Planning Commission Deputy Chairman Montek Singh Ahluwalia was recently heard grumbling that not much progress had been made in public-private partnerships (PPPs). Since the 11th Plan, over which he has presided, has identified infrastructure as the worst bottleneck in the Indian economy and since his Plan has placed much faith in PPPs, Mr Ahluwalia's concern appears to have come straight from the heart. But the question does need to be asked: is he getting the right advice and are the contracts what the market will lap up? The answer seems to be no to both questions. Perhaps getting better advice will lead to more success. The rest of the world certainly doesn't seem to be having any problems. From 50 PPPs in 1995 to over 2,500 in 2006 is a huge jump, of which India is not a part. | |
| It hardly needs any stressing that infrastructure projects involve very large financial risks. It is also old hat that mitigating these risks lies at the heart of successful PPPs. What is not so clear, however, is how this mitigation is to be achieved. Much depends on how a PPP is viewed, recent academic research suggests that "from a public finance perspective PPPs remain public projects, and should be treated as such". It also tells us how to devise the best PPP contracts. The best contracts, say economists who have studied them, "trades demand risk, user-fee distortions, and the opportunity cost of public funds". This is done with the government giving a minimum revenue guarantee, and insisting that there will be a cap on the firm's revenues. In that way both parties are happy. The private investor gets something even if demand fails to materialise, and the government has the satisfaction of knowing that there is only so much money that the investors can make and that the taxpayer is not being ripped off. |
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| The revenue cap is very important in devising good PPPs because otherwise corrupt ministers will hand over the keys to the treasury to the investors. It has been known to happen all over the world. In the end, therefore, the point is simply to devise contracts that contain both positive and negative incentives. This requires the focus to shift from year-to-year risk profiles to inter-temporal risk profiles of cash flows. What the government has to find out is the trade-off between subsidies and user-fees. When subsidies are high, the projects will look as if they have been fully privatised; when they are low, theywill resemble public projects. So if Mr Ahluwalia wants PPPs to get off the ground, he only needs to find out from Mr Chidambaram how much the finance ministry will agree to fork out. In other words, unless there is a finance ministry buy-in, PPPs will not take off in India. Perhaps the best option "" if the battle is not to be lost for want of a nail "" would be to ensure that subsidies start off high and taper off, non-negotiably, to zero towards the end of the concession. But this requires a degree of faith in our ministers that may turn out to be misplaced. We are, it seems, stuck. |
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