The route of public-private partnerships (PPPs) has become popular in India for the provisioning of critical infrastructure. This is due to many policy and structural reforms. Compared with traditional models of infrastructure provisioning, PPPs have two distinct features. First, these show a significantly increased level of private-sector participation, which can boost project efficiency and effectiveness through its life cycle. Second, PPPs can spread the project cost over an extended period, which can free up public resources for investment in sectors where private investment may be shy to enter.
As India aspires for an over ₹100 trillion infrastructure push to drive growth, the role of PPPs needs close consideration. The recent Delhi high court order that Delhi Metro Rail Corporation (DMRC) has to pay ₹8,009.38 crore due to Reliance Infrastructure Ltd opens up debates on setting up public private partnerships as well as on sharing the risks involved. That the amount ordered is several times the annual revenue of DMRC from its Delhi operations points to the scale of the financial impact this could have. The effects might last for years. While risk sharing is one of the major reasons for implementing PPPs, technical and organizational challenges occur for some PPP partners. These include unclear agreements on risk and responsibility sharing, insufficient procedures to deal with disputes between partners, and a lack of agreement on ways to deal with risks of failure. The problem gets more complicated in the absence of reliable tools for risk assessment. This often results in incorrect evaluations and inequitable distribution among or between partners.
Managing risks in PPP projects needs an accurate formulation of rules for partners and a mechanism specified for their mitigation. Effective risk allocation entails parties identifying project risk factors in advance and allocating these to the party which can manage them best. Still, some possible risks may emerge beyond the agreed terms. However, risks in PPPs should be allocated to the partner most effective in managing it at the least cost. Generally, public-sector partners are good at handling risks associated with changes in political and regulatory environments, while private-sector partners better manage risks associated with project management. PPP projects that do not transfer risk and gain from the private sector’s risk-management capabilities will have a higher probability of failing.
To better manage the risks of large projects, PPP policy can explicitly assign this to the private sector, with a transfer of specific risks and responsibilities throughout the project’s life cycle, including development, construction and operation. This entails a risk premium that in large private projects is a central part of the costs, and should be included in PPP projects. Government agencies should realize the need for specific risk-management capabilities and partner with the private sector. It is also important to recognize that in many areas, the public sector has not had sufficient experience in managing certain types of projects to acquire the necessary risk-management capabilities. In these situations, a misalignment arises that may lead to the project’s overall failure.
At the heart of this problem is the fact that the public and private sectors think about risk differently. Though many public agencies have evolved sophisticated strategies of managing risk, their focus is still confined to a specific set of issues. Often, these revolve around definitions of transparency and compliance with procurement laws. In some extreme situations, adherence only to these aspects can be at the expense of the efficiency of the whole project itself. An excessive focus on administrative risks ignores the fact that a project needs to cope with hard budget constraints, which is a result of low volumes of usage. Public-sector partners also have a tendency to push construction, operational and commercial risks out of central consideration. Operational and commercial risks emerge when a project faces cost overruns or construction delays. Public agencies tend to overlook these risks, as they do not face liquidity problems. This is because the failure of a project is unlikely to affect their liquidity as demand for additional funds can be mobilized from government budgets. But the fact that the promised benefits of the project will take longer time to appear is overlooked.
In contrast, for the private partner, commercial risks can have massive financial consequences. Anything from a 10-15% cost overrun can mean that a company no longer earns a profit on that specific project, and an accumulation of such projects can push the entire company to bankruptcy. This forces successful private players to build strong capabilities in risk management across project life cycles. Often, this is vetted by private investors for its sophistication. The private partner considers all risks—construction risks, commercial risks after completion, and others—and adds a premium to cover the additional measures and activities required to mitigate them. But for the government, some risk premia look like unnecessary costs. This might be viewed as good governance and financial control, but it tends to focus only on budgetary elements, leaving out project risks on an apparent assumption that these should be managed for free. We need explicit recognition of the fact that the private sector’s risk-management capabilities generate efficiency gains. So we need appropriate mechanisms for the transfer of these risks to private stakeholders.
In conclusion, for PPP projects to succeed, we require a fresh approach.
These are the author’s personal views.