Role of Public Private Partnerships in Rural Infrastructure in India

Posted in Finance Articles, Total Reads: 3664 , Published on 20 December 2012
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Government budgets or public funded development ventures tend to lag behind in terms of funding. Since funds are limited, and often insufficient to achieve predetermined targets, such projects get abandoned or lie incomplete often for years, until they are completely scrapped. Much has been written about Public Private Partnerships, or PPPs or P3s as they are commonly known; and many believe that it is the answer to India’s challenges in building up the rural infrastructure that is so vital, especially in recent times, due to the advent of globalization and seamless world markets. Building up a strong rural infrastructure will undoubtedly provide a much needed impetus to economic growth.


Defining PPPs

The primary features of a PPP are that it is a contractual arrangement between a public and a private entity, includes a certain degree of transfer of risk to the private entity with the benefit of remuneration, and has an emphasis on meeting a social need or fulfilling a development project which is intended for the public good.

This also implies that the private sector will operate and manage the project for a specified period of time. PPPs can be on the basis of Build-Own-Transfer/Build-Own-Operate-Transfer (BOOT) or Design-Build-Finance-Operate (DBFO) basis.

Why PPP Model?

The PPP model serves as a mechanism for the government to carry out the essential activities of development, especially rural development through infrastructure construction, while at the same time minimizing the risks and heavy drain on government budgets. The private sector can invest heavily as it has the resources to do so, and since these projects are for social good, the government plays a role in providing incentives for the private sector to invest, while at the same time ensuring that it is in a position to supervise and regulate the project.

As part of the incentives, the government has also resorted to viability gap funding for private entities who take up development projects, especially in rural areas. This means that the government funds a part of the project so as to incentivize it for the private entity to find it attractive enough to take up.

Hence it seems amply clear that the government would like to harness private sector resources and channel it into ensuring economic growth.

Rural Infrastructure in India

Under the Bharat Nirman plan, the Government of India is focusing on rural development and building of infrastructure in irrigation, rural housing and water supply, rural electrification and telecommunication connectivity. The government is laying emphasis on building a road network across the country that ensures connectivity throughout the nation and matches up to global standards. Also on the government agenda is building bridges, telecom networks and towers, electricity grids and other developmental infrastructure in rural areas.

NABARD had set up a Rural Infrastructure Development Fund (RIDF) in 1995-96 created out of the shortfall of commercial banks in lending to agricultural/priority sectors, with the primary aim of providing low cost funds to governments to undertake infrastructure development projects in rural areas. Since the setting up of this fund, NABARD has allowed the initiation of the PPP model to access these funds for infrastructure development projects in irrigation, housing, water supply, rural electrification and construction of roads and bridges.

In doing so, NABARD has ensured the following benefits:

  • Less pressure on state governments’ budget for developmental infrastructure
  • Ensures higher level of service and quality
  • Alleviates cost and time constraints
  • Increases private sector participation and contribution to economic growth and development
  • Creating a sense of ownership among private sector players

Private Sector Participation in Infrastructure Development in India

There are 758 PPP projects with a total value of Rs. 383,332.1 crore that have been given government approval. In the 10th plan, the Government of India has estimated 320 billion dollars for PPP funding.

According to Clive Harris, an infrastructure specialist at the World Bank Sustainable Development Vice Presidency, India has been leading in private sector contribution to economic growth among all the South Asian countries (2008). He says that most of this contribution has been in the telecommunication sector, with Indian telecom corporate focusing on building requisite infrastructure and that building a transport network and setting up power distribution infrastructure come in at a close second.

However, data given by the government shows that in recent years, almost 70% of PPP projects taken in India have been in the road transport sector. This highlights how the government is considering the national highway and road network grid as high priority and is focusing on developing it at par with global standards.

PPP Financing

During 1995 to 2007, around 68% of the PPP was finance by senior debt, with 25% equity, 3% subordinated debt and 4% of viability gap funding by the government. In the last few years, the percentage of senior debt has increased. One reason for this is that commercial banks have become more comfortable with the PPP model and hence acquiring project financing has become easier.

Benefits of PPP model in Rural Infrastructure

According to the Government’s National PPP Policy 2011, the government has laid emphasis on the fact that PPPs would help in achieving broad based and sustainable economic growth. Following would be the key benefits of the PPP model in rural infrastructure:

-Employment of private sector resources to fund rural development projects would ensure that the quality of these projects are at par with global standards, while guaranteeing the best technology, expertise and skills are available. Public sector institutions rarely have access to such resources and expertise to fulfill these targets.

- By giving incentives such as viability gap funding, government will ensure that private sector has enough incentive to undertake these projects. This means the focus will shift inward and development of rural and remote areas will take place. All this will ensure India progresses.

- The private sector is known for being efficient. Hence it is certain that problems like delayed decision-making, functioning of day-to-day operations, etc will not arise. Private sector companies treat these as their usual corporate plans and projects that they undertake, and execute them in a smooth, efficient manner.

- It bridges the gap between public and private, rural and urban. Not just do these projects help bring the best of both worlds – public and private – together, but are also ensuring that the level of economic development in the urban and rural areas occur simultaneously.

Conclusion

To achieve the overall development goals, the government has recognized the importance of PPPs as a mechanism for speedy and efficient fulfillment of its development plan. Especially in rural areas, where much remains to be done, by incentivizing projects for the private sector to pour money and resources into, the government has ensured that its rural sector does not lag behind. Also, with institutions like NABARD and commercial banks recognizing the importance of PPP projects in rural infrastructure, and coming out with services specific to PPP financing, I believe PPP has come of age in the Indian economy and can be profitably harnessed to reinforce India’s position on the world map.

This article has been authored by Lizanne Marie Raphael from MDI Gurgaon


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