Investment Models

Given India’s need for the development of infrastructure, several models for infrastructure development have been developed.

Types of Investment Models

1. Public Investment Model:

The government requires revenue for investment financed through taxes. Properly targeted public investment can do much to

• Revive the economy during an extended period of weak economic growth.
• Large pools of savings can be channelled into productivity.
• Leveraging private sector investment.
• Generating aggregate demand quickly,
• Fuelling productivity growth by improving human capital,
• Encouraging technological innovation.

2. Private Investment Model:

Often Tax revenue is not adequate to meet the investment demand alone. In this scenario, private investment is necessary to generate adequate growth in the economy.

It serves the following advantages:

• Efficient allocation of funds.
• Creating more innovation and competition,
• Realization of economies of scale and greater flexibility than the public sector.
• Reduce pressure on banks
• Leverage the centre’s financing capability to invest a far higher amount

Sources of private investment:

• International market: in the form of FDI or FPI.
• Domestic market: DIIs, Mutual funds, InvITs, REITs etc.
• Disinvestment and Privatization
• Bonds

3. Public-Private Partnership(PPP) Model:

It is an arrangement between government and private sector for the provision of public assets and/or public services.

We have already discussed about Private investment and Public investment in the previous chapters, we shall now discuss PPP Investment Modesl in India.

Public Private Partnership

The Public-Private partnership model has emerged out of the incompetency of the Public and Private investment alone to bridge the infrastructural deficit in India. The PPP model serves various advantages over public and private investments.

Advantages of Public-Private Partnership

• Public Project with Private Funding: large-scale government projects, such as roads, bridges, or hospitals are completed with private funding.
• Technology Induction: This works well when private-sector technology and innovation combine with public-sector incentives to complete work on time and within budget.
• Government ownership: It doesn’t amount to privatization.
• Well-defined Risk allocation: between the private sector and the public entity.
• Transparency: open competitive bidding and performance-linked payments.
• Quicker development: Developing countries face various constraints on borrowing money for important projects otherwise.
• CCEA chaired by the PM, gives its approval to the implementation of various PPP investment models.

Concession Agreement:

The Concession Agreement is the agreement between the private player and the government which contains the terms and conditions of their partnership for the development of an infrastructure project.

To ensure transparency, a model concession agreement is developed by the government, which is signed by all Private partners under the PPP Model.

Model Concession Agreement

A concession agreement (MCA) is a legal contract that forms the basis of the public-private partnership(PPP). It contains the terms and conditions of liabilities and responsibilities of the stakeholders and the revenue model for the development of a project.

Tender design for award of Concessions must ensure that competition for the market is vibrant and there are enough players who can participate.

Concession Period:

It is the duration during which the private partner has the right to operate and maintain the project while recovering their investment and earning profits. This period is typically outlined in the agreement and starts from the date the project is commercially operational.

During the concession period, the private entity is usually responsible for financing, constructing, and managing the facility, and they may charge users for services. After this period ends, the project typically reverts to the public sector or government authority.

For example, in the Highway project, the Private player is allowed to collect tolls during this period recover its construction cost and maintain the highway during the period as well.

Variable Concession Period: In several projects, it is possible to allow the private player to extend the Concession period if the

Importance of a Model Concession Agreement

• Quicker approval due to standardized documents and processes for the PPP framework.
• Ensuring uniformity, transparency and quality in the development of large-scale infrastructure projects.
• Clear messaging to the private players interested in investing under the PPP model.

History of MCAs developed under different PPP Models:

The Planning Commission developed 1st version of the Model Concession Agreement (MCA) for highways in 2006.

• Subsequently, it developed various other versions of the MCA for highways considering the different PPP modes like BOT (Toll), BOT (Annuity) and OMT(Operate maintenance Transfer) addressing to a significant extent, the changing needs of the sector.
• Since the need for improved road connectivity was a continuing imperative, M/o RTH including its implementing agencies like the NHAI had to increasingly resorted to the public-funded Engineering, Procurement and Construction. Thus HAM model was developed.

PPP Models:

Various types of Model concession agreements have been released by the government of India for development under the PPP model in various sectors.

Build Operate Transfer (BOT)

The private sector builds the project, operates and maintains it and eventually transfers its ownership to the government.

In many instances, the government becomes the firm’s only customer and promises to purchase at least a predetermined amount of the project’s output.  This ensures that the firm recoups its initial investment in a reasonable period.

Application in Sectors:

• Highway – where the private player is allowed to collect toll
• In complicated long-term projects as seen in power plants and water treatment facilities, BOT can be applied.

Variants of BOT

• BOT (Toll): Highway variant.
• Build Own Operate and Transfer (BOOT) After the negotiated period, the project is transferred to the government or the private operator.
  • Applicability: highways and ports.
• Build Own Lease Transfer: BOLT: the government gives a concession to a private entity to build a facility (and possibly design it as well), owns the facility, leases the facility to the public sector and then at the end of the lease period transfer the ownership of the facility to the government.

Build Own Operate (BOO)

The ownership of the newly built facility will rest with the private party. On mutually agreed terms and conditions public sector partner agrees to ‘purchase’ the goods and services produced by the project.

The government acts as both the consumer and regulator.

Application in Sectors: Important in Solar Power Generation.

Variants of BOO Model:

• Design-build finance Operate (DBFO): the entire responsibility for the design, construction, finance, and operation of the project for the period of concession lies with the private party.
• Lease Develop Operate (LDO):either the government or the public sector entity retains ownership of the newly created infrastructure facility and receives payments in terms of a lease agreement with the private promoter.

• Application in Sectors: airport facilities with a lease of say 99 years.

Design, Build, Operate and Transfer (DBOT):

Under the DBOT model, the project (mainly Highway) is financed only to the extent of a certain percentage of the cost by the private investor. (From the 2014 version of MCA)

This investment is recovered through annuity payments to be made by the government / Authority over a specified period commencing from the date of commissioning of the project.

The balance percentage of the project cost is provided by the Government during the construction period.

Engineering Procurement and Construction Model: EPC-

The engineering and construction contractor will carry out the detailed engineering design of the project, procure all the equipment and materials necessary, and then construct to deliver a functioning facility or asset to their clients.

Application in Sectors: EPC mode was the preferred mode of delivery for highway projects in 2013-14 and 2014-15.

Limitation: implementation is restricted by the financial resources available to the Government

Toll Operate Transfer (TOT):

Applicability in Sectors: For the operation of Tolls in the publicly funded national Highway projects already operational.

• Around 75 projects have been identified for potential monetization using the TOT model and bundled into 10 separate bids.
• NHAI would convert and organize its road assets into SPVs and innovative monetising structures like TOT (Toll-operate-transfer) and infrastructure Investment funds,

Hybrid Annuity Model (HAM):

The HAM model is developed for the allocation of risks between the PPP partners – the Government and the private partner i.e. the developer/investor.

• While the private partner continues to bear the construction and maintenance risks as in BOT(Toll) projects, it is required only to partly bear financing risk.
• The highway toll tax will be collected by the government i.e. by the NHAI unlike in the BOT(toll) model in which the private sector collects it. For this, there is a separate provision for operation and management payments by the government to the concessionaire.
  • Thus, The developer is insulated from revenue/traffic risk and inflation risk.
  • Investment recovery by private developers through annuity payments for 15 years by the government.
• All major stakeholders in the PPP arrangement – the Authority, lender and developer, and the concessionaire would have an increased comfort level resulting in a revival of the sector through renewed interest of private developers/investors in highway projects and this will bring relief thereby to citizens/travellers in the area of a respective project.

Viability Gap Funding(VGF):

The VGF model supports infrastructure projects that may not be financially viable without some level of government assistance. This makes the projects more attractive to private investors by bridging the gap between project costs and expected revenues.

1. Funding Structure: VGF is typically provided as a grant or subsidy from the government, covering a certain percentage of the project cost, enough to support its bankability.
2. VGF helps to share the risk between the public and private sectors. It mitigates the financial risk for private investors, making it easier to secure financing.

Applicability in Sectors: Airlines, Renewable Energy and urban infrastructure, where there is a clear social or economic need but insufficient revenue generation

Financial Support to PPPs in Infrastructure VGF Scheme:

Introduction of  two sub-schemes for mainstreaming private participation in social infrastructure:

1. Sub scheme -1: for Social Sectors such as Waste Water Treatment, Water Supply, Solid Waste Management, Health and Education sectors etc. These projects face bankability issues and poor revenue streams to cater fully to capital costs.
   1. Eligibility: The projects should have at least 100% Operational Cost recovery.
   2. Central govt contribution: Up to 30% of the Total Project Cost (TPC).

• State Government/Sponsoring Ministry/Statutory Entity may provide additional support up to 30% of TPC.

2. Sub scheme -2: for demonstration/pilot social sector projects.
   1. Eligibility: for Health and Education sectors with at least 50% Operational Cost recovery.
   2. Central and State Governments together will provide up to 80% of capital expenditure and up to 50% of Operation and Maintenance (O&M) costs for the first 5 years.

1. 1. • The Central Government will provide a maximum of 40% of the TPC of the Project.
      • In addition, it may provide a maximum of 25% of the Operational Costs of the project in the first five years of commercial operations.

Revamped to continue till 2024-25 with a total outlay of Rs. 8,100 cr. Rs 6000cr for economic infrastructure and Rs 2100cr for social infrastructure.

Active PPP Models:

	Finance (investment)	Revenue (Toll)	Operation and Management
BOT	Private	Private	Private
BOT- Annuity	Private	Government	Private
VGF	Govt + Private	Private	Private
EPC	Govt	Govt	Govt; Only Plan is Private.
HAM	Government and Private	Govt	Private
TOT	Government or Private	Private	Private

Problems with PPP Projects

Problems for the Public

1. Poor Regulation: of PPPs in practice.
2. Crony capitalism: means for accumulating land by private companies.
3. Proxy for Privatization: It is also argued that PPP is merely a ‘’language game” by governments who find it difficult to push privatization, or when politically it is difficult to contract out.
4. Political corruption: Many PPP projects in the infrastructure sector are run by “politically connected firms” that have used political connections to win contracts.
5. Frequent renegotiations: PPP firms use every opportunity to renegotiate contracts by citing reasons like lower revenue or a rise in costs which becomes a norm in India.

Problems for the Investors:

1. Many projects are unviable: Loans for infrastructure projects are believed to comprise a large share of the NPA portfolio of public sector banks in India.
2. Winner’s Curse: Often the investor with the best bid is stuck with the responsibility of completing the construction project which is stuck due to the fault of the government.
3. Projects stuck: due to non-availability of Capital, disputes in existing contracts, and regulatory hurdles related to the acquisition of land.

Vijay Kelkar Committee Report on Revisiting and Revitalising PPP Model, 2015

• Umbrella guidelines may be developed for stressed projects that provide an overall framework for the development and functioning of the sector-specific frameworks.
• Unsolicited Proposals (“Swiss Challenge”)to be discouraged to avoid information asymmetries and lack of transparency.
• Amend the Prevention of Corruption Act, 1988to distinguish between genuine errors in decision-making and acts of corruption.
• Contracts need to focus more on service delivery instead of fiscal benefits.
• Better identification and allocation of risks between stakeholders
• Prudent utilization of viability gap funds where user charges cannot guarantee a robust revenue stream.
• Improved fiscal reporting practices and careful monitoring of performance.
• Infrastructure PPP Adjudication Tribunal (“IPAT”) is chaired by a Judicial Member (former Judge SC/Chief Justice HC) with a Technical and/or a Financial member, where benches will be constituted by the Chairperson as per needs of the matter in question.
• An institutionalized mechanism like the National Facilitation Committee (NFC) to ensure time-bound resolution of issues.
• Ensure the adoption of principles of good governance by the Special Purpose Vehicle (SPV).
• Set up an institute of excellence in PPP to inter alia guide the sector, provide policy input, and timely advice and undertake sustainable capacity building.
• Scrap unviable projects: Re-bid them once issues have been resolved or complete them through public funds and if viable, bid out for Operations and Maintenance.
• Institution for Policy formulation: Set up an institution for invigorating private investments in infrastructure, providing guidance for a national PPP policy and developments in PPP.
• Allow issuing bonds: The Ministry of Finance to allow banks and financial institutions to issue Zero Coupon Bonds which will also help to achieve soft lending for user charges in the infrastructure sector.

Encourage the use of PPPs in sectors like Railways, Urban, etc. Railways to have an independent tariff regulator.

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