Structure and financing of public public private partnerships

Abstract

The infrastructure sector is acknowledged to have been a bottleneck in India’s economic development and this will become even more severe as we transition to a higher economic growth trajectory. There is a strong case for public private partnership in this space. Public private partnership in infrastructure projects in domain are a hand in glove fit for project financing. We studied the inherent risks in a highway project spread across preconstruction, construction, political and analyzed the risk sharing mechanisms being employed in the existing arrangements in India. Our view is that there is scope for more innovative structures (as have emerged globally) with better risk sharing in future and we analyzed a few of these possible structures. Introduction of BOT projects necessitated a different organizational structure to manage the risk and opportunity profile of this business which was different from traditional EPC business that construction companies were into. In order to ensure a better managerial focus and allocation of resources Gammon India, one of the leading players in the infrastructure businesses established a 100 % subsidiary for its BOT business. Going forward, as the industry matures the organization structures of construction companies will evolve into holding company with different subsidiaries with BOT and EPC business housed separately. This will ensure greater focus and independence to raise capital catering to different risk appetites. Currently we recommend raising equity at the BOT subsidiary level, through a private equity offering rather than tapping the primary markets as this business model is still in an early and evolving stage and market may not be able to place a fair value on its growth potential.