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| Do we need to rethink PPPs? |
| Business Standard / New Delhi Dec 30, 2009, 00:52 IST |
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There is little doubt that public private partnerships have contributed to infrastructure-building, but if the lay public perceives them as one-sided, most politicians will be reluctant to promote them.
 Rajeev Chandrasekhar
Member of Parliament Rajya Sabha
Public Private Partnerships (PPP) are critical to enabling massive infrastructure creation in India. They are unavoidable. That PPPs are required to drive our country’s growth and creation of infrastructure is undeniable. The idea of PPP was born as a way to ensure private capital flows and management capacity to augment and complement public capital and public investment.
By definition, a PPP is supposed to be a partnership between the public side (ie, taxpayer) and the private entrepreneur. PPPs in recent times are looking less and less like a partnership with private, and more and more like crony capitalism. There are many examples of lopsided deals in mines, petroleum, airports, ports etc. In Parliament, I was compelled to say that in some cases the deals are so lopsidedly in favour of the private investor that these are fit cases for nationalisation!
A PPP parking project that morphs into a shopping mall, PPP airports that become real estate bonanzas, PPP projects with inflated project costs, PPP projects where accounting fiddling allows for long deposits to be exempt from revenue share — the list of PPP fiddles can go on and on. Scams and land grabbing under the guise of PPP abound, and unfortunately, not many people in civil society seem to care. Given the size of cheques being written out at the cost of the taxpayer, the almost complete lack of political, media and civil society involvement in this debate is startling, to say the least!
Most of this is happening because there isn’t a clear set of do’s and don’ts and outcomes and expectations of PPPs. In the absence of a set of objectives, a bureaucrat or politician can ensure the signing of any concession agreement as a PPP. A fresh look at PPPs where there is a clearly defined and equitable benefit to the public side as well is required. Besides, a clear policy towards the monetisation of public assets like land, mines, spectrum, gasblocks with the objective of maximising returns to the taxpayer, is called for.
PPPs must have equal public and private returns. The returns on the public side must include a clear set of consumer benefits that are sustainable. Many PPPs in infrastructure require viability gap funding — these are best done through a clear quantified amount of grants and funding by the government, as opposed to land grants.
There are many success cases of PPPs — telecom is one, where the government has earned revenues and consumers have benefited in terms of choice and costs. So, consumer benefit must, in clear terms and in a sustainable way, be defined as the objective of PPP projects. In the case of airports, it’s not enough to say the objective of a PPP is to build a modern airport and then keep raising costs of travel by levying user/airport development fees. This creates a scenario where consumers are forced into a monopoly airport scenario with no cap on prices (a return to the cost-plus-tariff regime of the old Enron power days). There’s very little transaparency and disclosure in most PPP contracts, and PPPs are resulting in disproportionate returns to the private side of the equation with negligible returns to the public side.
Unfortunately, my city is also host to the most lopsided airport PPP to date (the infamous Bangalore International Airport). The public side (state) actually ended up investing almost Rs 4,000-6,000 crore in a project where the private sector invested about Rs 600 crore. End result — an average airport (better than the old HAL one, so people were happy initially); the largest contracts awarded to its largest shareholders (L&T, Siemens); 10 times profits on investments in less than three years or so of the airport to the private investors; shutdown of the existing HAL airport, giving BIAL a monopoly status; and increased cost of travel by levying user development fee with no concern for the travelling public, already suffering the long distances to reach the airport. So while the gains to M/s L&T, Siemens and Zurich Airport are obvious, what was the public benefit in this PPP project? This same question needs to be asked of all PPP projects if they are not to go the same way.
 PS Nair
Chief Executive Officer, Delhi International Airport Ltd
PPP in infrastructure was envisioned by the government to harness the power of technology, flexibility, project financing and execution capabilities of private infrastructure companies. The PPP model has not only helped the government share its burden of developing capital-intensive infrastructure projects such as power, road, ports, airports, oil & natural gas etc which are the lifeline of any developing economy, but it has also allowed the government to retain its control over the national assets being built by private entrepreneurs in such joint ventures. In the Indian scenario, where there is rampant red tape, the PPP model is a boon for the general public and the overall development of industry. With the emergence of PPP projects, instances of time and cost overruns have drastically reduced with most of the projects being completed either on time or even ahead of schedule.
As per the Planning Commission, it is estimated that around $150 billion per annum is required for the next five years to meet the ever-growing investment demands of power, transport and oil & natural gas sectors. However, funding continues to remain a major constraint. It is a well-known fact that the repayment tenure of infrastructure is longer than any other sector, which is a major concern for public/private sector banks, FIIs and private equity players, causing restricted fund inflow into infrastructure projects.
The success of the PPP model, such as the Hyderabad and Delhi airports, has made this business proposition increasingly attractive for international players who come in with global expertise and funding. It is noteworthy that of the total 454 airports (including airstrips) in India, 97 airports (excluding civil enclaves in defence-owned airports) are owned by the AAI while only five airports (Delhi, Mumbai, Hyderabad, Bangalore and Cochin) are operated under the PPP model. It is also noteworthy that these five PPP airports together handle over 60 per cent of the country’s total air traffic. Of these five, three are greenfield airports (Cochin, Bangalore and Hyderabad — initiated through the acquisition of land) and two (Delhi and Mumbai) are brownfield airports (where the existing airport infrastructure is developed and modernised). Both the brownfield airports are being upgraded with an estimated investment of $4 billion. The three greenfield airports have attracted a capital investment of approximately $2.5 billion. With the nation’s passenger traffic projected to grow at a CAGR of 15 per cent and cargo at 20 per cent in the next five years, PPP airports are going to play a major role in this growth story.
In the airport sector, infrastructure majors like GMR and GVK, in collaboration with globally acclaimed airports such as Fraport, Malaysian Airports Holding Berhad, South African Airports and Airports Authority of India, have set up PPP airport companies and are engaged in building world-class assets. They have put in place the best operating systems and processes. This model has also brought in a number of international players with relevant expertise into the Indian airport sector in hitherto unexplored areas such as ground handling, cargo, retail, advertisement etc. These PPP airports have maintained truly international standards — the apex body of global airports) new GMR Hyderabad International Airport has been ranked amongst the top 10 airports of the world on the passenger satisfaction index (in all the quarters since its commissioning in March, 2008). For the first time in the country, passenger comfort got the right focus, giving a new experience to the end user.
However, the uncertainty of the recovery mechanism and freedom to explore revenue streams are major impeding factors that need to be effectively addressed by the government through proper regulations. A conductive policy and regulatory environment is essential to ensure future investment and growth of this vital sector. In the absence of this, the current euphoria, enthusiasm and risk appetite of private players in this sector will dissipate over time.
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