No role model

No role model

Recent reports questioning the ‘sweet deal’ to the private concessionaire in the Delhi-Noida-Direct (DND) flyway raise the question whether we have the right checks and balances to make the most of public private partnership (PPP) projects in the country.

In the environment just after the 1990s’ economic reforms, risks and returns in infrastructure projects were hazy. The government had little money for these. The rationale was to provide a reasonable return to the private player’s investment. That stage has passed. Economic growth is robust and consumer confidence high. The private sector, too, now has the capacity to gauge the risks involved.

So, the rationale needs to be revisited now that private investment is flowing into these sectors. There are risks to be borne in any entrepreneurial activity. If that element is taken away, the incentive to deliver quality services at low costs does not exist. Further, the basis on which risk sharing between the government and the private player take place is liable to manipulation. For example, upfront demands for subsidy when traffic flow projections for a road are low, are not uncommon. But in a growing economy with a robust automobile sector, traffic flows continue to increase. In many cases, these traffic flows are not risks the private sector can manage better than the public sector, and then one has to think of alternative concession structures.

The limitations in PPPs as a risk-sharing device must be addressed. For example, if an operator knows that an asset such as a bridge or a road will be his for the period until he gets his returns, how is the asset different from another secure asset that gives the same returns, except for the uncertainty over the time frame for the returns to be earned? Should the risk-return profile then be any different?

The core element of PPP is performance-based reward. The private sector should be able to earn a competitive return only when it can deliver a certain level of service quality. In many sectors, it is possible to define service quality parameters. The challenge with using PPP gets more acute in sectors such as education, sanitation and others where it is difficult to link the price charged with the quality of service being delivered. Yet, given the huge requirement for investment, for instance for upgrading of infrastructure, the PPP approach can be used—as has been done in the UK and Australia. However, these concepts have yet to penetrate—there is little movement here.

In this context, the Union and state governments need to carefully structure PPPs to balance the interests of both stakeholders. A regulatory framework is supposed to achieve this and in theory at least, it does. But in practice, a balance is difficult. There have been instances where the investor’s risk perception has been accurate. For example, in some states, investors have to run a bureaucratic gauntlet to begin collecting toll fee and other forms of revenue from the project. However, there are other instances where the contract is loaded in favour of the concessionaire.

Some of the states are aware of the potential rip-offs that can take place this way: They no longer give the kind of guarantees that were the norm in the late 1990s. But a large majority of states lack the institutional capacity to successfully close such projects. Such capacity building should be given priority. Others are yet to discover this route to private sector participation and their ability to handle such complex contracts and prevent unfair deals is uncertain.

The government is making efforts to build capacity both in its departments and at the state level. This needs to be done in a much more systematic and thorough manner. After all, the responsibility of service delivery still lies with the government.

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