PPP projects faces liquidity crunch

Despite the Finance Ministry ingECB norms recently, along with allowing IIFCL to raise Rs 30,000 crore through tax-free bonds, the fund raising for infrastructure projects seems to be difficult. Arvind Mayaram additional secretary & FA in the ministry of rural development says "that in the present scenario in India’s PPP projects still present the most attractive channel equally for equity investors and lenders.There is money out there. What is required is to convince the investors and the lenders that PPP projects are a great opportunity for them."
He further says even though the impact of slowdown has made raising money a difficult exercise but still PPP projects have three factors in India which make it a relatively safe investment vehicle.

1. Efficient price discovery through competitive bidding process.
2. Transferring commercial risk to public sector.
3. Viability gap funding in case of an unviable projects.

More details can be seen here.

Understanding PPP

The definition and types of PPP can be seen here in my earlier post.

A paper by B. Raganelli, G. Fidone, Public Private Partnerships and public works, 2007 explains the relationship between the Public and the Private partner in PPP set up .It says that the public and the private partner shares Principal– Agent Relationship. They share a bilateral relation and they have to depend on each other for their functions. They end up having Information Asymmetries. The public entity looks after the public interest and good quality public work whereas the private entity is more concerned about the corporate profit.

A decision has to be taken while selecting the private party for the proposed project. There has to be clear rules and regulations which help the private party to understand the project in a better way so that it doesn’t result in Information Asymmetry. These clauses should be in line of the Public as well as Private party’s interest.

After selecting the private party, public party is unable to monitor the private party because of high monitoring costs so another problem arises of Moral Hazard. The private party indulges in practices which are contrary to the policies of the concession maker. This results in non performance of the private party leading to delay in completion of the project. That is why Penalty clause is always there in the concession agreement. The moral hazard problem could be solved by providing some incentives to the private operators for early completion of the projects or giving quality results.

All three problems namely Principal-Agent relationship, Information Asymmetry and Moral Hazard can arise in any of the project where two parties are involved and responsibilities are shared. A solution to these problems can be derived by making the concession agreement include all the possible clauses which could cause these problems to occur

Orissa to build four major roads through PPP route

Project Monitor News Bureau says "The Orissa government plans to construct four major roads in the state on public-private partnership basis at a cost of over Rs 2,100 crore.The project involves four laning of a 165-km long road between Sambalpur and Rourkela at an estimated cost of Rs 1,340 crore; constructing a 70-km road from Khuntuni to Kuradmal at a cost of Rs 400 crore; building an 18-km road between Joda and Bamberi at a cost of Rs 188 crore; and constructing a 42-km Koira-Lahunipada road with an expenditure of Rs 217 crore."

"The state government has started the preliminary works on the project and will soon appoint two private agencies for consultancy. The World Bank has agreed to bear the consultancy expenditure.
The funds for the project will be arranged after completing detail survey of about 900 acres of land required for all the four roads."

PPP fades off from Metro Rail Projects

PPP fading out of metro rail thts wht research bureau of Project Monitor says. According to them, PPP route cosumes more time to decide the developers. MMRDA is doing away with PPP route for Line 2 of Phase 1 of Mumbai Metro. Likely possibility is that MMRDA will follow Engineering Procurement Construction(EPC explained here) on lines of DMRC. Moreover they further go on saying that Line 3 from Colaba to Bandra(17 Km) fully underground line involves huge cost around 10000 crores for which PPP was not forthcoming.

According to MMRDA official "Thirty per cent of the cost will come from the Centre's viability gap funding mechanism and the state government while 70 per cent will come from Japan Bank for International Cooperation. There is no scope for PPP here."

More details are here.

Miscellaneous Links

1. L&T eyes JVs with Railways : Mr Nayak (President L & T) said: “The Railways has decided to set up new manufacturing capabilities through the public-private-partnership (PPP) route, and we are interested in floating a JV with them.” The news clip is here.


2. Mumbai Metro to be operational through PPP :Urban Development Minister Jaipal Reddy said.


3. IFC to advise Maharashtra on PPP infra projects: Maharashtra has roped in International Finance Corp, an arm of the World Bank, to advise it on developing infrastructure projects through public-private partnerships (PPP) route in the state. This news clip confirms that.

Need of PPP

To begin with, PPP refers to public private partnership which specifically means that the government and the private sector will join hands for specific projects according to the pre agreed conditions given in a document called Concession Agreement. This document gives the terms and conditions regarding the cost and revenue sharing model, upfront payment if any, etc. between the two. The next stage is the invitation of bids for the project. The selection crieteria may be the concession period or maximum upfront payment whichever is applicable.

There are many types of PPP. The details are here.

The need of PPP arose because of growing needs of the economy and decresing reserves of the government. By inviting private parties, Government can access their financial resources,
knowledge of technologies, managerial efficiency. This paper explains all.