Impediments Faced By Public Private Partnerships

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 Impediments arising from the absence of adequate infrastructure regulation that aggravates risks and uncertainties for investors. carries investments and costs; The environmental Impediments faced by PPPs in India and specially, Western Maharashtra are described under the following headings:

1. Political and bureaucratic Impediments.
2. Legal and regulatory Impediments.
3. Financial Impediments.
4. PPP policy framework Impediments.
5. Social Impediments.

These Impediments are described below in detail.

Political and bureaucratic Impediments

Progress in PPP development has been limited due to the frequent political unwilliness to relinquish 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. These Impediments include: the complex political struggles that often take place between national and local government; overlapping of responsibilities amongst various different authorities or agencies.

Multiple clearances at different Levels of authorities

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 but not concurrent. 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.

No political commitment to root out corruption in public sector

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 & also difficult to punish it when it is found. This kind of unwilling 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.

Problems in negotiations of Contract

This is pervasive across all infrastructure sectors. 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.

Legal and regulatory environment

PPP inevitably involve complex commercial and financial structures. This is attributable to the many stakeholders involved and, secondly, the wide range of risks associated with the project which has to be allocated properly. 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. The following are the legal and regulatory barriers faced by infrastructure players:

Lack of a clearly defined legal basis for private sector

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. 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. The institutional bottlenecks outlined above result in a considerable increase in transaction costs to plan, approve and execute BP projects which in turn leads to extended delays, changes in project viability and in some cases, project cancellations.

Restriction on participation of foreign investors

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.

Financial Impediments

Projects in the Road sector are facing financing issues, including aggressive bidding, under-pricing of projects, and funding Impediments (debt and equity). These financing issues are discussed below.

Aggressive bidding and under-pricing of projects

Aggressive bidding and under-pricing of projects have been a big challenge in the Road sector Projects. During 2009-2013 this was witnessed under the Build-Operate-Transfer (BOT) model for NHAI projects. Under-pricing of projects can be observed in EPC and the newly adopted Hybrid Annuity Model (HAM) projects in roads and some ports projects during the last few years. Aggressive bidding is one of the major reasons for delays or cancellation of PPP project as banks are becoming more and more cautionary in funding such projects. It also causes low participation from genuine bidders.

Huge dependency on commercial banks

Project sponsors in PPP projects depend hugely on commercial banks for financing the debt portion of the project. Commercial banks have been the largest contributor of PPP financing in India since the beginning. As on March 2016, outstanding credit to the sector stood at approximately INR 9. 6 lakh crore (20% CAGR during 2009-2016) and exposure to the sector stood at around 35% These banks have reached their corresponding exposure limits for the sector and run with high level of non-performing assets (NPAs) in the sector. Therefore, the infrastructure sector, in particular the transport sector, has been facing financing Impediments of lately.

Overpricing of the Projects by bidders

It has been observed that some developers play opportunistically, facilitated by poor appraisal capacity of banks, by inflating the TPC and thereby achieving financial closure at an amount substantially greater than the reasonable TPC. If the project is then jeopardized, the funds at risk are those of the lenders as there is virtually no obligation on the developers.

Under developed Pension and Insurance markets

In recent times, most insurance companies and pension funds have not focused on funding infrastructure. Most of the involvement of the state- owned insurance companies, including LIC, is in infrastructure projects of the central and state governments. Commercial banks have only been marginal players in terms of their share of infrastructure financing in the recent past.

An underdeveloped corporate bond market

In Most road infrastructure projects the gestation period is around 15 years. The availability of a developed bond market is an important backbone to project financing for Road infrastructure. Unfortunately, even today in India there is such corporate bond market for long term road project financing.

Lack of Equity as Source of Financing

Raising adequate equity finance tends to be the most challenging aspect of infrastructure project financing. the ability of sponsors to raise equity from the primary market remains limited. 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.

Limited exit options constrain equity participation

In India, the regulations do not allow easy exit between financial investors and sponsors of an unlisted company. As it requires the approval from the Reserve Bank of India at the time of the exercise, 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.

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. 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.

Poor economic Status of state government finances

Nearly all states suffer from huge debt obligations. Apart from the increasing level of debt, the outstanding guarantees of state governments have also recorded a sharp increase. Clearly, in such a situation, states are not the most reliant business partners for private sector participation in infrastructure.

PPP policy framework Impediments

Capacity deficiencies affect ongoing partnership arrangements, as well as any reforms that may be necessary due to lack of confidence. There are important potential Impediments 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:

Lack of clearly allocated authority and responsibility

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 & responsibility between central and state government and between central and line agencies. Full consideration must be given to adequacy of the resources required.

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).

Lack of 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.

Social Impediments

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. The following social Impediments need special attention:

PPPs as a viable means of providing infrastructure

BP 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.

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.