Article

Resetting PPP in Infrastructure The Indian Economic Journal

68(3) 365–382, 2020
Model in India Post-COVID-19 © 2021 Indian Economic Association

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DOI: 10.1177/0019466220976678
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Sandeep G. Kudtarkar1

Abstract
This article has set out to understand why a large number of public–private partnership (PPP) projects
delayed stalled and terminated in the largest PPP program in India. Based on quantitative and case-
study-based qualitative research, this study finds that the incomplete nature of PPP contracts, uncer-
tainty and information asymmetry leads to adverse selection, moral hazard, opportunism and holdup
of the PPP projects. The inefficacious and inequitable allocation of risks among stakeholders and lack of
contract management skills in project authorities exaggerated the problems, and the final outcome is a
large number of failed projects and no participation from private developers in future projects defeat-
ing the very purpose of adopting the PPP model to build public infrastructure. This study proposes a
20-point conceptual institutional framework suggesting policy and project-level measures for effective
execution of the future PPP program in India and developing countries with similar socioeconomic
environment post-COVID-19 pandemic amid recessionary conditions.

Keywords
PPP in India, infrastructure, contract and risk management, sponsor risk, framework for effective PPP
implementation, PPP in developing countries

JEL Codes: E6, H5, N7, O2, R4

I. Introduction
The public–private partnership (PPP) in infrastructure is an innovative structure to build public
infrastructure with collaborative efforts from the government project authority and the private
developers. A PPP concession is a contract of long duration (20–40 years), which defines all the aspects
of partnership such as ownership, responsibilities, risk allocation and contract management. A right is
conferred upon the private developer through a contract to design, finance, construct and operate public
infrastructure asset. The basic idea is to give incentive to private developers and investors to invest in

1
Aruna Manharlal Shah Institute of Management and Research, Mumbai, Maharashtra, India

Corresponding author:
Sandeep G. Kudtarkar, Assistant Professor, Aruna Manharlal Shah Institute of Management and Research, Ghatkopar West, Mumbai,
Maharashtra 400086, India; PhD Scholar, NMIMS University, Mumbai , Maharashtra 400056 India.
E-mail: supsanc@yahoo.co.in/skudtarkar@amsimr.org
366 The Indian Economic Journal 68(3)

Table 1. Status of PPP Projects in India Initiated During 1993–2016.

Sr. No. Project Type Number of Projects Percentage

1 Operational 625 46.02
2 Under construction projects( initiated till 670 49.33
year 2016)
3 Terminated Projects 63 4.63
4 Total projects initiated till year 2016 1,358
Source: www.pppinindia.gov.in and author’s calculation.

PPP projects in lieu of attractive financial returns from the project. The PPP model started with great
enthusiasm and expectations in India in 1999. A large number of contracts were signed in all the
subsectors of infrastructure. By 2010, India has become one of the largest markets of PPP projects
globally according to Infrascope Report 2015. The initial euphoria in the PPP model diminished after
2011. During 2011–2019, while the number of new projects reduced drastically, a large number of
already started projects were delayed, stalled and terminated. There has been an overall contraction in
terms of the number of PPP projects. The private sector players who started enthusiastically and won a
number of PPP contracts are now laden with huge debts and are trying to monetise PPP assets by selling
operational projects and are shying away from participating in new PPP projects and lenders restrained
themselves from lending to new PPP projects due to crisis of corporate defaults and piling of non-
performing assets (NPAs) in the Indian banking system. As exhibited in Table 1, out of 1,350 plus
projects initiated on PPP basic in India till 2016, only 46% projects have become operational, and the
rest of the projects were either terminated, delayed, stalled and could not become functional till end of
2019 just before eruption of COVID-19 pandemic.

Operational Projects
The projects that had been awarded to concessionaires on PPP basis after competitive bidding. The
financial closure achieved and then construction was completed, and the projects are in operation phase
collecting their revenue in the form of annuity or toll free. Some projects have even completed their
contracted life cycle.

Delayed/Under Construction Projects

The projects were awarded on PPP basis before 2016. But projects could not be completed till date due
to failure in achieving financial closure, delay in land acquisitions, environment permissions, legal
disputes between parties, inefficient contractors and change in design and scope. Normally, it takes
maximum three years for completion of infrastructure projects like roads, seaports, airports, metro-rail
and power projects. Hence, we have studied projects that were awarded prior to 2016 and till date their
construction is not completed. There are projects that are delayed by 8–10 years. On paper, they are
designated as under operational projects and they are not cancelled till date. Most of these projects are
stalled, and there is very low possibility of their revival.
Kudtarkar 367

Terminated Projects
The projects that were delayed stalled and with legal disputes are officially cancelled by either the
project authority or the private concessionaire based on the terms in the concession agreement (CA).
The rest of the article is structured as follows: Section I discusses the prevalent dismal state of PPP
projects in India. Section II discusses literature on PPP. Section III details the research methodology.
Section IV presents quantitative data and its analysis. Section V discusses 10 case studies. Section VI
presents the analysis. Section VII proposes a 20-point framework to be used for effective implementation
of future PPP projects.

II. Literature Review

Physical infrastructure like roads and airports and social infrastructure like schools and hospitals are
essential for economic growth and form the basis of providing a better standard of living for the citizen
of the country. The governments worldwide build infrastructure through budgetary provisions, but many
governments in developing countries which are not in a fiscal position to meet mammoth spending
requirement build infrastructure through partnership with private partners and the PPP (Ross & Bettignies,
2004). The government builds cost-effective infrastructure in collaboration with the private developers
in PPP modality using project management expertise of private developers without raising government
debt or imposing taxes on citizens (Chan et al., 2011).
The incomplete contract theory is discussed in detail by Grossman and Hart (1986) and Hart and
Moore (1990) suggesting giving property ownership right to the private investing party to incentivise
them to invest in public infrastructure projects and further protect the investor appropriation from the
government authority and encourages innovation to reduce life cycle cost of the project. The allocation
of two or more activities of a project to a private partner called as ‘bundling’ induces the private developer
to use more cost-effective and innovative designs reducing the project life cycle cost and enhance returns
to private partner (Daniels & Trebilcock, 2000). A PPP project requires a technically expert and financially
sound private developer with adequate technical knowhow, capable project team, effective project
organisation structure and past experience in executing infrastructure projects and public authorities
should select a competent private partner in procurement stage to ensure completion of project on time
and within assigned budget (Dada & Oladokun, 2012).
A risk is an uncertainty about future outcome, and risk management is bunch of activities and
measures to deal with risks to control the project (PMBOK, 1996). A risk allocation and management
is essential for PPP project management (Irwin, 2007), and risk allocation between the projects partners
while creating maximum value should carefully manage issues like adverse selection, moral hazard and
project hold up arising due to incomplete nature of PPP contracts and should be allocated to a partner
who can manage and mitigate it by aligning interests of all involved stakeholders and meticulously
drafting the CA taking into consideration that PPP is largely an incomplete contract. The time and cost
overrun lowers the benefit and destroy the economic value of the project. The poor outcomes of
individual PPP projects due to poor contract and risk management result into poor economic welfare
(Ansar et al., 2016).
The government transfers risks to the private sector as they are expert and experienced in building
infrastructure assets (Cheung et al., 2012). The private party should manage and adequately price the
risks, which are under their control, and the public authority should take charge of those risks, which
368 The Indian Economic Journal 68(3)

cannot be controlled by private party (Cheung et al., 2012; Zhang, 2005). The allocation of risk among
parties along with the adequate compensation to offset the accepted risk is discussed, negotiated and
contracted during the PPP procurement process (Abd Karim, 2011).
The private equity investors take risk of investing with the expectation of higher rate of returns
resulting into higher cost of PPP projects than public procurement projects. The lenders act as a
monitoring agency for PPP projects to safeguard their interests and investments (Jefferies et al., 2002).
A project structured on the sound principles of project financing optimally allocates risks among the
parties along with project cost optimisation (Akintoye, 2003). A certain and stable cash flow is
prerequisite for the project finance as lenders have recourse only to the cash flows and assets of the
project (Zhang, 2005).
The risk management involves monitoring of risk of the project throughout the entire life cycle of the
project. The private sector investors prefer to become party to PPP projects, wherein revenue risk is
mitigated through certainty of revenue to cover the project’s costs and generate risk adjusted returns,
while the government attempts to lower the cost of building public infrastructure by allocating some
risks to a private partner (Grimsey & Lewis, 2004). The risk should be managed on life cycle basis by
identifying risks in the earlier stages of the project and proactively managing them on continuous basis
(Zou et al., 2008). But the private developers succumbed to underestimating the cost (Cantarelli, 2011)
and the overestimation of the profits from PPP projects, which is termed as ‘optimism bias’ in the
literature (Flyvbjerg, 2009).
Abd Karim (2011) analysed various risk factors of PPP project such as political, legal, economic and
concluded that delay in project approval and getting various permissions, change in law and land
acquisition are the most observed issues in PPP. The study by Pickrell (1992) found that rail projects in
the US wrongly anticipated the traffic and revenue during operational phase, which resulted into revenue
risk and lowered benefits. Engel et al. (2007) stated that in highway PPP project, forecasting traffic
precisely is difficult, which leads to revenue risk during operation phase. In Indian context, Akalkotkar
and Malek (2016) cited budgetary constraint of government as a cause to introduce PPP program in
infrastructure on large scale. Lakshmanan (2008) mentioned problems like opaque procedures, faulty
risk allocation, inadequate project selection, cost and time overruns. Mathur (2017) cited land acquisition
delay budget overrun and demand risk as major risks. Baruah and Kakati (2016) described land
acquisition, demand risk and financial risk as the prime issues. Harisankar and Sreeparvathy (2013)
blamed faulty arbitration system in India. As per Gupta (2015), the cost overruns for Mumbai airport and
Delhi airport was 113% and 50.5%, respectively. Iyer and Jha (2006) have described project participant’s
commitment and sponsors competency as the success factors and miscommunication and lack of trust
among project parties as causes of failure for PPP projects. Pathan and Pimplikar (2013) investigated that
a BOT project gets affected by various parameters like structure of toll, revision in toll and its schedule,
capital grant from government and suggested that the project authority and the concessionaire should
decide about sharing of risks for effective risk mitigation.
The significant causes for failure of the PPP model in developing countries are absence of sound
institutional mechanism and effective and transparent policies (Akintoye & Matthias, 2009). A sound
and sensible legal and regulatory framework is requisite for dealing with the issues in PPP implementation,
and such a framework should be transparent, fair and highly predictable supported with an efficient,
procurement process (Harris, 2008). Such a sound framework can attract local as well as foreign investors
(Adetola et al., 2011; Kumaraswamy & Zhang, 2001).
Kudtarkar 369

III. Research Methodology

This study uses a mixed methodology method incorporating quantitative and qualitative analysis. In the
first stage, a quantitative study of 149 PPP projects in India (53 terminated and 96 delayed and stalled
projects) is conducted. The data of all individual PPP projects in the sample are collected, which had
been initiated as PPP project, CA was signed and contract was awarded to bid winning party, and
subsequently, these projects were delayed, stalled and terminated or cancelled. The data are collected
from the sources like www.pppinindia.gov., which is an official database of PPPs in infrastructure in
India maintained by the Ministry of Finance, Government of India, annual reports and credit rating
reports of project SPVs. For each individual PPP project, data such as special purpose vehicle (SPV)
name, project description, sponsor, contract signing date, the terminating party, reason for termination or
delay of project are obtained and analysed.
We have used a case study method to support the quantitative analysis and address the research
question of how and why the PPP model has failed in India. Ten cases of failed PPP projects are
thoroughly analysed. The cases are selected based on the logic of incomplete contract theory and
literature replication. The in-depth structured and semi-structured interviews were also conducted with
senior professionals involved in these projects. More than 1,000 pages of project documents including
CAs are examined.
A detailed examination is done after triangulating the quantitative data and insights from case studies,
interviews and project documents based on the various parameters like information asymmetry,
uncertainty and contract and risk management discussed in PPP literature. A 20-point framework for
improving performance of future PPP projects post COVID-19 is proposed.

IV. Data Analysis and Findings

Table 2 shows the descriptive data of quantitative analysis of reasons for termination of PPP projects.
Table 3 represents the analysis of reasons for delay/stalling of the projects.

Table 2. Analysis of Reasons for Termination/Cancellation of PPP Projects.

Number of Cumulative
Reasons for Termination Cases Percentage % Percentage
Sponsor risk 26 49.05 49.05
Dispute risk 8 15.09 64.14
Inefficient contractor 5 9.43 73.57
Land acquisition delay 4 7.55 81.12
Non receipt of grant from government 4 7.55 88.67
Lack of support from state government 2 3.77 92.48
Environment issues 1 1.88 94.36
Force majeure events 1 1.88 96.24
Forest land issue 1 1.88 98.12
Lower than expected revenue 1 1.88 100
Total 53 100 100
Source: IIFCL, NHAI, Ministry of Shipping and Civil Aviation State road authotities and authors calculation.
370 The Indian Economic Journal 68(3)

Table 3. Analysis of Reasons for Delayed and Stalled PPP Projects.

Number of Cumulative
Sr. No. Reasons for Termination Cases Percentage (%) Percentage
1 Land acquisition delay 35 36.46 36.46
2 Financially weak sponsor 21 21.88 58.34
3 Dispute between parties 8 8.33 66.67
4 Forest land issue 6 6.25 72.92
5 Inefficient contractor 4 4.16 77.08
6 Less than expected revenue 3 3.12 80.2
7 Non-cooperation by state government 3 3.12 83.32
8 Legal dispute between the parties 2 2.08 85.4
9 Environment issues 2 2.08 87.48
10 Agitation by public 2 2.08 89.56
11 Loss of revenue due to alternative road 1 1.04 90.6
12 Change in government policy 1 1.04 91.64
13 Change in project design 1 1.04 92.68
14 Change in scope 1 1.04 93.72
15 Dispute between the contractor and 1 1.04 94.76
sub-contractors
16 Force majeure events 1 1.04 95.8
17 Inappropriate bid with premium 1 1.04 96.84
18 Loss of revenue due to alternative road 1 1.04 97.88
19 Rising price of raw material during 1 1.04 98.92
operation phase
20 Policy change by government 1 1.04 100.00
Total 96
Source: IIFCL, NHAI, Ministry of Shipping and Civil Aviation, State road authotities and authors calculation.

V. Case Description

Navi Mumbai Airport

To address the congestion in Mumbai International airport, the government decided to construct a new
airport in New Mumbai in the vicinity of existing airport in 1998. But till date even the construction is
not started due to delayed environment permissions as proposed site is part of sensitive coastal regulation
zone and delay in land acquisition from the local farmers. The project cost escalated as the farmers are
paid four times the market price of land as per new land acquisition bill. After acquiring the land, the City
and Industrial Development Corporation, the project authority had done earthworks at the project site
before commencement of the construction. In a global competitive bidding in 2017, GVK infrastructure,
the current operator of the existing Mumbai airport was selected as a concessionaire but till date the
Kudtarkar 371

construction is not started, and due to current COVID-19 pandemic, the project will get further delayed.
In the meanwhile, due to legal issues, Adani Infrastructure has been appointed as a concessionaire
replacing GVK Infrastructure in August 2020. As the capacity of the existing airport in Mumbai saturated
in 2018, the plan to develop Mumbai city as an aviation hub did not materialise, resulting into severe
economic loss for the city.

Chennai Port—Maduravoyal Expressway

The project was conceived by the National Highways Authority of India (NHAI) to provide connectivity
between Chennai port and nearby state and national highway, and its bidding was done in 2010. The
authorities faced severe opposition from local farmers and delayed environment permissions due to
vicinity of river bed area to the project site. The construction was started in 2013, but till that time, since
very small portion of required land was acquired, the work progress at a snails speed and NHAI had to
pay the idle charges for labour and machines of the contractor. Finally, the NHAI terminated the project
in 2015. All the stakeholders in the projects severely impacted financially due to part of the work, which
was already done before the cancellation of the project which points to faulty planning and preparation
of the project.

Kishangarh–Udaipur–Ahmedabad Highway
Kishangarh–Udaipur–Ahmedabad highway was a six-lane 550-km highway awarded on PPP basis by
the NHAI to the concessionaire GMR Infrastructure in 2011 through competitive bidding as GMR
offered highest premium of USD 90 million per annum. But, after 2013, the economic conditions in
India deteriorated and GMR realised that it would be difficult to pay such a high premium if the project
revenue fall during operations. Hence, GMR dropped out of project citing the delay in getting
environmental permissions for the project and subsequently in 2013 requested again to renegotiate the
premium to start project work. The case points towards aggressive bidding by the developer.

Yamuna Expressway
The project is 165-km six-lane state highway connecting Noida to Agra in Uttar Pradesh state with
concession period of 36 years till 30 April 2044 at project cost of `14,000 Cr. Yamuna Expressway
Industrial Development Authority initiated the project and Jaypee Infratech Ltd. was appointed as the
concessionaire. The project included construction, operation and maintenance of the expressway and
right of developing 6,200 acres of land along Yamuna expressway.
The sponsor company Jaypee Enterprise Ltd. (JAL) had defaulted on `525 Cr of loans outstanding to
IDBI bank. The Supreme Court directed JAL to deposit `2,000 Cr with court to safeguard interest of
homebuyers. JAL had submitted to court a proposal to sell Yamuna expressway to a prospective buyer
who was willing to pay `2,500 Cr for the expressway. The court had restrained the directors of Jaypee
Infratech and JAL from travelling abroad without permission. Allahabad bench of NCLT has ordered
liquidation proceedings against Jaypee Infratech under IBC 2016.
372 The Indian Economic Journal 68(3)

Shivpuri Dewas Expressway

The NHAI awarded this 300-km national highway on BOT toll basis to the concessionaire GVK
Infrastructure in 2011. But due to economic slowdown, the company failed to raise equity and the
financial closure was not achieved. The company pulled out of the contract citing delay in getting the
environment clearance and the dispute reached to Delhi high court. Finally, the NHAI terminated the
project in 2014. In 2015, the NHAI restructured the project and awarded the project in three stretches of
100 km to three developers.

Three Seaports for Trans-shipment in the Vicinity

The shipping industry in India wanted to build a strong, alternative container trans-shipment terminal to
help send and receive cargo without routing them through neighbouring hub ports such as Colombo,
Singapore and Jebel Ali. To cater this need, the port operations started from 2011 at Vallarpadam by the
Union-government-owned Cochin Port Trust in Kerala. Another such facility was started at Colachel in
2016, and barely two months after that, the work began on a new trans-shipment terminal at Vizhinjam.
Colachel and Vizhinjam are just 36 km apart. Vizhinjam is 225 km from Vallarpadam.
When Vizhinjam will become operational, all three trans-shipment ports will get crowded in and
around the same region. The shipping ministry has decided to spent `1,700 crore to create infrastructure
for developing Vizhinjam as a national trans-shipment hub. Another container trans-shipment terminal at
Vizhinjam with viability gap funding (VGF) from the government is not recommended. The scarce
resources of the government like the VGF cannot be spent on a project, which will basically eat into
another project on which considerable government funds have already been spent. Setting up of a trans-
shipment terminal at Vizhinjam will result in both Vallarpadam and Vizhinjam fighting for the same
cargo and thus making both ports unviable in the process.

Water PPP in Karnataka

The Karnataka state government initiated a project to provide drinking water supply to the water-
scarce regions of Belgaum. The project was budgeted at `250 crores to be spent over a period of four
years between 2004 and 2008. Appropriate regulatory and legal framework was established by the
government to ensure better service delivery at affordable tariff and timely maintenance. However, the
project was faced with acute hurdles. The tariff was set at very high levels in order to recover the
project costs. Availability of water depended on the monsoon rains and the flow of water from the
Mandavi River in Goa.
The water disputes between the two states led to drying up of the Neer Sagar reservoir, from which
this water supply was being sourced. Several citizen and civil society groups protested that the
government’s decision to upscale the project was taking without the local population into confidence and
the ambiguity related to the tariff and costing of the project. Thus, an ambitious yet genuine people
welfare project was dealt a significant blow due to mismanagement of the stakeholders. The project has
proved to be too costly for the state government, and the overall benefits from the project did not reached
the population for which it was set up.
Kudtarkar 373

Ranchi Expressway Ltd.

Ranchi Expressway Ltd. was a 163-km national highway connecting Ranchi to Jamshedpur, for which
the NHAI awarded contract to Madhucon Projects Ltd. in 2011. The total estimated project cost of
`1,655 crores with a debt of `1,150 crores and equity of `500 crores. Out of the equity, it was mandatory
for the promoters of Madhucon Projects Ltd. to contribute 25% of equity, that is, `125 crores before
first drawdown date from consortium of banks led by Canara bank. But the promoter draws down
`1,030 crores without providing the equity and misused the bank funds. They did not carry out any
project work, and the project was terminated in 2018. When the enquiry was made by serious fraud
investigation agency SIFO, it was revealed that the promoters siphoned total `265 crores drawn from
banks. The investing agency CBI arrested the CMD and other directors of the company in a fraud case
in March 2019.

Delhi–Gurgaon Toll Road Project

The project was awarded on the BOT basis to the sponsor DSC Ltd. in 2002 and completed in 2008.
Since the concessionaire DSC Ltd. could not carried out the maintenance work as per the contract terms
and up to the expectations of the project authority, NHAI, the project was terminated by the NHAI in
2013. But the consortium of bankers led by IDFC bank had lent more money than the estimated project
cost by the NHAI without consulting the NHAI, and hence, the NHAI rejected to pay more than earlier
decided termination payment to banks putting banks to incur a big loss. The issue is also referred to
enforcement directorate (ED) and chief vigilance commissioner to investigate any siphoning of the funds
done by the project developers.

Airport Metro Line Project

This project was proposed to connect Delhi Airport to the city and outskirts in conjunction with the
existing Delhi Metro. Reliance Infrastructure Ltd. was the sponsor, and its subsidiary Delhi Airport
Metro Express Pvt Ltd. was the concessionaire for the project. The project was commissioned in February
2011. The consortium of banks led by Axis Bank lent a loan of `2,220 crores against a government-
approved debt of `1,247 crores without consulting the government authority. The lenders took a hit on
this account as the sponsor walked out of the project. The project was terminated, and bankers had to
incur loss of `1,000 crores due to reckless lending without considering the termination payment terms in
the concession and against the principles of project financing.

VI. Analysis and Discussion

Following the detailed quantitative analysis of sample of 150 failed projects corroborated by analysis of
10 cases of failed projects, we have derived following propositions.
Proposition 1: The contractual incompleteness and associated uncertainties resulted in increased
Information asymmetry and contractual hazards making execution and the scrutiny of the PPP
projects become more tedious.
374 The Indian Economic Journal 68(3)

A large number of stakeholders with conflicting interest were involved in the PPP project. The lack of
data sharing and the hiding of the private information made the projects susceptible to uncertainty and
information asymmetry. Due to information asymmetry and inadequate project monitoring and lack of
information, the project authorities could not resolved the issues occurred during construction and
operation phase due to heightened uncertainty. The resulting opportunism, moral hazard, adverse
selection and hold-up issues proved detrimental to the outcome and intended objectives of the PPP
projects.
Proposition 2: The lack of contract and risk management skills for managing the information
asymmetry and the uncertainty in the project resulted in failure of the projects.
The project authorities could not handle the uncertainty and information asymmetry due to lack of
contract and risk management skills. That coupled with inadequate contract monitoring led to delay, time
and cost overrun and even termination of the projects. In case of New Mumbai airport and Chennai port
expressway projects, the project authorities failed to deliver their own contractual obligations such as
providing land and environmental permissions on time. The project planning and preparation was
inadequate in these cases.
Proposition 3. The project authorities failed in addressing ex-post Information asymmetry by
specifying contractual performance norms tied with payment mechanism and effectively
monitoring them.
In cases of Kishangarh and Shivpuri expressway projects, the adequate enforceable performance
measures were observed to be missing in the CA. The authorities failed to monitor the construction and
operation of works resulting into loss of quality and increased cost. The authorities failed to knot penalties
with the contract clauses and incorporate quantifiable performance indicators to stimulate better
enforcement of projects.
Proposition 4: The inappropriate PPP project contracts eventually resulted into inadequate
contractual monitoring by project authorities.
Ideally, a good CA can encourage innovation and efficiency in the project by the concessionaire. But the
concessionaire used loopholes in the contracts for its own benefit and opportunistically skipped their
obligation due to lack of clear demarcation in terms of performance limits in the CA. The PPP contracts
failed in specifying justified reasons for renegotiations, which resulted into failing of the renegotiation
in reaching to logical conclusions.
Proposition 5: The objective of the PPP model was to make effective use of funds and expertise
from private sector, but aggressive bidding by the concessioners, the excessive funding by the
banks and misuse of the PPP model by some private developers defeated the objective to the
detriment of public, and the PPP model became instrument for the privatisation of profits and
nationalisation of losses.
As per the government guidelines, the total project cost was to be calculated as the sum of the bank
lending and equity money infused by the private developer. In cases of Delhi–Gurgaon Highway and
Delhi Airport Metro Express line projects, banks had lent more than the Government evaluated cost to
SPVs of projects without consulting the project authorities. Since the projects were cancelled, banks had
taken a hit as the liability of the Government in such cases was limited to the project cost defined by it
and termination payment in proportion to project cost. The banks hesitated to remove errant promoters
due to lack of the expertise to run the business. Such projects subsequently classified as NPAs.
Kudtarkar 375

The basic objective of the PPP model was to make effective utilisation of private finance and
efficiencies of developers, but few private players misused the PPP model for own benefit to the detriment
of the taxpayers. In cases like Ranchi Expressway, the concessionaires borrowed large funds from the
banks and diverted these funds to their other subsidiaries or siphoned the funds off to both India and
overseas, while themselves bringing in little or no committed equity. The grant received from the project
authority or loan from banks was paid as mobilisation advances to subcontractor belonging to same
sponsor group who in turn round-tripped the same back to concessionaire and showed as promoter’s
equity. The large payables were created by obtaining over-invoiced materials at inflated prices, which
were converted into equity of the sponsor using forged invoices.
The loan monitoring processes of the banks were inadequate to verify the source of real equity infused
by sponsors and prevent any fraud from the developers. Some concessionaires inflated the total project
cost many times the original project costs estimated by the project authority during bidding stage with
anticipation of reviving more grant during renegotiation in future. This resulted into entire funding of the
project with public funds while zero equity from developers. The diversion of funds to other businesses
and lack of equity funds significantly delayed financial closure of many projects and termination even
before the start of the construction.
The policy paralysis by government has often been cited as the main culprit for the slowdown in both
the economy and the infrastructure sector, but the private sector arguably deserves its share of the blame.
Some players participated in a bid process with the aim of winning the project with little regard for
project economics. Faced with a project that is commercially unviable from the outset, the winner
attempts to get the government to add sweeteners to the contract after the bidding has ended. It results in
the so-called ‘gold plating’ of costs and the loading of the project with much more debt than it can bear,
making a ‘restructuring’ of the loan a few years down the road almost inevitable. As per economic
theory, infrastructure projects are ‘long gestation’ projects where returns take years to fructify, in reality
the promoter, unofficially, retrieves a handsome de facto return on his investment within a relatively
short span of time. An aggressive bid was excuse to load the project with excessive debt and siphon off
surplus funds. The companies bid aggressively in a bunch of projects so as to build a large portfolio of
deals in a short time, which can then be sold to the public market in an IPO, enabling the promoter to
exit. Such projects eventually failed to achieve financial closure.

VII. Suggestions
Based on the research finding and analysis, we propose the framework for efficient management of PPP
projects post-COVID-19 pandemic.

Table 4. The Framework for Efficient Management of PPP Projects.

Policy Measures

1. Sectorial Planning

(Table 4 Continued)
376 The Indian Economic Journal 68(3)

(Table 4 Continued)

In infrastructure sector, each subsector is unique, and hence, while applying PPP model in specific subsector
like road, seaport, airport or power a suitable investment policy should be prepared by studying the financing
and revenue patterns depending upon the planned capacity to be built in the subsector while appropriately
allocating the risk among the partners and managing the risk proactively to create maximum value for the
money for government and suitable risk adjusted returns to the private partners to attract them to be
partner in future PPP project.

2. Institutional Development

The government bodies like municipal corporations, state electricity boards, state public transportation
companies and sea ports need capacity augmentation by providing them adequate sources of finance to make
them financially capable, corporatise them to make their governance professional and equip with trained
manpower capable of handling large size project efficiently.

3. Non-Performing PPP Assets

To arrest NPAs in future projects, banks should adopt proactive forensic audits to investigate malpractices
like bringing in fake equity, diversion or siphoning of the funds. A stringent legal action like step in, cure right,
attaching properties of the promoters should be taken to discourage the malpractices by providing adequate
legal rights to the banks. The complex cases should be handled by investing and enforcement agencies like ED,
CBI and SFIO.

4. To Attract Private Investors for Future Projects

In case of projects distressed due to reasons beyond the control of the concessionaires like time and
cost overrun due to land acquisition delay or environmental clearances, some form of compensation like
increasing the duration of the contract or deferment of premium to be provided to help sustain the projects.

Project-Level Measures

5. Value for Money Test

The pre-VFM criterion can be: (a) sufficiently large-scale bankable project; (b) optimum risk allocation among
the stakeholders; (c) sound-output-based design of the project; and (d) technically and financially viable
project. The draft national policy 2011 makes it mandatory to do the Value for Money analysis for the PPP
projects. For doing VFM analysis, there is a need for historical information of the projects; hence, up-to-date
database of all PPP projects can be maintained in future.

6. Techno Economic Viability (TEV) of Projects

Every project should be technically viable and economically feasible. The viability of project should be
assessed based on TEV study conducted by independent consultant who prepares detailed project report
(DPR) of the project.

7. DPR

DPR should be prepared by experts after visiting the project site instead of using Google maps and collecting
all the possible information. A good DPR is the very foundation of the project and help in improving the
project preparation. A DPR enables the project authority to establish a range of bids at which the project
could be viable and help eliminate bidders who want the project at all costs.

(Table 4 Continued)
Kudtarkar 377

(Table 4 Continued)

8. Plug-and-Play Readiness of the Project

To avoid time and cost overrun due to land acquisition delay, land, right of way, environment and
municipal permissions should be acquired by the project authorities before bidding and incorporating
flexibility in design and scope definition of the project during planning stage. A punitive provision should
be made in the contracts for the authority in case of breach in terms of availing land and other clearances
for the concessionaire.

9. Evaluation During the Bidding Process

The current single number comparison L1 method of contractor selection, where speculative and diligent
bidders cannot be differentiated, should be discarded. Instead, a comprehensive bidding process, where
each bid can be checked based on the parameters like efficiency, innovation and risk measures, can be
incorporated, which will force each bidder to take adequate diligence while making their proposals.

10. Drafting of Concession Agreement

A sound CA for the project can be drafted using the objective process and considering the risk profile,
prevailing market and economic conditions, latest technology, financial viability and investors’ expectations
and time lines.

11. Competition

A successful PPP requires competition. For creating competition, more companies should get involved
in bidding, for which international road shows can be arranged. The project must be well defined
after doing feasibility study. Having only one bid leads to a bilateral monopoly, and no bid leads to
loss of face. Utmost care should be taken to award projects to technically and financially competent
bidders while weeding out the incompetent ones. The provisions like submission of surety bond and
performance guarantee can be incorporated to discourage non-serious and incompetent bidders. A
bidder should not be allowed to bid for more than two or three projects at a given time to arrest
aggressive bidding.

12. To Ensure Financial Closure

The priority can be given to bids with realistic cost and benefit projections and firmly underwritten by the
lenders during bid evaluation process. In a two-stage bidding process, after prequalification in technical stage,
firms should be allowed to propose alternative if any to the reference project along with surety bond to offer
seriousness. A firm can be evaluated by setting threshold values during technical and financial evaluation stage
based on parameters like lowest toll, present value of revenue (PVR), grant or premium. A bidder with best
competitive offer and lowest PVR can be awarded the contract.

13. Contract Management and Project Monitoring

The project authority can make a sound contract plan, set up an efficient contract management team
and develop a robust institutional mechanism to achieve effective contract administration, performance
monitoring, effective service delivery and cordial relationship management. An optimum realistic
risk allocation among the partners and fair and transparent dispute redress mechanisms along with
reasonable exit norms are imperative. This can be supported by requisite monitoring and the contract
enforcement and the performance evaluation mechanism to avoid non-compliances and achieving the
overall efficiency.

(Table 4 Continued)
378 The Indian Economic Journal 68(3)

(Table 4 Continued)

14. Stakeholders Involvement

Encouraging stakeholder’s involvement and ownership for effective coordination of project activities
taking into consideration the expectations of all major and minor stakeholders to optimise the project
performance.

15. Payment Mechanism

Performance-based payments with incentive for innovation and efficiency to achieve better performance. The
operational grants for deficit funding can be linked with the operational performance.

16. Dispute Resolution

A project reaching the courts bound to fail so appropriate measures such as setting independent technical
and financial expert’s panels for quick and fair settlement of disputes can be incorporated before the disputes
reaching to the formal courts. The litigation must be strictly avoided as far as possible to avoid inadvertent
delays in legal processes.

17. Reducing Information Asymmetry

A sound and transparent concession should be drafted to mitigate uncertainty and information
asymmetry and potential conflict among the project partners in the project. The drafting and
enforcement of the contract can prevent moral hazards in the form of demand of renegotiation from
the private partners. The project authority can draft a flexible contract, which can deal fairly with all the
possible changes in future using sound quantitative and qualitative analysis of a given situation and can
punish the swindling developers.

18. Contract Enforcement Measures

When the concessionaire fails to persistently deliver services as stipulated, the authority should step in, in
active consultation with the lenders and in terms of the provisions of the contract because assets created
under the PPP mode are public assets.

19. Amending Model Concession Agreement

The model CA be revisited and updated keeping the materiality of the original contract intact to
accommodate changes in the macroeconomic conditions based on an objective assessment of causation and
fault, material risk factors, inflation in cost, adverse consequences and benefit to the citizens. A panel of legal,
technical and financial experts can examine and amended MCA as per extant international practice in terms of
variations, land acquisition, fair compensation, refinancing, changes in traffic and revenue and macroeconomic
and technical financial changes.

20. Renegotiation

While dealing with renegotiations of the project, an objective assessment of the factors like long term cost
and benefit, various potential risks, comparison of financial position of the project authority at the time of
drafting the concession and at the time of renegotiation can be done. This will help the project authority to
make a decision based on future likely outcomes of the PPP projects.
Source: Author’s construction.
Kudtarkar 379

As per ADB’s report ‘Meeting Asia’s Infrastructure Needs’ India requires $4.5 trillion to cater India’s
infrastructure demand by 2030, which is possible if both the private sector and the government together
invests in public infrastructure. The COVID-19 pandemic and nationwide lockdown have severely
impacted Indian government’s budget, and the government needs to shift back to the PPP model such as
BOT or toll-operate-transfer (TOT) projects funded by private players in place of current hybrid annuity
and EPC models funded entirely by the government.
India’s response to Corona pandemic needs elevating the public and private spend in Infrastructure
sector through PPP. It is the right time to put in place a progressive plan to kick start the PPP model with
a new approach by addressing the core structural issues such as inadequate contractual frameworks and
NPAs that have plagued the infrastructure sector for two decades while addressing the concerns of the
stakeholders with appropriate risk allocation and de-risking the private sector and addressing issues like
availability of capital, bankability of the projects, tech innovations, changing market conditions. The
robust financial and technical plans with optimum risk allocation structure and involving the lenders
with an acceptable credit risk to drive PPPs with large-scale private investment without burdening the
banking system with further NPAs.
The development financial institutes in India can forge innovative partnerships with foreign FIs to
ensure flow of capital. To improve the confidence of the private equity players, a sound pipeline of
bankable projects is required supported by innovative financial products and funding models along
with emphasis on project planning and regulatory framework to enhance the viability of PPP projects
in India. In the absence of many sector-specific regulators, a central legislation as adopted by South
Korea and even a separate ministry to deal with problem of slow ‘decision-making’ which had
paralysed PPP projects in the past is recommended. India needs to start PPPs in digitisation,
healthcare, railways to attract international companies and supply chains to switch over their facilities
to India.

VIII. Implications of the Research

The study contributes towards the growing body of knowledge on contract and risk management in PPP
projects by suggesting a framework of policy and project level measures for effective implementation
of future PPP projects. The findings of this study will help the project authorities to spot the probable
bottlenecks during the planning phase of the project and drafting of the CA to handle the uncertainty
and information asymmetry in the projects and take corrective measures during construction and
operation phase to improve the project performance. The study proposes a 20-point conceptual
institutional framework for improvement in the prevailing PPP policy. India, which was leading country
in terms of the number and value of PPP projects from 2007 to 2011, had lost the track, and by the end
of 2019, before eruption of corona pandemic, there were no takers for PPP projects offered by the
Indian government. This research is an attempt to study these phenomena in detail to find the root
causes for such a large number of failed projects. This study represents PPP market behaviour in India
and, therefore, is of significant relevance to other developing economies sharing socio-economic
similarities with India.
380 The Indian Economic Journal 68(3)

IX. Future Areas of Research

Several interesting areas for research emerged as we explored depth in this study. This research studied
the PPP projects awarded till 2016 on PPP basis to account the delays in the projects. Post 2016, new PPP
models such as hybrid annuity model and TOT were introduced by the government. The projects based
on these models can be evaluated for their performance in future. The preliminary contribution of this
research requires further validation through multiple cases of projects post 2016. It will be interesting to
study the impact of corona pandemic on the PPP model. The findings in India can be compared with
other developing countries like South Korea, Indonesia, Thailand and Vietnam who had shown
remarkable performance in PPP projects in the last five years.

X. Conclusion
This study is conducted to understand why a large number of PPP projects delayed, stalled and terminated
in the largest PPP program in the world implemented in India. Based on the quantitative and 10 case
studies, this study finds that the incomplete nature of PPP contracts and uncertainty leads to adverse
selection, moral hazard, opportunism and holdup of the projects.
The inefficient and inequitable allocation of risk among stakeholders, lack of contract management
skills in the project authorities in terms of tying contractual performance norms with payment
mechanism and ineffective monitoring while aggressive bidding by the concessioners, the excessive
funding by the banks and misuse of the PPP model by some private developers defeated the objective
to the detriment of public, and the PPP model became instrument for the privatisation of profits and
nationalisation of losses. The final outcome is a large number of failed projects and no participation
from private developers in future projects defeating the very purpose of adopting the PPP model to
build public infrastructure by making effective use of funds and expertise from private sector.
The study proposes a 20-point conceptual institutional framework suggesting policy and project-
level measures such as sectorial planning, institutional development, efficient and transparent
procurement process creating competition, designing bankable projects and de-risking them by
taking measures like awarding plug-and-play ready projects in terms of land acquisition and various
permissions to avoid delays in financial closures and time and cost overrun, setting a fair and
transparent alternative dispute redressal mechanism based on arbitration, mediation and conciliation,
rewarding efficiency and punishing dishonesty will attract the private developers and financial
investors for future PPP projects. A world-class infrastructure will help to attract supply chains and
foreign investment in India and achieve its dream to become 5 trillion dollar economy post corona
pandemic.

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

Funding
The author received no financial support for the research, authorship and/or publication of this article.
Kudtarkar 381

ORCID iD
Sandeep G. Kudtarkar https://orcid.org/0000-0002-6937-9405

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