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PPP: The prescription for infrastructure

PPP: The prescription for infrastructure

Most infrastructure projects are generally characterised by time and cost overruns. Political factors impact time overruns more than cost overruns.

The new government at the Centre has identified its top priorities and as expected infrastructure is high on the agenda. For a variety of reasons, the growing modus operandi for infrastructure development since the last decade has been through Public-Private Partnerships (PPPs). Private investment in infrastructure, which accounted for about 24 per cent in the 10th Five-Year Plan, is expected to increase to about 50 per cent in the 12th Five-Year plan. More than 1,400 PPP projects have been under various stages of development or achieved completion in the country in different sectors. However, a large majority of these projects have been in infrastructure. An interesting feature seen in all these projects is the substantial divergence in project performance. While it is difficult to pin-point a single reason for project performance, juxtaposition of a variety of factors such as the project technical features, operating environment, developer experience, and the prevailing political milieu, determine the success of the project.

Success of PPP projects
In a recent research study at IIT Madras, we specifically investigated the role of political environment in the success of PPP projects. We focused our attention on the road projects because they accounted for close to half of all the PPP projects. Our study was based on the analysis of 249 National Highways Authority of India PPP projects, of which 77 were completed and are in operation. We analysed these projects on various parameters and what we found was there was substantial divergence in performance among these projects. For example, the time overrun varied from -29.73 per cent to 133.33 per cent of the estimated project time and the cost overrun varied from -29.58 per cent to 155.40 per cent of the estimated project costs.

After controlling for other factors, we indeed found that political factors are strongly associated with the success of PPP projects. While some of the findings were as expected, some were counter intuitive. We specifically considered two factors that reflected the political environment. The first was whether the ruling parties in the State Government (SG) and the Central Government (CG) were the same or part of an alliance or whether they were different. The second was whether there has been a change in the SG during the development of the project.

Most infrastructure projects are generally characterised by time and cost overrun. Our findings showed that political factors impact time overrun more than cost overrun. While both the time and cost overrun are undesirable, the former can be considered as the lesser of the two evils. Cost overruns in PPPs can often lead to monetary gains for the private sector at the cost of the taxpayers, but the resilient political structure is equipped to minimise such over-runs. We are not saying that cost overruns do not occur in PPP projects. What we are saying is that political factors play a limited role in the occurrence of cost over-runs.

Political factors, however, are often associated with significant time over-runs. For example, when there is a change in the SG during the project development phase, the percentage time overrun in the project is higher (Fig 1). While this is on expected lines, the implication of this result is clear. Implementation of new infrastructure projects in the initial years of the government would help in reducing delays and ensure timely completion of the project.

The popular notion is that it is generally better to have the same party or alliance at the Centre and the State. Having the same political regime helps as far as investment amount is concerned. The average project cost in those States where the SG is part of the political alliance of the CG is about 12 per cent more than that of the States where the SG and the CG belong to different political parties (Fig 2). Reasoning this is not very difficult policy congruence at the State and Centre gives a lot of comfort to private investors, which is indicated in the willingness to invest higher investment amounts. Further, when the SG-CG combination is the same, the associated transaction costs seem to be lower. Unit project costs, i.e., the estimated cost to complete one lane-km of the project, was lower by 4.3 units for projects where the SG-CG was the same, as compared to where the SG-CG was different.

But, like they say, what is gained in the rounds is lost in the whereabouts. While the same SG-CG combination might result in attracting higher investment amounts and cost-effective projects, it does not seem to improve timeliness of execution. We found that when the SG-CG combination was different, the time overrun is actually lower. Now, isn´t that a knock from behind? A possible explanation that we could think for this result is that a bit of friction in governance can actually be helpful. When both the SG-CG are from the same party or alliance, a bit of lethargy seems to set in, whereas when both of them are different, it creates an environment of productive tension, with each pushing the other.

We also find a similar trend when we compare projects on unit time, i.e., the estimated time taken to complete one lane-km of the project (Fig 3). The average estimated unit time for projects where the SG-CG was same was higher by 8.5 per cent as compared to projects where the SG-CG was different.

On the whole, our findings on the political factors show the interesting dichotomy between cost and speed. While similar political combinations help in attracting investment and implement cost effective projects, political differences seem to facilitate faster implementation.

Time overrun when there is a change in State government
An example for this is the ¨Meerut – Muzaffarnagar¨ project in the State of Uttar Pradesh. The project which involved strengthening, improvement and four-laning of a 79-km stretch from Meerut to Muzaffarnagar, on NH-58, cost Rs 756 crore and was developed on BOT – Toll basis. The project was a part of National Highways Development Project (NHDP) under Phase IIIA. The Letter of Agreement (LoA) was signed in March 2005, and the construction started in March 2006. The project was scheduled to be complete by March 2009. But, in the Fifteenth Assembly elections in May 2007, there was a change in government. Samajwadi Party which was in power till 2007 was replaced by Bahujan Samaj Party in the May 2007 elections. Though the revenue generation started in April 2011, the project was completed in August 2011. The total delay in the project was 29 months. This was considerably higher than the delays seen in similar projects, where there were no changes in government.

Time overrun can be lower when the State and Central governments are different
An example for this is the ¨Bijapur – Hungund¨ project in the state of Karnataka. The project which involved widening of 97-km stretch from Bijapur to Hungund, on NH-13 was executed on Design, Build, Finance, Operate and Transfer (DBFOT) Toll basis. The total cost of the project was Rs 905.5 crore and was developed as a part of NHDP under Phase III. The Letter of Agreement (LoA) was signed in February 2010 and the construction started in September 2010. The project construction was scheduled to be complete in 30 months, by March 2013. The government at that time, i.e., from 2010 – 2013 in Karnataka was led by Bharatiya Janata Party (BJP), whereas, the government at the Centre during the same period was led by Indian National Congress (INC). The project which was scheduled to be complete in March 2013 was finished in April 2012, 11 months ahead of schedule. This shows that different governments in the State and Centre need not always result in project delays as governments may not want to be seen as delaying developmental projects because of political reasons.

This article has been authored by Thillai Rajan A, Associate Professor, Department of Management Studies, IIT Madras and Nandita Vadali, Graduate in Infrastructure Engineering, IIT Madras.

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