PPPs may not work for infrastructure projects or in ‘public goods’, where the benefits to users are general in scope.

The Government should stop being obsessive about public private partnerships (PPP) in infrastructure projects, especially those involving large positive externalities, or where capital costs cannot be easily recovered. There is no doubting the success of private sector participation in telecom and power. The country’s tele-density has reached 80 per cent of its population today primarily because of private players; likewise, they have accounted for over half of the power generation capacity added in the last two years. But the record of PPPs has been mixed in highways, while being far from inspiring in airports and metro railways. Take the case of Delhi’s international airport. After the recent hike in user fees to defray the cost of Rs 12,500-odd crore invested in its modernisation, the airport has become rather pricey. The Rs 6,000 crore high-speed metro line connecting the airport to the New Delhi railway station — built again under a PPP concession arrangement — has also had a troubled existence, culminating in the recent ‘temporary’ suspension of services. Even worse is the Hyderabad Metro, where actual construction has begun only now under a second promoter, four years after it was originally awarded.

The main reason why PPPs may not always work in infrastructure projects is that many of these generate positive externalities. A metro rail network not only enables people to travel, but also reduces congestion on the roads that leads to less pollution and deaths caused due to accidents. The latter benefits cannot be quantified or priced effectively: If a private operator were to try and impound these, he would only incentivise commuters to go back to using two-wheelers and cars. This holds true even for rural roads or irrigation, which have natural ‘public good’ and positive externality-creation characteristics, making them less suited for execution by private parties.

The mistake that the Government is doing is extending the PPP model to every conceivable sector or situation. One can, for instance, question the proposal to hand over the maintenance and management of the Chennai airport to private firms, just after the Airports Authority of India has spent some Rs 2,100 crore in completing its revamp. Ultimately, even PPPs have to be judged on two counts – whether they promote consumer welfare and make projects more viable. Consumers have defintely benefited from private telecom operators, whereas one cannot say the same about the Delhi airport modernisation or Hyderabad Metro projects. Also, where capital costs as well as positive externalities are too high, it may be better to implement such projects through the public sector. But even here, success is entirely is a function of professional management insulated from political pressures. The fares charged on the Delhi Metro cannot possibly recover the Rs 30,000 crore of investments already made; but they have certainly helped eliminate the hassles of daily commute for thousands of ordinary residents. If a fat cat Delhiite, who could have put his custom-built Bentley or Rolls Royce out to air, chooses instead to travel by the Metro, that, too, wouldn’t be unwelcome. There are worse cases of misdirected subsidies.

(This article was published on July 20, 2012)
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