The brewing PPP dilemma

Problems have arisen each time public welfare was ignored during project implementation under PPP, Ajay Saxena writes.

Infrastructure through Public-Private Partnership (PPP) is a public service thro­ugh private fund—a seeming contra­diction. The proponent must have stopped and wondered, “Why would a private party be inte­rested in doing social service?” So the gover­nment started developing businesses around public welfare schemes.

There are three primary stakeholders to a project: The government, the private operator and the public at large—the user community. The government allowed the second stake­holder to make 16-18 per cent profits out of the investment. The method of procurement was simple, using the DSR rate and the least quoted tender. Monitoring would be the basis of con­ti­nuing the contract award for the next period.

This is risk-free investment because it is as protected as government-secured bonds. Risk free investment is mostly less than 14 per cent. Added risk is 16-18 per cent. You will notice that with the same cost of the project there are varied Viability Gap Funding (VGF) require­ments, owing to the risks involved—geo­political, political, etc.

We have seen the political risk at play in the infamous Singur example. This is why docu­ments generally reflect 16-18 per cent. Compe­titive bidding would ensure fair value on the bid, and the model documents reflect very well the govern­ment’s objective to protect the wel­fare of the people at large. That was the good part.

Need for a project

There have been good and not so good cases in actual implementation, and while doing so, we have come to learn that the problems have arisen whenever the basic ele­ment of public welfare was not taken care of at the project development stage. If you really want to have a firsthand experience of how projections are made, you should sit with a PPP project development team: You would realise that people in the boardroom discuss equity returns and not the need for a project.

In many cases, the so-called public is taken for granted, and there have been no verifica­tions to ensure that there is a willingness to pay toll, tariff, etc. If a private entity wishes to build a road based on BOT without having stu­died the economy and geography of the region, it becomes a rather armchairish boa­rd­room projection. Willingness to pay may reflect the need for the project itself in the minds of the local users. Any coercion will lead to resistance.

It is not only about user willingness: A place like Nandurbar in northern Maharashtra may not require an airport—this should be clear when the region’s economy, user base, their paying capacity, and projection of future growth is carefully studied. Therefore, it could also be a case of using public money for a project that may not be needed.

Conflicting transaction advisory: The third aspect, which should be a major cause of concern for the private participant, is that if the company has not studied the need in all its dimensions, the project risk actually goes up in the company’s anxiety to justify the projected equity returns, which may be erroneously on the higher side. In the case of roads, calls for bids have attracted a large number of premium bids—sometimes when NHAI estimated a VGF of, say, 20-25 per cent.

How is it possible for the transaction advisor for NHAI to be so off the mark in the planning development? Many PPP transaction advisory companies were originally advisors on audit, raising finances, and mergers and acqui­sitions. So their inclination has been more on maxi­mising the client’s profit than on the lar­ger public welfare. That thinking continues today for infrastructure advisory for PPP.

On the other hand, government agency project development teams traditionally project public welfare more than private since they are largely accustomed to the government sector alone. The balance between the two approaches is missing. Monopolistic competition: A perfect mar­ket would always protect the buyer, and we see effects of a liberalised marketplace in India’s telecom sector: We pay some of the lowest tariffs in the world because of competition. In soft beverages, too, there is a constant price war.

In PPP, by design and default, there is a monopoly. In some ways, there is assurance of quality in this model. This type of delivery comes with its own set of problems, and our own learning has been witness to it: For the larger, there is no monitoring of these projects and much of the correction is from the pressure from consumers. For example, evasion of tariff is brewing as a serious problem.

On a toll road, it is less likely since it is (still) physical collection in a public space. But bill collection will remain a concern especially when the service provided is not up to the mark. So the pressure remains on the con­cessionaire to provide good service. If an urban consumer pays increased tariffs for water, for example, then you’d better pro­vide good-quality water, perhaps 24×7. The need for effective monitoring processes at the opera­tions and maintenance (O&M) stage has never been more striking.

Creating competition and thereby diffe­rential toll prices on different roads, for example, is not an option for us at this time. Transaction advisors dwell on maximisation of profits in this monopolistic marketplace, and in a social context, that is a problem.

This is why, for PPP projects, unlike in a more self-correcting, competitive market­place, a regulator makes immense sense. Apart from the critical role of being the ar­bi­trator in case of disputes, a regulator makes sure that both public and private pur­poses are indeed met at the impleme­ntation stage.

Flexibility for learning

Our PPP system has stayed away from rigidity in operational documents, and with good reason. While the Planning Commi­ssion and the MCA have done what they have deemed best, our PPP processes have been exp­eriential, and that is why the BK Chaturvedi Committee reworked the 2006 MCA in 2009. Indeed, the new documents provide for more flexibility.

Because bad news spreads like wildfire, there are protests—and not all of them are peaceful, some resort to hooliganism—if there is a mistake in implementation. On the other hand, the fact that NHAI has attracted premium bids is usually forgotten. We cannot forget that India’s PPP model is a much-lauded one around the world. In a conference on PPP in Kuwait, one of the speakers cited three examples of successful PPP projects around the world. All three were from India.

But the learning process is on­­go­ing one.

The author is PPP Expert at Asian Development Bank in charge of Maharashtra.