The Hindu Business Line : PPP, the new pep in infrastructure

PPP is the in-thing in infrastructure. `In Bengal, Left backs PPP in quest for growth,' reports Kolkata Newsline. `$100 billion of PPPs in next decade,' says The Australian, even as The Age, Australia alerts, `PPPs have genuine benefits — complexity is the enemy.'

What is PPP? The abbreviation means many things such as Point-to-Point Protocol, Purchasing Power Parity, and Polluter Pays Principle. What's relevant to our current discussion, however, is Public-Private Partnership.

Ministry of Finance defines PPP project as one that is based on a contract or concession agreement, between a Government or statutory entity on the one side, and a private sector company on the other side, for delivering an infrastructure service on payment of user charges.

A recent example of such a contract was what the National Highways Authority of India (NHAI) signed with a consortium of four firms led by Idaa Infrastructure.

The project involves the widening, from four-lane to six, of the Bharuch-Surat Section of NH-8, running to 65 km. Idaa expects to complete the job, on a Build Operate Transfer (BOT) basis, in 30 months at a cost of Rs 492 crore.

And the concession period is 15 years, during which the concessionaire will collect tolls from the users of the new infrastructure.

But why PPP?

"Whereas the Government of India recognises that there is significant deficit in the availability of physical infrastructure across different sectors and that this is hindering economic development," begins the rationale in the 6-page document titled `Scheme for support to public private partnerships in infrastructure' on http://finmin.nic.in.

Infrastructure, according to the Scheme, includes roads and bridges, railways, seaports, airports, inland waterways; power; urban transport, water supply, sewerage, solid waste management and other physical infrastructure in urban areas; infrastructure projects in Special Economic Zones; and international convention centres and other tourism infrastructure projects.

All these require large investments that cannot be undertaken only out of public financing, concedes the Government. To private players infrastructure may not always be financially viable `because of long gestation periods and limited financial returns.' How then to attract private capital and `the techno-managerial efficiencies associated with it'? Viability funding. For, this is the financial support given as grant, to bridge the viability gap of infrastructure projects undertaken through PPPs.

Not all projects seek such support. Some have, in fact, given money to NHAI; and this is the opposite of grant, called negative grant. For example, Idaa's cost for the Bharuch-Surat project is Rs 492 crore, while the negative grant component is Rs 504 crore, the largest ever that the NHDP (National Highways Development Project) has garnered.

One may chuckle remembering that infrastructure sector long remained infra on the radar of private investors. What has happened to pep up investment in infrastructure through the PPP route? Is it the carrot of gap funding? Or the long concession period allowed for the private operator to realise revenues through user charges? There's more. Writing in The Wall Street Journal, on May 3, Sara Seddon Kilbinger notes, "Toll roads, hospitals and other networks or structures that provide support to society — traditionally overlooked in real-estate portfolios — increasingly are being snapped up by investors seeking stable cash flow and improved returns." What can be the returns? "Superior to more traditional real-estate investments. In Europe, a water system can generate yields of 10-14 per cent. A mature toll road is likely to yield a return of in excess of 8 per cent during the first half of a 25-year concession to operate it. Airports typically generate yields of 8-9 per cent," mentions Kilbinger.

`The first privatisation of an existing road in the US' finds mention on www.macquarie.com.au, the site of Macquarie Bank, which has been `consistently associated with a stream of major financial innovations.' The project in question is Chicago Skyway, `a 12.5 km median-divided elevated roadway with a bridge over the Calumet River.' Last year, the City of Chicago gained $1.83 billion for giving away the exclusive right to operate Skyway for 99 years. And the investment is paying well. The latest reporting of `asset performance' on Macquarie's site shows the highest EBITDA (that is, earnings before interest, taxes, depreciation, and amortisation) increase of 40.7 per cent against Skyway.

To the investors, a major worry can be whether high returns are sustainable when the risk matrix changes. Meanwhile, there is popular backlash, to the phenomenon of private interests crowding the public space. A July 15 story on www.king5.com is headlined, `Foreign companies buying US roads, bridges.' It narrates how `on a single day in June,' many things happened: "An Australian-Spanish partnership paid $3.8 billion to lease the Indiana Toll Road. An Australian company bought a 99-year lease on Virginia's Pocahontas Parkway, and Texas officials decided to let a Spanish-American partnership build and run a toll road from Austin to Seguin for 50 years." Definite signs, these are, of lot of money out on the road, seeking avenues for investment.

For the avid who want to go beyond the ABCs of infrastructure, there is the ABCDE (Annual World Bank Conference on Development Economics), which recently discussed `the best choices for infrastructure'. A quote from the opening address of Bank President Paul Wolfowitz reads: "Our approach to infrastructure must focus not just on economic growth or human growth. It must also focus on `smart' growth, that is, growth that is economically sound, environmentally friendly, socially acceptable, locally desirable, and most important, growth that makes a difference in people's lives."

It seems certain that PPP in infrastructure will definitely make a difference to our lives. Will the `smart' difference be for the better? If not, will we have the option to choose a different road to development... before the concession expires?

ZeroBase@TheHindu.co.in

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