Partnership lessons
On public private partnerships, India must learn from UK. Be realistic, not ideological.
The starting point in India may often be a public agency which is inefficient, corrupt at the point of contact with the citizen and providing very poor service.
As India deepens private participation in infrastructure through Public Private Partnerships (PPPs), it is an opportune moment to explore the lessons from the UK, the pioneer in the use of PPPs and privatisation in infrastructure.
In 1989, the UK government handed over water and sewerage services to private monopolies after assuming the sector’s £4.9 bn debt and giving a £1.5 bn one-time grant. An analysis of water regulator Ofwat’s accounts shows that the companies have since piled up £51 bn in debt and paid out £56 bn in dividends. In the 10 years to 2016, the nine companies paid out £18.1 bn in dividends from post-tax profits of £18.8 bn. They financed maintenance and improvements in infrastructure almost entirely by debt, despite generating enough cash to cover the investments out of internal resources. A study found that refinancing all the equity and debt capital with public debt would reduce costs by £2.3 bn a year and lower household bills by 40 per cent.
In the same 10 years, Thames Water, which services London and was owned by infrastructure fund Macquarie, paid out £1.6 bn in dividends, assumed £10.6 bn in debt, ran up a £260 mn pension deficit and paid no UK corporate tax. In its 11 years of ownership, Macquarie generated 15.9-19 per cent returns. Interestingly, Scottish Water, the only one of the 10 companies which has remained public, with similar efficiency and quality, is the least leveraged and has the lowest tariff, despite investing 35 per cent more than the rest over the last 16 years.
The balance sheet is similar with the railways. Privatisation unravelled quickly with the rail track operator being re-nationalised for safety reasons. The remaining private part, train operators, is heavily subsidised, costing £3.3 bn in 2016-17. Despite rising fares, public spending has nearly doubled in real terms from £2.3 bn to £4.2 bn from 1996 to 2016-17. In the 2012-16 period, these private companies paid out as dividends £634 mn of the £868 mn operating profits. A 2011 government report found the cost of running UK railways 40 per cent higher, and fares 30 per cent higher, than the rest of Europe. Cost per passenger kilometre in 2010 was the same as 1996, despite vastly expanded usage. Asset stripping by high dividends and higher prices for consumers were a feature in electricity and gas too.
A National Audit Office (CAG equivalent) assessment of the UK’s pioneering Private Finance Initiative (PFI) found that schools and hospitals built with PFI are 40 per cent and 60 per cent more expensive than their respective public sector alternatives. Using the government’s lower borrowing cost to discount the cost of projects, it found that very few PFI projects would have passed the Value for Money test. It concluded that the country had “incurred billions of pounds in extra costs for no clear benefit”.
The balance sheet on service quality is not much better. Over 2000-11, the reliability and punctuality of British rail increased from 88 to 91 per cent, a small increment given the advances in digital technology and massive public investments. Skimping on investments on the less salient parts of the privatised water and sewerage utilities has taken its toll on the environment. A 2018 Environment Agency report stated that only 14 per cent of English rivers met the minimum standards, down from almost 25 per cent in 2009. Other studies have traced this to release of untreated sewage, attracting a slew of large fines, including a £20.3 mn fine in 2017 on Thames Water for dumping 4.2 bn litres of sewage in a case described by the judge as “borderline deliberate”.
An early 2018 poll by Legatum Institute found that 76-83 per cent favoured renationalising the railways, energy, and water industries. The Labour party has announced that it would renationalise the utilities. Finally, in his 2018 Budget speech, after 716 projects since 1992, the Chancellor of Exchequer formally brought down the curtain on PFI saying he would never sign a PFI contract.
How relevant is the UK experience to India? In the UK, the starting point in terms of efficiency and service quality was high, and corruption in service delivery low. The Indian public sector suffers from peculiarly Indian constraints. Political interference in recruitment, competitive trade union activity (witness the posters in every railway station), rigidities on salaries and writs in courts on service matters, reduce the efficiency of personnel management in the public sector. Activities of oversight agencies — Vigilance, Comptroller and Auditor General etc — cause extreme risk aversion in decision taking, reducing efficiency of procurement and operational decisions.
The starting point in India may often be a public agency which is inefficient, corrupt at the point of contact with the citizen and providing very poor service. With a much lower starting point, it is quite conceivable that private providers may be operationally more efficient and give better service. To that extent, the case for PPP is stronger in India than in the UK.
On the other hand, the regulatory capacity in India is weaker. The unambiguous lesson from the UK is that capable regulators could not prevent asset stripping and skimping on investments. There is nothing to suggest that this would not be repeated in India. Also, using PPP purely for off-balance sheet financing to reduce the short-run fiscal deficit, is penny-wise and pound-foolish because the cost of borrowing of the private sector is much higher.
Therefore, while encouraging PPP, India must be realistic, not ideological. The need is to tread cautiously. For a start, PPP must not be a short cut only to save money or bridge fiscal gaps or transfer risks; it should be used to improve service quality or bring efficiency improvements. Second, project design and the PPP components need to be carefully chosen. For instance, outsourcing labour-intensive and customer-service operations, while retaining pricing and investment in public hands, may bring in efficiencies without under-investment or over-pricing. Given the higher cost of private capital, and the inevitability of delays and related cost over-runs, construction is best financed with public borrowing though the operating asset could then be privately operated. Third, since it is impossible to write perfect long-term contracts, renegotiations are inevitable. Clear principles and a mechanism for renegotiations without moral hazard need to be planned for.
The writers are IAS officers. Views are personal
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