Dissolving the partnership

PPPs will not fix our infrastructure. Unless we tweak them slightly

Written by Shailesh Pathak | Published: August 20, 2010 12:33:06 am

Increasing private participation in infrastructure has been an oft-repeated mantra of the government. However,the actual constructed assets in infrastructure PPP (public-private partnership) over the last decade have been,mildly put,underwhelming. The great attention to PPPs means that infrastructure delivered by the public sector is an orphan. You’ve heard of the $150 billion of private infrastructure investment; how often have you heard of the other $350 billion of public investment being debated?

On the other hand,the ardent ardour for PPPs in infrastructure could get a reality check from analyses like Antonio Estache’s,who in a 2006 paper,reviewed the empirical evidence on PPPs over 25 years. Jose-Luis Guasch,in his 2004 book on Latin American concessions in infrastructure,describes how a majority of PPP projects were renegotiated,or worse. A colleague in the infrastructure private equity business says,“Marriages don’t last for thirty years,why should we expect PPP contracts to?” Many so-called PPPs in India have seen collusive bidding,and frequent post-award renegotiation. Given our governance structures,more of the same may be expected.

Distressingly,though,well-meaning optimists are working towards “half of infrastructure in PPP”.

Leading PPP proponents in India bring up the UK’s example,conveniently forgetting that in the UK it is largely focused on schools,hospitals,prisons and defence facilities. The last “hard infrastructure” PPP in the UK was Metronet in 2003,now bankrupt. Sixty eight per cent of the 920 PPPs listed on the UK project database are in social infrastructure — health,education,upgrading government buildings.

Perhaps the way forward for India is to embrace PPPs for better management of existing infrastructure,especially in health and education. In a single phrase,give out existing public assets over to private management under PPP,and take on new “build” by government. The private sector would improve the efficiency of existing assets,and the citizen would benefit.

The financing argument is even more compelling. There is considerable interest among international lenders and equity investors to participate in infrastructure projects only post-construction,when revenues or tolls start flowing in. A completed project such as the Delhi-Gurgaon Expressway would not have attracted international investing interest in 2003,when it started construction. But after March 2008,when tolling started,every long-term investor wanted in; patient investors like pension and insurance funds in particular like a relatively risk-free,lower return over periods of 10 to 20 years.

What could then be the way forward?

First,encouraging PPPs in existing government infrastructure assets,such as existing highways,power plants and urban infrastructure,as well as hospitals,colleges,schools,technical institutions etc. Both from execution and financing perspectives,private sector upgrade and better operations and maintenance are far easier in a lower-risk environment. Electricity distribution systems and Delhi and Mumbai airports are good examples. In urban and social infrastructure,existing assets of government,inefficiently managed,could be given over on PPP structures to improve citizen satisfaction. Think AIIMS Delhi,the Mumbai suburban railways or the Taj Mahal.

Second,government may focus instead on creating and building new assets. Transferring the operation of existing assets under PPP would release large public funding for creating fresh infrastructure assets. Why has India borrowed from the World Bank for retrofitting old thermal plants,and has not PPPed them out? Imagine NTPC PPPing out all its existing generation plants,and focusing only on building new generation capacity. Issues of persuading legacy employees for this change are eminently possible with effective leadership. After all,the private partner would largely employ the same staff for the generation plant,and pay much more for quality talent.

Third,the risks at the early development and construction stage are significant in our country. Such early-stage high risk is mitigated by the private sector by exorbitant pricing ,or by asking/ renegotiating far too many “sweeteners” in the documentation or real estate contracts. Remember the early ’90s IPPs,or even Bangalore or Hyderabad airports? Government/ PSUs have the best capacity to handle early stage risk,provided these projects are corporatised as special purpose vehicles,with suitably incentivised and empowered management teams.

Delhi Metro and the Mumbai-Pune Expressway have had an empowered CEO and management team,delivering quality output. Almost all of NHDP 1 and NHDP II were built with public money,by passionate and committed management teams in NHAI. So,create assets,and once commercial operations start,these new assets can be given out on PPP under a “reverse build-operate-transfer” mechanism,with the SPV management teams taking up fresh projects,as with MSRDC and the Mumbai-Pune Expressway. This will capture the externalities from infrastructure projects,unlocking land values to finance even more infrastructure.

If sceptics suggest that the public sector cannot deliver,well,then we should lose hope — since the same public sector would not be competent to be the regulating partner in PPPs. Surely we can find the hundreds of Sreedharans who are out there in the government and public sector.

The writer has spent eight years in private finance and 16 in government. He divides his time between Mumbai and Delhi express@expressindia.com

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