Budget 2014: PPP Model in Infrastructure

Union Budget Proposals regarding PPP

In his Union Budget speech, the Finance Minister Arun Jaitley stressed that various major projects would be undertaken under the PPP mode. He emphasised that there is a need to develop more sophisticated models with quick redressal mechanism in PPP contracts. As stated by him, India has emerged as the largest PPP market in the world.

The Minister announced the development of Metro rails in PPP mode. This includes Rs 100 crore which will be set aside for the development of the Metro rail in Ahmedabad and Lucknow. Further, a world-class convention facility was also proposed. He proposed that developing a gas grid would be a priority, employing piped gas. In this regard, about 15,000 km of additional pipeline would be developed. Besides, there are also plans to develop new airports and the Hastkala Academy through the PPP mode.

What is the PPP model?

It involves a contract between a public sector undertaking and a private sector company in which the private company undertakes a public project by assuming responsibility of the financial, technical as well as operational aspects of the project. In certain projects, like infrastructure projects, the government may provide a capital subsidy in the form of a one-time grant. In other cases, the government provides revenue subsidies including tax breaks.

Railway Budget stresses on PPP model

During the presentation of the Railway Budget in Parliament on July 8th, 2014, Railway minister Sadananda Gowda stressed the need to bring about reforms by proposing the need to invite private as well as foreign direct investment (FDI) as well as revive the PPP model for infrastructure development so as to meet the resource crunch. The minister stressed that inviting bids for PPP projects as well as inviting FDI will boost infrastructure development and result in the creation of more jobs. In this regard, the minister announced the setting up of logistic parks as well as private freight terminals on PPP model. He was hopeful that most of the future projects in the capital intensive Railways sector would be financed through the PPP mode. This includes many major projects including the ‘Diamond quadrilateral projects as well as high-speed rail projects that require considerable investments.

Benefits of the model

The PPP model for undertaking public projects has been widely accepted by many countries across the world due to various advantages they offer. Primary among these include the budgetary constraints of the government as well as the efficiency of private sector companies in undertaking such projects. Some of the other benefits include:

Improvement in the quality and quantity of infrastructure facilities

Completion of projects based on the plan proposed as well as the budgetary limitations

Speedy, efficient and cost-effective delivery of projects

Value addition due to the synergies between public authorities and private sector companies.

Helps reduce government debt and free up public capital to spend on other government services.

Tax payer benefits by avoiding paying more taxes towards infrastructure development.

Gliches and remedies

Experts believe that the PPP model is flawed and needs to be replaced with an alternative model. There are various shortcomings that they have come across in the model that need to be carefully looked into. They include:

Bank fundings for PPP projects like the Delhi-Gurgaon highway project and the Airport Metro Express Line project have been under scrutiny due to the fact that banks have extended loans to the SPVs of private firms undertaking these projects, the amount of which is higher than the government estimated project cost. There should be better transparency in bank funding to prevent malpractices.

Policy glitches have also been an impediment in the smooth progress of PPP projects. They are related to issues with Land acquisition as well as government clearances that should be obtained from the Ministry of Environment and Forests. Fast-tracking of approvals and clearances need to be brought about.

Aggresive bidding as well as flaws in the bidding process for high-profile projects need to be removed to make it more effective.

Project appraisal process needs to be overhauled to make it more effective.

Expectations from the Union Budget

There are high expectations from experts that the government will take measures to revive the PPP model in the implementation of major projects that have been stalled for long. By removing whatever glitches are there in the present model, the government can come up with a renewed model that will be effective in the implementation of future projects, particularly in the infrastructure sector.