Will PPP schemes boost infrastructure development?

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Recently, seventh pay commission recommended a hike of 23.6% in pay, allowances and pensions of the Central Government employees. This will put a burden of Rs 1 trillion on the government. To add to this, approval of One Rank One Pension (OROP) scheme for the armed forced will lead to an additional outgo of Rs 100 billion from the government's kitty. Now, with such huge amounts of outflow from government's kitty, the big question is, will it be able to fund the infrastructure activities as well as maintain the fiscal deficits at the promised levels?

The private sector investments have remained subdued since a while now. This has put incremental pressures on the government to speed up the public investments and to keep the economy moving. And while doing so, the government has also to keep the fiscal targets in check. Fiscal deficit is the excess of government expenditure over the revenue that it generates.

In such a scenario government is looking for 'Public Private Partnership' (PPP) model, wherein the investment from private sector as well as government is involved.

As per article in Mint, the government has already initiated several PPP models. The government has come up with a 'Hybrid Annuity Model' for road projects, wherein the government and private investors will share the financial burden in a ratio of 40:60 respectively. This will significantly reduce the burden on the government. The government has found out 15 road projects to bid under this model, which will entail an investment of Rs 121.8 billion.

Further, cabinet has also approved the development of 400 railway stations under the Swiss Challenge Formula in the next fiscal year. Underneath this formula, private entity will identify a project and will approach the government with a proposal to develop it. The government will then call for counter-bids from rivals. Provided the counter bid from rival is lower, original bidder could match the bid and win the project.

Going forward, private participation along with government spending will play an important role to boost the economic growth of the country and to keep the growth trajectory intact. Policy inaction was one of the main reasons why the project cycle was getting delayed. Thus, we believe these steps will likely to speed up the activity in the future. This shall give infrastructure cycle the much needed push.  

But at the same time the government will also need to resolve the problems of land acquisition and red tape still persist in the system. High debt has bloated on the books of infra firms and banks are struggling to recover loans. On top of that, there are still many stalled projects which have failed to get completed on schedule. We would await to see more development and steps the government takes, to make PPP models successful.

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