Public-Private Partnership (PPP) Framework in India

Posted 22 Jan 2025

Updated 25 Jan 2025

4 min read

Why in the News?

Benchmarking Infrastructure Development report released by World Bank analysing Public-Private Partnership (PPP) regulatory landscapes across 140 economies.

Key Highlights of the report

Public Fiscal Management System (PFMS): Only 19 economies have adopted specific budgeting, reporting, and accounting provisions.
Lack of transparency: Online publication of contract amendments was only carried out in 22 per cent of cases
Monitoring and Evaluation: Only 37% of the economies require payments linked to performance.

About PPP and Various PPP Models in India

PPP is collaboration between governments and private companies to provide public services or infrastructure.

The Private Investment Unit in the Department of Economic Affairs is responsible for policy-level matters concerning PPPs, including Policies, Schemes, programs, Model Concession Agreements, and Capacity Building in India.

Various PPP Models in India

Build Operate Transfer (BOT): It is a model where the private entity receives a franchise to finance, design, build and operate a facility (and to charge user fees) for a specified period, after which ownership is transferred back to the public sector.
- This type of arrangement involves greatest level of private sector participation.
Build Own Operate (BOO): It is a model in which a private organization builds, owns and operates a project or structure with some incentive from the government.
- Government may offer financial incentives such as tax-exempt status.
BOT-Annuity: In this the government harnesses private sector efficiencies through contracts based on availability/performance payments.
- The granting authority pays the concessionaire annuities on scheduled dates throughout the concession period.
Operations & Maintenance (Service Contract): The government contracts a private entity for specific services or maintenance of assets, usually for shorter durations than concession contracts.
Engineering Procurement and Construction (EPC): The private entity manages construction, procurement and construction has no role in project management and funded by government.
Hybrid Annuity Model (HAM): It combines EPC (40 per cent) and BOT-Annuity (60 percent). The government funds 40% of the project cost, while private developer secures the remaining 60%, often investing only 20-25% of the total cost, with the rest financed through debt.

Need of PPPs in India

Infrastructure Gaps: India has major infrastructure deficits in transportation, energy, and urban development.
- For example, the Mumbai Coastal Road Project, developed under a PPP model, aims to reduce traffic congestion and improve coastal access while attracting private investment.
Resource Mobilization: The government often lacks enough funds for large projects. PPPs help combine public and private financing.
- A 2023 RBI report highlights that many states face fiscal deficits of over 3%, limiting their infrastructure budgets.
Efficiency and Innovation: Private sector involvement can enhance efficiency and innovation.
- For instance, the Delhi International Airport uses advanced technology like automated check-ins and improved baggage handling.
Risk Sharing: PPPs distribute risks between public and private entities, improving project sustainability.
Meeting SDGs: PPPs are crucial for achieving Sustainable Development Goals (SDGs) in infrastructure.
- SDGs directly linked to social and economic infrastructure sectors
Focus on Service Delivery: Collaborating with the private sector allows the government to focus on regulation and oversight, enhancing service delivery.
- For example, the redevelopment of railway stations, like Rani Kamlapati Station in Bhopal, is promoted through PPPs.

What are the challenges faced by PPPs in India?

Regulatory Issues: According to the Ministry of Statistics and Programme Implementation (MoSPI), 449 infrastructure projects faced cost overruns totalling over Rs 5.01 lakh crore due to land acquisition issues, environmental clearance delays etc. (In March 2024)
Financing Constraints: High capital needs and perceived risks make securing financing difficult.
- For example, the National Infrastructure Plan requires investment of INR 111 lakh crores over the next five years.
Long-Term Contract Issues: Projects lasting 20-30 years can create "obsolescing bargains," where the private sector loses negotiating power due to economic or policy changes.
Dispute Resolution Mechanisms: Lack of effective frameworks hampers project integrity and stakeholder commitment leading to cost overrun and delays.
Involvement of State-Owned Entities: State-owned enterprises are often seen as government entities, discouraging their involvement in PPPs.

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Way Forward to Improve PPP in India (According to Vijay Kelkar Committee)

Service Delivery Focus: Contracts should prioritize service delivery rather than just fiscal benefits.
Risk Management: Assess risk management efficiency and cost-effectiveness with advanced modeling.
Expert Mechanisms: Establish a PPP Project Review Committee and an Adjudication Tribunal to resolve complex issues and streamline projects awaiting clearances.
Legal Revisions: Amend the Prevention of Corruption Act, 1988 to distinguish between genuine errors in decision-making and acts of corruption.
- Establish a PPP Institute and implement a National Facilitation Committee for timely project approvals.
Independent Regulation: Establish independent regulators for various sectors, and enhance project development in roads and ports.