Fixing PPPs

India’s tryst with public private partnerships (PPPs) has been far from happy. Touted as the answer to the country’s infrastructure needs, PPP projects in virtually every sector have either stalled or ignited controversies, most of which have been over the reason to go for such partnerships in the first place — value for money for the taxpayer. The Centre’s response — of taking over such projects — is not sustainable in the long term. In roads, for instance, as many as 125 toll plazas are set to be scrapped by this month-end alone, while toll collection in as many as 65 projects has already been stopped. Most of the road contracts awarded last year were on the EPC (engineering procurement contract) model, where the government bears all the funding and takes on all the risk. But this has also meant a sharp deceleration in infrastructure creation, given resource constraints. While the Budget for 2015-16 presented by Finance Minister Arun Jaitley on Saturday plans a massive step-up in government spending on infrastructure — between the Centre and PSUs, total infrastructure spend is slated to increase by ₹70,000 crore in the coming fiscal — this sum pales in comparison to the unmet need. Clearly, if this money is to come from the private sector, we need to fix the PPP model. Jaitley acknowledged as much in his Budget speech, stating “the PPP mode of infrastructure development has to be revisited, and revitalised. The major issue involved is rebalancing of risk. In infrastructure projects, the sovereign will have to bear a major part of the risk without, of course, absorbing it entirely”.

That, however, is easier said than done. All infrastructure PPPs have inherent risk, ranging from implementation risks, market risks, finance risks, labour issues and legal disputes over land titles, clearances and so on. Other types of risk are less quantifiable. For instance, airport modernisation in Delhi and Mumbai has stalled the creation of new greenfield airports in these centres because of non-compete covenants in the PPP concessions, while running airports in Hyderabad and Bengaluru were closed, creating political controversy. Compensating the existing concessionaires will make any new project unviable, while the public incurs opportunity costs.

Ideally, these risks have to be balanced between the government, which grants the concessions, and the private sector, in such a way is that each type of risk is allocated to the party that is best capable of managing it economically. Also, given the long-term nature of infrastructure projects and the inevitable environmental changes, disputes are inevitable. The government needs to develop a holistic solution by creating an independent PPP regulator and a clear arbitration/dispute redressal mechanism, alongside creating enablers such as financing institutions, ensuring greater transparency in the award of contracts, and creating institutional capability within the government to oversee PPPs.

COMMENT NOW