The Hindu Business Line : Power of public-private partnerships

Given the externalities, high risks and low rates of return, infrastructure financing cannot be left solely to the private sector. At the same time, given the Budget constraints and inherent inefficiencies, the public sector, too, cannot be fully relied upon. The solution, therefore, lies in public-private partnership, where the two can complement each other's efforts in providing infrastructure services.

SINCE Independence, several models to improve infrastructure financing have been implemented. In the 1950s through the 1980s, the Plan process helped the public sector attain the commanding heights of infrastructure sector. But since the 1980s, the public sector's role in providing and financing infrastructure has sort of diminished because of the absence of competition and effective regulation.

The private sector is now looking at infrastructure as a profitable business proposition, and the capital market appears mature enough to finance such ventures. Thus, the private sector now coexists with the public sector in the field of infrastructure, both subjecting themselves to the scrutiny of constitutionally appointed regulatory authorities.

Infrastructure has been defined as "comprising those basic services without which primary, secondary and tertiary productive activities cannot function." It includes non-tradeables such as a) transportation services — road, railways, ports and civil aviation, b) telecommunications, c) power, d) water supply, e) sanitation; and f) solid waste management. It does not include tradeables such as steel, cement, fertilisers and petroleum products, which are importable and, therefore, cannot be construed as physical constraints on economic growth.

Public-private partnership

Infrastructure financing is a challenge to both the private and public sectors. Given the externalities, high risks and low rates of return, such financing cannot be left solely to the private sector. At the same time, given the Budget constraints and inherent inefficiencies, the public sector, too, cannot be fully relied upon. The solution, therefore, lies in public-private partnership (PPP), where the two can complement each other's efforts in providing infrastructure services.

Here, social responsibility combines with the incentive system to improve infrastructure delivery. Investment and risk are divided between the two sectors depending upon each other's financing and risk-bearing ability.

Normally, it is the public sector that initiates PPP, by providing the seed capital. A public limited company is then formed, by raising funds through the stock market. Though the government may reserve the right to appoint personnel in key positions, accountability to investors and consumers is enforced, as it is a public limited company.

Specific functions of a PPP company, such as construction and maintenance of assets and providing infrastructure, are given to private companies. This arrangement is attractive to governments, as the investment gap is filled, investors and consumers are satisfied with the rate of return, and there is adequate supply of infrastructure.

The fundamental principle of PPP is that while the private sector is responsible for the design, financing, building and operation of the services, the government puts in place the legislative framework and provides institutional and political support. There are numerous variations of the partnership pattern depending on the risk allocation between the two sectors. The most common types of concessions are build-operate-transfer (BOT), build-operate-own-transfer (BOOT), build-own-lease-transfer (BOLT), design-build-finance-operate (DBFO) and free standing projects.

Ingredients of a good PPP

The PPP contract should specify, preferably in quantifiable terms, the outputs expected of the private partner. It would be beneficial to standardise contracts, indicating simple parameters with reference to risk-sharing, financing and pricing. Though the specifications of different projects vary, the use of standardised guidelines would help reduce the time and costs of negotiations. The production process should be such that the private sector has enough scope to innovate and, thereby, reduce the per unit cost of production. The payment mechanism should be objective, transparent and easy to operate. Infrastructure pricing is a complex process. Financial viability of the project, externalities, consumers' ability to pay and subsidy targeting should be factored in.

A detailed cost-benefit analysis of private sector involvement and public alternatives must be undertaken to ensure that PPP enhances public benefit. This can be achieved by developing a hypothetical `public sector comparator', under which, the public sector is assumed to have created efficient infrastructure at the least cost and at minimum time. It is against this benchmark that PPP performance has to be judged.

Benefits of PPP

A PPP essentially aims at creating a structure in which better value-for-money can be achieved through involvement of the private sector without undermining the Government's overall responsibility to the taxpayer for the quality of the service provided. It allows public ownership of infrastructure as well as ensures adequate rate of return on investment for the private participants.

The concerns

The bidding process is, perhaps, the most controversial aspect of a PPP. The government agency should prepare a detailed project report setting out standards for design, construction and O&M, procedure for price fixation, and distribution of risk and profit. This would help achieve objectivity and transparency in the bidding process. The user charges should be carefully designed and periodically reviewed. The Delhi-Noida toll bridge, for instance, became financially viable after much initial resistance on the part of users to pay for services, which have traditionally been considered as `free'.

PPPs in the road sector should design innovative procedures for toll collection so as to minimise time loss for the users. Also, partnerships in social sectors have to be based on a `bottoms-up' approach where the local panchayats and municipalities have a larger say in project design and its operationalisation. Such an approach has been followed in the Tirupur water supply project and the Rogi Kalyan Samitis of Madhya Pradesh.

All successful PPPs suggest the need for effective communication with the stakeholders, that is, the community at large, the political establishment and the specific user group, both before and after commissioning of the project on all sensitive issues, including rehabilitation and resettlement. It must be remembered that political consensus, even if initially achieved, tends to be fragile and needs to be continuously strengthened. But the cornerstone for all successful PPPs is trust and mutual respect.

PPPs in India

There are quite a few PPP experiments on infrastructure. While many of them are successful, quite a few may need to be restructured. But an objective analysis of these projects would provide a vital input in deciding whether to extend the PPP approach to other infrastructure areas as well. Here are a few of such PPPs:

The Tamil Nadu Water Investment Company (TWIC), formed as a joint venture between the Tamil Nadu Government and IL&FS, set up the New Tirupur Area Development Corporation Ltd (NTADCL) as an SPV (special purpose vehicle) to implement the first private water supply in the country at Tirupur. The total project cost is more than Rs 1,000 crore, with the Government's contribution of Rs 55 crore leveraged by almost 20 times. The project risks are apportioned to international level private agencies on the basis of core competencies.

In Vizag, rehabilitation of the 250-km canal and expansion of feeder canal capacity have been taken up. The Vizag project demonstrates the ability of the PPP framework to add value, by improving the efficiency of existing assets and expanding the range of services.

The Rogi Kalyan Samitis of Madhya Pradesh, set up with participation from donor citizens, elected people's representatives, social organisations such as Rotary, Lions, and the Red Cross, district administration officials and doctors have helped to radically transform the services offered by government hospitals across the State. These samitis have the mandate to raise resources through user charges, donations, grants, loans and commercial exploitation of hospital land and other assets.

The Mumbai-Pune Expressway, a 95-km, six-lane concrete expressway costing $400 million was taken up on BOT basis.

The Tamil Nadu Road Development Company (TNRDC) was formed as a joint venture between the Tamil Nadu Industrial Development Corporation and IL&FS to develop the road sector. Accordingly, the East Coast Road was developed, wherein the Government's contribution was leveraged by 12 times.

In 1997, the Jawaharlal Nehru Port Trust (JNPT) signed an agreement with P&O Australia for development of a two-berth container terminal on BOT basis for 30 years. P&O completed the project before schedule and commenced operations at the new terminal Nhava Sheva International Container Terminal (NSICT) in 1999.

The AAI Amendment Bill, 2003 provides the legal framework for private investment in new and existing airports. The greenfield international airport at Hyderabad is being built based on the PPP model.

Thus, the positives of PPPs for infrastructure development are particularly attractive to developing countries such as India, given the enormous financing requirements and equally large funding shortfall. However, PPPs should be regarded only as one amongst the range of alternatives for providing infrastructure facilities. Also, the PPP approach might be more successful in some sectors than others. The emphasis on PPP should also not preclude other options, including traditional public sector models.

(The authors are with the Planning Commission and the Government Arts College, Villupuram, respectively.)

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