Public-Private Partnership in India: Models, VGF, HAM, Kelkar Committee and Monetisation for RBI Grade B Finance

Last updated: 2026-11-13 · MockMentor

"Public-Private Partnership" ends the syllabus line on alternate sources of finance in the General Topics unit of the RBI Grade B Phase 2 Finance syllabus. It is a favourite of descriptive papers because it brings together infrastructure, public finance and risk sharing. Questions ask about PPP models such as BOT, DBFOT and the Hybrid Annuity Model, the Viability Gap Funding scheme, the Vijay Kelkar Committee and the National Monetisation Pipeline. This chapter covers all of these, with the lessons from India's PPP experience.

In one line: a PPP is a long-term contract in which a private partner finances, builds or runs a public asset or service and shares its risks and rewards with the government; India uses it widely in roads, airports, ports and power, with support from Viability Gap Funding and newer models such as HAM and asset monetisation.

Basic concepts

• Public-Private Partnership (PPP): an arrangement between a government or statutory body and a private entity for providing public assets or services, in which investment is made or management is carried out by the private entity for a specified period, with risks shared and payment linked to performance. This follows the definition used by the Ministry of Finance.
• Concession: the right given by the government to a private party to build or run an asset and collect user charges, for a fixed period.
• Concessionaire: the private party that holds the concession, usually through a special purpose vehicle (SPV).
• Annuity: fixed periodic payments by the government to the private partner, regardless of traffic or demand.
• Viability gap: the shortfall between the cost of a project and what it can earn, which makes it unattractive to private investors without support.
• Value for money: the test of whether a PPP gives better results for the public than a project carried out by the government itself.

Why in News?

1. The Union Budget 2025-26 announced a second National Monetisation Pipeline for 2025 to 2030, with a target of ₹10 lakh crore of fresh capital from monetising public assets, building on the first pipeline of 2021 to 2025.
2. The same Budget asked infrastructure ministries to prepare a three-year pipeline of projects that can be taken up in PPP mode, and allowed states to seek support from the India Infrastructure Project Development Fund.
3. The Union Budget 2026-27 raised capital expenditure for infrastructure to ₹12.2 lakh crore, which increases the need for private participation in projects.
4. The Hybrid Annuity Model remains the main PPP model for national highways, after the BOT toll model saw few takers.

Why PPPs are needed

1. The government's resources are limited, while infrastructure needs are huge.
2. Private partners bring efficiency, technology, innovation and management skills.
3. Risks can be allocated to the party best able to manage them, such as construction risk to the builder.
4. Life-cycle thinking: when the same party builds and maintains an asset, it has a reason to build well.
5. Projects can be completed faster with performance-linked payments.
6. The government can focus on regulation and planning instead of running assets.

Features of a PPP

• A long-term contract, often 15 to 30 years or more.
• The private party usually invests its own capital and raises debt.
• Payment through user charges (tolls, tariffs), government payments (annuities) or both.
• Risks and rewards shared according to the contract.
• The asset usually returns to the government at the end of the concession.
• Performance standards and penalties written into the contract.

PPP models

The models differ in how much responsibility, risk and ownership pass to the private party.

Engineering, Procurement and Construction (EPC) is not a PPP: the government pays the contractor to build and keeps all other risks.

BOT variants for roads

Hybrid Annuity Model (HAM)

The HAM was introduced by the Ministry of Road Transport and Highways in 2016, after BOT toll projects ran into losses and EPC projects strained the budget.

Risk allocation in PPPs

The principle is that a risk should be borne by the party that can best control or absorb it.

Government support for PPPs in India

Viability Gap Funding (VGF)

The Scheme for Financial Support to PPPs in Infrastructure, known as the VGF scheme, started in 2006 and was revised in 2020.

Other institutional support

The Vijay Kelkar Committee (2015)

After many PPP projects ran into disputes and stalled, the government set up the Committee on Revisiting and Revitalising the PPP Model of Infrastructure Development, chaired by Vijay Kelkar. It reported in November 2015. Its main recommendations were:

1. Amend the Prevention of Corruption Act, 1988, to distinguish genuine errors of judgement from corruption, so that officials are not afraid to take decisions.
2. Set up an Infrastructure PPP Project Review Committee to evaluate stressed projects and an Infrastructure PPP Adjudication Tribunal to settle disputes quickly.
3. Set up an independent regulator for sectors where none exists, such as roads and railways.
4. Avoid PPPs for very small projects, where the cost of contracting outweighs the benefits.
5. Create a mechanism to renegotiate contracts in a fair and transparent way.
6. Make the Swiss challenge method (in which an unsolicited proposal is put to open challenge) less common, as it lacks transparency.
7. Use PPPs only where they give value for money, not just to keep borrowing off the budget.
8. Build capacity in government and set up an institute for research on PPPs (3PI).

Several recommendations were accepted in part, such as amendments to the Prevention of Corruption Act in 2018 and the creation of the HAM.

Asset monetisation

National Monetisation Pipeline (NMP)

The first NMP, launched in August 2021, estimated a potential of ₹6 lakh crore over 2021-22 to 2024-25 by leasing core assets of the central government to private parties, while ownership stays with the government.

Monetisation uses models such as TOT, operate-maintain-transfer and InvITs. It is not privatisation, because the asset returns to the government. The second NMP, announced in the Union Budget 2025-26, covers 2025 to 2030.

Advantages of PPPs

1. Brings private money and reduces the burden on public budgets.
2. Faster completion and better quality through performance-linked payments.
3. Efficient operation and maintenance.
4. Innovation in design and technology.
5. Risk sharing with experienced private partners.
6. Better service delivery to users.

Challenges in India's PPP experience

• Aggressive bidding: developers bid unrealistic revenue to win contracts, then sought renegotiation.
• Land acquisition and clearance delays: caused cost overruns and stalled projects.
• Disputes and slow resolution: arbitration and court cases took years.
• Stressed balance sheets: many infrastructure firms and their bank lenders faced losses after 2012, contributing to the twin balance sheet problem.
• Inflexible contracts: no fair way to deal with changes in traffic or costs.
• Lack of independent regulators: the government is both a party to the contract and the referee.
• Public opposition to user charges: resistance to tolls and tariffs.
• Weak capacity in government: to design, appraise and monitor complex contracts.
• Fiscal risks: contingent liabilities from guarantees and annuities can strain budgets later.

Way forward

1. Choose PPP only where it gives value for money, using a proper appraisal.
2. Allocate risks sensibly and complete land acquisition and clearances before bidding.
3. Set up independent sector regulators and a fast dispute resolution system.
4. Build a deep market for long-term finance, including infrastructure bonds and InvITs.
5. Strengthen state and municipal capacity to design and run PPPs.
6. Record contingent liabilities transparently in budgets.
7. Extend PPPs to social infrastructure, such as health and education, with VGF support.

International bodies

• United Nations Economic and Social Commission for Asia and the Pacific (ESCAP): promotes PPPs in the region and has published guidebooks for policymakers.
• International Project Finance Association (IPFA): a non-profit body that promotes project finance and PPPs worldwide.
• World Bank Group's Public-Private Infrastructure Advisory Facility (PPIAF) and Global Infrastructure Hub (set up by the G20): support PPP capacity in developing countries.

Possible exam and interview questions

1. Explain the main PPP models used in India. Why did the Hybrid Annuity Model become popular for highways? (620 words)
2. What were the key recommendations of the Vijay Kelkar Committee on PPPs? How far have they been implemented? (420 words)
3. What is Viability Gap Funding, and how was it revised in 2020?
4. Distinguish between asset monetisation and privatisation.
5. Interview: Should PPPs be used for hospitals and schools?

Related reading: alternate sources of finance, Union Budget concepts, and development financial institutions.

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