The Practice of PPP in Urban Infrastructure

By Anand Sahasranaman, IFMR Finance Foundation

The recently released volume on urbanisation titled “Urbanisation in India” edited by Dr. Isher Ahluwalia, Dr. Ravi Kanbur and Dr. P. K. Mohanty, contains a chapter authored by Vikram Kapur, Commissioner of Chennai, and me, dealing with the practice of Public Private Partnerships (PPPs) in urban infrastructure in India. In this paper, we undertake an assessment of private participation in the provision of public infrastructure and services – participation in the form of financing as well as in developing, managing and operating public services. This post provides a synopsis of the chapter.

The environment for urban infrastructure provision has undergone a sea change in the last two decades. Prior to 1991, the government (along with government-linked institutions such as para-statals and public sector institutions under direction from the government) was the financier, developer and operator of all urban infrastructure and services. While this created some much needed infrastructure in cities, the absence of accountability in this top-down, centralised approach led to the development of infrastructure of poor quality, without concern for the needs of citizens.

However, since 1991 there has been a substantial re-think on the mechanisms for the development and financing of urban infrastructure. The passage of the 74th constitutional amendment gave statutory basis for ULBs and placed the third tier of government in India on a firm pedestal. All states created enabling legislation to transfer responsibilities of local infrastructure and service delivery to this tier of government. This development was followed by the emergence of new models of financing, developing and operating public services in India.

In view of the high deficits of central and state governments, new mechanisms to leverage private capital were required. The emergence of municipal and pooled bond markets have provided municipalities, large and small, with avenues to access private commercial funding to finance public infrastructure. While these markets have seen some hiccups, they have the potential to provide access to substantial financing for urban infrastructure. However, the policy environment must actively support the deployment of debt capital for public infrastructure creation. In this context, the flagship JNNURM program must incentivise the leverage of government grants with funds raised from the capital markets, as well as other reforms that deepen private sector participation in urban infrastructure and services. Additionally, the role of HUDCO must be revamped and it must refocus on its core mission of enabling financial resources generation for urban development. Instead of acting as a subsidised lender, HUDCO could become a market maker through the provision of guarantees and investing in subordinate tranches of municipal bonds or directly providing subordinate debt to projects to supplement private capital.

There has also been a sea change in the philosophy of models of public service delivery and consequently the role of the private sector in the development, management and operation of public assets. While the private sector has been recognised as being able to bring in management and technical capabilities as well as increased efficiencies, the historical experience of PPPs in India has been decidedly mixed. India has seen success in projects that are technically simple with small gestation periods; and with lesser uncertainties in demand estimation. Projects with greater management and technical complexity, long gestation periods and difficulties in estimating demand have faced problems. However, there is some evidence that newer projects are absorbing the learning’s from earlier failures and structuring risks in a way that reduce the probability of disruptions due to unexpected events in the course of a project’s life. Over the past decade there has also been increasing policy focus on PPPs with the Ministry of Finance’s model laws and guidelines, setting up of state PPP cells and legislation by some states to enable PPPs. While these are important measures, they will need to be supported by fundamental reforms in governance, institutional structures, laws and regulation to create an environment that is conducive for the creation of critical public infrastructure through the design and implementation of complex PPPs in India.

To read the full paper please click here.