Steps Taken by Indian Government to Promote PPP’s In the Past
Viability Gap Funding
Extending financing support through the VGF Scheme: Some projects may not be financially viable though they are economically justified and necessary due to long gestation periods and small cash flows. For the successful completion of such projects, the government has designed Viability Gap Funding (VGF).
Viability Gap Finance means a grant to support projects that are economically justified but not financially viable. Such a grant under VGF is provided as a capital subsidy to attract the private sector players to participate in PPP projects that are otherwise financially unviable. 20% of the project cost can be funded through VGF This 20% grant under VGF needs to be approved by either the Empowered Institution or Empowered Committee
I. Empowered Institution: The empowered Institution Consists of the following
a. Additional Secretary (Economic Affairs)
b. Additional Secretary (Expenditure)
c. Representative of Planning Commission not below the rank of Joint Secretary
d. Joint Secretary in the line Ministry dealing with the subject
e. Joint Secretary (FT), DEA -- Member Secretary
Viability Gap Funding up to Rs. 100 crore (Rupees one hundred crore) for each projectmay be sanctioned by the empowered Institution.

II. Empowered Committee: The empowered Committee Consists of the following
a. Secretary (Economic Affairs)
b. CEO Niti Aayog
c. Secretary (Expenditure)
d. Secretary of the line Ministry dealing with the subject
Viability Gap Funding up to Rs. 200 crore (Rupees one hundred crore) for each project may be sanctioned by the empowered Institution.

Eligibility for Projects to Get Funding Under VGF
a. The PPP projects may be posed by the Central Ministries, State Government or Statutory Authorities (like Municipal Authorities and Councils), which own the underlying assets.
b. To be eligible for financing under the scheme, the PPP projects should be implemented, i.e. developed, financed, constructed, maintained and operated for the Projects term by a Private Sector Company to be selected by the Government or a statutory entity through a transparent and open competitive bidding process.
c. The project should provide a service against payment of pre-determined tariff or user charge.
d. This Scheme will apply only if the contract/concession is awarded in favor of a private sector company in which 50% or more of the subscribed and paid up equity is owned and controlled by a private entity.

Eligible Sectors under VGF

• Roads and bridges, railways, seaports, airports, inland waterways;
• Power
• Oil and Gas pipelines (includes city gas distribution network)
• Urban transport, water supply, sewerage, solid waste management and other physical infrastructure in urban areas
• Infrastructure projects in Special Economic Zones and internal infrastructure in National Investment and Manufacturing Zones
• International convention centers and other tourism infrastructure projects
• Capital investment in the creation of modern storage capacity including cold chains and post- harvest storage
• Education, health and skill development, without annuity provision
• Oil/Gas/Liquefied Natural Gas (LNG) storage facility (includes city gas distribution network)
• Irrigation (dams, channels, embankments, etc)
• Telecommunication (Fixed Network) (includes optic fibre/ wire/ cable networks which provide broadband /internet) and Telecom Towers
• Common infrastructure in agriculture markets and Soil Testing.

Setting up of IIPDF for Financing Transaction Costs
There are lots of costs incurred in feasibility studies, environment impact studies, financial structuring, legal reviews etc. before PPP projected in started. These costs are also enormous and are called transaction costs for PPP.
The India Infrastructure Project Development Fund (IIPDF) provides financial support to cover these transaction costs The Union Finance Minister in the Budget Speech for 2007-08 announced in the parliament the setting up of a Revolving Fund with a corpus Rs. 100 Crore to quicken the process of project preparation. Accordingly the corpus fund titled India Infrastructure Project Development Fund (IIPDF) has been created in Department of Economic Affairs, Ministry of Finance, and Government of India with an initial corpus of Rs. 100 Crore for supporting the development of credible and bankable Public Private Partnership (PPP) projects that can be offered to the private sector.
The IIPDF is available for the purpose of meeting the project development costs which may include the expenses incurred in respect of feasibility studies, environment impact studies, financial structuring, legal reviews and development of project documentation, including concession agreement, commercial assessment studies (including traffic studies, demand assessment, capacity to pay assessment) etc.

Eligibility
a. The IIPDF will contribute only up to 75% of the project development expenses as an interest free loan. The balance 25% will be co-funded by the party
b. On successful completion of the bidding process, the project development expenditure would be recovered from the successful bidder. However, in the case of failure of the bid, the loan would be converted into grant
c. In case the bidder does not conclude the bidding process for some reason, the entire amount contributed would be refunded to the IIPDF

Setting up of PPP Appraisal Committee (PPPAC)
The Government of India (GOI) notified the appraisal mechanism by setting up of the Public Private Partnership Appraisal Committee (PPPAC) responsible for the appraisal of PPP projects in the Central Sector. The appraisal mechanism for the PPP projects was streamlined to ensure speedy appraisal of projects, eliminate delays, adopt international best practices and have uniformity in appraisal mechanisms and guidelines. The PPPAC comprises of the following:
a. Secretary, Department of Economic Affairs (in the Chair)
b. CEO Niti Aayog
c. Secretary, Department of Expenditure;
d. Secretary, Department of Legal Affairs; and
e. Secretary of the Department sponsoring a project

Setting Up of IIFCL
IIFCL is a wholly-owned Government of India company set up in 2006 to provide long term finance to viable infrastructure projects through a Special Purpose Vehicle called India Infrastructure Finance Company Ltd (IIFCL), broadly referred to as SIFTI. The sectors eligible for financial assistance from IIFCL are as per the Harmonized list of Infrastructure Sub-Sectors as approved by the Government and RBI and as amended from time to time. These broadly include transportation, energy, water, sanitation, and communication, social and commercial infrastructure. IFCL has been registered as a NBFC-ND-IFC with RBI since September 2013.
Offerings
I. Direct Lending:
a. As a senior debtor in consortium, IIFCL provides long-term funds to commercially viable infrastructure projects, taking an exposure of up to 20% of Total Project
Cost.
b. As a subordinate debtor in consortium, IIFCL provides subordinate debt up to 10% of the project cost
c. Senior Debtor means in case the borrower company becomes bankrupt then senior debtor will be given money before the Subordinate debtor
II. Credit Enhancement Scheme: Under the Credit Enhancement Scheme, IIFCL provides its partial credit guarantee to enhance the credit rating of bonds issued by infrastructure companies to AA or higher for refinancing of existing loans. IIFCL can undertake credit enhancement to the extent of 20% of Total Project Cost.

Sources of Funding for IIFL
IIFCL raises funds through long-term resources from both domestic as well as global markets
1. Domestic: IIFCL raises debt (both short-term and long-term) from the market through various suitable instruments created for the purpose.
2. International: IIFCL has established strong relationships with bilateral and multilateral institutions like ADB, World Bank and European Investment Bank and has committed lines of long-term low-cost credit to the extent of USD 1.9 billion, USD 195 million, Euro 50 million and Euro 200 million, respectively. Further, IIFCL is in discussion with JICA for Line of Credit for JPY 5 billion.

Model Concession Agreement
Model Concession Agreement (MCA) forms the core of public private partnership (PPP) projects in India. The MCA spells out the policy and regulatory framework for implementation of a PPP project. It addresses a gamut of critical issues pertaining to a PPP framework like mitigation and unbundling of risks; allocation of risks and returns; symmetry of obligations between the principal parties; precision and predictability of costs & obligations; reduction of transaction costs and termination. The MCA allocates risk to parties best suited to manage them. These concession agreements are basically made to make projects attractive to private bidders.
Model Concession Agreements have been set up for highways, transport, urban and other sectors to make sponsors and officials more comfortable with PPP projects.

Hybrid Annuity model in PPP
The government has decided to introduce Hybrid Annuity Model (HAM) to revive PPP in highway construction. At present, three different models –PPP Annuity, PPP Toll and EPC (Engineering, Procurement and Construction) were followed by the government while adopting private sector participation.
Launch of the new model is due to the many problems with the existing ones. Large number of stalled projects is blocking infrastructure projects and at the same time adding to NPAs of the banking system In this context, the government has introduced Hybrid Annuity Model (HAM) to rejuvenate PPP.
By features the HAM is a mix between the existing two models – BOT Annuity and EPC. Hence to Understand the HAM; we should know the basic features of existing PPP Model.
1. The Build Operate and Transfer (BOT) Annuity Model: Under BOT annuity, a developer builds the highway, operates it for a specified duration and transfers it back to the government. The government starts payment to the developer after the launch of commercial operation of the project. Payment will be made on a six month basis.
2. BOT Toll Model: In this toll based BOT model, a road developer constructs the road and he is allowed to recover his investment through toll collection. This toll collection will be over a period of nearly 30 years in most cases. There is no government payment to the developer as he earns his money invested from tolls.
3. Engineering, Procurement and Construction (EPC) Model: Under this model, the cost is completely borne by the government. Government invites bids for engineering.
knowledge from the private players. Procurement of raw material and construction costs are met by the government. The private sector’s participation is minimum and is limited to the provision of engineering expertise. A difficulty of the model is that financial is the high financial burden for the government

What is hybrid annuity?
In financial terminology hybrid annuity means that payment is made in a fixed amount for a considerable period and then in a variable amount in the remaining period. This hybrid type of payment method is attached under the HAM.
The Hybrid Annuity Model (HAM)
1. In India, the new HAM is a mix of BOT Annuity and EPC models. As per the design, the government will contribute to 40% of the project cost in the first five years through annual payments (annuity).
2. The remaining payment will be made on the basis of the assets created and the performance of the developer. Here, hybrid annuity means the first 40% payment is made as fixed amount in five equal installments whereas the remaining 60% is paid as variable annuity amount after the completion of the project depending upon the
value of assets created.
3. As the government pays only 40%, during the construction stage, the developer should find money for the remaining amount. Here, he has to raise the remaining 60% in the form of equity or loans.
4. There is no toll right for the developer. Under HAM, Revenue collection would be the responsibility of the National Highways Authority of India (NHAI).
5. Advantage of HAM is that it gives enough liquidity to the developer and the financial risk is shared by the government. While the private partner continues to bear the construction and maintenance risks as in the case of BOT (toll) model, he is required only to partly bear the financing risk.
Government’s policy is that the HAM will be used in stalled projects where other models are not applicable.

Other Steps
1. Setting up of a committee on Knowledge management and dissemination under Joint Secretary (Infrastructure), Department of Economic Affairs (DEA), to prepare PPP toolkits for various sectors. The toolkit comprises model concession agreements and prequalification criteria for different sectors, standard terms and conditions, and project preparation manual
2. Assistance for the creation of PPP cells in various state governments to act as a nodal agency for PPP projects at the state level
3. A portal for PPP activities in India has been set up - www.pppinindia.com. The website is a one-stop site on information relating to Public Private Partnership initiatives in India.
4. A database of PPP projects by central and state governments in India is available online. The purpose of the database is to provide comprehensive and current information on the status and extent of PPP initiatives in India at the Central, State, and sectoral levels.

Vijay Kelkar Committee
In the Union Budget 2015-16, the Union Minister of Finance Arun Jaitley announced that the PPP mode of infrastructure development in India needs to be revisited and revitalized. In regard with this announcement, a Committee on Revisiting and Revitalizing the PPP model of Infrastructure Development was set-up in 2015 which was headed by Dr. Vijay Kelkar. Its Recommendations are
I. Risk Allocation: Private sector feels that it carries so much risk in the PPP projects which stops them from going ahead with the project.

• As a result government has proposed to develop a better framework for Risk Management
• Provisioning of renegotiation of contracts in case private entity feels that project is not viable during the re-course of the project
• Signing up of Model Concession Agreements to distribute the Risk among all the stakeholders make Private Players Comfortable in this

II. Obsolescing Bargain: Typically, infrastructure PPP projects span 20-30 years and it is not possible to accurately estimate project cash flows. The developer, who invests money in a project over a 4-5 year construction period, often loses bargaining power related to tariffs and other matters in case there are abrupt changes in the economic or policy environment, which are beyond his control. This phenomenon, often called “Obsolescing Bargain”, leads to government opportunism, giving the government authority an upper hand over the private developer after project completion. For this government has proposed that appropriate safeguards for the project developer should be built into the contract to ensure that he has some say in the negotiation on issues that do not compromise bid award sanctity, even after project completion

III. Renegotiation of Contracts: Sometime Private party does not find the contracts viable after some time due to change in the economic scenario. In such a scenario the project hangs in between. The DEA has issued a well -researched guidance note for developing a framework for renegotiation of PPP contracts (“Renegotiation Framework”) with particular focus on 20 the National Highway and Major Port concessions

IV. For sourcing long-term capital at low-cost, banks and financial institutions should be encouraged to issue deep discount bonds, also known as zero coupon bonds. This will reduce the debt servicing charges during the initial period of the project .

V. It recommended for strengthening of 3 main pillars of the PPP framework viz. Governance, Institutions and Capacity. The report endorsed setting up of a 3PI (a PPP institute of excellence) for supporting institutional capacity building activities.

VI. The Prevention of Corruption Act, 1988 should be amended at the earliest to punish corrupt practices while saving those who made genuine mistakes in decision-making.

VII. Swiss Challenge Method of awarding contracts should be avoided as it discourages transparency. Unsolicited Proposals encourages unequal treatment of potential bidders in the procurement process, so they should be discouraged.

VIII. After successful completion of the projects, equity in the project may be offered to long-term investors including overseas institutional buyers. The divestment amount would be utilized for new infrastructure projects.

IX. Independent sectoral regulators should be set up as and when a new sector is declared to adopt PPP model. The regulators should follow a unified approach. Without the independent regulators, the projects would be subjected to bureaucratic and political pressure.

X. Infrastructure PPP Project Review Committee (IPRC) should be set up for evaluating and sending recommendations in time-bound manner for a stress in projects under PPP model. It means the effort should be made to streamline the stalled projects

XI. An Infrastructure PPP Adjudication Tribunal (IPAT) should be set up and its benches will be constituted by the Chairperson as per needs of the matter in question. They will settle the dispute between public and private sector

XII. The state owned enterprises and public sector undertakings should not be allowed to bid for PPP projects. The PPP model meant for leveraging the managerial and operational efficiency of private sector.

XIII. A dispute resolution mechanism that is quick and flexible is needed to allow restructuring within the commercial and financial boundaries of the project.

XIV. The report stated that the PPP structure should not be adopted for small projects

What is Swiss Challenge Method?
Swiss challenge method is a new process of giving contracts in which any person/company with credentials can submit a development proposal to the government. That proposal will be made online and another party can give their bid in order to beat that proposal. If the other party gives lower bid than the original proposer will be given a chance to lower his/her bid. In case the original proposer is not able to match the more attractive and competing proposal from other party, the project will be awarded to the other party. But In case the original proposer is able to match the more attractive and competing proposal from other party then the project will be awarded to
original proposer.