Enhancement in PPP model will attract investment in Infra projects: Moody’s

20 Oct 2016 Evaluate

Moody’s Investor Service in its latest report titled ‘Indian Infrastructure: Enhancement of PPP Framework Would Help Meet India's Infrastructure Needs’ has said that enhancement of India's public-private partnership (PPP) model could help attract more private sector investment towards infrastructure projects, and thus help address the country's very large infrastructure needs. It said that historical underinvestment and rapid economic growth are straining India's existing infrastructure. While the country's PPP model has seen reasonable success in some sectors over the last 20 years, PPP activity has been low in the last four fiscal years due to challenges with the PPP model. As such, India's PPP framework will benefit if it is developed further to address key issues regarding improved risk allocation, the ability to renegotiate unpredictable factors in the bid documents, and a move away from project awards based on one metric such as estimated revenues.

The report stated that there has been a large decline in private investment in PPP projects in recent years for a number of reasons, including delays in project approvals and land purchases by the government, complicated dispute resolution mechanisms in the concession agreements, and lower than expected revenues due to aggressive assumptions. Further, delays in project completion have resulted in cost overruns and revenue losses to private concession owners. These factors have impacted the financial viability of some projects and their ability to service debt.

According to Moody’s, more developed PPP markets such as the UK, Canada and Australia use both availability-payment and demand risk models and relatively standardized bid documents - features that could address some of the bottlenecks faced by the Indian framework. In particular, these more developed PPP markets typically feature well-developed regulatory frameworks, largely standardized project contracts, a large and sophisticated investor base and predictable project pipelines.

Moody's further said that the poor performance of some infrastructure projects, including PPP, has been a source of stress for both developers and the Indian banking system. As per the Reserve Bank of India’s June 2016 Financial Stability Report (FSR) report infrastructure, which accounted for 14.2% of total advances of the banking sector, accounted for 34.4% of restructured standard advances and 13.9% of gross non-performing assets of commercial banks in India. It also said that India's economy is set to grow at the fastest pace among major economies in 2016 and 2017, although Gross Domestic Product (GDP) growth remains constrained by various factors, including inadequate infrastructure investments.

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