PPP problems

State taking most of the risk in shared projects is undesirable

In the Union Budget for 2015-16, Finance Minister Arun Jaitley promised a major thrust towards investment in infrastructure. The outlay for the railways and road transport ministries were hiked substantially. The finance minister promised Rs 70,000 crore of new spending by way of budgetary support towards the government's Plan outlay. However, it, of course, continues to be true that public spending will be grossly inadequate to close India's infrastructure gap. According to the advance estimates of gross domestic product (GDP) for 2014-15, gross fixed capital formation is under 30 per cent of GDP - and has fallen nearly a whole percentage point over the year. This is a fall of at least eight percentage points since the pre-crisis years. And even that rate was small compared with that seen in countries like China that have demonstrated sustained high growth. In other words, public investment would struggle to fill the investment deficit. This is particularly true given India's constrained fiscal space; the finance minister has chosen to delay India's fiscal consolidation in order to prime the investment pump, but naturally this cannot be kept up forever. So private investment in infrastructure is key. This lies behind, presumably, the Rs 20,000-crore fund to be set up that will be able to leverage its equity to sell debt and, thus, mobilise private-sector debt funds for the infrastructure sector.

However, there are reasons to be concerned that the government may be repeating some mistakes from the past that it should have learned from. In his speech, the finance minister assured those listening that the problems in the private-public partnership (PPP) model would be addressed. The way this would be done, he said, was to ensure that the government took most of the risk in such ventures. The argument is that this will permit greater investment in such PPP projects. Certainly, something must be done about PPPs - the problems with the model have been responsible in large part for the investment slowdown of recent years, and such stalled projects are also a significant proportion of the stress on banks' balance sheets. Other methods to settle these issues were also mentioned - a law to oversee disputes, for one, which should be carefully drafted. The Economic Survey, released a day before the Budget, also suggested an independent committee to oversee renegotiation. These are both sensible ideas in theory, and the government's attempts to follow up on them - to "clean up" the sector of disputes and bad loans - should be supported and encouraged.

However, the proposal to transfer risk away from the private sector to the government must be re-examined. This essentially returns India to a pre-2000 model for investment. Has New Delhi forgotten disastrous investment models like Enron's Dabhol project? That is what happens when private returns are guaranteed by the state. When the state takes all the risks, there is little or no reason to suppose that the right projects are picked. Only when private capital takes the risk will the future pay-off from such projects be properly evaluated. PPPs cannot be turned into a system in which project choice is politicised, and serve as an excuse for vast transfers of scarce resources to the private sector in the guise of guaranteed returns - in return for projects of dubious viability and appropriateness. This is not the right way to revive the sector.