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Public Private Partnership (PPP): Partnering for Growth 3

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1. PPP: BRIDGING THE GAP TO FUND INDIA’S GROWTH STORY

Public-private partnership (PPP) is emerging as the new success route in India’s attempts to build world-class infrastructure. Over the last decade, policymakers at both central and state levels have been increasingly focussing on infrastructure investments so as to enable fast paced economic growth. However, as planned infrastructure projects throw up funding and technological challenges, governments are increasingly turning to the private sector with the PPP route emerging as the most favoured mechanism for cooperation. It is not surprising then that the PPP concept has expanded across key infrastructure segments ranging from roads and communications to power and airports. PPP in fact could be the key to policymakers’ attempts to create the requisite infrastructure for enabling double-digit GDP growth and enhancing people’s welfare. In fact, the Planning Commission expects private investments to contribute 50 per cent to total infrastructure investments (worth USD 1 trillion) in India during the 12th Five-Year Plan (FY12–17). It will be no surprise if a large chunk of these investments are directed through the PPP route. 2. PPP IN INDIA EVOLVED AS EARLY AS THE 19th CENTURY

AND HAS BEEN RECEIVED WELL IN THE COUNTRY The PPP model has been practiced in India for quite some time now. However, adoption of the concept on a larger scale took place only post liberalisation, especially after 2006. As the years have passed, the share of PPP in infrastructure investments have shot up, aided by favourable policies and key reforms. According to the Department of Economic Affairs (DEA), around 758 PPP projects with a total value of USD71.7 billion were operative in India by mid-2011 across various sectors.

Exhibit 1 PPP in India – pre-liberalisation to the present time

• The Great Indian Peninsular Railway Company (1853) • The Bombay Tramway Company's tramway services in

Mumbai (1874) • PPP models in power generation and distribution in

Mumbai and Kolkata

Pre-liberalisation

• Just 86 PPP projects worth USD157.1 billion were awarded until 2004

• Large-scale private financing has been limited to Vishakapatnam and Tirupur

1991–2006

• Growth in PPP to 758 projects costing USD70.1 billion by July 2011 from 450 projects costing USD45.7 billion in November 2009

Post 2006

Public Private Partnership (PPP): Partnering for Growth 4

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3. SUCCESS OF PPP IN INDIA TO CONTINUE ON THE BACK OF

RISING INFRASTRUCTURE INVESTMENT The Planning Commission (PC) expects investments in infrastructure projects to be worth USD1.0 trillion over the course of the 12th Five-Year Plan (2012–17); its share in GDP would likely touch 10.0 per cent by the end of this period from 8.0 per cent in FY11. With an aim to achieve the target withstanding the underlying resource constraints, the government is expected to rely heavily on the private sector (for both capital and expertise) with PPP projects being the favoured route for both parties. Moreover, PC targets to achieve 50.0 per cent private and PPP funding in total infrastructure investments in its 12th Plan compared to a little more than 30.0 per cent in the 11th Plan. These reflect immense opportunities for the private sector in the coming years.

Exhibit 2 Share of infrastructure in GDP

Source: 12th Five-Year Plan document, Aranca Research

Exhibit 3 Private sector share in infrastructure

Source: 12th Five-Year Plan document, Aranca Research

0

3

6

9

12

0

50

100

150

200

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13E 2013-14E 2014-15E 2016-17E

Total Investment (USD Thousands) Total Investment as a % of GDP

0%

20%

40%

60%

80%

100%

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Public Investment Private Investment

Public Private Partnership (PPP): Partnering for Growth 5

…………………………………………………………………………………………………………………………......... 4. SIGNIFICANT UNTAPPED POTENTIAL FOR USE OF PPP IN

VARIOUS NEW SECTORS The government has been constantly addressing factors constraining private investment and implementing appropriate measures to streamline PPP projects. With policymakers keen to involve global firms as well, the next decade promises a swathe of opportunities for domestic and foreign investors alike in the sector. In line with this, the government has undertaken measures to further rationalise PPP processes by formulating a national PPP policy and developing corporate bond markets. The formation of an exclusive PPP department in the DEA to supervise and co-ordinate various PPP proposals was also a part of this initiative. Furthermore, India Infrastructure Finance Company Limited (a non-banking financial company) was established to provide financial support for projects with long gestation period. In addition, to further simplify the compliance process, a Public Private Partnership Committee (PPPAC) was formed. Since 2006 till date, PPPAC has granted approval to 204 projects with a total project cost of USD37.5 billion. Likewise, various funds such as Viability Gap Funding Scheme and Project Development Fund have been introduced by the central and the state governments. Some of the state governments – for instance, in Karnataka and Andhra Pradesh – have successfully built an institutional framework to propel PPP investment, while others are following suit. 5. GOVERNMENTS HAVE ADOPTED DIFFERENT PPP MODELS

ACROSS SECTORS With growing acceptance of the PPP concept in large scale investments, respective government have formulated specific PPP models addressing the needs of different sectors. Overall, a PPP model requires private sector participation for design, construction, operating, maintaining and finance. However, control of the asset under contract vests with the public entity during the contract period and once the project is complete, entire ownership is transferred to public entity. The most commonly used models in India have been highlighted in the table below.

Public Private Partnership (PPP): Partnering for Growth 6

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Exhibit 4

PPP models in India

6. INVESTMENT OPPORTUNITIES ACROSS INFRASTRUCTURE

SECTORS TO DRIVE PPP GROWTH IN INDIA In terms of number of projects, roads and highways are emerging as the favoured destinations for PPP, while telecom and electricity lead in terms of private investments. Nevertheless, the government is focusing on PPP across railways, water supply and sewerage, and health and education sectors.

Exhibit 5 Share of private sector and PPP in infrastructure

Source: 12th Plan document, PPP India database, Aranca Research

• Used for two-thirds of the total PPP projects in India • User-fee based BOT model: Widely used in medium- to

large-scale projects, especially in energy and transport (road, ports and airports)

• Annuity-based BOT model: Commonly used in sectors/projects not meant for cost recovery by levying a fee on sectors such as health and education

BOT (build-operate-transfer) models

• Contracts yield time and cost saving benefits; also enable efficient risk-sharing and improve quality

Modified design-build

(turnkey) contracts

• Suitable for sectors (water supply, sanitation, solid waste management and road maintenance) constrained by the availability of economic resources to improve efficiency

Performance- based

management/ maintenance

contracts

0

500

1000

1500

2000

10th plan 11th plan (Estimated) 12th plan (Projection)

Investments in Infrastructure (USD Billion) Estimated PPP Investments

Public Private Partnership (PPP): Partnering for Growth 7

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Exhibit 6 PPP projects in India by sector (Total: 758)

Source: 12th Five-Year Plan document , PPP India database, Aranca Research Roads and highways: The success story till now in PPP activity in India

India has the second-largest road network of 3.3 million km worldwide. However, rural areas are still disconnected from the main roadways. Hence, there is a need for a large network of roads and highways interconnecting a swathe of urban and rural areas. Also, highways account for just 2.0 per cent of the country’s total road infrastructure. This reflects significant scope for growth. To encourage PPP in roads infrastructure, the central government is expected to undertake sub-projects in National Highways Development Programme (NHDP) Phase-III to Phase-VII, mainly on the PPP route. Furthermore, various initiatives, such as 100 per cent FDI, 100 per cent exemption from income tax for 10 years, loans at lower interest rates and no-toll charges for rural roads, have been undertaken for raising the share of private investments. In India, Build Operate and Transfer (BOT) Toll, Build Operate and Transfer (BOT) Annuity and Special Purpose Vehicle (SPV) are the most popular forms of PPP that have been used for the development of national highways. As depicted in the table below, the Ministry of Roads and Highways has undertaken 68 projects through PPP.

Exhibit 7 Projects underway

Type of project Total value (USD million) Phase

Built Operate and Transfer (BOT) (Toll-based projects) 1,745 Completed -23; In-

progress - 25

Built Operate and Transfer (BOT) (Annuity) Projects 440 Completed - 6; In-

progress - 2

Special Purpose Vehicles (SPV)

437 Completed -5; In-progress -7

53%

20%

8%

7%

7% 2%

1%

1% 1%

Roads

Urban development

Ports

Power

Tourism

Education

Health care

Airports

Railways

Public Private Partnership (PPP): Partnering for Growth 8

…………………………………………………………………………………………………………………………......... Passenger and cargo traffic are projected to grow at an annual rate of 12.0–15.0 per cent and 15.0–18.0 per cent, respectively, over the 12th Plan Period due to rising economic activities, urbanisation and connection of rural areas to the main road infrastructure. To boost road infrastructure, the central government has earmarked an annual investment of USD 3.7 billion. Due to its high-growth potential and government support, road infrastructure is expected to be strengthened, going forward. Power: Where policymakers are eyeing private participation the most

The Indian power sector has garnered significant interest from private players. With 56 projects for a total consideration of USD 12.6 billion, the sector accounts for 18.0 per cent of the total value of PPP projects across sectors. India’s total generating capacity is around 173,626.4 Megawatts (MW), of which the private sector accounts for the lowest (21.2 per cent). Factors such as rapid urbanisation, rural electrification and industries across the length and breadth of the country indicate the need for an additional generation capacity of 75,785 MW during the Twelfth Five-Year Plan; this would entail additional investments of USD 64.6 billion. The private sector is likely to account for a major share of the additional capacity (55.6 per cent) and investments (50.8 per cent). PPP is likely to be the preferred route for such ventures.

Exhibit 8 Sector-wise capacity break-up under the 12th Five-Year Plan (in MW)

Source: 12th Five-Year Plan, Aranca Research

56% 26%

18%

Private

Centre

State

Public Private Partnership (PPP): Partnering for Growth 9

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Exhibit 9 Sources of funding for power projects under the 12th Five-Year Plan

Source: 12th Five-Year Plan, Aranca Research

The government is encouraging PPP to increase power penetration in both urban and rural areas. During the 12th Plan, the central government plans to initiate over 100 PPPs in urban areas and around 1000 in rural areas to bridge the demand-supply gap. In line with this, it has permitted 100 per cent FDI in the sector; also, independent regulators are encouraging global power companies to establish power plants through PPP. Railways: The sector is likely to witness strong PPP activity in the coming years

India has the world’s fourth-largest rail network, spanning over 64,000 km. Although private sector investments have been low, the dynamics is likely to change, going forward. Private sector involvement is visible across a number of railway-related services. For example, private container trains have commenced operations even as Indian Railways Corporation (IR) manages 1,271 book stalls across various railway stations and operates four hotels on PPP basis. IR’s enquiry services, known as ‘Rail Sampark 139’ (Integrated Train Enquiry System), are operative through the PPP route. The Indian railways sector requires an investment of USD 97.2 billion under the 12th Five-Year Plan (FY12–17), of which IR is expected to raise USD 18.7 billion and the remaining is likely to be funded through PPP. Under the 12th Plan, the Ministry plans to award projects related to locomotives and coach manufacturing units, and the construction of a corridor for high-speed rail to generate the required investments. Other potential projects to increase private sector participation include redevelopment of railway stations, logistics parks, private freight terminals, port connectivity, dedicated freight corridor (Sonnagar-Dankuni) and energy conservation.

51%

31%

18%

Private

Centre

State

Public Private Partnership (PPP): Partnering for Growth 10

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Exhibit 10 The government is expecting to finance the following projects through PPP

Project Funds expected from the private sector (USD million)

High Speed Corridor (Mumbai–Ahmedabad)

3,740.0

Elevated Rail Corridor (Churchgate–Virar)

3,740.0

Dedicated Freight Corridor (Sonnagar–Dankuni)

1,874.1

Redevelopment of stations 1,870.0

Energy projects 1,122.0

Port connectivity projects 935.0

Loco and coach manufacturing units 561.0

Logistics parks 561.0

Private freight terminal; other freight schemes

526.4

7. OPPORTUNITY TO BENEFIT FROM UNTAPPED FAST GROWING INDIAN SECTORS THROUGH PPP

Currently, PPP in India has been largely concentrated in sectors such as power, telecom, roads and airports. However, opportunities exist in other segments as well with education and health likely to emerge most lucrative in the coming decades.

Higher education: India has emerged as an ideal market due to a large young population base and a service-focused economy that renders education a prime need. In 2011, PPP in higher education accounted for a mere 2.2 per cent of the total PPP projects. Currently, private higher education constitutes 80 per cent of professional higher education and 33 per cent of overall education. PPP can enhance the quality of education, relevance of an education system and funding possibilities to enable the government to improve the educational system.

Healthcare: As the Indian healthcare industry is gearing to become an USD 75.0-billion industry by 2015—a steep rise from the current USD 40.0 billion—there is a need for significant participation from the private sector to cater to the rising demand for healthcare. After education, healthcare is another sector where PPP is still at a nascent stage. Of the total PPP projects in the country, healthcare accounts for just 1.1 per cent. There is a growing need for human resource, hospital beds and pharmaceuticals due to rising population

Public Private Partnership (PPP): Partnering for Growth 11

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and high incidence of chronic disorders. Currently, several central- and state-run hospitals as well as pathology and radiology services are outsourced to private firms. PPP can serve as a mode to finance healthcare services and if regulated, it has the potential of reaping significant benefits for the country.

8. CONCLUSION: PPP – THE BEST FOOT FORWARD FOR GROWTH

The future of PPP in India looks bright as the country aims for a higher growth trajectory through strong infrastructure investments. With the increasing involvement of PPP modules in development across various sectors, the share of PPPs and the private sector in total infrastructure investments is expected to rise to 50.0 per cent in the 12th Plan from 30.0 per cent in the previous one. Infrastructure, defence, healthcare and education are the key sectors witnessing a higher role of PPP; this trend is set to continue over the next decade as well. In order to increase this share, policymakers should look at setting up an independent institutional structure for PPP handling, sector-specific regulatory mechanisms and higher level of transparency of information for PPP. With the best use of the various PPP models available and innovating through new ones, the country is likely to confront challenges on the path of economic growth with ease.

Public Private Partnership (PPP): Partnering for Growth 12

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