Development of Infrastructure Projects under PPP Trust through Public Private Philanthropy Partnership – P4
Corporate Social Responsibility (CSR) funds can play a pivotal role in urban infrastructure projects under the Public-Private Partnership (PPP) model, where private corporations collaborate with public authorities to deliver impactful, sustainable, and community-focused infrastructure solutions. Here are areas where CSR funds can be effectively utilised:
1. Public Health Infrastructure
2. Education and Skill Development
3. Sustainable Urban Mobility
4. Water and Waste Management
5. Affordable Housing
6. Public Parks and Open Spaces
7. Renewable Energy Projects
8. Smart City Initiatives
9. Urban Resilience and Disaster Preparedness
10. Affordable Urban Transport
11. Technology for Urban Development
12. Food Processing Units / integrated common facility centers for Agri & allied
13. Skill Development
Advantages of CSR-PPP Integration
CSR funds under the PPP model can catalyze impactful urban infrastructure projects by integrating corporate resources, public sector support, and community needs and offer a unique opportunity to address urban challenges by funding projects that improve infrastructure, promote sustainability, and uplift underserved communities. Collaborating with Urban Local Bodies (ULBs) and leveraging public-private partnerships can maximize the impact of CSR investments, aligning them with long-term urban development goals. The implementation model for the same i.e., Urban Infrastructure Projects under PPP model is as mentioned below:-
Formation of PPP Trust for Development of Urban Infrastructure in the State:
I.?????? Background:
?At present, Various departments / Local Bodies in the State require institutional support and budget / cash reserves to conceptualise, develop & implement its infrastructure demands. Further, the funds available with the Government are also limited to meet the projected demand for development of Medium / Large / Mega projects in the State. Therefore, there is an urgent need for such an institutional structure which enables leveraging of the government resources and adequate flow of long-term funds for Infrastructure development in the State through accessing of Private Entities, Development Partners, Capital Markets, Commercial Banks and Financial Institutions, private sector arms of multi-lateral and bilateral Financial Institutions etc., in the form of grants, equity, loans etc. It is also required that the infrastructure projects are professionally developed through a rigorous project development framework and are structured in a manner that renders them financially viable to be executed / funded by Banks, Domestic and International Financial Institutions and any other grants / innovative means of finance through various PPP models without recourse to the State Government guarantees and burdening the government but can be done by moderately leveraging the assistance from various stake holders.
II.???? Proposal:
Anent to the above, to cater to the financial needs of various departments in a more effective and efficient manner, it is recommended to create:
i)???? An Asset management Institution in partnership with the reputed financial institutions & technical / policy advocacy & fundraising institute (experienced in PPP projects) to act as a financial intermediary to augment the infrastructure planning, structuring, modelling, funding requirements & resources of various departments across the sectors and
ii)??? To form a PPP Trust under Indian Trusts Act, 1882 and an arm under Section 80(g) of Income Tax Act.
III.?? Modalities of PPP Trust:
1)??? The CSR Fund from various perspective private entities / business establishments / industries / development partners may be appropriated to the PPP Trust for various Public Private Philanthropy Partnership (P4) project development initiatives for the welfare of people.
2)??? This shall act as a Project Development Fund (PDF) - A dedicated vehicle to be established to support PPP / P4 projects (towards Conceptualisation, Structuring, Modelling & Execution).
3)??? This PDF shall support any PPP / P4 project across sectors i.e., Transportation/Mobility, Urban Housing, Disaster Management, Electrification, Water, Waste Management, IoT, Public Health, Renewable Energy, Education / Skill development etc., ranging from Medium, Large & Mega projects in the state.
4)??? The PPP Trust shall be controlled by State Urban Investment Promotion Board (Chaired by Hon’ble Minister MA&UD), further having been recommended by the Urban Investment Promotion Committee (UIPC) chaired by Secretary, MA&UD.
5)??? The Projects as recommended by the ULBs/Corporations/department shall be conceptualised / evaluated by group of technical experts of the institution formed vide II (i) above on the viability & outcome of the proposed projects (Techno-commercial & legal due-diligence).
6)??? There shall be a PPP Trust policy in place, which allows PDF to support towards development of various PPP / P4 projects and address specific project preparation challenges in the state.
7)??? The PDF component (arm under 80G(g)) of PPP Trust shall be put in use like IIPDF of GoI for servicing project conceptualisation / development needs to conceptualise or nurture the PPP project or for Grant / Interest free loan of a potential PPP / P4 project for implementation. (Wherein such grant / loan shall be given to the ULB/Corporation/department (Project Sponsoring Authority) and such ULB/Corporation/department shall use the same in form of equity infusion /VGF/ initial infrastructure development. The modalities of grant / loan / VGF shall be further developed in the policy & guidelines. The repayment to the trust shall be from the revenue share / lease amounts received from the department from such PPP project).
8)??? The PPP Trust shall also raise money from MLFIs (Grants/Loans) wherever deemed to be necessary and shall lend to the Private investor for development of respective PPP partner which may ease the process of financial closure to the private player and shall substantially reduce the project cost. This may be called as Infrastructure Development Fund (IDF).
9)??? This shall often be seen as a signal of Political commitment towards implementation of PPP program or respective PPP / P4 projects.
IV.?? Modalities of Asset Management Institution:
a) The new entity - ____ shall be contemplated to be an Asset Management Company (AMC) for managing the PPP Trust (includes PDF & IDF). On one hand it will assist ULB/Corporation/department in preparing and structuring infrastructure projects on commercially viable models as per the needs in the state, while on the other it will raise financial resources for the proposed PPP / P4 project through PDF, IDF or innovative instruments with the objective to nurture / develop PPP / P4 projects in developing Urban Infrastructure Projects on commercial or PPP principles.
1. PPP Trust will be set up as a separate legal entity, as a Trust under The Indian Trusts Act 1882 and under Section 80(g) of Income Tax Act.
2. _____ shall be the Asset Management Company (AMC) to the PPP Trust.
3. AMC would be set up with an initial seed corpus to be provided by the Government. Subsequently, other contributors like domestic and international Banks and financial institutions, private sector arms of Multilateral and bilateral funding Agencies like BRICS Bank, Asian Infrastructure Investment Bank, etc., would be identified by the AMC to provide capital in the form of grants,equity, lines of credit, technical assistance etc.
4. Government shall provide in-principal approval for the AMC to collect PDF from private entities / business establishments / industries / development partners in form of CSR and IDF / grants from Multinational Bank viz., ADB towards the proposed PPP Trust, which will be managed as decided by the Government / UIPB.
5. AMC will help the state Government to set up, institutionalize and manage PPP Trust by mobilizing resources from different sources like CSR fund, banks, and financial institutions, including private sector arms of multilateral and bilateral agencies like ADB, financial instruments issued in the Capital Markets, by leveraging government grant and other financial assistances. The various sources of funds would be identified by the AMC, wherein they would provide capital in the form of equity, loans, grants, lines of credit, technical assistance etc. Such resource pool would be deployed in the Urban/Rurban areas on various viable PPP infrastructure projects across various sectors.
6. AMC will also help to leverage further resources through Bond issues, attracting Private Sector Investment in development of Infrastructure in the state through PPPs etc., as to help departments in unlocking the potential and monetizing their assets and bring financial discipline among the departments.
7. It will draw upon the expertise of different key personnel & verticals who are specialized in areas like project development, fund syndication, project appraisal, fund management, legal due diligence etc of development of PPP projects across sectors.
8. Government may provide additional funding based on leveraging requirements through the suitable sources. Such contribution from Government through grants or other schemes may be considered as equity or equivalent into the projects to leverage commercial funding from the market.
b) Shareholding: The AMC is to be incorporated with the following shareholding pattern:
Government shareholding: up to 50%
Perspective Private Entity / Group: 50%
(In future, the Company may invite select multilateral / bilateral financial agencies and other reputed financial institutions to partner in this joint venture)
c) Capital: The initial equity capital of the Joint Venture Company shall be Rs.10 Crore.
d) Broad Scope of the proposed Joint Venture:
? Project Planning, Identification, Financial Structuring, Phasing.
? Project Appraisal including financial analysis, financing strategy, project structuring.
? As a trustee for PPP Trust – Manage PDF & IDF.
? Debt syndication - Loans, Bond Issue, fund management.
? Investment Management of various securities and assets including monetization.
? Procurement and contract management of identified projects.
? Project Management Services to ensure efficient delivery of projects by departments.
? Capital market access including new infrastructure finance vehicles as per regulatory guidelines.
? Appraisal and Capacity building of departments executing PPP projects.
? Liaisoning & Investor / Investment facilitation.
? AMC may provide its services to all the departments for development of PPP projects that are intending to develop / being developed in the State.
e) AMC Management:
? AMC Board of Directors will comprise of 6 members.
Members: i.e., 3 members from Government, 2 members from Private entity and 1 Independent Director.
? All strategic decisions will be taken by the Board of the Company.
? AMC is proposed to be set up as a line organization to be managed professionally and staffed with the requisite skill sets.
? The contribution from Government through grants or other schemes may be provided to the PPP Projects and would be considered as equity or equivalent (VGF) into the projects to leverage commercial funding from the market. The AMC will also help to leverage further resources through Bond issues by departments, attracting Private Sector Investment in Infrastructure development through PPPs etc., help departments in unlocking the potential and monetizing their assets and bring financial discipline.
V.????? The Secretary, MA&UD shall be the Chairman of the Company, Secretary, Finance and Secretary, Planning as nominees of Government on the Board of the AMC.
VI.?? The Urban Investment Promotion Committee (UIPC) shall be chaired by Secretary, MA&UD along with CDMA, Head of PPP Cell, Representative from Finance department & respective commissioner / MD of ULB / Corporation / department as members and that this shall be acting as the committee to appraise the potential projects to UIPB for grant of PDF / IDF for initiation / development / execution of PPP projects vide its recommendations along with relevant studies / reports.
VII.?????? Outcome:
The above outlines a strategic initiative to establish a Public-Private Partnership (PPP) Trust for the development of infrastructure projects in a state. The key idea is to create an institutional framework that can mobilize resources from both public and private sectors/corporations, including domestic and international financial institutions, to fund medium to large-scale infrastructure projects without overly burdening the state government’s finances.
Key Points of the Proposal:????????????????????
1.???? Formation of a PPP Trust: The document proposes the formation of a PPP Trust under the Indian Trusts Act, 1882, and an arm under Section 80(g) of the Income Tax Act. This Trust would serve as a financial intermediary, helping to pool and allocate resources from various private and public entities, including CSR funds, grants, and loans from banks and financial institutions.
A PPP (Public-Private Partnership) Trust can be formed under the Indian Trusts Act, 1882, and can seek benefits under Section 80(g) of the Income Tax Act, 1961, to develop PPP projects in India. Here’s how it works:
i. Formation under the Indian Trusts Act, 1882:
·?????? Legal Entity: The Indian Trusts Act, 1882, provides the legal framework for the creation of trusts in India. A trust can be formed by any person competent to contract, for a lawful purpose, and with clear intention and objectives. The trust deed, which acts as the foundational document, must clearly state the purpose (in this case, the development of PPP projects for the welfare of state), the beneficiaries, and the mode of management.
·?????? PPP Trust: By forming a PPP Trust under this Act, the government or any other entity can establish a trust that focuses on infrastructure development projects. The trust can act as a financial intermediary, pooling resources from both public and private sectors to fund infrastructure projects across various sectors.????
ii. Tax Benefits under Section 80(g) of the Income Tax Act, 1961:???????????????????????????????????
·?????? Tax Exemption: Section 80(g) of the Income Tax Act, 1961, allows donors to claim deductions for donations made to certain approved trusts and institutions. If the PPP Trust qualifies under Section 80(g), it can attract more contributions from private entities, including CSR funds, by offering tax benefits to donors.
·?????? Qualification Criteria: To qualify for Section 80(g) benefits, the trust must be registered under the relevant sections of the Income Tax Act and must use its income and resources for charitable purposes, which can include activities related to public infrastructure and development.
iii. Implementation and Benefits:??????????????????????????????????
·???? Mobilization of Funds: The formation of a PPP Trust with 80(g) approval can significantly enhance the trust’s ability to mobilize funds from the private sector, international agencies, and financial institutions. This helps in addressing the financial constraints that often limit infrastructure development.
·???? Structured Development: The trust can systematically plan, structure, and execute infrastructure projects in collaboration with private partners, ensuring that projects are financially viable and meet the necessary regulatory and commercial standards.
2.???? Asset Management Institution: An Asset Management Company (AMC) is to be established as a joint venture between the government and private entities, with the government holding up to 49% and private entities holding 51% of the shares. This AMC would manage the Trust i.e., Project Development Fund (PDF) in the trust and Infrastructure Development Fund (IDF) to raise funds from multilateral FIs for potential PPP projects also assist in project planning, and facilitate financial structuring and resource mobilization.
3.???? Funding and Resource Mobilization: The AMC would seek to leverage various funding sources, including bonds, equity, and loans, to support infrastructure projects. It would also help in managing and monetizing government assets, thus ensuring financial sustainability and discipline within departments.?????????????????????
4.???? Governance and Management: The governance structure involves a Board of Directors with members from both the government and private sector. Strategic decisions would be made by this Board, ensuring a balance between public interest and financial viability.
?
Challenges:????????????
VIII.???? Conclusion:
?The formation of a PPP Trust for the development of Urban infrastructure projects in the state offers a structured approach to nurture projects & mobilizing resources both during conceptualisation stage and execution stage of projects through Public-Private-Philantropy Partnerships (PPP). This initiative can significantly enhance the capacity of local bodies and government departments to undertake large-scale projects by leveraging CSR funds, private sector investments and financial institutions.
However, the implementation of this model comes with both advantages and disadvantages.
?Advantages:???????????????
1.?? Resource Mobilization: The PPP Trust structure allows for effective pooling of resources from various sources such as CSR funds, private equity, and loans from financial institutions. This helps in addressing the budget constraints faced by government bodies.
2.?? Professional Project Development: By involving experienced financial and technical experts, the PPP Trust ensures that projects are developed with a strong focus on financial viability and sustainability, increasing the likelihood of successful execution.
3.?? Reduced Government Burden: The trust model enables infrastructure projects to be funded and executed without placing a direct financial burden on the state government, reducing the need for government guarantees.
4.?? Increased Private Sector Participation: The establishment of a PPP Trust encourages greater private sector involvement in infrastructure development, bringing in innovation, efficiency, and additional funding opportunities.
5.?? Self-Sustainable: The institution formed for managing PPP Trust shall be dynamic & self-resilient in nature. The costs / fee for the professionals working in the institution shall be earned by the same from the trust fund with the pre-determined fee structure as decided by the Competent Authority for each of the project.
Disadvantages:
1.?? Complexity in Implementation: The creation and management of a PPP Trust involve complex legal, financial, and administrative processes that require significant coordination and expertise, which can be challenging to establish.
2.?? Potential for Misalignment of Interests: While the private sector's involvement brings in necessary capital and expertise, there may be potential conflicts between public objectives and private sector profit motives, which need careful management.
3.?? Dependence on External Funding: The success of the PPP Trust heavily relies on attracting and maintaining the interest of private investors and financial institutions, which may fluctuate based on market conditions and perceptions of risk.
4.?? Regulatory Challenges: Navigating the regulatory environment and ensuring compliance with all relevant laws and policies can be a significant hurdle, potentially delaying project timelines.
In summary, while the PPP Trust model offers a promising framework for advancing Urban infrastructure development in the state, careful consideration of its implementation challenges is essential to fully realize its potential benefits which is possible by proper structing / re-structuring of PPP Policy & Guidelines for the same.
The proposal reflects a structured approach to addressing the challenges of infrastructure development in the state by leveraging public and private resources. The formation of a PPP Trust and an AMC could potentially provide the necessary institutional support to attract investment, enhance project planning, and ensure the financial viability of projects without over-relying on state guarantees. However, the success of this initiative will largely depend on the efficiency of the AMC in managing resources, the quality of project selection, and the ability to navigate the complexities of public-private partnerships in a way that aligns with public interest. The model shall deliver promising results, but will require careful implementation to address any potential risks related to governance, financial management, and stakeholder coordination.
Apropos, this shall be a feasible and strategic approach to developing PPP projects in the state. It provides a structured mechanism to mobilize and manage funds while offering tax incentives to donors, thereby fostering public-private collaboration in infrastructure development. PPP Trust shall be the state’s own form of IIPDF, FI & VGF pool and lead the way in fostering PPP projects aligning People participation & interests i.e., Public Private Philanthropy Partnership (PPPP – P4). Further, this shall ease the burden on private player in case of any shortfall of pre-determined revenue streams.
Annexure – 1
i.??? IIPDF:
The IIPDF stands for India Infrastructure Project Development Fund. It is a financial initiative by the Government of India aimed at supporting the development of infrastructure projects in the country, particularly those undertaken through Public-Private Partnerships (PPPs).
Key Features of IIPDF:
·???? Project Development Support: IIPDF provides financial assistance for the preparation of project reports, feasibility studies, and other pre-construction activities necessary to develop bankable infrastructure projects. By providing the necessary financial resources during the early stages of project development, the IIPDF aims to ensure that projects are well-prepared and financially viable, increasing their attractiveness to investors and lenders.
·???? Focus on PPP Projects: The fund is specifically designed to support PPP projects, helping government bodies to structure and develop projects that can attract private sector investment.
·???? Managed by DEA: The fund is managed by the Department of Economic Affairs (DEA), under the Ministry of Finance, Government of India, ensuring that it aligns with national economic and infrastructure policies.
The IIPDF is an important tool for fostering private investment in infrastructure, reducing the financial burden on government entities, and ensuring that critical infrastructure projects can be successfully executed with private sector participation.
ii.?? VGF:
VGF stands for Viability Gap Funding. It is a financial mechanism used by the Government of India to support infrastructure projects that are economically justified but fall short of financial viability due to high upfront capital costs. The VGF scheme is particularly important in Public-Private Partnerships (PPPs) where private sector participation is encouraged to develop infrastructure projects.
Key Features of VGF:
o? Typically, VGF covers up to 20% of the total project cost.
o? An additional 20% may be provided by the sponsoring ministry or state government, making the total potential VGF contribution up to 40% of the project cost.
Advantages of VGF:
·???? Encourages Private Investment: By reducing the financial risks for private players, VGF promotes greater participation from the private sector in infrastructure development.
·???? Accelerates Infrastructure Development: VGF helps kickstart projects that are crucial for economic growth but might not be attractive purely on commercial terms.
·???? Public Benefit: VGF enables the execution of projects that are socially beneficial, such as roads and water supply systems, which might not otherwise be financially viable.
Disadvantages of VGF:
·???? Risk of Misallocation: If not carefully managed, there is a risk that funds could be misallocated to projects that do not truly need them or are not viable even with funding.
·???? Dependency: Overreliance on VGF might discourage private sector innovation and efficiency, as projects are cushioned by government grants.
The VGF scheme was launched in 2006 and renewed the scheme till 2024-25 with a total outlay of Rs. 8,100 crores to support projects that come under Public-Private Partnerships.
In summary, VGF is a critical tool in India's infrastructure development strategy, helping to bridge the gap between the economic viability and financial feasibility of key infrastructure projects.?
iii. Provisions for CSR in India
?Mandatory CSR Provisions: Companies Act, 2013:??????????????????????????????????????????????
o?? CSR Mandate: Section 135 makes it mandatory for certain companies to undertake CSR activities. Companies with a net worth of ?500 crore or more, a turnover of ?1,000 crore or more, or a net profit of ?5 crore or more during the immediately preceding financial year are required to spend at least 2% of their average net profits of the last three years on CSR activities.
o?? CSR Committee: It also mandates the formation of a CSR Committee within the company to oversee CSR activities and ensure compliance with the requirements.
Tax Benefits for CSR: Income Tax Act, 1961:?????????????????????????????????
1.???? Section 80(g) of the Income Tax Act, 1961:
o?? Tax Deduction: Contributions made by a company towards CSR activities, specifically donations to charitable organizations approved under Section 80(g), are eligible for tax deductions. This section allows donors to deduct 50% or 100% of their donations from their taxable income, depending on the category of the charitable organization.
o?? However, not all CSR expenditures are eligible for tax benefits under Section 80(g), as the Income Tax Act does not allow deductions for CSR expenditures that are part of the mandatory 2% CSR spending under Section 135 of the Companies Act.
2.???? Section 37(1) of the Income Tax Act, 1961:
o?? General Expenditure: This section provides for the deduction of business expenditures. However, the government has clarified that expenditures on CSR activities, as mandated by the Companies Act, will not be allowed as a business expenditure under Section 37(1).
Summary:?
·???? CSR Obligation: Governed by Section 135 of the Companies Act, 2013.
·???? Tax Benefits: Contributions to specific activities under Section 80(g) of the Income Tax Act, 1961 can be tax-deductible, but the mandatory 2% CSR expenditure cannot be claimed as a deduction under Section 37(1).
This ensures that while CSR is mandatory, companies cannot reduce their taxable income by claiming these mandatory expenses as business deductions, except in cases where the donations are made to eligible charitable entities under Section 80(g).