The Hindu Business Line : PPP in infrastructure: Is India Inc. deriving value?

India ranks low on governance and a PPP structure has the advantage of combining better governance with effective implementation and delivery systems. It enables the Government to shift its focus from controlling cost to monitoring delivery standards.

MS AMEETA CHATTERJEE, DIRECTOR, CORPORATE FINANCE, KPMG.

India will need investment of over $500 billion up to fiscal 2011-12 to upgrade its infrastructure if it wants to maintain close to 9 per cent growth, the Finance Ministry’s annual Economic Survey 2007-08 had noted. Numbers aside, India’s constraints in infrastructure are obvious in our daily lives — evidenced by clogged airports, poor roads, inadequate power and delays at ports, feels Ms Ameeta Chatterjee, Director, Corporate Finance, KPMG in India.

The requirement of the hour (and for many more to come later) is a good system through which every rupee spent on infrastructure derives maximum value, minimising spillage. Fortunately, the solution is also at hand: Governments around the world have used public-private partnerships (PPPs) as a means for improving their service delivery across infrastructure be it roads, ports, power, waste management or even education and health services (as seen in the UK).

No doubt, the Indian Government has its hands full. “The single most important task of the Government, to enable an environment conducive for PPP development, would be to resolve the financing market. The country has a $500 billion programme over the next five years and government coffers are not getting any better in the current scenario of rising oil prices and inflation levels,” Ms Chatterjee told Business Line through an email interaction.

The moot point, according to her, is the inadequacy of the financing commitments available to the Government even after having made considerable progress on easing the financing needs through Viability Gap Funding and ‘potential’ use of its foreign reserves as Sovereign Wealth Fund. “But this is of limited impact in relation to the $500 billion spending envisaged in the next five years,” she notes. So, what to do? To find out, read on…

Edited excerpts from the interaction:

What is so uniquely attractive about a PPP arrangement?

First and foremost, it brings accountability and transparency in government spending. In comparison with other countries, India ranks low on governance and a PPP structure has the advantage of combining better governance with effective implementation and delivery systems.

It enables the Government to shift its focus from controlling cost to monitoring delivery standards. It also allows better assessment and focus on whole-life solution for the construction and maintenance of the assets rather than a piecemeal approach to construction and operating costs.

Isn’t the source of the problems still present?

We have seen too many assets built and then wasted away due to lack of maintenance — this problem can be easily addressed in a PPP transaction. Apart from the benefits of getting the private sector to commit to time and cost parameters, it also provides alternative source of financing. And, very often, it frees up funds which can help in diverting the finances for improving other facilities in the system.

Does India gain something in implementing PPP on such a huge scale? Isn’t failure a bigger concern, if such an initiative does not take off?

India has a clear advantage of implementing PPP on a larger scale across sectors, such as education, water supply, hospitals, because it has more than 10 years of experience behind it.

Although critics may say that there are still too many regulatory and institutional challenges to allow the roll out of a PPP programme, we have to consider the success of the National Highways Development Project (NHDP) programme with size of $50 billion; it has managed to build around 5,800 km of highways in such a short period.

Let us also consider the privatisation of the telecom sector and the phenomenal level of penetration levels that have been achieved in the last ten years.

Some argue that PPP should be limited to social sectors only…

The Indian Government has also learnt a lot of lessons in implementing PPP programmes; and a natural progression of the PPP initiative would be to explore private involvement in social sectors such as health and education.

India is seen as a source of global talent pool; however, there are severe quality (qualitative) and quantity (quantitative) constraints in our education system to support the India growth story, leave alone become a source for global talent. Given the geographic and socio-economic challenges to be addressed in social sectors across the country, the Government should promote pilot projects as quick wins to set an example for others to follow.

Do you feel confident about the other side to the PPP: the ‘private’ sector?

Apart from the growing experience and understanding of PPP mechanisms within the public sector managers, we now have a remarkable pool of home-grown private companies that are able to specialise in delivery of the infrastructure programme under PPP models.

More interestingly, this pool of private sector companies is only bound to grow as Indian companies look at acquiring international assets, such as GMR acquiring a 50 per cent equity stake in the US-based power utility InterGen, and international companies are increasingly interested in the India markets.

There are many doubts regarding the implementation of PPPs. Demystify at least some of them.

Yes, there are also some myths that we must deal with in the PPP sector. Such as that ‘PPP is tantamount to privatisation’. It must be clarified that the assets continue to be owned by the government and private sector in invited to build and operate the facilities.

A lot of management contracts that government bodies use regularly — cleaning of hospitals, waste management, toll road collection, etc — are also a form of PPP, but they rate low in the level of risk transferred to the private sector. And the ability of the public sector to achieve a higher risk-sharing arrangement will provide for more significant ability to transform the delivery of the service.

In building wider acceptance of PPP as means for delivery of public services, the programme managers must not underestimate the need for regular and comprehensive consultation process which will provide a means for effective communication for dealing with misconceptions.

The second myth is that the PPP model comes with no additional cost to the Government. While the private sector will bring in efficiency in delivery and also innovative ideas for generating revenues from the assets, it normally comes with an additional cost to the Government. And programmes such as Viability Gap Funding have been set aside to address these funding requirements.

To put the cost discussion in the right perspective, one needs to assess the private sector cost (along with the level of service that it guarantees) alongside the cost of delivery of the service by the state on similar standards — any other comparison is like comparing oranges with apples.

D. MURALI

KUMAR SHANKAR ROY

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