PPP 2.2: Recycling Capital for India’s Infrastructure

Context

India’s growth requires a $1.4 trillion infrastructure pipeline to support its economic expansion and net-zero targets. The use of public capital expenditure alone is not sustainable in the long term. The PPP 2.2 model is a paradigm shift from passive capital mobilisation and passive capital circulation to passive capital circulation of the infrastructure in India.

The Evolution of PPP in India 

• PPP 1.0 (Mobilization): This phase has been about the process of bringing in private investment for the huge infrastructure gap, via BOT (Build-Operate-Transfer) and HAM (Hybrid Annuity Model). 
• The Flaw of Short-term Capital: Long-lived infrastructure assets spanning 30-50 years were often financed with short-term bank loans (7-10 years). This mismatch resulted in a weak revenue growth phase and heavy debt-servicing costs, stressed assets and non-performing assets (NPAs). 

Understanding PPP 2.2: Capital Circulation 

The original idea behind PPP 2.2 is not only to mobilise capital in the beginning, but to also continually circulate the capital. 

• Dynamic Risk Based Repricing: Reserve Bank of India (RBI) should implement Dynamic Risk Based Repricing. Today, banks have much higher risk premia for construction-stage projects, after their projects have been completed and de-risked. This eliminates refinance incentives . 
• Life Cycle Risk Matching: The state should cover high risk phases (preparation of the project, land acquisition). Projects can then be handed over to long-term institutional investors, such as global pension funds, insurance companies and sovereign wealth funds, in a seamless transition. 

Key Enablers for PPP 2.2 

• Reviving IDFs (Infrastructure Debt Funds): IDFs are the key link between operational infrastructure and longer-term institution investors. 
• Asset Recycling: Unlocking capital from mature, de-risked assets is vital. A dollar that sits there forever in an existing asset is a dollar not available to be used for the next highway, transmission line, or renewable energy project. 
• Institutional Restructuring: To expand existing institutions such as the National Investment and Infrastructure Fund (NIIF) to explicitly manage the risk transfer mechanisms and to draw in patient global capital. 

Significance for India 

• Decongesting Public Balance Sheets: Reduce excessive public borrowing so the government can have fiscal discipline and push hard for capital expenditure (capex). 
• Decarbonization: Guarantees long-term returns for the trillions needed for green investments (renewables, green hydrogen, climate resilient cities) with stable, inflation-linked returns. 
• Resource Optimization: Speeds up the delivery of National Infrastructure Pipeline (NIP) and the National Monetisation Pipeline (NMP) by making the liquidity available and unlocking bank capital for new projects. 

Way Forward 

India needs to move towards a more dynamic, circulation model of financing infrastructure, replacing the state budget. The active development of secondary markets for operational infrastructure assets, coupled with structural reforms and strong contract enforcement, is needed.

Source: The Indian Express

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