First, create capacity

Caution on reviving PPP model is warranted

The report of a committee reviewing the functioning of public-private partnerships (PPPs) in infrastructure, headed by former Finance Secretary Vijay Kelkar, is now available to the public. Several infrastructure sectors, including roads, ports and airports, have been hit by problems in the implementation of PPPs. The Kelkar Committee Report, therefore, deserves close scrutiny as it underlines some important things to keep in mind going forward. For example, the Report points out the need for genuinely independent sectoral regulators. Without such regulators taking arms-length decisions, the working of PPPs will always be excessively subject to political and bureaucratic pressure or to influence by powerful promoters. A Bill on infrastructure regulators was being prepared by the previous government, and that legislation should be updated and passed as soon as possible.

The Report also recognises that renegotiation in such projects, given their long-term horizons, may become a fact of life. However, it is vital that such renegotiation should not vitiate the original bidding process for the PPPs, as has often been the case so far. The Report's suggestion, to embed the renegotiation framework in the original bidding process, is not a foolproof solution. It could end up being a cover for bureaucratic arbitrariness. What is needed is capacity for impartial arbitration - some, including the last Economic Survey, have suggested an independent renegotiation commission, and there is merit to this argument. In fact, the lack of capacity in the design, negotiation and implementation of PPP contracts is at the heart of the problem; the government must move forward swiftly with its proposed capacity-creating "3P Institute", which has also been recommended by the Report.

But, given the capacity constraints in governance the Report highlights, how useful are PPPs in the medium term anyway? After all, infrastructure projects might well have a higher risk profile than other projects, needing higher returns for private capital than is socially beneficial. In other words, engineering-procurement-construction (EPC) contracts, in which the government takes the risk and controls the asset so built, could be considerably cheaper. Ideally, to maximise social welfare, PPP models should be limited only to projects where EPC contracts are not feasible. There is also the question of the cost of financing and enabling of private partners' exits. The Report plugs cheaper financing for PPPs - but, in fact, excessively easy finance is part of what caused recent troubles. As Transport Secretary Vijay Chhibber has pointed out, banks' assessment of project costs when extending loans to private players was often much higher than the National Highways Authority of India's own estimates. Nor is it clear how the Reserve Bank of India's mandate that state-owned banks clean up their books fits with the idea that infra PPPs need cheaper finance.

In general, in the medium term, PPPs will be difficult to revive. Private sector investment in power, for example, has all but dried up following commodity price risk that was unaccounted for, and unpaid bills by power distribution companies that should also have been accounted for. In this, as in other sectors, many large Indian groups are awash in debt, and unable to invest; and the continued capacity deficit in administering PPPs means private interest will not be revived soon. If the government, convinced by the need to swiftly revive PPPs, over-compensates the private sector for this lack of interest - by taking too much of the risk, or making finance too easily available - then it could only be repeating the mistakes of the past.