Sonia Sethi: The 5Cs of infrastructure PPPs

The correlation between greater spend on infrastructure and high economic growth has been well-established. Whether the relationship is causal or not, it is certainly coterminous. Thus the Government targets $375 billion investment in infrastructure over the next three years. Fifty per cent of the infra deficit is sought to be bridged through the public-private partnership (PPP) mode as per the Twelfth Plan figures. Given the number of stalled infrastructure projects (worth Rs 11.36 lakh crore as in December 2015), it is the need of the hour to analyse success-failure determinants in the PPP space. Data suggests that while one in 20 projects in the government sector get stalled, the ratio for PPPs is one in five (CMIE). 

 

The experience of riding the first wave of the PPP movement in infrastructure in India as an implementing agent, a transaction advisor and an academician is useful. An attempt is being made here to put across some pointers to create a robust framework for the same in the not so ebullient current scenario — perhaps in the spirit of what Donald Schon called a ‘Reflective Practitioner’. Academic research in this subject underlines the need to devise a diagnostic filter that encompasses some evaluative parameters that can ensure the viability and sustainability of PPP projects. We can call them the 5Cs. While these parameters are not new to experts but a judicious application of the same before signing off projects could make the critical difference between the success and failure of projects.

1C: Public sector comparator

The World Bank defines the PSC as a tool “used by a government to make decisions by testing whether a private investment proposal offers value for money in comparison with the most efficient form of public procurement”. In simple terms it’s a tool that allows governments to decide if public procurement or PPPs would be more cost effective. Unfortunately studies reveal that this tool is judiciously used only in developed countries. Emerging economies seem to be resorting to PPPs to overcome the deficit in resources. This tendency often leads to sub-optimal choice of projects for PPPs. It would be advisable to run all projects through this filter to ensure value for money and long term viability.

2C: Cash flows

Cashflows are the pivot on which the feasibility of projects rests. However, while calculating the cash flows it is often seen that the data used to calculate the net present value (NPV) is not always credible and maybe manipulated to achieve the Internal Rate of Return of a reasonable 14 to 16 per cent as expected by government agencies. It is prudent to follow the basic thumb rule that the ratio of benefits to costs should be more than one. Greater scrutiny is required to ensure that the numbers are not inflated or even deflated in some cases to obtain approval for PPP projects. Projects high on IRR may be best tackled in the EPC mode by the public sector. 

3C: Categorisation of risks

Risk allocation, the trickiest part of project structuring should prudently categorise risks between the public and private sectors. Often times projects are criticised for being skewed either in favor of the private sector or the public sector. The MCA provides a broad framework for risk allocation but the wide spectrum of infrastructure sectors ranging from roads to power to soft sectors like health and education demand not only sector specific but even project specific risk categorisation. The simplistic aphorism that risk should be allocated to the best party suited to manage them should be customised and elaborated with regard to sectors and projects.

4C: Contract management

It is contended here that the 4th C is the most crucial of all Cs. It is observed that the BOT is the most common model followed in India but contours of alternate models need to be explored. The Hybrid Annuity model used in the Roads sector is a case in point. Also a good BOT agreement must clearly spell out risk allocation, performance standards, terms of payment and of course termination and dispute resolution mechanisms. The recent Kelkar Committee Report strongly recommends Renegotiation and refinancing to be included in contract agreements. This would offset the ‘obsolescing bargain capacity’ of the private sector. While some propose the setting up of an independent institution for dispute resolution, the same can be managed within a transparent and accountable government system. The Contract must spell out a robust framework of rights, obligations, penalties including termination conditions. As an aside, the allegations of secrecy, unfair advantage etc. levied against the Swiss Challenge model need to be revisited. In an age of start-ups and Skill India campaigns, innovative proposals in the infrastructure space could be encouraged, of course with adequate price discovery mechanisms.

Tough Choice: Emerging economies seem to be resorting to PPPs to overcome the deficit in resources. This tendency often leads to sub-optimal choice of projects for PPPs

5C: Capacity building

As stated earlier, providing infrastructure has been traditionally the responsibility of the public sector. Negotiating the complex terrain of public and private collaboration through sophisticated project structuring and mind boggling contract agreements can be daunting. While the MEA did its bit by preparing tool kits and guidelines, there is a palpable knowledge deficit especially at the grassroots level. Club this with a huge mindset leap that is required and we have a formidable task ahead. Thus, adequate interventions for capacity building of all stakeholders and project implementers must be prioritised.Converting the 5Cs into a scorecard can help reflective practitioners grade projects into robust, safe or unviable. Certainly a good data base for effective decision making.

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The author is additional director general of foreign trade, Ministry of Commerce & Industry