Have PPPs taken banks for a ride?

Charan Singh Jagvinder S Brar | Updated on January 20, 2018 Published on May 05, 2016

Road to nowhere The financial policy on PPPs M Prabhu

Special purpose vehicles seem to have diverted bank funds towards other uses. A comprehensive policy response is called for

A significant rise in stressed assets, especially in public sector banks, is a matter of concern, with the Reserve bank of India (RBI), the Centre, and commercial banks trying to address the situation. However, higher SAs have been recorded in many sectors; major stressed areas are infrastructure, iron and steel, textiles, aviation and mining. How can this be fixed?

Public infrastructure

One area in which large amounts of SAs are involved is public infrastructure. Public infrastructure requires substantial capital, invested upfront, which necessitates financing from various sources such as the public sector (banks and government) and the private sector, usually in a public private partnership (PPP) delivery model.

In India, the public sector usually comprises a procuring authority (PA) and lenders, mainly PSBs, because of large amounts and a long gestation period. The private sector comprises private players bringing in common equity.

The project entity is usually a special purpose vehicle (concessionaire). Globally, the PPP delivery model has evolved over the last two decades and India with rather limited practical and legal experience, has had mixed success with it.

Recently, it has emerged that large value loans of many PSBs to PPP infrastructure assets have been classified as SAs. This is alarming because, while the original intent of PPP was to harness funds and expertise for public welfare, this model seems to be burdening the public exchequer.

There is a possibility, given that SAs are associated with PPP infrastructure projects, that concessionaires borrowed large funds from PSBs, and diverted them to their other businesses, while bringing in little or no equity of their own, in sharp contradiction to the original plan. This fact implies pilfering of public funds and highlights gaps in the existing legal, policy, and regulatory framework, as well as the need to revise the model concession agreement.

The key issues, immediately related to facts that cause bank loans to become SAs, specifically in the public infrastructure domain, are fake equity by promoters; inflated cost estimates to ensure that projects are financed only with public funds; diversion and siphoning of funds, including bankers turning a blind eye by to red flags; and aggressive projects in techno-economic valuation studies.

Further still, when projects are completed, sometimes the concessionaires unjustly enrich themselves by obtaining the rights to collect future revenue, although they may have failed to bring in their originally promised equity.

In conclusion, the diversion and siphoning-of borrowed funds by concessionaires lower national welfare — by causing financial losses to banks, mainly PSBs, as well as delaying project implementation and resulting in a loss in quality of life.

The current situation of high SAs should be used as an opportunity to examine different circumstances under which they emerge. The PPP delivery model has worked in many countries and is imperative to fund capital intensive infrastructure projects.

In order to plug losses, gaps in the legal, policy and regulatory framework need to be addressed on priority basis, particularly because of significantly large budgetary allocation for infrastructure in the most recent Budget.

The role of banks

In this context, apex banking institutions such as the National Institute of Bank Management and the Indian Bankers’ Association could probably play an important role in granular analysis of the performance of banks and stressed assets, and making recommendations to ensure robust banking in future.

For past cases of SAs, to identify malfeasance and monitor their recovery, government could consider setting up a special cell to swiftly deal with SAs above a certain threshold. This cell could also provide guidance and advisory support to bank staff who are generally ill-equipped in legal and procedural aspects of statutory options .

There may also be need for a standing committee on frauds and SAs. The committee could consider harnessing expertise from regulators, bankers, intelligence agencies, rating agencies, and auditing and consulting firms. The rating agencies, and auditing and consulting firms could have special information, which regulators may not have. All cases of SAs above ₹100 crore should automatically come under the purview of the mission cell and the standing committee. These steps, together, may make a difference.

Singh is RBI Chair professor of economics at IIM Bengaluru, and Brar is a partner at KPMG India. The views are personal.

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Published on May 05, 2016
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