India Economy

The potholes in the PPP route

S A Raghu | Updated on January 19, 2018

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The model has not eased government’s responsibilities in risk sharing or financing

The Kelkar Committee report is about revitalising public private partnerships (PPPs); but the real agenda is to jump-start growth through public investment, now that the private sector is shying away from investing in infrastructure or elsewhere.

The original rationale for PPPs, though simple, is shrouded in irony. Those services and public goods which fail the test of the market — health, water supply, roads, drainage — are the domain of the government, but its failure to provide affordable and reliable service plus the compulsions of fiscal deficit management have led to PPPs. And we have now come a full circle — market failure necessitated government investment and government failure evokes a return to market through PPPs. India is now the largest market for PPPs in the developing world.

The evidence on the effectiveness of PPPs is unconvincing; but it is hard to judge as the model is overwhelmingly skewed in terms of just roads, and to some extent, power. On the execution front, progress has been very slow — just 24 of the 182 awarded projects have been completed. But NITI Aayog claims that, on an average, PPPs complete in 50 months, far lower than the 126 months it took for rate contracts. Relative efficiency is not an endorsement for a model and there is also the fact that a significant proportion of stalled projects (a massive ₹9 lakh crore) are infrastructure PPPs.

Issues in the model

The Kelkar Committee has made some significant recommendations, but there are specific issues which are independent of the model.First, the rationale of risk-transfer from public to private sector that underpins PPP projects is somewhat nebulous. Typically, risk-sharing is expected to occur when the private partner takes on some project risks, such as delays and cost overruns, while risks such as revenue, land acquisition and clearances should rest with the government. However, the private sector is saddled with these as well. In a typical road sector project, the cash flows are skewed with sizeable upfront capital investment, while toll revenues can almost never justify private investments over a short term. The Hybrid Annuity Model of the NHAI is actually a dilution of the PPP concept by letting the government absorb the revenue risk and also partake of financing to the extent of 40 per cent. The UDAY initiative to reform distribution involves a larger role for state governments. Thus, there seems no getting away from risks for the government.

Second, funding remains a huge issue. The key pre-requisite is the availability of long-term finance and the responsibility now sits on banks — they had an exposure of ₹1.7 lakh crore to just the road sector.

The lack of a vibrant bond market is telling; the Kelkar Committee’s recommendation to develop the Zero Coupon Bond as a funding mechanism would work, provided there are investors with appetite. Ideally, insurance companies, pension funds and other long-term investors should pick this up, but there are many regulatory restrictions as well as fiscal and regulatory issues with bonds.Even UDAY, in the power sector, envisages States picking up 75 per cent of the ₹4.3 lakh crore outstanding debt. State administrations will repay the liabilities by selling bonds. The moot question again is — where are the investors?

Finally, other sectors that require equally large investments, such as ports and railways, health and education, are hardly being discussed. Here, it is even harder to create ‘bankable’ projects, the sine qua non for a PPP. Therefore, there is unlikely to be any significant PPP activity here and the government may have to bear the responsibility for both investments and risks. A worrying prospect is, the government could be focusing only on roads.

It may be prudent for the government to work on finding the right mix of resources, balance fiscal prudence and inflationary pressures, improve EPC delivery and governance practices, rather than fixing the PPP model. It has hardly unburdened the government of any significant responsibilities in risk sharing or financing. Even the report suggests that PPP should be used judiciously, only where EPC contracts are not feasible.

The writer is an independent consultant

Published on January 31, 2016

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