There is no alternative to PPP

There are few people in the seats of power who’re more convinced about PPP than Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission of India. In a freewheeling interview and a mood for candour, he responds to questions-some rather fundamental-by Shashidhar Nanjundaiah that the government needs to persist with PPP despite the tardy turn of things, but says the government needs to recognise commercial imperatives to better convert agenda into action.

You had forecast that the slowdown would be over by March 2012. Had you anticipated this prolonged downturn? Is the much-documented slowdown in project execution real, or is much of it a media phenomenon?
I had indeed hoped that the slowdown would be over by end March and the economy would turn around in 2013-14. Results for the first quarter GDP are not yet available, but judging by the industrial production figures, there is no turnaround yet. However, there will be a turnaround, even if it takes a little longer than we had hoped. We must remember that globally also the extent of slowdown in 2012, continuing into 2013, has been sharper than was thought earlier. However, some positive signs are evident in the global economy in 2013.

As for project execution, the slowdown is certainly not a pure media exaggeration. The exaggeration lies perhaps in focussing only on what is happening in India, without recognising that there is also a global slowdown. Even China has slowed down. We can’t do much about the global economy, but we can do something about our domestic constraints on project implementation and that should be our first priority. The government has been taking a number of steps to address this problem.

Towards the end of 2011, you had said that inter-ministerial coordination remains a bottleneck in project execution. Have things changed?
A lot of things have happened on the government side, most notably the establishment of the Cabinet Committee on Investment (CCI) to resolve coordination problems. It has produced results. Until a few months ago, 78,000 MW of generation capacity, which came on stream after 31 March 2009, did not have assured fuel supply agreements. Since then, this capacity, which is either on stream or expected to come on stream by April 2015, has been given assurance of coal based on a mixture of domestic and imported coal. I understand fuel supply agreements for all these plants will be signed by end August. This is a major step removing uncertainty in a key area.

The CCI has also taken a number of other steps to speed up environmental clearances for many ongoing projects, including road projects. Some relaxations have been implemented in bank treatment of credit for infrastructural projects. Security clearances which had held up a very large number of oil and gas exploration projects have also been resolved for most of these projects. Resolution of these problems does not of course translate into an instantaneous pick up in implementation, since the investors are also experiencing other constraints, including availability of finance. However, it is good that government has done what it could do.

Has project execution improved after the appointment of the Anil Swarup committee?
The Anil Swarup Committee in the Cabinet Secretariat is doing very good work. It has met with a large number of Central Government Ministries to identify projects facing problems and is also meeting the Chief Secretaries of the states since many of the problems are at the state level. I believe they have reviewed about 85 large projects and have been able to resolve problems in about 25 of them. Of course this is an ongoing process. The committee is working with admirable transparency, putting details of all its meetings and decisions on the web.

I understand you’re planning to do an overhaul of the PPP policy…
It is more of a review of the problems that have arisen, and what we can do about them.

Is there confusion about the ownership of PPP projects? The government is the owner of the public interest while the private party is in charge of execution. Does some confusion exist?
This is a valid concern. Civil society often emphasises the disconnect in PPP projects because they feel that the government has abdicated its responsibility and handed over projects to the private sector. We need to reassure them that this is not the case.

The obligation of the government is two fold. First to ensure that acceptable standards of service are embedded within the terms and conditions of a concession agreement, and second to ensure that these service obligations are actually met in the operational phase. The central government PPPs do have clear performance standards in the concession agreements, whether it is the riding quality of the road, or the speed at which passengers are processed in airports.

The Cabinet has also approved establishment of a system where each agency that awards PPP projects also sets up a monitoring cell the purpose of which is to ensure that the performance of each project is regularly monitored reported and cases of non-performance according to the terms of the concession agreement are documented and corrective steps taken are also listed. Every ministry whose agencies award PPP projects is expected to set up a PPP Monitoring Cell, in the Ministry which collates the reports from different agencies. The Planning Commission and the Finance Ministry will review these reports and depending on the severity of the problem, reported back to the Cabinet Committee on Infrastructure (CCI).

The monitoring process focuses on public interest issues. It does not focus on the private party’s internal management problems unless they impact service. For example, labour problem that impact the functioning of a toll booth will be taken up because it causes delays but problems that don’t impact on service standards are left to the private party to handle. Similarly, in an airport, passenger throughput rates must be met, but we are not supposed to monitor how they manage internally.

This reporting structure has been designed and Ministries are only now beginning to put it in place. These things always take time to become operational. I’d be happy if they are fully functional by end December.

Why are we seeing private players’ exits and pullouts from some cornerstone projects ostensibly on issues of unviability or tardy clearances?
There may be several problems. Lack of regulatory clearances on time is a major problem and this is something the government should help with, The CCI and the Anil Swarup Committee are trying to do this. But there are other problems as well such as for example financing difficulties which may be because financial conditions have charged or the concessionaire over-estimated its own balance sheet strength. This has to be resolved by the concessionaires.

When a government plans a project, it is usually with the intention of (eventually) accomplishing it regardless of private sector interest. So isn’t it possible that the government takes care of clearances before biding a project out?
This is theoretically possible but it is not as easy as it seems. Government agencies may be less motivated to obtain clearances than private entrepreneurs. However, we should perhaps do more of this wherever possible, so that the task left to the private concessionaire is minimised.

Have you been overambitious in planning so much PPP?
The PPP targets we have set for infrastructure follow from two key assumptions. First that the economy must be put on an 8 percent growth path and the infrastructure needs must be planned accordingly. The 8 percent growth path envisaged in the 12th Plan definitely, needs infrastructure investment of around $1 trillion. The second assumption is that the public sector does not have the resources needed to achieve more than half of this so the PPP share must be 50 percent. This is certainly an ambitious percentage because the percentage actually achieved in the 11th Plan was only 34 percent, but we needed to be ambitious since resources available with the government will not allow the government to do more.

Our transition to the 8 percent growth path is clearly delayed because growth is lower than targeted in the first two years of the 12th Plan. The infrastructure growth plan will therefore also be delayed. However, we must realise that if we want to achieve ambitious infrastructure outcomes we need to do a lot of PPP. It is totally unrealistic to say we are over ambitious on PPP so we must do it in the public sector. Public sector’s resources are limited and have to go into priority areas such as health and education. If we can’t do the PPP we have targeted, we will simply have to lower our growth ambition. It is in this sense that there is no alternative to PPP.

If we are happy with 5 to 6 percent growth we can do with much less PPP, but if we are aiming at 8 percent growth, even if it is a little delayed, we have to achieve ambitious targets in PPP.

Are you happy with the response?
When the PPP thrust began in the Eleventh Plan many people doubted that the private sector would respond. The response was actually very positive and there are a very large number of PPP projects currently in operation, not only those initiated by the central government but also many by state governments. The World Bank and ADB rank India as a country with the largest number of PPP projects.

Naturally, when you have large expansion in the number of PPP projects, there will also be problems. This is also true with public sector projects. We have to address these problems keeping in mind that PPP projects attract much more scrutiny on the part of stakeholders who want to be sure that the public interest has not been compromised, either in terms of an excessively generous concession arrangement, or in terms of standards of delivery of service which are not being enforced, or post bid concessions to solve problems which also become controversial. This is natural.

PPP should be viewed as bringing private money into public projects not putting public money into private projects. We must respond to it by having better structured projects with greater accountability and strong competitive bidding.

You’ve been an advocate of private participation. Isn’t it possible to rely less on private money and more on its execution skills? Since much of the domestic private finance is stuck in exhausted group and sector exposure limits, should the government take a breather and come back to the sector in a couple of years, depending more on budgetary allocations (at least as an alternative) and EPC projects?
It is certainly possible to rely less on private money and more on the skills of the private sector by entering into pure management contracts and undertaking investment in the public sector. However, I do not think there is any advantage in that. If the private execution and operational skills are indeed important, they are likely to be more assiduously deployed if their own money is involved. Besides, as I have said public money is scarce and if the private sector can bring in money, there is no reason why we should discourage. In that sense, keeping the option open on private sector investment to increase the scale of investment that we could otherwise achieve.

Is there a conflict among government agencies between economic and commercial success?
I don’t think there is a necessary conflict. Of course, government agencies have to look beyond limited commercial objectives to maximise economic or social good. However, the extent to which the commercial objective is being sacrificed should be well defined.

It should certainly not be an invitation to incur open ended losses in a public sector mode or to neglect the importance of commercial objectives for PPP partners which only means providing a larger subsidy. Infrastructure development cannot pay for itself fully. So a subsidy is necessary, but we should exploit as much as we can the growing willingness of the public to cover a part of the cost through user charges which makes PPP possible.

How can infrastructure sectors improve their models of execution?
Infrastructure projects are implemented in two modes: one is through pure public sector implementation and the other through PPP. A common requirement for improved execution in both cases is the need to ensure transparency and quick award of regulatory clearances such as forest clearance, environment clearance, shifting of utilities, etc. These are very important and we need to greatly improve our procedures in terms of transparency, predictability, and reasonable timelines. As far as pure public sector projects are concerned, the actual construction of these projects is done by a private contractor on a construction contract. I think the most important thing in these cases is to shift from the prevailing "unit rate" contracting method, in which the total cost keeps changing due to changes in design or scope of work, to the EPC contracting method in which the design is fixed and all construction risks are borne by the construction contractor. This incentivises the private contractor to execute projects on time and within cost estimates. Shifting to the EPC method would raise initial costs of construction to more realistic levels, but it would avoid the frequent revisions in the cost which otherwise take place.

As far as PPP projects are concerned the most important thing is to have clear concession agreements which lay down the responsibilities and risks that have to be taken by the private sector, have good qualification criteria so only credible parties bid for the concession and have strong competitive bidding. The pre-qualification requirements are very important. Part of the problem at present is that there is very strong pressure on the part of the smaller players to weaken the eligibility criteria so that smaller companies can compete. But this often leads to weak companies bidding aggressively and then pleading for relaxation of terms and conditions.

I recognise the need for encouraging the development of credible concessionaires but a balance has to be struck. We now have enough players who can take on larger projects. We should also try to attract international concessionaires who will come if our contracting procedures are transparent and dispute resolution is quick.

EXECUTIVE PLANNER

Recent dramatic events like the withdrawal of GMR, GVK, RInfra and Tata from mega-projects-blaming clearances or other problems relating to the government-have forced the Planning Commission back to the drawing board. Any time now, the Planning Commission-on the basis of four failed projects-will bring out a paper on what ails PPP. It is hoped that this would include decisions on contract renegotiations, delay assessment, and exit options. The Commission has taken the initiative on more than one occasion when it comes to facilitating the bridge between agenda and execution-addressing project monitoring, dispute resolution and factors for project delays.

New proposed models of PPP implementation like uncapped revenue for contractor, segregating earnings between passenger vehicles and goods carriers, and other are in the offing, and are expected to trigger new interest from the private sector.

Meanwhile, Ahluwalia remains the most sought-after policymaker in the country.