Accelerating PPP in India - FINAL (Secured)

Accelerating
public private
partnerships in India
FICCI
I am happy to share with you the FICCI-E&Y Report on Accelerating PPP in India to be
released at the India PPP Summit 2012 organized by FICCI.
Indian infrastructure sector is going through a signifcant transformation. Investment
in infrastructure is envisaged to be doubled to US $ 1 trillion during the Twelfth Five
Year Plan and about half of this is targeted to be achieved through private sector
investment.
Indian Government has taken a number of steps to encourage private investment in
infrastructure through public-private-partnerships. However, it has been observed
that while PPP projects in some sectors have displayed good progress, several others
achieved only limited success. Issues relating to project implementation, monitoring
and dispute resolution are among the key concerns of the infrastructure developers.
To discuss some of the critical issues, FICCI is organising the India PPP Summit 2012 in New Delhi. The summit will
also focus on procedural bottlenecks adversely impacting the ability to implement infrastructure projects and time-
bound execution of PPP projects.
As Knowledge Partner for the event, Ernst & Young has prepared a comprehensive Background Paper covering a
large number of important areas. The report has been prepared through detailed analysis of several critical factors
infuencing PPP projects in India. I take this opportunity to thank them for their efforts.
At the summit, the speakers, experts and delegates would discuss a wide range of topics pertaining to this important
area. I hope you will fnd this report useful and as always, your suggestions and feedback are welcome.
Hemant Kanoria
Chairman
FICCI National Committee on Infrastructure
Foreword
India has witnessed a high economic growth in last few years. However, lately
it has been facing strong headwinds with growth rate declining from 9 plus to
around 7%. Many reasons have been attributed to the slowdown in the economy
and lack of adequate and quality infrastructure is undoubtedly one of them. Both
federal and provincial governments have been taking number of measures with
varied success. Public Private Partnership format, with its mixed success across
the globe, has been acknowledged as an essential tool for focused private sector
investments in economic and social infrastructure projects.
The Indian PPP story has been a mixed bag so far. National Highway Development
Program, despite its many challenges in meeting its target, has been successful in
attracting huge private sector investments. However, there exists huge untapped
potential for PPPs in sectors like Railways, Power- Transmission and Distribution,
Education, Health and Urban infrastructure. The degree of use of PPP formats and consequently amount of
private sector investments in infrastructure project shows huge variations across various states. The fnancing
of PPPs is also emerging as a challenge as commercial banks are reaching their sector exposure norms. Indian
private sector also have capacity constraints to fund gigantic equity requirements hence necessitating higher FDI
and more foreign players.
Government in order to propel PPPs, which are expected to bring in about 50% of the infrastructure spend of USD
1000 billion in Twelfth Five Year Plan (2012-17) is taking steps to further streamline PPP processes by drafting
national PPP policy and development of corporate Bond markets. Many state governments, like Karnataka and
Andhra Pradesh have put in place an institutional framework for encouraging PPPs whereas other states are in
process of doing so.
India PPP Summit 2012, being organized by FICCI, is a platform to bring together policy-makers, regulatory
authorities, industry experts and business leaders from the infrastructure sector to join hands in dealing with
issues pertaining to implementation, monitoring and fnancing of PPP projects in the country.
This paper focuses on progression of PPPs over the years, existing frameworks and challenges for PPPs in India,
state level experience and sector related opportunities, practices followed in other countries, funding options for
fnancing PPPs and recommendations for spearheading the usage of PPPs in India.
I am privileged to present the FICCIErnst & Young Report, Accelerating PPP in India, which especially focuses on
various aspects of promoting PPPs in India.
Abhaya Krishna Agarwal
Executive Director and National Leader Public Private Partnerships
Government & Transaction Advisory Services
Ernst & Young
Accelerating public private partnerships in India ] 4
1.Public private partnership in India 07
1.1 Evolution of PPPs 07
1.2 Current status of PPPs in India 07
1.3 Common forms of PPP models in India 08
1.4 PPP policy framework 09
1.5 Challenges in PPP in India 11
1.6 State-level experience 12
1.6.1 Andhra Pradesh 12
1.6.2 Karnataka 14
1.6.3 Gujarat 15
1.6.4 Jharkhand 16
1.6.5 Chhattisgarh 16
1.7 International experience 17
1.7.1 United Kingdom 17
1.7.2 Australia 18
1.7.3 Brazil 19
1.7.4 Philippines 20
2. Funding infrastructure through public private partnerships 23
2.1 Overview 23
2.2 Meeting the Twelfth Five Year Plan targets 23
Contents
[ Accelerating public private partnerships in India 5
2.3 Means of infrastructure funding 24
2.3.1 Commercial lending 25
2.3.2 Bonds 28
2.3.3 External commercial borrowings 28
2.3.4 Foreign investment funding 29
2.3.5 Foreign Institutional Investment (FII) 29
2.3.6 Multilateral agencies lending 29
2.3.7 Insurance/pension funds 23
2.4 Grants 31
2.5 Private sector capabilities 31
3. Key Industries/sectors for PPP 35
3.1 Highways 35
3.2 Railways 36
3.3 Power 37
3.4 Urban infrastructure 38
4. Recommendations 41
4.1 Policy recommendations 41
4.2 Project development recommendations 41
4.3 Financing recommendations 42
PPP projects take much less
time to complete and the
Government does not have to
bear cost overruns. This will
not only enable us to leverage
our limited public resources
but also improve effciency of
service delivery.
Shri Manmohan Singh,
Honorable Prime Minister of India
Source: PM inaugural address at the Conference on
Public Private Partnership in National Highways
A public private partnership (PPP) is an agreement between the government and private sector for the purpose
of provisioning of public services or infrastructure. With a common vision in place, the public and private sector
bring to the table their own experiences and strengths resulting in accomplishment of mutual objectives.
The Government of India (GoI) has been focusing on the development of enabling tools and activities to encourage
private sector investments in the country through the PPP format. Private investments amounting to US$150
billion is expected to bridge the infrastructure gap of US$500 billion over the period 2007-2012
1
. As a part of
meeting this fnancing gap, the PPP model is increasingly been seen as a means of harnessing private sector
investment and seeking operational effciencies in the provision of public assets and services.
The extent to which the GoI envisages a signifcant role played by PPP in improving the level and quality of
economic and social infrastructure services is increasingly evident from the growing reliance on the PPP model in
the recent past.
1.1 Evolution of PPPs
2
1.2 Current status of PPPs in India
The PPP India database (Department of Economic Affairs, Ministry of Finance) indicates that 758 PPP projects
costing INR3,833 billion
3
is awarded/underway status (i.e., in operational, constructional or in stages wherein at
least construction/implementation is imminent). There exists signifcant untapped potential for the use of the PPP
model in e-governance, health and education sectors.
1 Investment in Infrastructure in India, Article base website, http://www.articlesbase.com/investing-articles/investment-
in-infrastructure-in-india-4585328.html, accessed 23 December 2011
2 Facilitating PPP for Accelerated Infrastructure Development in India, Ministry of Finance & Asian Development Bank,
December 2006
3 PPP India Database as of 31 July 2011
1.
Public private partnership in India
Source: PPP in India website
Few notable PPPs could be found as early as
19th century:
The Great Indian Peninsular Railway
Company (1853)
The Bombay Tramway Company's tramway
services in Mumbai (1874)
PPP models were there in power generation
and distribution in Mumbai and Kolkata in
the early 20th century
Only 86 PPP projects worth
INR340 billion were awarded
till 2004 (World bank study of
13 states in 2005)
Most of the projects were in
bridges and roads sector
Large-scale private nancing
has been limited to
Vishakapatnam and Tirupur
Increasing acceptance of PPP
model due to favorable policy
reforms and innovative PPP
structures
Growth in PPP from 450
projects costing INR 2,242
billion in November, 2009 to
758 PPP projects costing
INR3,833 billion in July 2011
Phase I:
19th century and
early 20th century
Phase II:
1991 - 2006
Phase III:
After 2006
Karnataka, Andhra Pradesh and Madhya Pradesh are the leading states in terms of number and value of PPP
projects. At the central level, the National Highway Authority of India (NHAI) is the leading user of the PPP model.
In order to select a provider/award a contract a competitive bidding process (either national or international) are
followed. International competitive bidding projects accounted for 35% of total investment followed by domestic
competitive bidding (26%).
1.3 Common forms of PPP models in India
While the preferred forms of PPP model is the one in which the ownership of underlying asset remains with the
public entity during the contract period and project gets transferred back to public entity on contract termination,
the fnal decision on the form of PPP is determined using the Value for Money Analysis.
PPP projects in India by sector
(Total number of projects: 758)*
Source: PPP India database, *As of July 31, 2011
Airports,
0.7%
Education,
2.2%
Energy,
7.4%
Healthcare,
1.1%
Ports, 8.0%
Railways,
0.5%
Roads,
53.4%
Tourism,
6.6%
Urban
Development,
20.1%
PPP projects by value of contracts
(Total value of contracts: INR3,833 billion)*
Based on INR 100 crore,
2.5%
Between INR 100 to
INR 250 crore,
5.2%
Between INR 251 to
INR 500 crore,
14.4%
More than INR 500 crore,
77.9%
BOT (build-operate-transfer) models
The BOT form of model and its variants is the
most common form of PPP model used in India
accounting for almost two-thirds of PPP projects
in the country. The two major forms of BOT
models are:
User-fee based BOT model: Commonly
used in medium- to large-scale PPPs for the
energy and transport sub-sectors (road,
ports and airports).
Annuity-based BOT model: Commonly used
in sectors/projects not meant for cost
recovery through user charges such as
rural, urban, health and education sectors
PPP models
supported
by the
Government
Modied design-build (turnkey)
contracts
The design-build contracts yield
benets in the form of time and cost
savings, efcient risk-sharing and
improved quality. The turnkey
approach with milestone-linked
payments and penalties or
incentives can be linked to such kind
of contracts.
Performance based
management/maintenance contracts
The PPP models that lead to improved
efciency are encouraged in an
environment that is constrained by the
availability of economic resources. The
sectors meant for such form of PPP
models include water supply, sanitation,
solid waste management, road mainte-
nance etc.
While there do exist build-own-operate (BOO) models, they are not supported by the GoI due to its fnite resources
and the complexities in imposing penalties in case of non-performance and estimation of value of underlying assets
in case of early termination. Also, the GoI does not recognize the engineering-procurement-construction (EPC)
contracts and asset divestitures as PPPs.
1.4 PPP policy framework
4
Signifcant growth in the number of PPPs in the past 15 years has made India one of the leading PPP markets in the
world. As a result, a proper PPP eco-system comprising institution, developers, fnanciers, equity providers, policies
and procedures has emerged.
In the light of growing PPP trends and policy/institutional intervention, the GoI feels it is imperative to have in
place a broad policy framework. Following the Finance Ministers budget 201112 speech to come up with a
comprehensive policy, the Ministry of Finance drafted a National PPP policy for soliciting suggestions. The draft
National PPP Policy proposes to focus on assisting Central and state Government agencies and private investors by:
Undertaking PPP projects through streamlined processes and principles
Ensuring adoption of value for money approach through optimization of risk-return allocation in project
structuring
Attaining apt public oversight and monitoring of PPP projects
Developing governance structures to facilitate competitiveness, fairness and transparency
Prominent features of the proposed National PPP policy:
The GoI plan to formalize PPPs as preferred implementation models based on the existence of strong track
record for those models. It has laid down strong procedures to procure a PPP project. In order to instill
transparency in PPP, it will publish separate mandatory disclosures and fair practices, set up dedicated dispute
resolution mechanism, develop new market-based products (e.g., pre-bid rating), and explore possibilities of
setting up web-based PPP market place.
4 National Public Private Partnership Policy Draft for consultation, Ministry of Finance, September 2011
Major policy and institutional initiatives taken:
Setting up of PPP Appraisal Committee to streamline
appraisal and approval of projects
Preparation of PPP Toolkit to improve PPP decision making
process
Establishment of transparent and competitive bidding
processes through model bidding documents
Extending nancing support through development funds,
VGF, user charge reforms, etc.
Institutions Developers
Financiers Equity providers
Need for policies
and procedures in
PPP ecosystem
The PPP process should comprise four phases:
The GoI is likely to establish MIS for continuous monitoring of the performance of PPP projects.
The development of a sustainable PPP program requires a strong and well defned institutional structure:
Supporting the creation of nodal agencies such as PPP Cells at the state or sector level.
Laying down of appraisal mechanism for PPP projects by the PPP Appraisal Committee (PPPAC)
PPP
identication stage
Consists of strategic
planning, project
prefeasibility analysis,
Value for Money
analysis, PPP suitability
checks, and internal
clearances to proceed
with PPP development
Procurement stage
Consists of
procurement and
project award
PPP contract
management and
monitoring stage
Consists of project
implementation and
monitoring over the
life of PPP project
Development stage
Consists of project
preparation (including
technical feasibility and
nancial viability analysis),
project structuring,
preparation of contractual
documents and obtaining of
project clearances and
approval
Creating enabling environment for PPPs:
GoI has a progressive fnancial support system for PPP projects. Some of the key initiatives include India
Infrastructure Project Development Fund (IIPDF), Viability Gap Funding (VGF), resources for annuities/
availability-based payments, long tenor lending, re-fnancing facility, infrastructure debt funds, etc. The GoI
will provide legislative and policy support to develop equity, debt, hybrid structures and appropriate credit
enhancement structures.
The GoI will undertake capacity building interventions to develop organizational and individual capacities for
identifcation, procurement and managing PPPs.
The PPP Cell in Department of Economic Affairs will have professionals who provide competencies and
technical support to the ministries and other authorities developing PPPs.
1.5 Challenges in PPP in India
5
While most of the above challenges are being worked upon by the GoI, the limited availability of sources of funding is
the biggest bottleneck for the success of the PPP model.
5 Infrastructure Challenges in South Asia: The Role of Public-Private Partnerships, ADB, September 2007
Transparency in PPP programme, The Financial Express, October 27 2011
Indian Infrastructure Challenges, IDFC, September 2010
There is no independent PPP regulator as of now. In order to attract more
domestic and international private funding of the infrastructure, a more robust
regulatory environment, with an independent regulator is essential.
Regulatory
environment
The PPP program lacks a comprehensive database regarding the projects/studies
to be awarded under PPP. An online data base, consisting of all the project
documents including feasibility reports, concession agreements and status of
various clearances and land acquisitions will be helpful to all bidders.
Lack of information
The project development activities such as, detailed feasibility study, land
acquisition, environmental/forest clearances etc., are not given adequate
importance by the concessioning authorities. The absence of adequate project
development by authorities leads to reduced interest by the private sector,
mispricing and many times delays at the time of execution.
Project development
The limited institutional capacity to undertake large and complex projects at
various Central ministries and especially at state and local bodies level, hinder the
translation of targets into projects.
Lack of
institutional capacity
The private sector is dependent upon commercial banks to raise debt for the PPP
projects. With commercial banks reaching the sectoral exposure limits, and large
Indian Infrastructure companies being highly leveraged, funding the PPP projects
is getting diffcult.
Financing availability
1.6 State-level experience
6
The scenario in each state is different in the context of infrastructure development as each state has the right to
promulgate legislations in the areas covered in the state list of the Constitution of India. However, certain states
have taken substantial steps to encourage PPP activity. They have created legal frameworks for participation of
private sector in the state.
1.6.1 Andhra Pradesh
7
Andhra Pradesh is the leading state in terms of PPP projects by number of contracts (96) and value (INR669 billion).
It accounts for around 17.5% of the total value
8
of PPP contracts in India.
The state has been drawing interest for PPP project investment in sectors such as urban development (29%), energy
(24%), roads (22%), etc.
6 PPP India Database as on 31 July 2011
7 PPP Cell of Andhra Pradesh, PPP Cell AP website, http://ppp.cgg.gov.in/Login.aspx,
accessed 16 December 2011
8 PPP India Database as of July 31, 2011
Gujarat
Uttar Pradesh
Andhra Pradesh
Maharashtra
Karnataka
States of India and PPP
6
The top fve states account for 58.3% of total
value of PPP in India.
The major sectors being targeted for PPP format
by leading states are roads, ports and airports.
Maharashtra, Karnataka and Gujarat average
around 11% of the total value of PPP of the
country.
The bottom 10 states represent only 3.5% of
the total value of PPP indicating differences in
attractiveness of investment by private sector.
Prominent projects undertaken
HITEC City, Hyderabad
Rajiv Gandhi International Airport
Gangavaram Port
Krishnapatnam Port
Hyderabad International Convention Center & an
Integrated Township
108 Mobile Emergency Response Service and
104 Mobile Health Service
PPP projects in pipeline
Hyderabads metro rail project
Bridge across River Godavari at Rajahmundry
Machilipatnam Port at Machilipatnam
Development of four greenfeld airports
Bus Rapid Transit System in Hyderabad and
Vijayawada
Diagnostic centers in hospitals at
Vishakapatnam, Kurnool, Kakinada and Warangal
The state has set up various institutions to promote infrastructure:
Andhra Pradesh Industrial Infrastructure Corporation (APIIC) provides estate infrastructure for the
development of industrial areas (IT parks, food processing zones, SEZs, etc.)
AP Invest promotes Andhra Pradesh as the favored destination
AP Tourism Developement Corporation provides tourism infrastructure to attract tourist infow
Infrastructure Corporation of Andhra Pradesh (INCAP) deals with projects that are of critical importance
to the states progress
AP Road Development procures road projects in the state
AP Urban Finance & Infrastructure Development Corporation provides fnancial assistance, technial
assistane and other guidance
State PPP cell acts as a nodal agency for all PPP projects for supporting the states PPP initiatives
Institutional support
Andhra Pradesh was the frst state to enact the AP Infrastructure Development Enabling Act, 2001
applicable to all infrastructure projects implemented by the state. The act lays down guidelines for
developer selection, illustrates various PPP types, and range of state support to infrastructure projects
Policy reforms
The Government of Andhra Pradesh extends support in the following forms:
Direct fnancial support in the form of states share of viability gap funding (VGF) to promote economically
viable projects
Exemptions in terms of sales tax, stamp duty and seigniorage fees
Asset-based support to provide Government-owned land at concessional lease charges, providing linkage
infrastructure to projects
Administrative support to get clearances, undertake rehabilitation and resettlement, supply power and
water at project site, land requirements
Funding initiatives
Case study: Major bridge across Godavari
Major bridge across river Godavari costing INR8.1 billion, is the frst four lane bridge in Asia under the PPP
mode. The scope of the project is to design, build, construct, fnance, operate and maintain major bridge
across the river Godavari with a total project length of 15 kms. While the construction for the bridge is
on, the project got its fnancial closure in May 2009 and the land acquisition to an extent of 90% is also
complete. The project is likely to begin its commercial operations in May 2012 and is expected to yield
signifcant benefts in the form of reduced distance between Eluru and Rajahmundry, reduced time of travel,
lower travel costs than earlier and decongestion of traffc.
PPP model - The project is on BOT toll basis with the developer being selected through competitive bidding
process for a concession period of 25 years. The project will have grant of INR2.1 billion and the remaining
shall be raised in the form of equity provided by the developer and debt from the FIs.
1.6.2 Karnataka
9
According to Economic Survey 2010, Karnataka is among the top states in PPP in infrastructure projects. The
state has 104 PPP projects of value INR447 billion
10
. As the knowledge hub of India, it has immense potential for
investment in the areas of information technology, biotechnology, textiles, steel and cement.
In 2008, the transportation sector bagged the maximum investment on a PPP basis in the state. However, the
Government of Karnataka is now targeting new areas for PPP. It has tabled a Bill in Legislative Assembly to develop
all ports in the state on a PPP basis and is formulating an integrated energy policy that aims to promote PPP
projects in the energy sector.
9 Geert Dewulf, Ashwin Mahalingam, and Stephan Jooste, The Transition Towards a Sustainable PPP Regime, August 2011
Karnataka Special Ppp On Fast Track, 24 October 2011, Project Monitor, via Factiva, 2011 Economic Research India
Pvt. Ltd., distributed by Contify.com
Infrastructure Development department website, http://idd.kar.nic.in/ppp-go.html, accessed 12 December 2011
The State Government has established the Infrastructure Development Department in 1996. It aims to
attract private sector participation in the development of infrastructure projects.
The State Government has set up a PPP cell in the Infrastructure Development Department to boost PPP
in the state. PPP cell aims at identifcation, conceptualization and creation of a shelf of projects that can
be considered for implementation through the PPP route.
The states New Infrastructure Policy, 2007 aims to provide a fair and transparent policy framework for
promotion of PPP in the infrastructure sector in the state. The policy has the provision for consideration of
implementing the project frst through PPP for all new investments in infrastructure.
The State Government decided to establish a single window to facilitate the speedy approval of the projects.
Policy reforms
The State Government has set up a fund called Karnataka Infrastructure Project Development Fund to
provide fnancial assistance to state agencies taking on infrastructure projects under PPP mode. The fund
targets investment in railways, airports, ports, roads, urban infrastructure, energy, tourism and industrial
infrastructure.
Funding initiatives
Case study: Bangalore International Airport
The Greenfeld Bangalore International Airport, the frst PPP airport in the country, is developed on a
PPP model with total investment of INR19.3 billion. It is the joint venture between the Airports Authority of
India (AAI), Karnataka State Industrial Investment and Development Corporation Ltd. (KSIIDC) and private
promoters. The airport is built on international lines with world class facilities along with the capacity to
handle 40 million passengers on further development.
PPP model - The Bangalore International Airport is being built on BOOT format with Government of
Karnataka and Airports Authority of India (AAI) each having 13% equity shares and developer being selected
through competitive bidding process for a concession period of 30 years (provision of 30 years extension).
The INR19.3 billion fnancing being done as equity INR31.5 million, state support INR3.5 billion and debt
INR12.65 billion.
1.6.3 Gujarat
11
With around 63 projects valued at INR396 billion
12
,
Gujarat is among the leading states witnessing high
level of PPP activity especially in the sectors of
ports and power. Gujarats vision 2010 envisioned
development of robust infrastructure in the state
primarily through the PPP mode. Similar planning exercise has been undertaken for future projects in the form
of Blueprint for Infrastructure, Gujarat-2020. It envisages investment of INR120 trillion by 2020 across
infrastructure sectors.

11 The Transition Towards a Sustainable PPP Regime, Geert Dewulf, Ashwin Mahalingam, and Stephan Jooste, August 2011
Major Initiatives, Gujarat Offcial State Portal, http://www.gujaratindia.com/index.htm, accessed 11 December 2011
Public Private Partnership, Gujarat infrastructure Development Board website, http://www.gidb.org/, accessed 12 December
2011
Gujarat is the frst state to build a regulatory framework for PPP through the passing of Gujarat
Infrastructure Development Act in 1999. It defnes guidelines for the private sector participation in
fnancing, construction, maintenance and operation of infrastructure projects undertaken on a PPP basis
in Gujarat.
Gujarat Infrastructure Development Board (GIDB) was set up in 1995 to undertake PPP initiatives in
the state. Gujarat Infrastructure Development (GID) Act 1999 provides a mechanism for selection of
developers to encourage private sector participation.
GIDB has developed model concession agreements for certain sectors such as ports, urban transport, road
and water.
In addition, sector-specifc policies of the state provide for utilization of PPP.
Policy reforms
The State Government has formulated viability gap funding scheme to provide funds for essential PPP
projects. Under this scheme, the State Government provides fnancial support up to 20% of the cost of
PPP project. The funding is provided in the form of a capital grant at the stage of project construction.
Funding initiatives
Case study: Dahej LNG Terminal
Gujarats Dahej LNG Terminal is the frst LNG terminal in India, spread over 48 hectares and is currently
under operation stage. Owned by Petronet LNG Ltd. and located at Dahej in Bharuch district of Gujarat,
the PPP project is estimated to cost INR23 billion.
PPP model - Dahej LNG Terminal PPP is in a BOOT format with contract awarded by the Negotiated MoU
method for 30 years. The equity was contributed by Indian oil companies, a France-based company and
Asian Development Bank. The project had a debt-equity ratio of 71:29.
(Source: PPP in India and http://www.gidb.org/cms.aspx?content_id=106)
Gujarat and PPP
Gujarats 40 minor private sector ports handle
approximately 80% of cargo handled by all
private ports in India.
Gujarat possesses frst ever private port
project in the country.
The only chemical port and tow LNG
Terminals have been developed in the PPP
format.
Two air strips have been developed by
private developers.
1.6.4 Jharkhand
Jharkhand witnessed relatively low PPP activity in infrastructure projects. The state has undertaken nine PPP
contracts costing INR17 billion
13
. The BOT has been the preferred form of PPP type applicable in these projects.
The sectors such as urban development and roads have drawn more attention towards PPP in the state. The
draft Jharkhand Industrial Policy, 2011 lays down signifcant emphasis on implementation of the concept of PPP
in industrialization especially in infrastructure development/industrial area development/industrial park/ human
resource development/service sector etc.
14
1.6.5 Chhattisgarh
The state of Chhattisgarh recorded relatively low PPP activity in infrastructure projects with only four PPP contracts
costing INR8 billion
15
. All the projects have been undertaken in the roads sector utilizing the BOT-Toll PPP type.
Chhattisgarh formulated an industrial policy for the period of 20092014 to focus on PPP. It allows the industrialist
to form their own private industrial park for an area of up to 75 acres resulting in speedy acquisition of land. The
state government actively supports the PPP method for development of tourism and infrastructure.
14 Jharkhand Industrial Policy 2011, Jharkhand Industry website, jharkhandindustry.gov.in/Jharkhand%20Industrial%20
Policy%202011%2013.9.11.doc, accessed 19 December, 2011
National Games Housing Complex at Ranchi
Government of Jharkhand (GoJ) envisaged development of a self-contained township at Ranchi with quality
infrastructure in the state, supporting and complimenting the 34th National Games. The project entailed
development, construction, sale of dwelling units, operation and maintenance (O&M) of around 1,600
dwelling units equipped with all utilities and facilities. The Phase-I of the project (1,200 houses) were to be
completed by July 2007, Phase-II (600 houses) by March 2008. The estimated cost of the project is INR25
billion.
PPP model - Department of Arts, Culture, Sports & Youth Affairs, of Jharkand leased 56.44 acres of land for
fve years in lieu of constructed dwelling units. Nagarjuna Urban Infrastructure Company Limited (NUICL)
has been involved in development, construction, sale and operation and maintenance (O&M) of the dwelling
units.
(Source: PPP Database http://www.pppindiadatabase.com/Screens/frmView.aspx?PROJECTID=R2qxVb@@12/
erI=&AUTHORISEDUSER=N )
Upcoming PPP projects in Jharkhands social infrastructure
PPP for model colleges
The state of Jharkhand announced its plans to
develop model colleges under the PPP mode to
provide better education and increase the gross
enrolment ratio.
(Source: http://www.telegraphindia.com/1101206/jsp/
jharkhand/story_13263505.jsp)
Jharkhand announces plan for PPP hospital
The state of Jharkhand announced its plans to
operate the newly built 500-bed Sadar Hospital at
Ranchi in PPP mode with the view to avail qualifed
and specialist doctors and trained nursing and
paramedical staffs.
(Source: http://www.igovernment.in/site/jharkhand-moots-
ppp-mode-govt-hospitals)
16
1.7 International experience
1.7.1 United Kingdom
PPP activities in the UK started gaining momentum in the 1980s, in a bid by the UK Government to reduce the
economys dependence on public sector fnancing.
17
With the support of various initiatives over the years, the PPP
model has evolved from a channel to offset the constraints on public sector expenditure, to the preferred model to
deliver superior quality services.
According to the UK treasury data, 698 private fnance initiative (PFI) projects have been signed to be delivered
through the PPP route, in various sectors such as education, health, defense, public-housing, IT and transport.
18
The PPPs in the UK have been highly successful, with several countries around the world trying to emulate the UK
model. According to British National Audit Offce (NAO) an assessment of the UK PPP policy in 2009 shows that 65%
of the contracts were delivered on time and within the agreed budget.
19
16 Chhattisgarh, Ministry of Foreign Affairs, Kingdom of Thailand website, http://www.mfa.go.th/internet/document/6691.
pdf, accessed 19 December 2011
World class education in Chhattisgarh, Dailybhaskar.com website, http://daily.bhaskar.com/article/MP-RAI-soon-world-
class-education-in-chhattisgarh-iiit-likely-to-open-in-state-2142187.html, accessed 19 December 2011
17 Public-Private Partnerships, Government Guarantees, and Fiscal Risk, International Monetary Fund, April 2006, p. 72-76
18 Project Database, PPPForum website, http://www.pppforum.com/projects, accessed 14 December 2011
19 Theorizing Public-Private Partnership Success: A Market-Based Alternative to Government, Paper for the Public
Management Research Conference at Syracuse University, June 2011, p. 16
Upcoming PPPs
16
Setting up of Gems & Jewellery SEZ on PPP
Chhattisgarh State Industrial Development
Corporation Limited plans to set up a Gems and
Jewellery SEZ covering 70 acres. The project
will be developed on a PPP basis with M/s Ramky
Infrastructure Ltd. The project is expected to be
completed by 2014 at a cost of INR17.42 billion.
Sports City in Naya Raipur
Naya Raipur Development Authority is setting up a
sports city with facilities for aquatic, tennis and indoor
stadium on PPP in Naya Raipur over 137 Acres. The
private player will build the sports facilities and hand it
back to the authority. A 93 acre residential land parcel
will cross-subsidize the sports facilities.
Infrastructure
UK (IUK)
2007
Partnerships
UK (PUK)
2000
Treasury
taskforce
1997
PFI
1992
1.7.2 Australia
20
The Australian PPP market is one of the most well developed markets for PPP. The initial phase of PPP pertained
to infrastructure projects that were modeled on the BOT and BOOT types. However, the focus of PPP shifted to
social infrastructure in 2000s. The projects are diverse and relate to hospitals and schools. The market for social
infrastructure is expected to continue to develop as there is need for water and energy infrastructure to meet
Australias future sustainability requirements.
Australia is witnessing signifcant growth in infrastructure. The infrastructure market is estimated to procure
investments worth US$101 billion by 2016. In addition, the devastation caused by the foods in northern Australia
exacerbates the massive task of rebuilding damaged infrastructure. Thus, there is requirement of private
investment in the country.
20 Case Studies of Transportation Public-Private Partnerships around the World, Offce of Policy and Governmental Affairs,
July 2011
Public Private Partnerships, Infrastructure Australia website, http://www.infrastructureaustralia.gov.au/public_private/,
accessed 11 December 2011
High level of political commitment: Timely reforms
have been introduced by the Government to ensure
development of the PPP markets. This includes
steps such as PFI, and empowering the National
Audit Ofce (NAO) to independently oversee PPPs.
Strong policy framework: A proper legal and
institutional framework at national, regional and
municipal levels is in place, which acts as a safeguard
for potential partners. It is ensured that the
Government spending is regularly scrutinized and
published for the general public.
Key
success
factors
1
2
3
4
Specialized bodies: The creation of specialized
bodies such as Partnerships UK (PUK) and the
Treasury Taskforce has institutionalized and
gave structure to the PPP activities, which has
been critical for the success of a PPP program
in such a large scale.
Utilization of taxpayer's money: A proper evaluation
tool, along with a program management process, has
been put in place. This screening optimizes the
project risk, and ensures that they are delivered on
time without compromising on the quality.
Case study: Advantage PPP - A55 Llandegai to Holyhead Trunk Road
The 101 million A55 Llandegai to Holyhead trunk road has been designed, fnanced and built by UK
Highways A55, a consortium of Carillion Laing and Hyder and is the frst trunk road built in Wales under the
Private Finance Initiative. It is a key international highway linking Dublin and Ireland more generally with
Wales and England and the major markets of Europe. The project proved to be a major achievement for the
concessionaire as it delivered the project 6 months ahead of time despite the wettest winters and fuel crisis.
Infrastructure Australia
Independent statutory advisory council with 12 members
from government and private sector
Australian PPP unit
Established by Department of Finance and Administration to
provide guidance to government agencies on use of PPP
National PPP Forum
Facilitates cooperation across Australian regional
jurisdictions for infrastructure projects through PPP
Key national
entities for PPP
1.7.3 Brazil
21
Private investment to build infrastructure has existed in Brazil for a long time. In fact, it was the main form in which
majority of the countrys original infrastructure were developed. The frst railroads of the country were built by
private players under the state licenses. Brazil has one of the longest highway network under private concessions
22

in the world indicating co-existence of public and private entities.
PPP activities are regulated under the Concessions Law (1995) and the Public Private Partnerships Law (2004). The
main drawback of the concession law has been that the users (especially drivers on toll roads) are unwilling to pay
for the use of a previously free road. Under the law the contract duration can vary between 5 to 35 years and the
contract value should be at least US$11 million.
The adoption of the two model structure in the PPP law has proven to be effective because:
The PPP law allows the payments to be partly or totally funded by the Government. This has helped in attracting
private investments in projects that cannot be sustained by the fees charged from the users.
The Government has to establish a fund to provide warranty of its obligations under the agreement.
The law also provides for the use of alternative mechanisms for disputes resolution, including arbitration.
21 Brazilian PPP Program, Lessons and Challenges, Brazil Ministry of Planning website, http://estatico.buenosaires.gov.ar/
areas/hacienda/pdf/8_mesapanel_vanialucia_lins_souto.pdf, accessed 12 December 2011.
An Overview of Concessions and Public-Private Partnerships in Brazil, American Bar Association website, March 2011.
Public Private Partnership Unit website, www.ppp.mg.gov.br, accessed 12 December 2011
Privatization and Public-Private Partnership, Barbosa, Mssnich & Arago Advogados website, 2008, p. 4
22 A concession is the right to operate public services or facilities for a fxed period of time, at the concessionaires risk.
Case study: Advantage PPP - Sydney Harbor tunnel
The level of traffc between North Sydney and the Sydney Central Business District led to the development
of the tunnel on PPP model (BOOT). The New South Wales Government selected the Sydney Harbor Tunnel
Company Pty. Ltd. as the preferred consortium in 1987. The PPP model with ownership of private sector
led to signifcant alleviation of congestion in the area and proved to be successful.
Investment is recovered from the revenues collected from the users in the
terms of concession (Revenue source = user tariffs)
Ideal for long-term sustainable projects
The Concession
Law
Sponsored concession state is allowed to complement concessionaires
revenues (Revenue source = user tariffs + public)
Administrative concession Government is responsible for the private
partners remuneration (Revenue source = public payments)
The Public Private
Partnership Law
Scope for improvement: Despite certain advantages, few PPP projects have been contracted in the country. Many
Government offcials are not comfortable with the idea of paying taxpayers money to private investors and are
hesitant in implementing such contracts. There are major issues are in the areas of policy formulation, regulation
and supervision of contracts. According to the law, the Government cannot make any payment until the private
partner provides the service to the users. This creates fnancing diffculties as the private investor may have to
make huge investments in building facilities without receiving any cash fow. Brazil launched Phase two of its Growth
Acceleration Program, which estimates to incur public and private investments worth US$526 billion to upgrade the
countrys infrastructure in the period 2011 to 2014.
1.7.4 Philippines
23
Government of Philippines has been promoting participation of private sector not only in traditional infrastructure
projects such as power, transportation and water sectors, but also in non-traditional infrastructure and development
sectors such as information and communications technology, health and property development since 1987. PPP
enabled resolving of the power crisis in the early 1990s and helped improve road network quality, transport linkages
and social services in the country. PPP initiatives have bagged approximately US$19.5billion in the country.
The countrys PPP program is a vital component of its development plan. The PPP center is at the helm of affairs of
the PPP program. It provides various services and assistance to implementing agencies (IAs), government-owned
and controlled corporations (GOCCs), state universities (SUCs), local government units (LGUs) and the private
sector in the development and implementation of critical infrastructure projects. In addition, the countrys BOT law
recognizes the role of private sector in the development of the country by providing various incentives such as tax
exemptions. PPP center serves as an effcient nodal agency for PPP projects of the country. Project Development
and Monitoring Facility (PDMF) of the center provides funds for PPP activity.
Government is proactive in takings steps to build up support for PPP projects. It has allocated US$6.8 million in the
2011 budget to enable structuring and preparation of PPP projects. In addition, it is developing an interim scheme
to provide access to long-term fnancing for PPP projects until a dedicated infrastructure fnance facility can be
established.
23 Public Private Partnership Projects, Republic of Philippines, March 2011
The Philippine PPP Program, PPP unit, December 2008
Case study: PPP in Brazil - MG-050 highway
The recovery, expansion and maintenance of the MG-050 highway was the frst highway project in Brazil to
be executed through PPP. The 372-km long highway entails investment worth US$650 million till 2032. The
project is being executed as sponsored concession and the private player has been granted a guarantee by
the state-owned Minas Gerais Economic Development Company.
Case study: Advantage PPP - North Luzon Expressway (NLEX)
In 1990s, the Government of Philippines invited the private sector to undertake the rehabilitation,
expansion, and modernization of NLEX. The total cost of the project amounted to US$252.2 million. The
private sector undertook the responsibilities of fnancing the project without the Governments guarantee,
building tollway and assuming constructing risk. It resulted in development of the regional agriculture and
industry besides providing access to northern and central Luzon.
2.1 Overview
The development of a good physical and social infrastructure is characterized by signifcant investment
requirements, low operating costs with repayments from revenues generated from the project. The GoI has
traditionally been taking the onus of fnancing, implementation, operations and maintenance of these projects.
However, to avoid cost and time overrun and beneft from innovative project structuring and implementation
strategies, private sector participation in development of infrastructure is extremely critical.
The GoI, cognizant of the fact, is setting the targets for its Twelfth fve year plan such that that 50% of the infra
spending is met by the private sector.
2.2 Meeting the Twelfth Five Year Plan targets
The Eleventh Five Year Plan (FYP) period of 20072012 is about to end soon and the GoI is currently drafting the
Twelfth FYP. Thus, while the fnal Twelfth fve year plan is yet to see the light of day, the Approach Paper for the
Twelfth FYP targets an infrastructure spending requirement of INR40,992 billion (up from infrastructure spending
levels of INR9,061 billion and INR20,542 billion during the Tenth and Eleventh FYPs respectively) in order to attain
a share of 10% of the countrys GDP. Around 50% of such investment is estimated to come from the private sector,
against the average 35.8% contribution that was estimated in the Eleventh FYP.
The Approach Paper
24
to the Twelfth FYP further states that while public investment in infrastructure is needed for
the overall societal development and wider reach, the PPP-based development needs to be encouraged in all feasible
areas. For this, the institutional mechanisms to support this kind of investment deserve strong support.
As a result, the GoI has already taken various measures to enhance availability of funds and meet increased level of
private sector participation. The next section describes in detail each of the funding sources and the measures taken
by the GoI to encourage the use of such source for infrastructure fnancing.
24 Faster, sustainable and More inclusive Growth An approach to the Twelfth FYP, Planning Commission, GoI
2.
Funding infrastructure through
public private partnerships
Infrastructure spending estimates across
the various FYPs (in INR billion)
Source: Planning Commission projections of Investment in infrastructure during the Twelfth Five Year Plan
Planned year-wise infrastructure spending
during the Twelfth FYP (in INR billion)
6,809
13,113
20,496
2,252
7,429
20,496
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Tenth Plan
(Actual)
Eleventh Plan
(Revised)
Twelfth Plan
(Projected)
Public investment Private investment
FY2013,
6,194
FY2014,
7,127
FY2015,
8,095
FY2016,
9,181
FY2017,
10,395
2.3 Means of infrastructure funding
The following table broadly indicates the various means of funding for an infrastructure project.
Sources of funds for PPP
25
Forms Domestic sources External sources
Debt Domestic commercial banks
Domestic term lending institutions
Domestic bond markets
Specialized infrastructure fnancing
institutions
International commercial banks
Export credit agencies
International bond markets
Multilateral agencies
Equity Domestic developers
Public utilities
Other institutional investors
International developers
Equipment suppliers funds
Other international equity investors
Multilateral agencies
Bank credit: Commercial banks are facing diffculties as they have already reached their lending exposure limits
for the infrastructure sector and face the problems of concentration risks and ALM mismatches.
Bonds: The bond market in India is highly underdeveloped. The rate at which the bond market in India is
growing is considerably slow in comparison to the rate of growth needed by the GoI to build its infrastructure.
External Commercial Borrowings (ECBs): ECB lending is highly dependent on the interest rate scenario.
Prominent infrastructure companies such as L&T have been increasingly evincing interest in ECBs as an option
for infrastructure funding.
Multilateral agencies: The World Bank and the Asian Development Bank have launched programs supporting
PPP projects in India. The institutions provide technical and fnancial assistance to facilitate infrastructure
development.
The infrastructure sector has been witnessing rising debt equity ratios in the recent years. The senior debt is
contributed by both commercial banks and public sector banks. The use of subordinated debt is limited and is used
particularly in the road sector.
Apart from lending in form of debt fnancing, the government grants are devised to support economically unviable
but feasible projects. The domestic bank credit has been the prime source of debt fnancing in case of infrastructure
projects.
25 Proposed Multitranche Financing Facility India: India Infrastructure Project Financing Facility, Asian Development Bank,
November 2007
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2.3.1 Commercial lending
Commercial lenders are the prominent fnancers for the infrastructure sector of the country. The following table
indicates that infrastructure lending of commercial banks grew from INR1,128 billion in 2006 to INR5,266 billion in
2011 registering a growth of approximately 36%. In addition, the share of bank fnance extended to infrastructure
sector as a percentage of gross bank credit has increased from 2.2% in 2001 to around 13.4% in 2011.
26
Bank credit to the infrastructure sector
in INR billion 2006 2007 2008 2009 2010 2011
Infrastructure sector 1,128 1,433 2,051 2,699 3,798 5,266
Primarily comprising
Power 601 731 950 1,244 1,878 2,691
Telecommunication 184 194 380 503 593 1,004
Roads and Ports 196 249 345 470 735 925
Source: Handbook of Statistics on Indian Economy 2010-11
However, many Indian banks are now on the verge of reaching their maximum limits for lending toward the
infrastructure sector. With signifcant number of high investments proposals in the pipeline for the infrastructure
sector, the banks are fnding it diffcult to fnance infrastructure projects. One of the key problems faced by banks is
the asset-liability mismatch problem, typically of infrastructure projects.
27
Challenge of asset-liability mismatch and reaching infrastructure exposure limits
The asset-liability mismatch problem arises due
to the fact that longer duration loans required by
the infrastructure projects need to be fnanced by
shorter duration borrowings. The lending banks are
fnding it increasingly diffcult to provide fnancing
to high-value projects with repayments schedules of
up to 15 years in comparison with deposits ranging
in maturity period of one to three years. With ALM
and concentration risks, the loans are not complete
refection of the project risk and loan pricing controls
(for liquidity shortfall and refnancing risk). The low
deposit rates have further aggravated the situation
as the depositors are unwilling to commit themselves
to long-term maturities
28
.
26 RBI Annual Report 2010-11, pg51
27 Loan-deposit mismatch may hit bank lending to infra sector, Live Mint website, http://www.livemint.
com/2011/02/08224328/Loandeposit-mismatch-may-hit.html, accessed on 4 January 2012
28 Bank face asset-liability mismatch on infra lending, Business Standard website, http://www.business-standard.com/india/
news/banks-face-asset-liability-mismatchinfra-lending/393085/, accessed 29 December 2011
Infrastructure loans are of 10-15
years duration, while most bank
deposits have tenure of one-two
years. In the last fnancial year,
not much disbursement took place,
and now every bank is sitting
on huge sanctions waiting to be
disbursed. This is going to create
a major problem, as we wont have
deposits of equal maturity,
Chairman and Managing Director of a
public sector bank
(Source: Business Standard)
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The difference between liabilities and assets varies according to their maturity profle buckets. The table indicates
that as the maturity time period increases, the liabilities (deposits and borrowings) surpass the assets (loan and
advances and investments). It results in asset liability mismatch for banks.
The problem accentuates with infrastructure lending as infrastructure loans are long-term in nature.
Table: Maturity profle of selected items of liabilities and assets of four public sector banks (in INR million) as
on 31 March 2011
SBI Bank of India Punjab
National Bank
Canara Bank Total
Deposits
Over 5 years 1,571,656 538,719 714,426 523,464 377,587
Borrowings
Over 5 years 409,693 98,139 101,781 43,550 77,986
Loan and Advances
Over 5 years 1,360,204 363,307 264,986 355,125 287,161
Investments (at book value)
Over 5 years 1,600,123 543,334 579,436 597,985 374,098
Difference
Over 5 years 97,898 26,978 2,822 38,610 20,569
In the absence of a developed corporate bond market, use of refnancing facility has been suggested to mitigate
ALM mismatches. Under this facility, the long-term funds will be borrowed and used to refnance infrastructure
loans of banks and specialized NBFCs.
Many banks are close to
exhausting their internal limits
set for infrastructure frms.
We may not see the same
pace of expansion, in terms
of credit disbursement to the
infrastructure sector, in the next
two years that we have seen in
the past two years
R. Ramachandran, Chairman and
Managing Director of Andhra Bank
Maximum loan proposals are
coming from this (infrastructure)
sector. All are big-ticket
proposalsBanks will have to
see their loan book and see what
their headroom available for
lending
P.K. Anand, Executive director of
Punjab and Sind Bank
(Source: Livemint)
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Take-out fnancing as a solution: The take-out fnancing scheme has been developed to deal with issues of hitting
sectoral limits, concentration risk and asset-liability mismatch. The takeout fnancing scheme involves three parties
project company, lending company and taking over institution (bank/consortium of banks/FI). Under the scheme,
the taking over institution enters an agreement by which the lender transfers a part/whole of the outstanding to the
taking over institution on a pre-determined basis. The concept of takeout fnancing has been accepted as a global
practice to release long-term funds for fnancing infrastructure projects.
IIFCL, an SPV formed for the purpose of lending funds to infrastructure projects and supplement other loans from
banks and fnancial institutions, has been recognized as a special agency to extend takeout fnance scheme in 2010.
A tripartite agreement was signed in September 2011 between IIFCL, LIC and IDFC which allows takeout fnancing
to an extent of 50%
29
of the project cost.
IIFCL has further increased take-out fnancing disbursement target by INR50 billion as a result of which the banks
and infrastructure developers are expected to get attractive takeout fnancing deals. Under the new concession
in PPP projects, the take-out fnancing rate is likely to vary from 9.90% to 10.85%. The banks will now be able to
seek out takeout fnancing immediately after the commercial operation date. Also, the BOT projects of NHAI will be
eligible for the scheme. These changes will enable banks reduce exposure to existing borrowers and free up their
capital and operate within the exposure limits.
30
Measures taken by the RBI
31
Additionally, the Reserve Bank of India (RBI) has taken a number of regulatory concessions for
infrastructure fnance:
Permitting banks to enter take-out fnancing arrangement
Freedom to issue long term bonds by banks
Relaxation of single and group borrower limit for additional credit exposure in the infrastructure sector
Flexibility to invest in unrated bonds of companies engaged in infrastructure activities within the overall ceiling
of 10%
Excluding the promoters shares in the SPV of an infrastructure project to be pledged to the lending bank from
the banks capital market exposure
Permitting banks to extend fnance to fund promoters equity where the proposal involves acquisition of share
in an existing company engaged in implementing or operating an infrastructure project in India.
Further, the central bank recently eased the norms by allowing banks to lend 20% of its capital funds to
Infrastructure Finance Companies (IFCs).
29 IIFCL, LIC, IDFC enter into MoU for takeout fnancing, Economic Times website, http://articles.economictimes.indiatimes.
com/2011-09-19/news/30175667_1_takeout-fnancing-iifcl-india-infrastructure-fnance, accessed 2 January 2012
30 IIFCL raises takeout fn bar by Rs5,000 crore, DNA website, http://www.dnaindia.com/money/report_iifcl-raises-takeout-
fn-bar-by-rs5000-crore_1627878, accessed 20 December 2011
31 K C Chakrabarty: Infrastructure fnance experiences and the road ahead, BIS Review, February 2010
2.3.2 Bonds
The bond market in India comprises issuances by
both Central and state governments, public sector
undertakings, other government bodies, fnancial
institutions, banks and corporates. However,
the corporate bond market currently is highly
underdeveloped and lacks liquidity and depth.
32
The corporate debt markets have been constrained by detailed primary issue guidelines, lengthy processes, and
absence of long-term investors.
The bond market primarily functions as a private
placement market as the public issues of bonds have
been found to be diffcult, slow, expensive as well as
risky. A debt private placement amount of INR5.4 billion
was raised in the infrastructure sector during FY09 up
from INR4.3 billion in FY08.
33

Indian companies are allowed to issue bonds in Indian
currency for trading on the corporate bond market in the
country according to the existing regulations. Foreign
institutional investors are permitted to invest in these
bonds up to INR935 billion collectively, with a carve
out of INR234 billion for infrastructure projects.
34

2.3.3 External commercial borrowings
External commercial borrowings (ECBs) can also serve as an important means of funding debt requirements of the
infrastructure project. The number of ECBs extended depends on interest rates in the country. Over the years, they
have become cheaper and developers are increasingly viewing them as an alternate source.
Some of the regulatory changes implemented to make ECBs an important means of funding include:
In May 2011, the RBI permitted IFCs to raise funds through ECBs of up to 50% of net-owned funds without
approval.
35
In September 2011, the limits to avail ECB under the automatic route has been liberalized as given below:
36
Corporates in real sector/industrial sector/infrastructure sector INR35 billion or equivalent as compared to
the current limit of INR23.3 billion or equivalent
32 India to set up vibrant bond market: Mukherjee, Economic Times website, http://economictimes.indiatimes.com/markets/
bonds/india-to-set-up-vibrant-bond-market-mukherjee/articleshow/7320944.cms, accessed 20 December 2011
33 Product Innovations for Financing Infrastructure: A Study of Indias Debt Markets, Asian Development Bank, October 2011
34 India to set up vibrant bond market: Mukherjee, Indo-Asian News Service, 19 January 2011, via Factiva 2011 HT Media
Limited.
35 ECB norms liberalized for infrastructure fnance frms, Live mint, May 2011
36 External Commercial Borrowings (ECB) Rationalisation and Liberalisation, RBI, September 2011
India plans to develop a vibrant
bond market to facilitate
infrastructure fnancing, as
the source of nearly one-third
of the targeted $1 trillion
investment in the sector during
the Twelfth plan period is not
known yet..We want to
develop and set up a vibrant
bond market in the country
to facilitate infrastructure
fnancing.
Pranab Mukherjee
Honble Finance Minister of India
(Source: Economic Times)
The success of governments
very ambitious infrastructure
programme hinges on
developing an adequate bond
market
D.H.Pai Panandiker, President, RPG Foundation
(Source: Business Week)
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Corporates in specifed service sectors such as hotel, hospital and software INR9.3 billion or equivalent as
against the current limit of INR4.6 billion or equivalent
The corporate entities in the infrastructure sector can now avail of ECBs for interest during construction (IDC)
as a permissible end-use, under the automatic/approval route, as the case may be, subject to IDC being a part of
project cost and is capitalized.
The GoI approved fund raising worth INR609.5 billion by companies through external commercial borrowing (ECB)
or foreign currency convertible bonds (FCCB) for infrastructure projects in the last two fnancial years.
37
Companies such as L&T Finance are mulling the ECB route for its expansion. L&T Infrastructure Finance raised
INR4.2 billion through the ECB window this fscal and is aiming to raise more funds through this route.
38
2.3.4 Foreign investment funding
Foreign direct investment (FDI) FDI of up to 100% is permitted in greenfeld infrastructure projects under the
automatic route. In the case of existing projects, FDI under the automatic route is permitted up to 74% and FIPB
approval is required beyond 74%. FDI gained a prominent role in infrastructure fnancing in the recent years. Total
FDI increased from US$5.03 billion in 200203 to US$27.02 billion.
39
Over the next two years, India could attract
FDI worth US$80 billion. The infrastructure sector as a percentage of total FDI increased signifcantly from around
4% in 200203 to around 16.7% in 201011.
40
Going by these trends, FDI could signifcantly contribute to fnancing
infrastructure in India.
2.3.5 Foreign Institutional Investment (FII)
The GoI is reportedly in talks with the regulatory authorities to allow infrastructure fnance companies to issue bonds
to foreign investors for the purpose of raising infrastructure fnance in the country. The GoI had earlier raised the
limit on FII investment in corporate bonds of duration of more than fve years issued by companies in this sector.
41
2.3.6 Multilateral agencies lending
Institutions such as the World Bank and the Asian Development Bank also provide funds to fnance PPP
infrastructure projects.
Asian Development Bank
42
The GoI started a PPP initiative called Mainstreaming PPPs in India in collaboration with ADB. It commenced in
2007 to enable PPPs by focusing on all activities relating to various parameters such as process standardization,
sector tools, development funds and projects development.
43
ADB also provides support to India in structuring of potential PPP through its support in the form of Technical
Assistance (TA).The support provided by the institution is in the following forms:
Public sector loans to states or municipalities for fnancing grants/equity support
Public sector loans to IIFCL that further grant funds for project companies
Private sector loans to project companies
Provision of guarantee to commercial lenders.
37 http://www.projectsinfo.in/News.aspx?nId=tqS7Qlvq+Qa2afymafoMpg==
38 L&T Infra launches tax-free bonds; mulls ECB route for funds, Business Line website, http://www.thehindubusinessline.
com/industry-and-economy/banking/article2656496.ece, accessed 22 December 2011
39 Department of Industrial Policy and Promotion, India FDI Fact Sheet April 2011 Pg4
40 RBI Annual Report 2010-11 pg70
41 http://www.moneycontrol.com/news/business/govt-aims-to-ease-fi-entryinfra-fnance-bonds-sources_579707.html
42 Country Operations Business Plan, ADB, December 2010
43 Theoretical Framework, ADB website, http://www.adb.org/India/PPP/about.asp, accessed 2 January 2012
ADBs TA support for the Indian PPP program identifed more than 30 pilot projects across challenging sectors such
as urban, health, education, power distribution and the rural sector. It is supporting approximately 452 PPP projects
across the country through the PPP cells.
World Bank
World Bank support intends to increase the availability of long-term fnancing for infrastructure PPP projects
in India. It will help IIFCL to stimulate the development of a long-term local currency debt fnancing market for
infrastructure in India.
The International Bank for Reconstruction and Development (IBRD) has provided a Line of Credit (LoC) of INR58
billion to IIFCL for infrastructure projects.
In addition, World Bank project (20092015) regarding IIFCL support is expected to bring around 150 new PPPs
to fnancial closure, resulting in a four-fold increase in the amount of private capital available. Such a fnancing will
support a number of PPP projects, mainly in the roads, power and ports sectors.
2.3.7 Insurance/pension funds
Pension funds can serve as an alternate source of fnance for infrastructure projects as they provide long-term
streams of income, constancy, predictable cash fows, lower default rates, diversifcation of project and societal
benefts. The GoI plans to allow infrastructure companies to raise fnances from both domestic and foreign insurance
and pension funds by launching infrastructure debt funds (IDFs). IDFs can be setup as a trust or a company. To
attract off shore funds into IDFs, the Ministry of Finance proposed that withholding tax on interest payment on
borrowing by IDFs will be reduced from 20% to 5%. Also income of IDFs will also be exempt from income tax.
The government clears policy
impediments to enable life
insurance companies and
pension funds, which have funds
for 20-30 years at their disposal,
to invest in the infrastructure
sector.
Suggested by KC Chakrabarty, Deputy Governor, RBI
(Source: The Times of India)
Setting up of India infrastructure debt fund
The GoI has laid down the format for INR500 billion infrastructure debt fund with 50% participation from
foreign banks and multilateral agencies and the remaining being contributed by the state-owned FIs. The fund is
expected to lend to any infrastructure project, which is based on PPP.
2.4 Grants
Grant is the amount, which a project awarding authority provides to the project sponsor in order to support the
fnancial viability of a project. Projects that are not commercially viable on their own require a fund support from the
GoI. The GoI introduced Viability Gap Fund to provide catalytic assistance and support, especially for regions and
sectors where PPPs are diffcult.
2.5 Private sector capabilities
Private sector is slated to play an important role in providing funds for development of infrastructure in the country.
It is expected to fnance 50% of investment of US$1 trillion in infrastructure projects in the country during the period
201217. The Planning Commission states that apart from the highway and power sectors, the following areas can
also leverage Indias private sector capabilities during the Twelfth FYP.
44
Civil aviation: Private sector contributed to the modernization of airport infrastructure. The new Mumbai
airport is expected to be developed on PPP model. Private sector capabilities can also be leveraged for
development of other airports in the country.
Higher education: Private sector growth in higher education needs to be facilitated through utilizing innovative
PPP models.
Skill development: Upgrading of ITIs through the PPP model and participation of private sector in fnancing,
service delivery, and training of trainers.
Housing: Scope of affordable housing for weaker sections can be expanded through participation of private
sector.
44 An Approach to Twelfth Five year plan, Planning Commission, October 2011
Viability Gap Funding
Financing:
Providing 20% of project cost
Additional 20% can be allowed by the sponsoring authority, if required
Eligible sectors:
Transportation (rail, roadways, seaport, highways)
Power/ Energy
Urban infrastructure (water supply, sewage, solid waste management)
Tourism (international convention centers)
Special Economic Zones
Current status:
The total Viability Gap Funding (VGF) outlay for the Eleventh Five Year Plan (20072012) had been estimated at
INR69.73 billion. In the FY1011 alone, INR4.80 billion was provided as VGF. The total approvals for VGF grant
till now are INR82.89 billion for projects that have been granted In-principle/fnal approval. The actual level of
VGF amount of these proposals will be known once the bidding process is completed.
(Source: Outcome budget FY1112, Ministry of Finance, pg 3)
The coverage of VGF scheme is also being considered for expansion in case of education and health sectors.
Also, the state governments (such as UP Government) are undertaking development projects through VGF to
make them proftable for promoters.
Urban infrastructure: There are signifcant opportunities for private sector in the felds of urban renewal and
management, drinking water supply, waste water recycling, treatment of municipal sewerage wastage and
treatment or urban sewerage.
Health care services: PPP arrangements can be utilized to fnance health care services and to strengthen the
secondary and tertiary health care systems in the country.
In India, majority of equity in infrastructure projects is contributed by project developers, with the next-largest
contributor being the public sector. The private sector consortium along with public agency contributes equity
depending on the terms of contract while debt is sourced from an outside agency.
According to World Banks Private Participation in Infrastructure database, India stands second only to China in
terms of number of PPP projects and is second to Brazil in terms of investments.
PPP projects in India require a minimum shareholding commitment from sponsors of projects amounting to 51%
of the equity up to second year of commencement of operations. The equity capital is entirely provided by project
sponsors out of their existing balance sheets. There is also placement of minority equity stakes with Engineering
Procurement and Construction (EPC)/O&M contractors besides strategic investors who are likely to beneft from the
projects operations.
A private player in a PPP project can be a private company, a consortium of private interests or a Non Government
Organization (NGO). Private sector plays the role of designing, construction, operation and maintenance of the
project. Private players are also responsible for providing equity of the PPP project. They, in turn, can tap the
primary market to raise capital via an IPO issue.
However, private developers have limited amount of capital, tied up for long term in infrastructure projects. They
rely on private equity investors to decrease promoters risk. Private equity witnessed around 241 deals worth
INR266 billion in the infrastructure sector in 1H11.
Table: Capital raising of infrastructure companies and PE investments in infrastructure
IPO/FPO PE
Number of issues INR billion Number of deals INR billion
2004-05 4 62 7 4
2005-06 9 46 10 28
2006-07 12 66 40 115
2007-08 21 206 77 341
2008-09 3 10 48 184
Source: Financing Infrastructure, IDFC Series
The investment is contributed by both domestic and foreign players. However, the domestic players dominate the
scenario of PPP projects in India.
Table: Prominent private players in Indian Infrastructure
Domestic players Investment
(INR billion)
Number of
projects
Major domestic players
Larsen & Turbo Transportation Infrastructure Ltd. 35 10
Small domestic players
DS Constructions 3 4
Sadbhav Engineering Limited 21 11
MSK Projects (India) Limited 2 15
Total 65 40
Source: Shodhganga
3.1 Highways
Road sector (405 projects valued at INR1,767 billion) accounts for 53% of the total number and 46% of the total
value of PPP projects in India
45
. The road network in India comprises national highways (65,569 km), state highways
(1,30,000 km) and district/rural/urban road (31,40,000 km)
46
. The contracts have primarily been awarded by
competitive bidding and are largely in the BOT format (toll or annuity basis).
Common forms of PPP in national highways
PPP format Projects Value (in INR billion)
BOT toll 48 93.3
BOT annuity 8 23.5
Special Purpose Vehicle Projects 24 46.8
Source: Ministry of Road Transport & Highways
National highways: Signifcant progress has been made in the fnancing of ambitious National Highway
Development Program (NHDP) covering a total length of 45,974 km and investment of INR2,200 billion up to
2012.
Status of State Highways
Project status No. of projects
Completed projects 73
Projects under implementation 62
Projects in the bid process 41
Projects where feasibility study has commenced 44
Projects in pipeline for 2011-12 38
Total 258
Source: Compendium of PPP projects in state highways, Infrastructure website
State highways: With signifcant progress being made by the NHDP (in case of national highways) in which
approximately 85% of projects are proposed to be under the PPP mode, growth model for state highways also
holds potential. The state governments of Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Rajasthan and
Madhya Pradesh are taking initiatives to promote PPP-based state highways.
45 PPP India database as of 31 July 2011
46 Ministry of Road Transport & Highways
3.
Key industries/sectors for PPP
Several government initiatives to enhance private sector participation
(including PPP) in roads sector:
Viability Gap Funding in the form of capital grants subsidy of up to 40% of project cost
100% tax exemption in any consecutive 10 years out of 20 years
Duty-free import of certain identifed high quality construction plants and equipment
Allowing FDI up to 100% in the sector and relaxed ECB norms
Long concession period of up to 30 years
Right to collect and retain toll
Model concession agreements for state highways
Standardizing of model bidding documents
Investment requirements: The national highways constitute just 2% of the entire road network but carry
approximately 40% of total road traffc indicating existence of signifcant potential to be unleashed. The investments
worth INR4,902 billion have been planned as a part of the Twelfth FYP (compared to INR2,786 billion for the
Eleventh FYP). The contribution of private sector is likely to range from INR1,667 billion to INR2,451 billion during
the Twelfth FYP (based on an estimated 34% of private spending in the Eleventh FYP and envisaged 50% private
spending in the Twelfth FYP).
3.2 Railways
The railways sector just experienced 4 PPP contracts valued at INR15.7 billion
47
. The projects have been contracted
either by domestic competitive bidding or through negotiated MOUs. Due to the large size of the projects, the PPP
projects in railways have to be supplementary or an extension to an existing large railway network.
The recent PPP data
48
indicates around nine projects being contracted so far in Gujarat (4), Orissa (2),
Haryana (1), Andhra Pradesh (1) and Karnataka (1). The nine projects have BOT (or its variants) format
(including one on DBFOT) PPP as the preferred BOT model. The INR9 billion metro links from Delhi Metro
from Sikanderpur to NH 8, Gurgaon has the highest value of PPP railway contract so far.
The PPP experience in the railways sector has proven to be a mixed bag so far. In projects with clear cut
demarcation of responsibilities, the model has proven successful such as in the case of last mile port-connectivity
(For instance, last mile connectivity to Mundra port with Palanpur-Gandhidham railway line; and rail link from
Bhadrak to new port at Dhamra in Orissa). On the other hand, the railways has been facing problems in using the
PPP route for manufacturing rolling stock and locomotives (two mega railway projects manufacture of Electric
locomotives at Madhepura and Diesel Locomotives at Marhorwa have been on hold).
Investment requirements: As reported, the Indian railways (IR) require INR5.2 trillion of public investment during
the Twelfth FYP (201217) of which the Indian Railway Corporation will raise INR1 trillion and the balance needs to
be generated internally or through the form of PPPs. The IR announced its plans of restructuring to attract funding
of INR500 billion
49
to meet its expansion targets proposed for the Twelfth FYP. In order to carry out this, the railway
is currently working out strategies to design and award PPP projects. The railways ministry has reportedly, plans of
awarding projects on locomotive and coach factory and construction of a corridor for high-speed rail in Twelfth Plan
period to generate the estimated investment.
47 PPP India Database as on 31 July 2011
48 PPP data, PPP in India Database, accessed 9 December 2011
49 In track change, Rly eyes R50k cr pvt investment, The Financial Express website, http://www.fnancialexpress.com/news/
In-track-change--Rly-eyes-R50k-cr-pvt-investment/840860/ accessed 19 December 2011
Some of the PPP project initiatives undertaken by the railways sector include:
Container Corporation of India Limited (CONCOR) for developing multi modal transport logistics
infrastructure to support domestic container traffc
Pipavav Railway Corporation Ltd. (PRCL) to provide broad gauge rail link to Port of Pipavav in Gujarat
Rail Vikas Nigam Limited (RVNL) for Port connectivity works and improvement of the Golden
Quadrilateral to meet future transportation needs
The projects proposed for PPP format
include:
High speed rail corridor
Dedicated freight corridor
Locomotive and coach factories
Multi-modal Logistics hubs
3.3 Power
The GoI has taken several initiatives over the last few years to promote participation from private players in the
power sector. With a total of 56 projects valued at INR672 billion, the energy sector accounts for 18% of the overall
value of PPP contracts awarded in various sectors.
50
Power generation
51
: Power generation in India takes place primarily at the state level (46%) and Central
level (31%), with private sector accounting for the rest. Participation of private players in the power sector is
centered on thermal power generation, largely implemented through the BOO and BOOT models.

Introduced in 2005, nine Ultra Mega Power Projects (UMPPs) are expected to rope in an investment of around
US$3540 billion from the private sector. To increase investor confdence, UMPPs are awarded through
competitive tariff-based bidding, and are being developed on a BOO basis.
Power transmission: Since January 2011, transmission projects have also been awarded through competitive
bidding under the BOO model. For instance, Sterlite has already been awarded three projects (amounting to
US$40 million) for building power transmission systems on a Build-Own-Operate-Maintain (BOOM) basis.
Opportunities in the power sector
52
The demand-supply gap has been widening at an alarming pace, primarily led by rapid growth in population and
manufacturing activities. The country is expected a power defcit of around 10% during 201112 and by 2030,
the total demand for electricity in India is expected to cross 950GW.
The Planning Commission projected an investment of US$171 billion in the power sector during the period
201217, out of which the private sector is expected to contribute around US$60 billion. Currently, 100% FDI is
permitted for generation, transmission and distribution through the automatic route.
50 PPP Project Status Report, Public Private Partnerships India database, 31 July 2011
51 Position paper on the power sector in India, Department of Economic Affairs, MoF (India), December 2009
52 India plans 16 Ultra Mega Power Projects to enhance power generation, Industrial fuels and power website, http://www.
ifandp.com/article/0010818.html
This time around, we will indeed make a
difference when it comes to PPP projects.
Railways doesnt have enough resources
on its own and the government cant keep
funding our plans for ever. So, PPP is the
only way forward,
Dinesh Trivedi
Honble Railway Minister of India
Source: Financial Express
(http://www.fnancialexpress.com/news/in-track-
change-rly-eyes-r50k-cr-pvt-investment/840860/0)
Policy initiatives and incentives to encourage private participation:
Increasing foreign participation up to 100% under the automatic route
New policy framework that includes: Electricity Act, 2003, National Electricity Policy 2006, Tariff Policy
2006, Rural Electrifcation Policy 2006, New Hydro policy 2008 and mega power projects 2008
Introduction of open access to transmission lines and distribution systems by licensees or consumers or
generators
Introduction of competition/UMPPs
Renewable energy holds signifcant opportunities
in generation as well as manufacturing activities,
largely due to underutilized resources and lack of
political will. The GoI has an ambitious Power for
All plan, which aims for complete electrifcation
by the end of 2012. To implement this initiative,
signifcant participation from the private sector
is required. The option of PPP in nuclear power
generation is also being explored, though FDI in the
sector is not permitted yet.
3.4 Urban infrastructure
The urban infrastructure sector witnessed a relatively signifcant number of PPP contracts (152) valued at INR294
billion
53
although it accounts for only 8% of total value of contracts indicating a large number of PPP projects with
small contract value.
The GoI recognizes the importance of urban infrastructure in the changing dynamics of Indian population as it is
expected that urban population will reach 600 million by 2031
54
. The GoI launched the Jawaharlal Nehru National
Urban Renewal Mission (JNNURM) to establish a framework and provide incentives to promote PPP to states and
urban local governments.
However, the sector still witnesses obstacles to attract private investment as there is lack of adequate legal
framework at the state and city level and institutions and key stakeholders do not have the capacity and knowledge
to carry out project on PPP basis.
53 As per PPP in India database (as on 31 July, 2011)
54 Report on Indian Urban Infrastructure and Services, The High Powered Expert Committee (HPEC) for Estimating the
Investment Requirements for Urban Infrastructure Services, March 2011, page XXI
The scope for investment
in the power sector over the
next few years is well over
$300 billion and given our
large expansion programme
in this sector, we would
defnitely need and welcome a
large amount of foreign direct
investment.
Sushil Kumar Shinde
Honble Union Power Minister
Source: IFANDP (dated April, 2011)
(http://www.ifandp.com/article/0010818.html)
Prominent PPP project initiatives in urban infrastructure:
24 X 7 water supply project for Nagpur city to provide uninterrupted water supply to consumers; model
slated to be emulated in many other cities
Water supply and sewerage project in Kolkata to develop water supply-cum-sewerage for the township of
Sector-V of Salt Lake
Integrated solid waste management project in Chennai to meet the requirements of solid waste
management
City bus service of Surat to cater to the need for public transport system for the congested city of Surat
One of the most critical issue in urbanization is effcient transport system and a recent study shows that metro
rail answers the transit needs of urban areas most effectively and has the potential to bring all round benefts to
business, to environment and multiple benefts to people in all walks of life
55
.
A new metro project is being taken up in Hyderabad for 71.16 km., at an estimated cost of INR123.32 billion,
besides the ongoing metro projects of Bangalore, Chennai, Kolkata (East-West Metro corridor) and Mumbai. Also,
metro rail projects have received in principle approval forJaipur,Patna, Pune, Kochi and Lucknow.
The Central and state governments will require funds to fulfll the demand for urban infrastructure. The defcit can
only be met through involving private players in the sector.
Ministry of Urban Developments strategic plan states that PPP can play a prominent role in the felds of solid
waste management functions such as door-to-door collection, street sweeping, transportation and treatment;
e-goverenance and strenghtening of urban local bodies (ULBs).
The ministry also envisions setting up of a PPP urban
infrastructure fund to encourage PPP to supplement
government efforts.
Source: Report on Indian Urban Infrastructure and Services,
The High Powered Expert Committee (HPEC) for Estimating the
Investment Requirements for Urban Infrastructure Services,
March 2011, page XXV
55 Study on Urbanizing India & Mega Metro Network Vision for the Emerging Cities of India-2030 http://www.assocham.org/
arb/general/Metro Study_Update.pdf
Urban infrastructure investment requirement: INR39,186 billion (2012-31)
44%
11%
10%
8%
6%
5%
3%
3%
1%
8%
Urban roads
Urban transport
Renewal and redevelopment including slums
Water supply
Sewerage
Storm water drains
Capacity building
Trafc support infrastructure
Solid waste management
Other sectors
Government will encourage
PPP model for developing
infrastructure like water supply
and municipal solid waste
management in the cities across
the country
Kamal Nath
Honble Urban Development Minister of India
Source: The Hindu
(http://articles.economictimes.indiatimes.com/2011-
12-20/news/30538042_1_ppp-model-solid-waste-
management-urban-local-bodies)
4.1 Policy recommendations
An independent institutional structure for handling of PPP program: With the express objective of meeting
the PPP targets, an independent institution should be set up to act as nodal agency with the responsibility
of creation of PPP data base, best practices, model documents for all sectors and coordination with all
departments.
Development of sector-specifc regulatory mechanism: In order to protect the interest of users, private
developers, the social community and lenders and sector-specifc regulators should be established. The
independent regulators can make the dispute resolution mechanism effective especially in cases where public
authority is also an operator, for example in railway, where the Indian Railway is the concessioning authority
and at the same time compete with private train operator (through Concor).
Dissemination of information on PPPs: There exists a need for the creation of specifc information policy
for PPPs wherein all bid documents, feasibility reports and current status of the projects are published on a
dedicated contract portal. The international policy models such as Partnerships Victoria (Australia) can be
referred to in this case.
4.2 Project development recommendations
Capacity building measures for the government: There is a need for capacity building at the Centre and
more particularly at the state governments and local bodies level. The PPP nodal agencies at the Centre and
state level should take the responsibility of creating awareness about the PPP program in all departments and
wherever required, the services of the technical and fnancial consultant for training of the staff should be
taken. The multilateral and bilateral agencies can also provide technical and fnancial assistance for the PPP
projects and to provide best global practices to be followed in PPPs.
Role of consultants: For development of PPP project the role of technical and transaction advisors is most
critical. Hence, it is imperative the utmost care is taken in appointment of consultants. Generally the consultant
fee is a small proportion of the project cost and the value addition by a good consultant could be much higher.
For the success of the project, consultants quality is more critical as compared to the cost implications. Hence,
the preferred model for selection of the consultant should be either quality based or quality-cum-cost based
with higher weightage to quality.
4.
Recommendations
Policy recommendations Project development
recommendations
Financing recommendations
Setting up independent
institutional structure for
handling PPP program
Development of sector-specifc
regulatory mechanism
Dissemination of Information
on PPPs
Capacity building measures for
the Government
Role of consultants
Project development activities
Optimal allocation of risks,
authority and accountability
Selection of private sector
partner
Developing corporate bond
market
Encouraging participation by
pension funds and insurance
companies
Stimulating PE investments in
infrastructure sector
Hedging mechanism for
external borrowings and
investments
Project development activities: The lack of project preparation by the relevant development authority such
as, inaccurate scope defnition, land acquisition, utilities, environment clearance, no public consultations etc.
can result in poor bid response and also at the execution stage delays in commencement of construction,
compromises on the design quality to reduce costs or attempt to change scope resulting in abnormal increase in
project cost leading to disputes. The authorities should try to get all approvals and latest feasibility reports with
technical scope of work before awarding concessions.
Optimal allocation of risks, authority and accountability: There is a need for effective distribution of
responsibility, costs and risks between the public and private sector. In many cases, due to lack of proper
project development, public authorities are not able to fulfll their responsibilities such as land acquisition,
environmental clearance, state support etc., due to which project gets delayed. However, even in cases where
government is not able to fulfll its part, the private sector has to suffer the losses due to delay, as there is no
appropriate framework for compensation.
Selection of private sector partner: To get best technical and fnancial offer, the authorities should start
interaction with private sector from the project development activities stage, and concerns of the private
bidders should be taken care of in the best possible way. For selection of private partners there is an excessive
focus on highest fnancial bids. The speculative bids can hamper the project in the long run, as the developer
will fnd it diffcult to get funding and service the obligations. The authorities should evolve a policy on the
speculative bids and other selection methods such as competitive dialogue process for complex projects should
also be used.
4.3 Financing recommendations
Developing corporate bond market: There is an immediate need to develop the corporate bond market.
The proposal to set up Infrastructure Debt Funds (IDFs) is a step in the right direction. Further, in order to
jumpstart the corporate bond market in infrastructure projects, the large Indian commercial banks while funding
the project can compulsorily fund some part of debt by subscribing to bonds. These bonds can be listed on
exchanges. The large commercial banks and NBFCs can also play the market makers in infrastructure bonds for
initial years.
Encouraging participation by pension funds and insurance companies: Given the fact that the commercial
banks are concerned about asset liability mismatches and concentration risks, the GoI should alternately
consider domestic institutional investors for investment in infrastructure. The GoI should make the investment
policies and regulatory guidelines of the insurance companies and pension funds more conducive and fexible
toward investing in the infrastructure sector. The regulations such as rating requirements and treatment of
investments by insurance companies in infrastructure sector can be reviewed.
Stimulating PE investments in infrastructure sector: Global and domestic private equity funds have the
capability to provide fnance for infrastructure growth in India. To attract PE funds for bidding in infrastructure
projects, the eligibility criteria should be suitably amended, and apart from the fnancial networth, the Funds
under Management for PE and Venture Capital funds should also be included.
Hedging mechanism for external borrowings and investments: The Indian companies have been raising
external commercial borrowings for infrastructure projects. IDFs also aim to tap international insurance and
pension funds for investment in infrastructure in India. The hedging of foreign currency exposure eats up a
large part of interest rate arbitrage through foreign funding. The GoI can use a part of its foreign currency
reserves to give a less expensive currency hedging mechanism for foreign currency borrowings and investments
in the infrastructure space.
Notes
Abdul Salam
Deputy Director
FICCI
Industrys Voice for Policy Change
Federation House, Tansen Marg, New Delhi 110 001
Email: abdul@fcci.com
Tel: + 91-11-2376 5082
Fax: + 91-11-2332 0736
Mobile: + 91-99 998 84 007
Web: www.fcci.com
FICCI contact
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About Federation of Indian Chambers of Commerce
and Industry (FICCI)
Established in 1927, FICCI is the largest and oldest
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interwoven with Indias struggle for independence
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also provides a platform for sector specific consensus
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development, which encompass health, education,
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serves as the first port of call for Indian industry and the
international business community.

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