Investment in PPP projects shows a decline: Moody's Investor Service

According to Moody's Investor Service, there has been a large-scale decline in private investment in PPP projects in recent years because of 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. Delay in project completion has 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.

Since 2011, there has been a decline in private investment in public infrastructure through PPPs. In fact, 2015 saw the lowest number of PPP project awards in the last 10 years. The fall in the number of PPP projects approved by PPPAC has slowed the pace of infrastructure development and increased the dependence of such projects on public sector funding.

A Moody's report released on Thursday said the poor performance of some infrastructure projects, including PPP, has been a source of stress for both developers and the Indian banking system.

"Historical underinvestment and rapid economic growth are straining India's existing infrastructure," says Abhishek Tyagi, a Moody's Vice President and Senior Analyst. "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," says Tyagi.

The report says further development in the PPP framework may help stimulate more private investment.

"UK, Canada and Australia have well developed PPP markets and have mostly utilized the availability-payment PPP model as opposed to a demand risk or hybrid PPP model. The more mature PPP markets generally have well-developed regulatory frameworks, relatively more standardized project contracts, a large and sophisticated investor base, and predictable project pipelines. Adjustments to the PPP framework which align India with more mature PPP markets could help attract new private investment," said the report.

The decrease in PPP projects can also be partly attributed to global economic slowdown and aggressive bidding by the private sector in earlier projects. This has put significant strain on the finances of project developers, with the debt levels of the top companies increasing significantly.