table 1.8: Private Sector Performance in Telecommunication Sector Description Sector Position as at the End of Mar-02 Mar-06 Mar-07 Mar-08 Wireline Phones (In Lakh) Public Wireless Phones (GSM+CDMA*) (In Lakh) Total Telephones (Fixed + Cellular) Private Total Public Private Total Tele-density (%) Switching Capacity (In Lakh) Public VPTs [PSUs+Private] Total

51 OFC Route Kms (Inclusive of MTNL) TAX Lines (In Lakh) Rural Phones (in Lakh) * CDMA : WLL (Wireless+Mobile) Source: Department of Telecommunications, GoI. New mobile phone connections have been increasing substantially during the recent period and as a result, India has 326 million strong telephone networks with 88 per cent share relates to mobile segment at the end of June 2008, which is one of the largest in the world. Due to continuous encouragement for private operators in this sector, their share in the total telephones has increased to about 73.5 per cent as at end-march India has joined 100 million mobile club of the world during 2006 as the fifth country after China, the US, Japan and Russia. The private sector projects are reported to be working successfully in the cellular segment due to increase in commercial gains and also vast investment opportunities available in this sector. Though it appears to be a major success story in private sector participation in the telecom sector, some of the issues deserve attention. Issues such as spectrum allocation, tariff rationalization, etc., need to be addressed to encourage further healthy competition in this sector. Since April 2008, one of the major issues concerning the private operators, viz., the access deficit charges have been removed, which may lead to a downward tariff revision. Though the overall teledensity has improved to 28.3 per cent at the end of June 2008, the slow progress in rural tele-density is to be addressed to improve the communication facilities across the country.

52 Roads and Highways The PPP model may be considered as a successful one not only in the world over but also in India in the development of road sector as majority of the on-going highways development projects have been taken up under this model. With a view to attract private investment in road development, maintenance and operation, National Highways Act (NH Act) 1956 was amended in June 1995 to facilitate private participation in road infrastructure projects. While there are a number of forms of PPP, the common forms that have been used for development of National Highways are Build Operate and Transfer (BOT) on Toll basis, BOT on Annuity basis and SPV basis. At present, the Government has embarked upon a massive programme to develop highways through the National Highways Development Project (NHDP), Phase-I to Phase-VII. Under these projects, 13,146 Kms of National highways have been proposed at an estimated cost of Rs.54,000 crore. So far 82 projects valued about Rs.23,104 crore have been taken up on BOT (Toll) basis. Of this, 34 projects have been completed and remaining 48 projects are under progress. Under annuity basis, 25 projects covering a length of 1376 Kms have been taken up, of which eight projects have been completed and the remaining projects are under progress (Table 1.9). Another 12 projects have been taken up under SPV funding, of which five projects have been completed. Given the unmatched investment opportunity, contractors and supervision consultants consisting of 46 firms from 27 countries have been implementing about 80 projects with a cost of about Rs.22,000 crore in India.

53 Table 1.9: Projects Undertaken through PPP in Road Sector Item BOT (Toll) BOT (Annuity) Number of Projects Value of the projects (Rs.Cr) Projects Completed 34 8 Projects Under Progress Source: Annual Report , Department of Road Transport and Highways, GoI. (As at end-march 2008) Another issue in the road sector is that many of the projects have been delayed due to problems in land acquisition, hurdles in material movements, law and order problem. A clear mandate to acquire land for public use is to be conceived and to be operationalised to speed up the public projects. In case of toll roads, levying of user charges at a higher rate at the initial stage may dampen the road users, which could be rationalized through gradual increase in the later stage. Risk and revenue sharing arrangements should be clearly dealt with for smooth passage of project implementation. Excessive commercialization may affect the common man, who may be protected with some element of subsidy at the initial stage. Above all, the confidence of the local people is to be gained for smooth implementation of the project. Airports There are 449 airports/airstrips in the country. Among them, the Airport Authority of India (AAI) owns and manages 92 airports and 28 civil enclaves at defense airfields, which provides air traffic services over the entire Indian airspace and adjoining oceanic areas. The legislative framework for privatization of airports

54 already exists in India. Some airports have already been owned by State Governments, private companies and even individuals. However, the financing of airport infrastructure has some inherent problems. These projects have a large element of cost, very long gestation period and highly uncertain returns on investment based on several assumptions of traffic growth that may not materialize. It has been estimated by the Task Force on Financing Plan for Airport constituted by the Planning Commission that private sector investment for the modernization and development of various airports under PPP model would be Rs.31,100 crore (Table 1.10). Table 1.10: Projected Investments from PPP in Airports Airport Private Investment (Rs. Crore) Delhi & Mumbai 11,400 Bangalore & Hyderabad 4,000 Chennai & Kolkata 5,700 Five Greenfield Airports 8,500 City side Development 1,500 Total 31,100 Source: Report of the Task Force on Financing Plan for Airports, Planning Commission, GoI. Modernization and restructuring of Mumbai and Delhi airports at an estimated investment of US $3 billion over next 20 years under PPP model has already been in operation. Constructions of new Greenfield international airports at Bangalore and Hyderabad on BOOT basis, though delayed, have been completed by April Modernization of other major airports like Chennai, Kolkata, etc., is pending due to procedural hassles and land acquisition problems, which are to be addressed urgently to ease the air traffic. Due to the introduction of open sky policy, the air

55 traffic has increased significantly in major airports and the runways in these airports are not in a position to handle the increasing traffic, which resulted in flight delays. This call for expansion and modernization of existing airports on a priority basis and also new airports of international standard, at least in the metros, are to be developed to accommodate the growing air traffic. Furthermore, the Committee on Infrastructure has approved the development of 35 non-metro airports. While the AAI will undertake all the development works on the air side, city side developments at most of the viable airports will be undertaken with private sector participation through JVC/private consortium. In view of worldwide thrust towards corporatization and privatization of airports, comprehensive strategy needs to be prepared to capture the best investment opportunities. In case of Greenfield projects, the promoter may be required to prepare pre-feasibility study for the smooth functioning of the project. Transparency in the operations and in the revenue and risk sharing would ease the hurdles in the implementation of the projects under PPP model. There will also be need for commercialization of marginal or loss-making airports by transferring them to private companies, State Governments, urban local bodies etc., for operation and management under negotiated terms and conditions. Ports and Shipping There are 12 major ports and about 60 non-major and private ports in the country. With the awarding of infrastructure status for inland waterways and inland ports, the construction of ports under private sector has picked up. At present, 36 private/captive port projects involving capacity addition of about 137 MTPA3 and an investment of about Rs.9,756 crore are at various stages of evaluation and implementation. Out of these, 13 projects with capacity addition of about 47.40

56 MTPA involving an investment of about Rs.2662 crore have been operationalised and four projects are under implementation through private participation. Development of other ports is under slow progress, which needs attention of all concerned for early execution. The main areas which have been thrown open for private investment under BOT basis include construction of cargo handling berths, container terminals, warehousing facilities, installation of cargo handling equipments, construction of dry-docks and ship repair facilities. There is a plan to develop 54 new berths through PPP model in the next five years, which are to be hastened to relieve the port congestion problem. India s weak export infrastructure in the ports such as congestion problems, insufficient bulk terminals and age old Coastal Regulatory Zone Act, need to be addressed. More encouragement for PPP model and captive ports for development of minor/intermediate ports will improve the port infrastructure in the country. In addition, efficiency in cargo handling is to be improved to reduce the dwelling time of ships, which is higher when compared to international standards. Railways The demand for railway containers has grown rapidly due to increasing containerization of cargo during the recent period. Since the beginning of the year 2006, container movement has been thrown open to competition and private sector entities would be eligible for owning and operating container trains. The rapid rise in international trade and domestic cargo has placed a great strain on the Delhi- Mumbai and Delhi-Kolkata rail track. Government has, therefore, decided to build a dedicated freight corridor on these high density routes. This corridor would be

57 constructed, operated and maintained by a corporate entity on commercial principles. Part of eastern, western and dedicated fright corridors would be undertaken through PPP model. The approach to be adopted for the dedicated freight corridor would herald the ownership and operation of a large number of freight trains by competing private entities. It is expected that the proposed separation of rail from wheels would initiate a paradigm shift in the functioning of Indian railways. Urban Development Over the next 25 years, modernizing and expanding the water, electricity, and transportation systems of the cities of the world will require approximately $40 trillion. But the cost of not meeting the challenge could be even greater than $40 trillion (Doshi et al, 2007). In the Indian scenario, there are about 400 cities with more than 100,000 population, which are facing immense problems in terms of financial management, in the provision of public services, and overall city management. Government or local bodies alone could not develop the cities and solve the problems. Development of urban infrastructure should be an integral part of development strategy, which includes mass rapid transport system, drinking water, sewage system, solid waste management, urban roads and lightings, etc. However, investment in these areas has been inadequate. Development of this sector with the PPP may have a changing pace in the overall economic development, which requires an investor friendly environment with commercial viability of the projects. Overall, the solution to overcome the urban infrastructure bottlenecks is to organize the infrastructure more effectively, balance

58 the public-private interest, reinvigorate electricity, water and transportation system by integrating finance, governance, technology and proper designing of the projects. Figure 1.12: Sectoral Distribution of PPP Projects Initiated by Central Government in India Source: Planning Commission (2010b) Development and use of PPPs for delivering infrastructure services has now at least 11 years of precedence in India, with the majority of projects coming in line in the last 5 7 years. Policies in favor of attracting private participation as well as innovation with different structures have met with varying degrees of success. As per the Database of Department of Economic Affairs, Ministry of Finance on July 31, 2011, some sectors like telecommunications, power, and ports and roads, have done very good progress compared to limited success in other sectors. We see that from table 1.11 below that road projects account for 53.4% of the total number of projects and 46% by total value because of the small average size of projects. Ports though account for 8% of the total number of projects have a larger

59 average size of project and contribute 21% in terms of total value. It is noteworthy that if ports and central road projects are excluded from the total, there is in fact a relatively small value of deal flow, at only Rs 125, crores in basic infrastructure PPPs to date, suggesting a significant potential upside for PPP projects across sectors where states and municipalities have primary responsibility. It is observed that the potential use of PPPs in e-governance and health and education sectors remains largely untapped across India as a whole, though off-late there have been some activities shaping in these sectors. Table 1.11: Completed projects across various sectors Source: Department of Economic Affairs, Ministry of Finance, Government of India (July 31, 2011)