Dear Readers,

The Vijay
Kelkar Committee recently released the Report on Revisiting and Revitalising PPP
model of Infrastructure Development, and it could be important for your exams.

Finance
Minister Arun Jaitley had stated during the Union Budget release that the
Public Private Partnership (PPP) mode of infrastructure development needed to
be revisited and revitalised. Following this announcement, a Committee was
established, headed by Dr. Vijay Kelkar. This article will look at the
elementary idea of the Report and its major findings.

What is PPP?

·
PPP in infrastructure stands for the provision
of a public asset and service by a private partner who has been given the right
(the “Concession”) for the purpose, for a specified duration. This is done on
the basis of market determined revenue streams which ascertain commercial
return on investment.

·
PPPs are important devices to speed up
the development of infrastructure in the country. This acceleration is an
urgent requirement because it will facilitate quicker growth and generate a
demographic dividend for itself.

·
From great experience, India has
occupied the number one spot in the largest world markets for PPPs. As this market
expands, newer opportunities as well as challenges will arise. To check this, regular
reviews of PPPs become increasingly important so that problems can be curbed in
time.

Key Findings of the Report

·
The need to strengthen the three
pillars of PPP structures – Governance, Institutions and Capacity – has been
highlighted.

·
To rebuild India’s PPP capacities,
structured capacity building programmes for various stakeholders and customized
plans for banks need to be developed. A national level institution to support
institutional capacity building activities must be set up.

·
The Committee recommends establishing
independent regulators in fields that are going towards PPPs. These regulators
will be unified with a mandate that covers activities in various sub-sectors of
infrastructure so as to make sure the regulators are giving a balanced
performance.

·
A major task was the optimal
allocation of risks across the various PPP stakeholders. The Committee says
that adopting the Model Concession Agreement (MCA) has rarely helped in
tackling project specific risks. This is primarily because the implementation
authorities have been using the “one-size-fits-all” method and it has not
helped in equitable allocation of risks.

·
For future PPP Contracts, the
Committee recommends these broad guidelines: (i) an entity should carry the
risk which is in its usual course of its business; (ii) an assessment must be done
for evaluating the ease and efficiency of risk management by this entity; (iii)
evaluation of cost effectiveness of the risk management should be done; (iv) all
relevant specifications should be taken into consideration before implementing
the risk management framework.

·
Infrastructure PPP usually span over
20-30 years and a developer may lose bargaining strength pertaining to tariffs
and other matters if there are any sudden changes in the policy or economic
environment. To protect the private player against this loss of bargaining
power, the Committee advises these measures: (i) proper safeguards for the
developer should be constructed from the start; (ii) critical assumptions
should be defined beforehand and renegotiation should be considered only if the
actual are significantly different from these assumptions; (iii) such an option
will ensure that renegotiation is not misused.

·
The final call on a renegotiated
concession agreement should be based on (i) full disclosure of the renegotiated
approximate long-term expenditure, risks and potential benefits; (ii)
comparison with the financial standing for the government at the time of
signing of the agreement; (iii) comparison with the existing financial position
for the government just before renegotiation.

·
The Committee observes that there
exist several stalled PPP projects that need to be revived. There is an urgent
need to develop a stable framework which recognizes and assesses “actionable
stress” – use of stress and adversity to tackle the underlying systematic
issues. It also notes the need to evolve sector specific institutional
mechanisms to address these stalled infrastructure projects.

·
 Within the domain of PPP is the role of a
“Private Sector Partner” which will implement the project. In this light, the
Committee asserts that since State Owned Entities and Public Sector
Undertakings are basically Government bodies and function within the government
framework, they should not be allowed to bid for PPP ventures.

·
Improvement
in a PPP venture’s risk profile can be carried out through partial recourse to
trustworthy third-party institutions. This way, the PPP project can be made
more suitable for domestic as well as overseas investors. The implementation can
be done by cash flow support systems or partial credit guarantees.

·
The
Committee recommends encouraging banks and other financial bodies to issue Deep
Discount Bonds or Zero Coupon Bonds (ZCB) so as to explore alternatives for
sourcing long term capital at minimal cost. This way, the debt servicing costs
in initial stages will be decreased.

·
In some countries, there is a legal framework for PPPs in the form of
PPP Act/Law/Policy. The Ministry of Finance may develop and publish a national
PPP Policy document. Such a document should ideally be endorsed by the
Parliament as a policy resolution to impart an authoritative system to the
executive as well as legislative agencies, in charge of oversight
responsibilities. The Committee recommends an evaluation of whether enacting a
PPP Law will provide better expansion of PPP into new fields, like health,
additional social sectors and urban transportation.

These are the major
points pertaining to the Vijay Kelkar Committee Report on Revisiting and
Revitalising the PPP Infrastructure Development Model. If you can understand
these well, you can easily attempt questions on it.

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