Public-Private Partnership in Indian Infrastructure Development: Issues and Options

Reserve Bank of India Occasional Papers
Vol. 29, No. 1, Summer 2008
Public-Private Partnership in Indian Infrastructure

Development: Issues and Options
L. Lakshmanan*
Infrastructure bottleneck has been a serious concern in India in its way of robust
pace of economic progression. While many advanced economies and fiscal constrained
developing countries have developed their physical infrastructure successfully either
through private participation or through public-private partnership (PPP) model, in India,
private participation in the process of infrastructure development has received lacklustre
response. While private telecom services is a success story in India, the PPP constitutes a
miniscule share in overall infrastructure building despite initiation of various policy
adjustments and sector-specific reform programmes. The main focus of this paper is to
provide an analytical abstract of sector-wise infrastructure developments in the country
and the status of private participation and the PPP in building such public infrastructure.
This paper raises some specific concerns in the power, transportation, telecom, petroleum,
and urban infrastructure sectors and puts forth suggestive measures to enhance the private
participation. It also identifies some generic issues such as inadequate transparency of
procedures, inappropriate risk allocation, improper project appraisal, cost and time
overruns, overlapping of regulatory independence, dearth of good governance, etc., which
need attention to attract private investors to participate in the public infrastructure building.
JEL Classification : H400, H420, H540, L900, L980.

Keywords : Infrastructures, Public Provided Private Goods
Introduction
Physical infrastructure is an integral part of development of an
economy and provides basic services that people need in their every day
life. The contribution of infrastructure to economic growth and
development is well recognised both in academic and policy debates.
Well developed physical infrastructure provides key economic services
efficiently, improves the competitiveness, extends vital support to
productive sectors, generates high productivity and supports strong
economic growth. Physical infrastructure covering transportation, power
*
The author is Assistant Adviser in the Department of Economic Analysis and Policy of the Reserve Bank
of India. He is indebted to Dr. Rakesh Mohan, Deputy Governor for his invaluable suggestions while this
paper was submitted to him as an internal note form. He is also grateful to Shri K.U.B. Rao, Adviser for his
encouragement and guidance. The responsibility of the views expressed in the paper rests with the author
only and the usual disclaimer applies.
38 RESERVE BANK OF INDIA OCCASIONAL PAPERS
and telecommunication through its forward and backward linkages

facilitates growth; social infrastructure including water supply, sanitation,
sewage disposal, education and health, which are in the nature of primary
services, has a direct impact on the quality of life.
Over the years, the basic infrastructure in India has been developed
to an extent, which is not sufficient enough while considering Indias
geographical and economic size, its population and the pace of overall
economic development. Infrastructure bottleneck has been a serious
concern in India and basic infrastructure like roads, railways, ports,
airports, communication and power supply are not comparable to the
standards prevalent in its competitor countries.
To develop the Indian infrastructure to a world class and to remove
the infrastructure deficiency in the country, the investment requirements
are mammoth, which could not be met by the public sector alone due to
fiscal constraints and mounting liabilities of the Government. This would
call for participation of private sector in coordination with the public
sector to develop the public infrastructure facilities. In this direction, the
economic reforms initiated in the country provide forth the policy
environment towards public-private partnership (PPP) in the
infrastructure development. Sector-specific policies have also been
initiated from time to time to enhance the PPP in infrastructure building.
While the PPP is spreading to develop basic infrastructure world wide,
in India, the participation of private sector in the infrastructure building
has not been much encouraging, despite several rounds of policy reforms.
Against this setting, the rest of the paper is organised as follows.
Section I attempts to review the structure of PPP through literature survey.
Section II assesses the global practices towards PPP in the infrastructure
development. Section III evaluates the status of private sector participation
in infrastructure development at the global level and Section IV captures
the Indian experiences in this regard. Section V reviews the investment
requirements to bridge the infrastructure gap in the country. Section VI
focuses on the sector-wise developments of infrastructure projects with
the status of PPP and overall private sector participation along with sector-
specific concerns. Generic issues while implementing the infrastructure
PUBLIC-PRIVATE PARTNERSHIP IN INDIAN INFRASTRUCTURE 39
DEVELOPMENT: ISSUES AND OPTIONS
projects in the country with private participation and options thereon are
analysed in Section VII. Finally, concluding observations are drawn in
Section VIII.
Section I
Structure of PPP Literature Survey
What is Public-Private Partnership?
The expression public-private partnership is a widely used concept
world over but is often not clearly defined. There is no single accepted
international definition of what a PPP is (World Bank, 2006). The PPP is
defined as the transfer to the private sector of investment projects that
traditionally have been executed or financed by the public sector (IMF,
2004). Any arrangement made between a state authority and a private
partner to perform functions within the mandate of the state authority,
and involving different combinations of design, construction, operations
and finance is termed as Irelands PPP model. In UKs Private Finance
Initiative (PFI), where the public sector purchases services from the
private sector under long-term contracts is called as PPP program.
However, there are other forms of PPP used in the UK, including where
the private sector is introduced as a strategic partner into a state-owned
business that provides a public service.
The PPP is sometimes referred to as a joint venture in which a
government service or private business venture is funded and operated
through a partnership of government and one or more private sector
companies. Typically, a private sector consortium forms a special
company called a special purpose vehicle (SPV) to build and maintain
the asset. The consortium is usually set up with a contractor, a
maintenance company and a lender. It is the SPV that signs the contract
with the government and with subcontractors to build the facility and
then maintain it.
Thus, the PPP combines the development of private sector capital
and sometimes, public sector capital to improve public services or the
management of public sector assets (Michael, 2001). The PPP may
encompass the whole spectrum of approaches from private participation
through the contracting out of services and revenue sharing partnership
arrangement to pure non-recourse project finance, while sometime it

may include only a narrow range of project type. The PPP has two
important characteristics. First, there is an emphasis on service provision
as well as investment by the private sector. Second, significant risk is
transferred from the Government to the private sector. The PPP model is
very flexible and discernible in variety of forms. The various models/
schemes and modalities to implement the PPP are set out in Table 1.
Table 1: Schemes and Modalities of PPP
Schemes Modalities
Build-own-operate (BOO) The private sector designs, builds, owns, develops,
Build-develop-operate (BDO) operates and manages an asset with no obligation
Design-construct-manage-finance to transfer ownership to the government. These
(DCMF) are variants of design-build-finance-operate
(DBFO) schemes.
Buy-build-operate (BBO) The private sector buys or leases an existing asset
Lease-develop-operate (LDO) from the Government, renovates, modernises, and/
Wrap-around addition (WAA) or expands it, and then operates the asset, again
with no obligation to transfer ownership back to
the Government.
Build-operate-transfer (BOT) The private sector designs and builds an asset,
Build-own-operate-transfer (BOOT) operates it, and then transfers it to the Government
Build-rent-own-transfer (BROT) when the operating contract ends, or at some other
Build-lease-operate-transfer (BLOT) pre-specified time. The private partner may
Build-transfer-operate (BTO) subsequently rent or lease the asset from the
Government.
Source: Public Private Partnership, Fiscal Affairs Department of the IMF.
Privatisation and Public-Private Partnership

Typically, the PPP is not a privatisation. At the same time, it cannot
be described as partial privatisation also. Privatisation has generally been
defined as a process of shifting the ownership or management of a service
or activity, in whole or part, from the government to the private sector.
The privatisation may be of many forms, which include outsourcing,
management contracts, franchise, service shedding, corporatisation,
disinvestment, asset sales, long-term lease, etc. The key difference
between the PPP and privatisation is that the responsibility for delivery
and funding a particular service rests with the private sector in
privatisation. The PPP, on the other hand, involves full retention of
responsibility by the government for providing the services. In case of
ownership, while ownership rights under privatisation are sold to the
private sector along with associated benefits and costs, the PPP may
continue to retain the legal ownership of assets by the public sector. The
nature and scope of the services under privatisation is determined by the
private provider, while it is contractually determined between the parties
in PPP. Under privatisation, all the risks inherent in the business rest
with the private sector while, under the PPP, risks and rewards are shared
between the government and the private sector.
Thus, the PPP operates at the boundary of the public and private
sectors, being neither nationalised nor privatised. Thus, politically, the
PPP represents a third way in which governments deliver some public
services in conjunction with private sector. Moreover, in a practical sense,
the PPP represents a form of collaboration under a contract by which
public and private sectors, acting together, can achieve what each acting
alone cannot (Michael 2001).
The Indian Case
In the Indian context, the term PPP is used very loosely while at the
international arena, the PPP is adopted for developing public assets in
various forms as explained in Table 1. According to Ministry of Finance
Government of India the PPP project means a project based on a contract
or concession agreement, between Government or statutory entity on
the one side and a private sector company on the other side, for delivering
infrastructure service on payment of user charges. This is a narrower
definition as compared to world best practices where the private sector
participation in any form of concession agreement, divestiture of the
public sector, greenfield projects and management and lease contract
are considered as PPP. The Planning Commission of India has defined
the PPP in a generic term as the PPP is a mode of implementing
government programmes/schemes in partnership with the private sector.
It provides an opportunity for private sector participation in financing,
designing, construction, operation and maintenance of public sector
programme and projects. In addition, greenfield investment1 in the
infrastructure development has also been given more encouragement in
India.
1
Greenfield investment is defined as an investment in a start-up project, usually for a major capital investment
and the investment starts with a bare site in a greenfield.
Section II
Global Practices towards PPP in Infrastructure Development
While discussing the infrastructure development, a generic question
arises, Why is PPP needed? In the face of fiscal and other constraints,
governments of most emerging economies have been turning towards
the private sector as a means of financing infrastructure development.
Many countries have, however, found that it is not always easy to attract
the private sector, as the conditions for their participation are, in most
cases, different from the traditional method of funding. A closer alliance
between various parties involved in the infrastructure development will,
however, provide the opportunity to share their views on the risk
perspectives, legislative and regulatory environments, which support
private investment, project funding packages, project formulation and
the means of reducing project preparation and gestation period. It has
been empirically proved that both the public and private sectors have
significant effect on each other, the magnitudes of the long-run influence
of private production on infrastructure expansion are relatively greater
than the reverse for most countries (Eric C Wang 2002). Review of
cross-country experiences while adopting the PPP model in the
infrastructure development would provide due solution to the critical
question raised at the beginning of this Section.
A number of OECD countries have well established PPP
programmes. Other countries with significant PPP programmes include
Australia and Ireland while the US has considerable experience with
leasing. Many continental EU countries, including Finland, Germany,
Greece, Italy, the Netherlands, Portugal and Spain have PPP projects,
although their share in public investment remains modest. Reflecting a
need for infrastructure investment on a large scale, and weak fiscal
positions, a number of countries in Central and Eastern Europe, including
the Czech Republic, Hungary and Poland, have embarked on PPP. There
are also PPP programmes in Canada and Japan. The PPP in most of
these countries are dominated by road projects. Similarly, the EU Growth
Initiative envisages the use of PPP type arrangements primarily to develop
trans-European road network.
While focusing on country specific practices, the PFI of the UK is

perhaps the best developed governments PPP programme, which also
comprises privatisation and other forms of cooperation between the public
and private sectors, including the provision of guarantees. The PFI
projects are viewed primarily as being about the provision of services,
and not about the acquisition of assets. In this endeavour, the private
sector makes a long-term commitment to maintain assets and provide
services, and the government makes a long-term commitment to procure
those services; significant risk is transferred to the private sector; public
sector investment projects are considered for PFI where they are likely
to represent value for money, and where it meets the UK governments
criteria for efficiency, equity and accountability (IMF, 2004).
In the case of Ireland, the pick up in enthusiasm for PPP can be
summarised that there was quick buy-in on the part of all PPP
stakeholders, where the government made it clear that its social partners
would be consulted on the approach taken to select PPP projects. Second,
the government paid more attention to the efficiency benefits of PPP
than to just their fiscal advantages. Third, conclusion was reached that
the PPP would be a success despite some institutional challenges that
had to be overcome. To facilitate the PPP process, the National
Development Finance Agency of Ireland was set up to mobilise resources
to finance PPP projects and to provide financial advice to government
agencies seeking to form PPPs.
Chiles experience with PPP has been successful and a significant
portion of the sizeable infrastructure gap was fulfilled through this model.
Chiles success with PPP has been underpinned by a solid institutional
framework, well developed procedures to identify, evaluate the projects,
efforts to ensure adequate sharing of risks between the stake holders,
and reforms to ensure the availability of financing for projects. In the
case of Mexico, most progress has been made with respect to
telecommunications, ports and airports, but this mainly takes the form
of privatisation. Empirical evidence suggest that public infrastructure in
Mexico has negligible effects on private sector costs.
The PPP has been operating in China for over 20 years. Since the
introduction of open economic policy in early 1980s, some state-owned
enterprises started their reform by becoming a limited liability company.

Since the 1990s, some local governments have initiated to resort to the
private sector on the provision of public facilities and services. Since
2000, the PPP has become one principal strategy used by the Chinese
Government in the provision of public facilities and services. The main
objective of PPP is to make use of market competition in order to ensure
the effective use of resources in the provision of public facilities and
services. However, some local governments place too much emphasis
on attracting private investments by offering even more favorable terms
than the normal national status.
Lessons Drawn for India
Many developing countries like China, have developed toll
roads and a number of private sector greenfield power projects, while
Argentina has developed its power sector mostly through divestiture
and greenfield investments. The main aim of the Chinese is to attract
investors through PPP. Brazil has not only attracted more greenfield
projects in power sector but also known for its telecommunication sector
development under PPP model. The UK provides guarantees for PFI
projects to attract more investment. Chile, on the other hand, has
succeeded in the PPP model with institutional development,
standardised contract procedures and appropriate risk sharing
mechanism. Cross country analysis reveals that the PPP model differs
widely across countries and sectors. Overall, many developing countries
have developed their power projects, roads, telecom, ports and airports
through PPP model, which they considered as the apposite way of
developing the public infrastructure through private participation, while
these countries have faced fiscal constraints. Judging from the country
experiences, the selection of right PPP model is based on the
concessions that the PPP is getting, level of development, risk sharing
mechanism, government guarantees, stability of the policy environment
and commercial consideration of the projects. Therefore, it is rightly
accepted that right type of private participation in the infrastructure
development with right risk sharing is the only way out to build public
infrastructure and thereby bridge the infrastructure gap.
Section III
Status of Private Participation in Infrastructure
Development Global Scenario
Till the early 1990s, provision of infrastructure services were the
monopoly of the government world over and the private sector
participation was very limited. Disenchantment with past approaches to
providing infrastructure services, coupled with tightening budget
constraints, governments have explored how best to harness the benefits
of private participation. Accordingly, the private participation in the
infrastructure development has started picking up in various forms.
Moreover, the globalisation and opening up of the markets by Emerging
Market Economies (EMEs) have provided investment opportunities for
the private investors to develop the public infrastructure projects with or
without collaboration with the public sector. Multilateral Institutions have
also focused their attention towards the progress in the infrastructure
development with private participation, as the basic infrastructure would
accelerate the pace of overall economic development of a country. The
World Bank has stared capturing such details and also a leading data
source for private participation in infrastructure development through
its Private Participation in Infrastructure (PPI) Project Database2. This
database has information on over 3,800 projects in energy,
telecommunications, transport, and water and sewerage sectors spread
across 150 low and middle-income countries. This database covers the
private sector investment/commitment to the development of
infrastructure projects and does not include public investment.
According to PPI database, between 1990 and 2006, about 3841
infrastructure projects have reached financial closure, of which major
share pertaining to Latin America and the Caribbean (31.4 per cent)
followed by East Asia and the Pacific (28.6 per cent) and the Europe and
Central Asia (19.4 per cent) (Table 2). Middle East and North African
region attracted a meager share of private investment at 2.9 per cent.
Though the Latin American and Caribbean countries have attracted more
private projects during the mid-1990s, the pattern has changed during
the recent period towards East Asia and South Asia due to growing
investment opportunities in these countries in tandem with their
macroeconomic developments.
2
This database records contractual arrangements with and without investments in which private parties
assume operating risks in low- and middle-income countries. Projects included in the database do not have
to be entirely privately owned, financed or operated. Some have public participation as well.
Table 2: Number of Projects by Region and year of Financial Closure

Financial East Europe Latin Middle South Sub- Total
closure Asia and and America East and Asia Saharan
year Pacific Central and the North Africa
Asia Caribbean Africa
1 2 3 4 5 6 7 8
1990 12 2 39 1 4 2 60
1991 9 7 12 0 2 3 33
1992 20 15 42 1 4 4 86
1993 51 164 45 2 6 10 278
1994 81 62 85 4 11 8 251
1995 60 71 86 2 34 16 269
1996 99 70 106 2 30 18 325
1997 113 47 152 7 18 28 365
1998 48 47 153 9 20 28 305
1999 46 32 83 6 25 31 223
2000 48 40 94 11 15 31 239
2001 69 34 58 14 19 29 223
2002 85 24 61 5 16 9 200
2003 98 29 50 5 26 26 234
2004 78 27 49 13 25 18 210
2005 93 36 35 17 25 40 246
2006 89 39 55 12 68 31 294
Total 1099 746 1205 111 348 332 3841
Source: Compiled from Private Participation in Infrastructure (PPI) Database of the World Bank.
When we look at the details on country-wise infrastructure projects

with private sector participation, China tops in the list of attracting more
projects in the developing region followed by Brazil, Russian Federation,
India and Argentina. Development of energy infrastructure in China was
the leading sector, both in number of projects and investments, followed
by construction of toll roads. In case of Brazil, large private investment
has flown into the telecom sector. Argentina has attracted more private
investment towards the development of their energy sector.
In terms of investment, region-wise analysis reveals that projects in
Latin America and the Caribbean region have attracted a maximum share
at 39.9 per cent between 1990 and 2006 followed by East Asia and the
Pacific with 23.1 per cent and the Europe and Central Asia with 18.9 per
cent in the development of infrastructure with private sector participation
(Table 3). Brazil attracted more investment among the developing
countries followed by China, Argentina, Mexico and India. Major share
of private investment attracted towards telecom sector in the developing
region with a share of 48.9 per cent followed by energy sector (29.3 per
cent), transport sector (16.9 per cent) and water and sewerage sector (4.9
per cent).
Table 3: Investment in Projects by Region and year of Investment (US$ million)

Year of East Europe Latin Middle South Sub- Total
investment Asia and America East and Asia Saharan Investment
and Central and the North Africa
Pacific Asia Caribbean Africa
1 2 3 4 5 6 7 8
1990 1949 68 10598 10 132 40 12798
1991 3090 277 9789 0 640 0 13795
1992 7205 402 12876 10 40 20 20553
1993 13256 1231 15321 2932 1113 32 33882
1994 14773 3655 16296 298 2801 647 38469
1995 17771 8180 17064 120 3845 817 47796
1996 27219 10722 25573 123 5813 1437 70888
1997 36574 14628 48302 5067 6192 2978 113740
1998 10076 11891 68905 3436 2330 2201 98838
1999 12210 9772 38012 2887 4601 2914 70395
2000 18027 25652 38515 4115 3451 2166 91924
2001 12557 14239 33284 4373 4880 4012 73344
2002 11410 17299 19309 1590 6154 3313 59074
2003 17784 12126 15416 1894 3995 5568 56781
2004 13560 17181 17551 7384 11543 3933 71153
2005 17955 35491 20653 7069 14255 8737 104161
2006 17583 23512 28739 10954 24104 11761 116651
Total 252998 206323 436201 52264 95888 50575 1094241
Section IV
Indian Experience in Private Participation in Infrastructure
Development
Before the launching of economic reforms in the country, the

infrastructure projects were mainly developed by the Government. Since
the initiation of the economic reforms, the development of infrastructure
has been given thrust through varied means. Along with the initiation
of structural reforms in the country, the Government of India has
announced new industrial policy in 1991 to develop the industrial and
infrastructure sectors, which gave more emphasis on private
participation. Policy announcements relating to sector-specific
infrastructure developments with the PPP have also been announced
in the subsequent annual Budgets of the Union Government. The
coverage of the term infrastructure was expanded from time-to-time to
enable the sector to avail of fiscal incentives such as tax holidays and
concessional duties during the course of their development.
Since the initiation of the reform process, measures were

introduced to strengthen the existing infrastructure and to develop new
projects with private participation. The private sector participation in
the infrastructure building have broadly been taken place through
corporatisation of existing PSUs (e.g. GAIL, ONGC, IOC, etc),
greenfield investment for development of new projects, PPP in the form
of BOT or BOOT model in the road sector and concession agreements
with the private sector such as rehabilitate, operate, and transfer; or
rehabilitate, lease or rent and transfer; or build, rehabilitate, operate,
and transfer basis. Recently established joint venture structure of
institutions to develop and modernise the Delhi and Mumbai airports
is an apt form of PPP.
According to the PPI database of the World Bank, about 249
infrastructure projects in India have attracted private sector participation
and reached financial closure between 1990 and 2006, which constituted
a share of 6.1 per cent of the total project among 150 low and middle
income countries in the world. Of which, transport sector has a major
share at 54.2 per cent followed by energy sector at 30.5 per cent during
the period (Table 4). The telecom sector accounted for a share of 13.7
Table 4: Number of PPI Projects in India, 1990-2006

Financial Energy Telecom Transport Water and Total
closure year Sewerage
1 2 3 4 5 6
1990 0 0 1 0 1
1991 1 0 0 0 1
1992 2 0 0 0 2
1993 3 0 0 0 3
1994 1 4 1 0 6
1995 6 10 0 0 16
1996 6 6 4 0 16
1997 2 4 6 0 12
1998 7 2 8 0 17
1999 8 0 13 0 21
2000 9 0 1 1 11
2001 1 8 4 1 14
2002 4 0 8 0 12
2003 6 0 17 0 23
2004 9 0 6 1 16
2005 3 0 14 1 18
2006 8 0 52 0 60
Total 76 34 135 4 249
per cent in private participation during the period. Many number of

infrastructure projects under private participation have attained financial
closure during 2006 particularly in the transportation sector due to mass
development of National Highways Development Projects (NHDP) like
Golden Quadrilateral and North South-East West Corridor (NS-EW)
projects.
Investment requirements of the infrastructure projects are huge
and the private sector contribution to the development of public
infrastructure has increased many folds during the recent period due to
various policy initiatives by the Government towards more
encouragement for private participation. However, when compared to
other EMEs, private participation in the infrastructure development in
India has gained momentum only recently and its share is not much
encouraging. India has attracted only about 6.5 per cent of the total
investment among 150 low and middle income nations. The investment
has flown mainly into the telecom sector which constituted a share of
49.6 per cent of total investment in India, followed by energy sector at
28.9 per cent and transport sector at 21.3 per cent between 1990 and
2006 (Table 5). Among the developing countries, India stood at fourth
position, after China, Brazil and Russian Federation, in terms of
Table 5: Investment in PPI Projects in India, 1990-2006 (US $ Million)
Financial Energy Telecom Transport Water and Total
investment Sewerage Investment
1 2 3 4 5 6
1990 0 0 2 0 2
1991 614 0 0 0 614
1992 13 0 0 0 13
1993 1,051 0 0 0 1,051
1994 311 97 125 0 533
1995 1,008 683 0 0 1,691
1996 1,553 1,229 182 0 2,964
1997 970 3,827 405 0 5,201
1998 1,066 673 296 0 2,035
1999 2,500 1,045 467 0 4,012
2000 2,357 682 30 0 3,068
2001 345 3,445 343 2 4,136
2002 386 4,615 715 0 5,717
2003 835 1,968 550 0 3,352
2004 4,144 3,731 1,117 111 9,103
2005 755 6,201 1,526 0 8,482
2006 2,750 7,271 9,473 0 19,494
Total 20,658 35,466 15,230 113 71,467
attracting the projects and fifth position in terms of volume of

investment under private participation. Major share of investments have
flown mainly to the sectors where the return on the investments and
commercial considerations are high. However, while considering the
investment requirements of the country to develop the basic
infrastructure, it is considered to be a miniscule share.
Section V
Investment Requirements to bridge the Infrastructure Gap
After analysing the realistic stature of private participation in the
infrastructure development in India, it would be more appropriate to look
into the quantum of investment requirements to bridge the infrastructure
gap and to transform the Indian infrastructure into a world-class. The
impact of infrastructure investments on growth depends on the timing of
investments, their scale in relation to the existing imbalance between
demand and supply of infrastructure, and the location of the projects
themselves. Taking into account the infrastructure gap in the country,
there is no concrete estimation of requirements for infrastructure
development to fill the gap in the country as the requirement will vary
from time to time, place to place and project to project.
After the initiation of economic reforms, the first estimation of
investment requirements for infrastructure development was attempted
by the Expert Group on Infrastructure (The India Infrastructure Report,
1996). The Group estimated that the investment in infrastructure was to
be stepped up from 5.5 per cent of GDP in 1995-96 to 8.5 per cent of
GDP in 2005-06. But at the same time, the average annual investment
was at 4.9 per cent during the 10th Plan period. Then the Committee on
Infrastructure, headed by the Prime Minister, has estimated in 2006 the
investment requirements for the 11th Plan period at Rs.14,50,000 crore
or US $320 billion. The 11th Plan document has identified sector-wise
infrastructure gap and accordingly fixed physical target to be completed
during the 11th Plan to achieve overall GDP growth of 9 per cent (Table
6).
The 11th Plan document has revised the earlier estimation by the
Committee on Infrastructure and placed the investment requirement for
Table 6: Infrastructure Deficit and 11th Plan Physical Target

Sector Deficit 11th Plan Target
Roads / 65,569 Km of NH comprise only 2% of 6-lane 6,500 km in GQ; 4-lane 6,736
Highways network carry 40% of traffic; 12% 4-laned; km NS-EW; 4-lane 12,109 km; 2-lane
50% 2-laned; and 38% single-laned 20,000 km; 1,000 km Expressway
Ports Inadequate berths and rail/road New capacity: 485 mn. MT in Major
connectivity Ports; 345 mn. MT in Minor Ports
Airports Inadequate runways, aircraft handling Modernise 4 metro and 35 non-metro
capacity, parking space and terminal airports; 3 greenfield in NE; 7 other
buildings greenfield airports
Railways Old technology; saturated routes: slow 10,300 km new rail; 10,000 km gauge
speeds (freight: 22 kmph; passengers: 50 conversion; modernise 21 stations;
kmph); low Payload to Tare Ratio (2.5) Dedicated Freight Corridors
Power 11% peaking deficit; 7% energy shortage; Add 78,000 MW; access to all rural
40% transmission and distribution losses; households
absence of competition
Irrigation 1123 BCM utilisable water resources; yet Develop 16 mha major and minor
near crisis in per capita availability and works; 10.25 mha CAD; 2.18 mha
storage; only 43% of net sown area flood control
irrigated
Telecom/ Only 18% of market accessed; obsolete Reach 600 million subscribers; 200
IT hardware; acute human resources' million in rural areas; 20 million
shortages broadband; 40 million internet
Source: Eleventh Five Year Plan Document, Volume I, Planning Commission, Government of India.
developing the physical infrastructure at about Rs.2,060,193 crore or
US $515 billion, which is higher by 136.4 per cent of the anticipated
investment in 10th Plan (Table 7). The document estimated that the private
investment would be about 30 per cent and suggested a strategy that the
private participation is to be encouraged directly as well as through various
forms of PPP wherever desirable and feasible.
Table 7: Projected Investment in Infrastructure Development During 11th Plan
Sectors Investment (Rs. Crore) Share in Total (%)
10th Plan 11th Plan 10th Plan 11th Plan
1 2 3 4 5
Electricity 2,91,850 6,66,525 33.5 32.4
Roads and Bridges 1,44,892 3,14,152 16.6 15.2
Telecommunication 1,03,365 2,58,439 11.9 12.5
Railways 1,19,658 2,61,808 13.7 12.7
Irrigation 1,11,503 2,57,344 12.8 12.5
Water Supply and Sanitation 64,803 1,43,730 7.4 7.0
Ports 14,071 87,995 1.6 4.3
Airports 6,771 30,968 0.8 1.5
Storage 4,819 22,378 0.6 1.1
Gas 9,713 16,855 1.1 0.8
Total 8,71,445 20,60,193 100.0 100.0
Source: Eleventh Plan Document, Planning Commission, GoI.
In this connection, some basic issues need to be discussed. First,

how to step up the investments in infrastructure? Over the past three
years, the infrastructure investment was at around 5 per cent of GDP,
which is targeted to be increased to 9 per cent at the end of the 11th Plan
period as suggested by the Plan document. Here the question arises,
where such a huge investment has to come from? To increase the
investment to 9 per cent at the end of the 11th Plan, each year, additional
investments has to increase by at least one per cent of GDP during the
Plan period. To fund such additional investments, there are broadly two
sources domestic savings and external savings. Under the domestic
sources, household savings forms part of major source, which are to be
stepped up from the level of 23.7 per cent of GDP on an average during
the 10th Plan. Then the government savings, which has mainly represent
the public sector savings that have started being positive since 2003-04
only. Next comes the private corporate savings that estimated at 6 per
cent of GDP on an average during the 10th Plan is to be increased
significantly to cope up with the additional infrastructure requirements
during the current Plan. To fill the gap between the investment
requirements and the domestic savings, foreign capital inflows is to be
channelised from the level of 1.1 per cent of GDP in 2006-07. Then the
question arises, how to mobilise such huge investments from different
sources? At the Government side, both Centre and States have to borrow
about 27 per cent of estimated total investments in addition to budgetary
allocations and internal generation.
At the financing side, three major initiatives have been taken to
augment the funding for infrastructure projects, viz., (a) setting up of
India Infrastructure Finance Company Ltd (IIFCL), a SPV, to meet the
long term financing requirements of potential investors; (b) provision of
viability gap funding; (c) using of a limited portion of foreign exchange
reserves for the development of infrastructure projects through the
subsidiaries of IIFCL. But these developments will not serve the purpose
fully. Private investments have to flow freely to achieve the desired goal.
The ability to tap private resources - from within the country as
well as internationally - for financing infrastructure will strengthen the
development. In this regard, the banking system would play a crucial
role while transforming the financial savings into investments. But the
problem is that, in the post reform era, there has been decline in activities
and importance of term lending institutions. In fact, some term lending
institutions have converted into banks. Given the huge requirement of
funds for investment in infrastructure and increasing role of private
players, it is natural to expect them to approach banks to raise funds for
investment. As the basic sources of funds for banks are public deposits,
mostly of short or medium term in nature, it would create mismatch in
the asset-liability management of the banking system while lending to
infrastructure on a long term basis, which is to be addressed.
Another major issue is, how to transform corporate and other savings
into infrastructure investment? The 11th Plan document has estimated
that the private share in infrastructure development would reach 30 per
cent during the 11th Plan from 20 per cent during the 10th Plan. Further
more, about 48 per cent of the infrastructure financing requirements has
to come from debt financing. But the development of corporate debt
market is at a nascent stage. A prudent policy to develop the corporate
debt market in India will only help to mobilise such huge investment
requirements, which would facilitate to achieve the desired development
levels in the infrastructure.
Next the foreign investment flows, which requires innovative
instruments and mechanisms that are to be devised much attractive to
capture such inflows. The international financing of infrastructure could
be in the form of greenfield FDI, ADRs, GDRs, asset securitisation, finance
through SPV, etc., for which, suitable policy framework are to be devised
to utilise economically the increasing capital flows without affecting the
domestic monetary and exchange rate stability.
On the whole, the return on infrastructure is not always lucrative as
projects yield returns with considerable lags. Also, the implementation
of infrastructure project is spread over a long period of time. This creates
uncertainty about both the feasibility and profitability of the projects.
The massive investments for infrastructure development, therefore,
require innovative methods of financing and unbundling of risks. The
investment in the infrastructure sector, both from the public and the
private, is to be stepped up significantly to remove the infrastructure
bottlenecks and thereby sustain the economic growth.
Section VI
Sector-wise Private Participation Status and Issues
India has been growing at a level of 9.3 per cent, on an average,
during the last three years and the supply of infrastructure has also
improved to an extent to cope up with the increasing demand. But gaps
are widening. The developments in the infrastructure projects since the
introduction of economic reforms could be captured on the basis of two
major data bases in addition to respective Ministry sources one by the
Planning Commission on PPP projects and the other by the World Bank
on PPI database. As we have already discussed about the PPI database,
let us have a brief overview on the status of sector-wise infrastructure
projects based on Government of India databases and throw some light
on the sector specific issues.
A. Infrastructure Projects under PPP Model
Since most of the infrastructure services are rendered by the
Government, commercial approach towards cost recovery has not been
adopted, and with the limited resources at Governments disposal, PPP
has been encouraged to fill the infrastructure gap. To support the PPP
model projects, a Public Private Partnership Appraisal Committee
(PPPAC) was constituted in January 2006. The PPPAC has been adding
value by shortening the approval process within the Government, reducing
the transaction costs and acting as a central focal point for identifying
and disseminating best practices in rolling out PPP across sectors and
Ministries of the Government. Since its constitution, it has granted
approval to 65 projects, with an estimated project cost of Rs.53,136 crore.
When we look at the overall developments of infrastructure under
PPP model, only 147 projects in the roads, ports, civil aviation and urban
infrastructure have been materialised under the Government of India
scheme. Investment in these projects is expected to be around Rs.59,793
crore. However, only about 33 projects have been completed and the
remaining projects are in progress (Table 8). Majority of the PPP projects
are pertaining to the road sector under BOT or BOOT basis. Government
has entered into concession agreement with the private partners for a
period of 10 to 30 years in these road sector projects for construction,
maintenance and revenue sharing arrangements.
Table 8: Sector-wise PPP Projects - Government of India*

Sector/Union Territory No. of Estimated Cost
Projects (Rs. Crore)
1 2 3
Road Transport & Highways 84 22752
Ports, Births, Terminals, etc 30 9770
Civil Aviation 4 21144
Cluster Development 26 1764
Urban Infrastructure 3 4363
Total 147 59793
* As on October 5, 2006
Source: The Committee on Infrastructure website, Planning Commission, GoI.
PPP in the States

Many of the State Governments have also ventured into PPP model
to develop their State infrastructure on the lines of central schemes.
Accordingly, about 244 projects are in progress under the PPP model with
an estimated investment of Rs.69,893 crore and another 76 projects with
an estimated cost of Rs.34,724 crore are in the pipeline. Among the ongoing
projects, Rajasthan has more number of PPP projects (42 projects), followed
by Madhya Pradesh (28), Gujarat (27), Karnataka (26), Sikkim (24) and
Andhra Pradesh (21). However, investment-wise, Gujarat attracted higher
share at 26.1 per cent of the total investments, particularly for the
development of 13 ports at a cost of Rs.11,730 crore and two urban
development projects at Rs.5100 crore. Other states like Sikkim and
Maharashtra also have more shares in the PPP projects (Table 9).
In the State scheme, road sector attracted about 46.7 per cent of the
total PPP projects in the country followed by urban infrastructure and
power sector. Along with the national highways development, States have
also taken various initiatives to strengthen and modernise their road sector
to smoothen the transport movement. However, in term of investments,
port sector attracted major share at 34.5 per cent as it involves huge
capital requirement for its development. Other sectors like power and
roads have also attracted a share of 23.5 per cent and 20.4 per cent,
respectively (Table 10). Overall, the potential benefits that normally
expected from the PPP projects include cost effectiveness, higher
productivity, accelerated delivery of projects, clear customer focus,
enhanced social service and recovery of user charges. Due to various
Table 9: State-wise Ongoing PPP Projects in Infrastructure Sector

Name of the State Total No. Total Estimated Cost
of Projects (Rs.Crore)
1 2 3
Gujarat 27 18251
Sikkim 24 15627
Maharashtra 9 12498
Orissa 4 3668
Kerala 5 3488
Karnataka 26 2930
Madhya Pradesh 28 2615
Puducherry 4 2233
Andhra Pradesh 21 1999
Rajasthan 42 1818
Tamil Nadu 7 1237
West Bengal 13 1216
Punjab 14 750
Jharkhand 8 732
Goa 3 618
Delhi 6 96
Andaman & Nichobar Islands 1 85
Uttaranchal 1 17
Chandigarh Administration 1 15
Total 244 69,893
Source: The Committee on Infrastructure web site, Planning Commission, GoI.
facilities offered by the Government for infrastructure development

through PPP, there is further potential for PPPs to contribute more and
help bridge the infrastructure gap in India.
B. Sector-wise Infrastructure Developments - Major Concerns
When we assess the overall physical infrastructure development in
the country, India has the fifth largest electricity generation capacity and
Table 10: Sector-wise PPP Projects in the States

Sector Ongoing Projects Projects in Pipeline
No. of Estimated No. of Estimated
Projects Cost Projects Cost
(Rs.Crore) (Rs.Crore)
1 2 3 4 5
Roads 114 14265 48 14668
Ports 24 24091 10 16676
Airports 4 2358 2 250
Railways 3 812 .. ..
Power 35 16409 6 795
Unban Infrastructure 64 11958 10 2335
Total 244 69893 76 34724
Source: The Committee on Infrastructure web site, Planning Commission, GoI.
has generated about 704 billion units of power in 2007-08. Its road
network is the second largest in the world aggregating 3.34 million
kilometers (Kms). Indian Railways is the second largest rail network
under a single management in the world. India is the third largest telecom
services market in the world with 326 million strong telephone networks
at the end of June 2008, including mobile phones of around 287 million.
Indian ports, both major and minor, have estimated to handle 650 million
tonnes traffic during 2006-07. To develop such a huge physical
infrastructure, in addition to PPP model, private sector has also been
directly involved in the development of public infrastructure, particularly
in telecom, power, ports, airports and urban development. Despite various
concession agreements, tax holidays and other benefits to develop the
public infrastructure with private participation, the infrastructure
development so far have said to be not much encouraging due to sector
specific policies and other constraints as discussed below.
Power Sector
India has a huge installed power generation capacity of 1,43,061
MW (end-March 2008), of which the private sector projects constituted
at 14.0 per cent only (Table 11). Government of India has, earlier,
envisaged a mammoth capacity addition plan of 100,000 MW through
2012 to meet its mission of power for all. The 11th Plan has targeted
additional power generation capacity at 78,577 MW, which is more than
the total capacity added in the previous three Plans. Even among the
proposed capacity additions, the private sector would have a share of
only 13.7 per cent, which is very low when compared to power
requirements. This huge capacity addition may not be feasible viewing
from the pace of development of ongoing and proposed new projects.
Table 11: Status of Private Power Capacity (As on March 31, 2008)
(MW)
Item Thermal Hydro Nuclear RES Total
1 2 3 4 5 6
Total Installed Capacity 91907 35909 4120 11125 143061
Of which Private Sector 9772 1230 0 9009 20011
Share in Total Capacity (%) 10.6 3.4 0.0 81.0 14.0
RES: Renewable Energy Sources.
Source: Central Electricity Authority, Ministry of Power, GOI.
Given the fiscal constraints, private participation in the power sector

development has been considered essential for meeting this capacity
addition and to meet the growing demand for power. However, there is
no PPP model power project in the central sector and in the states also, it
is very limited as the power projects have either been developed by the
public sector or by the private sector as Independent Power Producers
(IPP), Captive Power Plants (CPP) and Merchant Power Plants (MPP).
Though the power sector reform has encouraged private power
project, the response in this regard is not much encouraging. According
to Power Ministry sources, about 7366 MW capacity (5 per cent of total
installed capacity) consisting of 37 projects has been fully commissioned
so far in the IPP segment. Five private power projects have been
completed with a capacity of 718 MW and about 5776 MW capacity is
under execution. There are about 52 thermal power projects and nine
hydro power projects with an installed capacity of 30,825 MW have
been cleared/appraised by the Central Electricity Authority (CEA), but
there is no sign of their early execution. India has an estimated unutilised
hydro power potential of more than 1,50,000 MW. However, only 17.5
per cent of the electricity supply comes from the hydro power sector in
2007-08. A study by the CEA has identified 399 potential hydel projects
with an aggregate capacity of 1,07,000 MW. Preparation of pre-feasibility
Reports of 162 schemes with aggregate installed capacity of 47,930 MW
has already been completed by the CEA. In addition, about 60,000 circuit
Kms of transmission network is expected by 2012. Of which, how many
projects will be executed through private participation is a big question.
Ultra Mega Power Projects with each having a capacity of minimum
4,000 MW through private sector funding have also been considered by
the Government to augment the capacity addition to meet the power
requirement in the country. However, there are certain issues that come
in the way of private sector participation need attention to augment the
private investment.
The initial response of the domestic and foreign investors to the
private participation in the power sector was extremely encouraging.
However, many projects have encountered unforeseen delays. There have
been delays relating to finalisation of power purchase agreements,
guarantees and counter-guarantees, environmental clearances, matching

transmission networks and legally enforceable contracts for fuel supplies.
Continuous losses by State Electricity Boards (SEBs) arising both from
inadequate tariff and from Aggregated Technical and Commercial losses
of as high as 40 per cent discouraged the private investors in power
generation as they faced insecurity of payment and hence expansion of
private investment in this sector was constrained. In this regard, policy
issues such as inability of SEBs and State Governments to provide
acceptable payment security to the private power suppliers, delay in
finalisation of power purchase agreement (PPA), fuel supply agreement,
fuel transportation agreement and problems in sourcing coal supply to
thermal power stations need a relook to encourage private participation.
Second, focusing of small projects under private participation may
be viable, bankable, and easily executable and above all, the gestation
period will also be minimal. On the other hand, big projects like Dabhol,
which encountered with many problems, has also been a discouraging
factor for the private participation in mega projects. Reducing the risk is
a better option than allocating it. Therefore, minor power projects in the
private sector or on PPP basis should be encouraged. An important factor
which discourages private participation is the reluctance of lenders to
finance large IPPs.
Third, using domestically available fuel may reduce the input cost,
which is to be explored first before going in for import of fuels by the
developers. Captive mining - not only in India but also abroad - by the
power producers would ease the fuel constraints. The cost could be
reduced by minimising the complexities in the projects instead of shifting
the risks to other parties. Better management and appropriate choice of
technology for the Indian condition would reduce the capital cost
significantly.
Fourth, the disappointing aspect of the reform process could be the
slow tangible progress on competition and open access to grid in the
sector. The Electricity Act 2003 provides for an enabling framework to
stimulate private investments for capacity augmentation and also for
private licensees in transmission and distribution through an independent
network. However, private participation in transmission and distribution
system has not been an easy task. It is widely debated that the captive
unit have found it difficult to transmit excess power through the national
grid, while putting private grid is a costly affair and unviable option at
the initial stage.
Fifth, renewable energy should play a major role in the supply of
power. However, using of renewable energy sources in India is very
limited at around 25 per cent of hydro power and another 7.7 per cent of
other renewable energy out of total installed capacity, which is to be
encouraged in the wake of their availability, cost and environmental
friendly features. Gross wind power potential in the country has been
estimated at over 45,000 MW, based on the areas having wind power
density of 200 Watt per square meter or more, which is to be explored
fully to optimise the power generation at a lower cost. When renewable
energy sources are used, the demand for fossil fuels will be reduced.
Unlike fossil fuels, most renewable sources do not directly emit
greenhouse gases. In view of aforesaid issues, power sector reform has
to go a long way, although the legislative and institutional pre-requisites
are now in place. If implemented properly, it would create a user
competition in wholesale as well as retail power supply.
Telecommunication Sector
Usually, the Government owned operators play a major role in the
development of telecom sector worldwide. In India, private investment
and association of the private sector was needed in a big way to bridge
the resource gap. Therefore, the telecom sector was opened up for private
participation after the announcement of industrial policy in 1991 to bridge
the gap. As a result, the private telecom companies have started operations
in the Indian soil due to vast availability of market potentials. Slowly,
they picked up their market share and currently they outperform the
government owned services due to increasing commercial gains.
Adoption of unified access service, accepting the intra-circle mergers
and acquisitions, licensing regulations and announcement of broadband
policy, the private sector has continued to play a significant role in the
growth of the telecom sector and their participation has increased
significantly during the recent period. The total telephone connections
have increased substantially from 45 million at the end of March 2003

to over 300 million at the end of March 2008 (Table 12). The Government
continues to provide incentives to the telecom sector and reduced the
Table 12: Private Sector Performance in Telecommunication Sector
Description Sector Position as at the End of
Mar-02 Mar-06 Mar-07 Mar-08
1 2 3 4 5 6
Wireline Phones (In Lakh) Public 379.44 419.79 374.61 352.28
Private 5.93 309.15 33.13 41.85
Total 385.37 728.94 407.74 394.13
Wireless Phones (GSM+CDMA*) (In Lakh) Public 2.18 191.05 339.3 443.21
Private 62.13 500.93 1321.24 2167.58
Total 64.31 691.98 1660.54 2610.79
Total Telephones (Fixed + Cellular) 449.68 1420.92 2068.28 3004.92
Tele-density (%) 4.29 12.74 18.31 26.22
Switching Capacity (In Lakh) Public 474.25 792.14 888.17 959.76
VPTs [PSUs+Private] Total 468862 547111 564610 532281
OFC Route Kms (Inclusive of MTNL) 326271 490437 519155 564166
TAX Lines (In Lakh) 34.27 69.53 82.2 86.85
Rural Phones (in Lakh) - 147.68 233.07 765.0
* CDMA : WLL (Wireless+Mobile)
Source: Department of Telecommunications, GoI.
license fees significantly. Due to acute competition in this sector, the

tariffs for various services have experienced a downward movement apart
from harmonisation. As at end March 2008, 134 private licensees have
been providing mobile telephony services with a total investment of
Rs.95,000 crore. Besides, 120 new private licensees are yet to commence
their service (GoI).
New mobile phone connections have been increasing substantially
during the recent period and as a result, India has 326 million strong
telephone networks with 88 per cent share relates to mobile segment at
the end of June 2008, which is one of the largest in the world. Due to
continuous encouragement for private operators in this sector, their share
in the total telephones has increased to about 73.5 per cent as at end-
March 2008. India has joined 100 million mobile club of the world during
2006 as the fifth country after China, the US, Japan and Russia. The
private sector projects are reported to be working successfully in the
cellular segment due to increase in commercial gains and also vast
investment opportunities available in this sector.
Though it appears to be a major success story in private sector
participation in the telecom sector, some of the issues deserve attention.
Issues such as spectrum allocation, tariff rationalisation, etc., need to be

addressed to encourage further healthy competition in this sector. Since
April 2008, one of the major issues concerning the private operators,
viz., the access deficit charges have been removed, which may lead to a
downward tariff revision. Though the overall tele-density has improved
to 28.3 per cent at the end of June 2008, the slow progress in rural tele-
density is to be addressed to improve the communication facilities across
the country.
Petroleum Sector
The Government has formulated New Exploration Licensing Policy
(NELP) to accelerate and expand exploration of oil and gas in the country.
The latest NELP-VII is offering 57 blocks under transparent international
competitive bidding system (29 onshore, 9 shallow water and 19
deepwater blocks beyond 400m bathymetry). Simultaneous 10 blocks
of Coal Bed Methane is under offer for exploration in the third round.
Some of the PSUs in this sector have formed joint venture companies
for exploration and production. However, the response of the private
sector has not been much encouraging. About 14 per cent of the crude
oil production is under joint venture and private sector projects. In the
refinery sector, India has a refinery capacity of over 156 million tonnes.
During the recent period, creation of additional refinery capacity has
been limited in the country in the public as well as in the private sector
when compared to the demand. Currently, two private sector refineries
control 28 per cent of refinery capacity in the country. In the case of
natural gas production, the share of private/joint venture sector has been
picking up with 23 per cent during 2005-06 (Table 13). Steps to augment
Table 13: Oil and Gas: Public Private Share in 2005-06
(Per cent)
Sector Public Private
1 2 3
Retail Network 94.3 5.7
Refinery Capacity 75.0 25.0
Crude Production* 86.0 14.0
Natural Gas Production* 77.2 22.8
* Private sector include JVCs
Source: Indian Infrastructure, Eight Anniversary Issue, August 2006.
the crude oil production as well as refinery capacity of the country would
ease strain on domestic petroleum prices and supply.
Roads and Highways
The PPP model may be considered as a successful one not only in
the world over but also in India in the development of road sector as
majority of the on-going highways development projects have been taken
up under this model. With a view to attract private investment in road
development, maintenance and operation, National Highways Act (NH
Act) 1956 was amended in June 1995 to facilitate private participation
in road infrastructure projects. While there are a number of forms of
PPP, the common forms that have been used for development of National
Highways are Build Operate and Transfer (BOT) on Toll basis, BOT on
Annuity basis and SPV basis. At present, the Government has embarked
upon a massive programme to develop highways through the National
Highways Development Project (NHDP), Phase-I to Phase-VII. Under
these projects, 13,146 Kms of National highways have been proposed at
an estimated cost of Rs.54,000 crore. So far 82 projects valued about
Rs.23,104 crore have been taken up on BOT (Toll) basis. Of this, 34
projects have been completed and remaining 48 projects are under
progress. Under annuity basis, 25 projects covering a length of 1376
Kms have been taken up, of which eight projects have been completed
and the remaining projects are under progress (Table 14). Another 12
Table 14: Projects Undertaken through PPP in Road Sector

(As at end-March 2008)
Item BOT (Toll) BOT (Annuity)
1 2 3
Number of Projects 82 25
Value of the projects (Rs.Cr) 23104 7695
Projects Completed 34 8
Projects Under Progress 48 17
Source: Annual Report 2007-08, Department of Road Transport and Highways, GoI.
projects have been taken up under SPV funding, of which five projects
have been completed. Given the unmatched investment opportunity,
contractors and supervision consultants consisting of 46 firms from 27
countries have been implementing about 80 projects with a cost of about
Rs.22,000 crore in India.
The Committee on Infrastructure has proposed a massive

infrastructure developmental programme, of which the road sector
projects include (i) Completion of GQ and NS-EW corridors, (ii) Four-
laning of 10,000 kms under NHDP Phase-III, (iii) Two-laning with paved
shoulders of 20,000 Kms of national highways under Phase-IV, (iv)
Augmenting highways in North East under Special Accelerated
Programme, (v) Six-laning of selected stretches of National Highways
under Phase-V, (vi) Development of 1000 Kms expressways under Phase-
VI, and (vii) Construction of ring roads, flyovers and bypasses on selected
stretches under Phase-VII. NHDP Phase I and II were mostly funded
through Government where the share of BOT highways was only 10 per
cent. Under the second phase, financing was through cess and market
borrowings in addition to external funding of Rs.7,609 crore by World
Bank and Asian Development Bank. Further, a policy decision has been
taken that all the projects in NHDP Phase-III to Phase-VII would be
taken up on the basis of PPP on BOT model. The development of 1,000
Kms access-controlled Expressways under PPP will be on new alignment
and built on Design, Build, Finance and Operate (DBFO) model. The
Committee on Infrastructure had mandated the formulation of a Model
Concession Agreement (MCA) for PPP projects in national highways to
specify the policy and regulatory framework on a fair and transparent
basis. Accordingly, a MCA has been released by the Government as a
guideline. The MCA unbundles the risks and costs, and allocates them
to the partners best suited to manage them. Establishment of Dedicated
Road Fund may ease the financial constraints of the Government in view
of the large number of projects, which are under various stages of
implementation.
Another issue in the road sector is that many of the projects have
been delayed due to problems in land acquisition, hurdles in material
movements, law and order problem. A clear mandate to acquire land for
public use is to be conceived and to be operationalised to speed up the
public projects. In case of toll roads, levying of user charges at a higher
rate at the initial stage may dampen the road users, which could be
rationalised through gradual increase in the later stage. Risk and revenue
sharing arrangements should be clearly dealt with for smooth passage of
project implementation. Excessive commercialisation may affect the
common man, who may be protected with some element of subsidy at

the initial stage. Above all, the confidence of the local people is to be
gained for smooth implementation of the project.
Airports
There are 449 airports/airstrips in the country. Among them, the
Airport Authority of India (AAI) owns and manages 92 airports and 28
civil enclaves at defence airfields, which provides air traffic services
over the entire Indian airspace and adjoining oceanic areas. The legislative
framework for privatisation of airports already exists in India. Some
airports have already been owned by State Governments, private
companies and even individuals. However, the financing of airport
infrastructure has some inherent problems. These projects have a large
element of cost, very long gestation period and highly uncertain returns
on investment based on several assumptions of traffic growth that may
not materialise. It has been estimated by the Task Force on Financing
Plan for Airport constituted by the Planning Commission that private
sector investment for the modernisation and development of various
airports under PPP model would be Rs.31,100 crore (Table 15).
Table 15: Projected Investments from PPP in Airports
(Rs. Crore)
Airport Private Investment
1 2
Delhi & Mumbai 11,400
Bangalore & Hyderabad 4,000
Chennai & Kolkata 5,700
Five Greenfield Airports 8,500
City side Development 1,500
Total 31,100
Source: Report of the Task Force on Financing Plan for Airports, Planning Commission, GoI.
Modernisation and restructuring of Mumbai and Delhi airports at an

estimated investment of US $3 billion over next 20 years under PPP
model has already been in operation. Construction of new greenfield
international airports at Bangalore and Hyderabad on BOOT basis, though
delayed, have been completed by April 2008. Modernisation of other
major airports like Chennai, Kolkata, etc., is pending due to procedural
hassles and land acquisition problems, which are to be addressed urgently
to ease the air traffic. Due to the introduction of open sky policy, the air
traffic has increased significantly in major airports and the runways in

these airports are not in a position to handle the increasing traffic, which
resulted in flight delays. This call for expansion and modernisation of
existing airports on a priority basis and also new airports of international
standard, at least in the metros, are to be developed to accommodate the
growing air traffic. Further more, the Committee on Infrastructure has
approved the development of 35 non-metro airports. While the AAI will
undertake all the development works on the air side, city side
developments at most of the viable airports will be undertaken with
private sector participation through JVC/private consortium.
In view of worldwide thrust towards corporatisation and privatisation
of airports, comprehensive strategy needs to be prepared to capture the
best investment opportunities. In case of greenfield projects, the promoter
may be required to prepare pre-feasibility study for the smooth functioning
of the project. Transparency in the operations and in the revenue and
risk sharing would ease the hurdles in the implementation of the projects
under PPP model. There will also be need for commercialisation of
marginal or loss-making airports by transferring them to private
companies, State Governments, urban local bodies etc., for operation
and management under negotiated terms and conditions.
Ports and Shipping
There are 12 major ports and about 60 non-major and private ports
in the country. With the awarding of infrastructure status for inland
waterways and inland ports, the construction of ports under private sector
has picked up. At present, 36 private/captive port projects involving
capacity addition of about 137 MTPA3 and an investment of about
Rs.9,756 crore are at various stages of evaluation and implementation.
Out of these, 13 projects with capacity addition of about 47.40 MTPA
involving an investment of about Rs.2662 crore have been operationalised
and four projects are under implementation through private participation.
Development of other ports is under slow progress, which needs attention
of all concerned for early execution. The main areas which have been
thrown open for private investment under BOT basis include construction
of cargo handling berths, container terminals, warehousing facilities,
installation of cargo handling equipments, construction of dry-docks and
3
Million tonnes per annum.
ship repair facilities. There is a plan to develop 54 new berths through

PPP model in the next five years, which are to be hastened to relieve the
port congestion problem.
Indias weak export infrastructure in the ports such as congestion
problems, insufficient bulk terminals and age old Coastal Regulatory
Zone Act, need to be addressed. More encouragement for PPP model
and captive ports for development of minor/intermediate ports will
improve the port infrastructure in the country. In addition, efficiency in
cargo handling is to be improved to reduce the dwelling time of ships,
which is higher when compared to international standards.
Railways
The demand for railway containers has grown rapidly due to
increasing containerisation of cargo during the recent period. Since the
beginning of the year 2006, container movement has been thrown open
to competition and private sector entities would be eligible for owning
and operating container trains. The rapid rise in international trade and
domestic cargo has placed a great strain on the Delhi-Mumbai and Delhi-
Kolkata rail track. Government has, therefore, decided to build a dedicated
freight corridor on these high density routes. This corridor would be
constructed, operated and maintained by a corporate entity on commercial
principles. Part of eastern, western and dedicated fright corridors would
be undertaken through PPP model. The approach to be adopted for the
dedicated freight corridor would herald the ownership and operation of
a large number of freight trains by competing private entities. It is expected
that the proposed separation of rail from wheels would initiate a paradigm
shift in the functioning of Indian railways.
Urban Development
Over the next 25 years, modernising and expanding the water,
electricity, and transportation systems of the cities of the world will require
approximately $40 trillion. But the cost of not meeting the challenge
could be even greater than $40 trillion (Viren Doshi et al, 2007). In the
Indian scenario, there are about 400 cities with more than 100,000
population, which are facing immense problems in terms of financial
management, in the provision of public services, and overall city
management. Government or local bodies alone could not develop the

cities and solve the problems. Development of urban infrastructure should
be an integral part of development strategy, which includes mass rapid
transport system, drinking water, sewage system, solid waste
management, urban roads and lightings, etc. However, investment in
these areas has been inadequate. Development of this sector with the
PPP may have a changing pace in the overall economic development,
which requires an investor friendly environment with commercial
viability of the projects. Overall, the solution to overcome the urban
infrastructure bottlenecks is to organise the infrastructure more effectively,
balance the public-private interest, reinvigorate electricity, water and
transportation system by integrating finance, governance, technology and
proper designing of the projects.
Section VII
Generic Issues and Options
Despite improvements in physical infrastructure development in the
country during the recent years, significant gap exists between demand
and supply of critical infrastructure facilities, which has become a binding
constraint on the rapid pace of economic progress. As mentioned earlier,
infrastructure gap exists in almost all the sectors (Table 6). In the case of
power sector, the power shortage stood at around 9.8 per cent and the
power shortage during the peak demand period has been much higher at
about 16.6 per cent (in 2007-08), which severely affected the industrial
production and economic development. The per capita consumption of
electricity has increased to 704 kwh in 2007-08, which constantly put
pressure on the generation front. In the road sector, among the proposed
development of about 5846 Kms of Golden Quadrilateral (GQ), 96.7
per cent of the projects have been completed and the remaining works
are pending due to various litigations. In North South-East West corridor
of 7142 Kms, only about 1962 Kms have been completed till February
2008 even though the completion target has been fixed by end-December
2009. Employee productivity of railways in India is very low when
compared to China, Korea, Brazil and Indonesia. Wagon shortage hinder
the movement of industrial raw materials, coal, minerals, etc., which
affects the industrial production. Port container and air freight traffic is
also very low in India as compared to other Asian economies. Indias

weak export infrastructure in the ports, congestion problem and
insufficient bulk terminals are major constraints in this sector. Space is a
major constraint in big cities to expand the basic infrastructure. In the
absence of well defined law to acquire land for public infrastructure
development has also lead to slowdown in the urban infrastructure. Poor
basic amenities in the rural areas are also a major concern, despite 72
per cent of the population lives in villages.
When we look at the progress of infrastructure development so far,
private participation and PPP arrangements in the development of public
infrastructure have still faced several implementation challenges. These
challenges typically involve tariff setting and adjustment, regulatory
independence or dispute over contractual provision and risk sharing. It
may be observed from the discussion so far, the PPP in the infrastructure
development is picking up during the recent years, particularly in the
road sector and to some extent in the airports and ports sectors. Telecom
sector is considered to be a successful sector in attracting private
participation on a large scale. This may be due to sector-specific policies
and other factors such as Government commitment, increased private
interest in these sectors, move towards better competitive process, greater
availability of information, size of the projects, acceptable price and
encouraging developer return, fiscal concessions, etc. However,
considering the size and magnitude of the proposed and ongoing projects
in the infrastructure sector as a whole, the lacklustre response by the
private participation and slow progress in some of the projects need to
be reversed through investor friendly policies, transparent procedures
and other conducive measures. The PPP model will not be feasible in all
types of infrastructure but they are possible in many areas, which are to
be exploited fully. The key to making PPP model acceptable is to create
an environment where PPPs are seen to be a way of attracting private
money into public projects, not putting public resources into private
projects. Towards this direction, the following generic issues, therefore,
need the attention to make the PPP model as a success storey in the
infrastructure development as in the case of some of the developed and
developing economies.
Transparency: There is a widespread consensus among economists

that transparency is crucial in the case of PPP projects. At present, the
process of executing the projects in India involves various stages and
each stage is to pass through complicated policies and programmes.
Though, the process of bidding and awarding the contract is stated to be
much transparent, still there is scope for improvements. The PPPs can
sometimes run into controversy if the private partner is seen to have
received unduly favourable treatment. This can be overcome by ensuring
that the terms of concession agreements are transparent and protective of
public interest. Though this approach has been adopted by the Centre
through model concession agreement, the State governments should also
adopt transparent approach similarly to ensure that the PPP will be a success
story.
Risk Allocation: As the projects in the infrastructure sector requires
huge investments and involve much time frame for their execution,
various risks, viz., construction risk, financial risk, market risk,
performance risk, demand risk and residual value risk are to be allocated
appropriately among the constituents. The risks should not be passed on
to others as and when arise, which would affect the cost and progress of
the project and create unnecessary litigations. Too many risks assumed
by Government will likely put unjustified pressures on taxpayers. On
the other hand, too few will prevent potential private investors from
participating in the venture.
Project Appraisal: Execution of infrastructure projects should have
a clear choice about its implementation whether by the Government or
private or both under PPP. Also, the technicality of the project should be
clear regarding its soundness, viability and return. When we look at the
PPP programme, while there are a number of successful projects, there
have also been a number of poorly conceptualised PPPs brought to the
market that stood little chance of reaching financial closure. Clear
appraisal of the project before its execution would avoid many litigations.
At the same time, it is important to avoid a possible bias in favour of the
private sector.
Cost and Time Overruns: Many of the projects under the PPP are
delayed due to litigations, which lead to cost and time overruns in their
implementation. For instance, as per the Ministry of Statistics and

Programme Implementation, out of 491 central sector projects of more
than Rs.100 crore at the end of March 2008, about 231 projects have
witnessed delays in their execution due to varied reasons. The cost overrun
of these projects has, though, come down from 51.8 per cent of the original
cost in March 2004 to 13.9 per cent in March 2008, still it constitutes a
significant share, which is to be reduced through implementation of the
projects on schedule.
Government Guarantee: Generally, investors look for Government
guarantee for their investments and their return before entering into a
venture. Constant changes in the procedures for offering Government
guarantees discourage the investment opportunities. Though, Government
guarantee for private investment is not a preferred option in the fiscal
angle, transparent policies and guidelines towards Government guarantee
will provide clear perception and encouragement towards the PPP even
in the risky areas of investment. But at the same time, the guarantee
should not put the Government into pecuniary losses due to lack of clarity
as in the case of Dabhol power.
Centre-State Disagreement: Execution of some of the projects like
airport development, road, etc., are delayed due to disagreement
between the Centre and the State Governments in various aspects,
particularly locational choice, cost sharing structure, political
disagreement, etc., which are to be avoided with appropriate policies,
political will, cooperation, coordination, dedication and determination.
Regulatory Independence: In the infrastructure sector, regulatory
bodies like Telecom Regulatory Authority of India, Central Electricity
Regulatory Commission, State Electricity Regulatory Commissions,
Tariff Authority of Major Ports, National Highway Authority of India
and Airport Authority of India have established as autonomous agencies
to regulate the activities coming under their jurisdiction. Though
regulatory independence is vital for speedy implementation of policies,
there are instances of disagreements between the regulatory authorities.
To reduce the risk of arbitrary and ad-hoc policy interventions due to
disagreement between the authorities, principles on key issues need to
be specified upfront in sufficient detail.
Corporate Governance: Good corporate governance will succeed

in attracting a better deal of public interest because of its apparent
importance for the economic health of corporates and society in general.
The corporate governance framework should ensure that timely and
accurate disclosure is made on all material matters. The corporate
governance practices of the parties involving in the PPP have to match
with the benchmarking corporate governance practices with the best
in the rest of the world.
In addition, appropriate institutional framework is a prerequisite
for the success of the PPP in the infrastructure development due to its
size, investment requirements, structure and dimension. Foreign
investment will freely flow into a country when there is sound, stable
and predictable investment policy. Frequent changes in the policies
will be an irritant to the investors, which is to be restricted in an
emerging economy like India. Overall, in addition to sector-specific
issues, the generic issues also need the attention of all concerned to
make not only the PPP model a successful but also to attract more
private participation to upgrade the Indian infrastructure into a world-
class.
Section VIII
Concluding Observations
In India, infrastructure gaps exist in all most all the sectors, posing
a serious threat to sustenance of the growth momentum. To augment the
infrastructure facilities with private participation, the initiated policy
measures have not met with significant success. Except for the telecom
sector, which has witnessed a revolution and has been able to attract
massive private investments, other sectors have faced with lacklustre
response. Even in the telecom sector, though the overall tele-density has
improved during the recent period, rural tele-density remains low, which
needs to be dealt with appropriate policy measures.
The status of the PPP in the infrastructure development in India,
both in the Central Government schemes as well as State sponsored
schemes, is not encouraging. Stable macroeconomic framework, sound
regulatory structure, investor friendly policies, sustainable project
revenues, transparency and consistency of policies, effective regulation

and liberalisation of labour laws, and good corporate governance are the
basic requirements, which define the success of the PPP model. The PPP
model in the road sector has experienced with enthusiastic response with
the introduction of massive NHDP with structured MCA. However, many
of the road projects are faced with cost and time overruns on account of
prolonging disputes in land acquisition, hurdles in the material movements,
law and order problems, etc.
Power shortage is a serious concern and the quality of the power
supply is generally poor, especially in rural and semi-urban areas, which
has affected the micro and small enterprises severely. Though the Planning
Commission has put in place an ambitious plan to provide power for all by
2011-12 by adding more than 78,000 MW of generation capacity and also
facilitate capacity additions in transmission and distribution networks
during the 11th Plan period, slow progress in capacity addition needs to be
speaded up with a policy thrust. Further, private sector participation in
power generation is not forthcoming due to specific issues such as delays
in finalising power purchase agreements, high aggregated technical and
commercial losses, age-old transmission networks, shortage of fuel supply
and policy and procedural barriers while exploring renewable energy
sources.
The progress in the development of many of the port projects under
private participation is at a sluggish pace, which requires conducive policy
environment. Efficiency in cargo handling needs to be enhanced through
modernisation of port facilities to facilitate the trade. The PPP model
projects in the airport sector are in slow progress and also restricted to
major airports. Modernisation of airports like Chennai and Kolkata is yet
to take-off due to procedural hassles and land acquisition problems. This
brings to the fore a need for constructive and stable policy environment
towards land acquisition for public utilities. The urban infrastructure
bottlenecks need to be addressed through a development strategy, which
encompasses efficient planning and organisation of the project, balancing
the public-private interest, reinvigoration of electricity, water supply and
transportation system and integration of finance and technology.
International experience suggests that the success of PPP projects
requires a single objective of better services for the public at a reasonable
cost. This is achievable through realistic and reasonable risk transfer

while addressing the public concerns. The Indian PPP model should
adhere to such objectives and best practices to march forward on the
success path. In this pursuit, easy availability of long-term private capital
is an essential requirement. Fostering the greenfield investments in the
public infrastructure with appropriate user charges, transparent revenue
and risk sharing agreements would transform the international capital
inflows into productive ventures. Above all, selection of right PPP model
for a right project at a right time through realistic planning would go a
long way in providing meaningful and hassle free infrastructure
development, which ultimately would increase the infrastructure
standards and thereby sustain the overall macroeconomic developments
of the country.
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Reserve Bank of India Occasional Papers

Vol. 29, No. 1, Summer 2008

Public-Private Partnership in Indian Infrastructure

JEL Classification : H400, H420, H540, L900, L980.

and telecommunication through its forward and backward linkages

arrangement to pure non-recourse project finance, while sometime it

Privatisation and Public-Private Partnership

While focusing on country specific practices, the PFI of the UK is

enterprises started their reform by becoming a limited liability company.

Table 2: Number of Projects by Region and year of Financial Closure

When we look at the details on country-wise infrastructure projects

Table 3: Investment in Projects by Region and year of Investment (US$ million)

Before the launching of economic reforms in the country, the

Since the initiation of the reform process, measures were

Table 4: Number of PPI Projects in India, 1990-2006

per cent in private participation during the period. Many number of

attracting the projects and fifth position in terms of volume of

Table 6: Infrastructure Deficit and 11th Plan Physical Target

In this connection, some basic issues need to be discussed. First,

Table 8: Sector-wise PPP Projects - Government of India*

PPP in the States

Table 9: State-wise Ongoing PPP Projects in Infrastructure Sector

facilities offered by the Government for infrastructure development

Table 10: Sector-wise PPP Projects in the States

Given the fiscal constraints, private participation in the power sector

guarantees and counter-guarantees, environmental clearances, matching

have increased substantially from 45 million at the end of March 2003

license fees significantly. Due to acute competition in this sector, the

Issues such as spectrum allocation, tariff rationalisation, etc., need to be

Table 14: Projects Undertaken through PPP in Road Sector

The Committee on Infrastructure has proposed a massive

common man, who may be protected with some element of subsidy at

Modernisation and restructuring of Mumbai and Delhi airports at an

traffic has increased significantly in major airports and the runways in

ship repair facilities. There is a plan to develop 54 new berths through

management. Government or local bodies alone could not develop the

also very low in India as compared to other Asian economies. Indias

Transparency: There is a widespread consensus among economists

implementation. For instance, as per the Ministry of Statistics and

Corporate Governance: Good corporate governance will succeed

revenues, transparency and consistency of policies, effective regulation

cost. This is achievable through realistic and reasonable risk transfer

 Towards Faster and More Inclusive Growth: An Approach to the 11th

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also very low in India as compared to other Asian economies. Indias

Towards Faster and More Inclusive Growth: An Approach to the 11th