Are PPP's running out of steam?

Good in theory, but quite questionable in practice, is the Indian PPP story. In theory, PPPs are wonderful, because of appropriate risk transfers, efficiency improvements, additional financial resources, a whole life solution, and speedy implementation. In practice, apart from some notable exceptions, Indian PPPs have been about ‘bid and win now, renegotiate later’.

First, innovative financial engineering has ensured that risks remain with the government while private concessionaires take the upside. Renegotiations, cost escalations, and post-award deal sweeteners are quite common. 

Second, incremental private investment is minimal, not counting the inflated lending from public sector banks and IIFCL, or viability gap funding. Concessionaires, in a no-lose strategy, recover their equity contribution during the project implementation stage itself.

Third, easy exits for developers undermine better efficiency on account of whole life solutions. Fourth, prompt implementation is too closely linked to renegotiation and/or sweeteners. Emaar-MGF’s CWG Village is a good example of all the above. Given our governance structures, more of the same may be expected. Indeed, in the extreme view, PPPs are seen as a new ‘licence raj’ to enrich private concessionaires at the expense of the taxpayer. The private sector has done well in taking full advantage of PPP opportunities.

Sadly, infrastructure delivered by the public sector (over 70% of total) has become an orphan; this is similar to the nineties' focus on ‘adult literacy’ at the cost of primary education. The establishment wryly decries any possibility of improving public sector efficiencies. Some officials describe EPC as a clumsy method, but then every private sector concessionaire signs well-structured EPC contracts for project execution. What is stopping the government from doing the same?

Perhaps the way forward for India is to embrace PPPs for better management of existing infrastructure, especially in health and education. Give out existing public assets, such as highways, power plants, airports, hospitals, colleges, schools, technical institutions and urban infrastructure, with existing cash flows, over to private O&M under PPP. New ‘build’ with early stage risk should be undertaken by the government. The above PPP of existing assets would release large funding for the public sector to create fresh infrastructure assets. However, such ‘build’ should be through SPVs, with suitably incentivised and empowered management teams.