Public Private Partnerships: Are we in a hurry to adopt them?

Dr. Manisha Verma*

PPPs are being increasingly perceived in the country as an attractive alternative to the traditional means of provisioning of public services. Many public organisations are adopting them to meet their stated objectives of public service delivery. The evidence however from the sectors that have adopted them, such as highways, civil aviation and railways suggests that it may be yet too premature to view them as panacea for the infrastructure ills within the country. Private interest in PPPs is observed to be dwindling. This paper analyses the present scenario of PPPs in the infrastructure sector and highlights some crucial findings from recent studies in this area. It also suggests steps the government may need to take regarding PPPs as a policy choice.

Keywords: Infrastructure, PPPs, India, Governance

1. Introduction

 Public Private Partnerships, or PPPs as they are popularly termed, seem to have become a buzzword in policy circles in the country with several government departments adopting this mode for delivery of public service. They are being increasingly viewed as an attractive alternative to the traditional modes of procurement and delivery of services. Be it the Ministry of Highways, Power, Coal, Railways or Education. Every other day one reads about them taking the PPP route. What is it about the PPP mode of service delivery that has encouraged them to make this choice?  Has this framework of collaboration between the public and private agencies furnished more efficient and effective outcomes in the sectors it has already been adopted in, to compel the policymakers to choose them for accomplishing their mandated objectives? Or, are we in a hurry to adopt them without sufficient evidence to support this decision? Moreover, what must the role of the State[1] be in this arrangement? This paper attempts to answer these queries.

2. What are PPPs?

Theoretically, PPPs define a framework for a long-term contractual and cooperative institutional arrangement between the public and private sectors where they both pool their differentiated financial, technological and managerial resources. Proponents of PPPs claim that the these forms result in the following gains- the infusion of private capital in public infrastructure projects which helps to fill the ‘infrastructure deficit’ that several cash-strapped governments find difficult to do on their own; transferring of several risks associated with large infra projects (financial, commercial, operational, engineering, manpower etc.) which can be handled better by the private sector due to its flexible and more agile structures of management; access to their more efficient technological, manpower and managerial capabilities in infrastructure development and management; and bundling of services under one concessionaire or a consortium leading to reduction in transactions cost thereby resulting in lowered total project cost (this argument is supported by the theory of value-for-money and lifecycle approach to asset development and operation).

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[1] The terms State, government, public sector, public agencies and public institutions, unless otherwise stated, are used interchangeably. ‘State’ is written with capital ‘S’ to differentiate it from the term ‘state’ meaning a province or a sub-national administrative unit.

3. Worldwide review of PPPs

Despite the wide and popular perception that partnerships with the private sector provide better services and more efficient public administration, comprehensive review of worldwide experience of PPPs has revealed that there is sufficient and growing evidence suggesting to be cautious and even sceptical about them (Hodge, 2009). A useful body of literature studying PPPs in the OECD and capitalist countries has found serious flaws with the claims of economic superiority, effectiveness and profitability of the PPP mode (Shaoul, 2011; Smith, 2009). Analysts have been wary of veracity of measures used to determine VfM (value for money) and cost effectiveness of these projects pointing out that inaccurate discount rates, and flimsy and unprofitable risk analysis based on subjective criteria are often employed for estimation (Ball et al., 2007; Fitzgerald, 2004). There have been allegations of excessive profiteering, hidden wealth transfers to the financiers, and deliberate attempts by governments to showcase their perceived efficiency and inflated savings. Studies have also revealed flawed evidence to support claims of improved time and cost over-runs. Some critics (e.g. Shaoul, 2011) suggest a subtle political power shift towards the private sector based on its capital power, through the PPPs. Many analysts have termed them as a Faustian bargain, while doubts have been expressed regarding their social desirability (Flinders, 2005). Several studies have highlighted serious concerns in respect to their governance aspects including transparency, accountability, equity and efficacy under all conditions, and the risk of ‘elite capture’ and ‘crony capitalism’ (Rosenau, 1999; Peters and Pierre, 1998; Ragin, 1994).

4. Methodology

This paper is primarily informed by findings of my larger research in PPPs in highways in India. This is supplemented and enriched with the data from several secondary sources such as government reports and records, audited records, media reports and reports of funding agencies, as well as worldwide studies in PPPs in different sectors.

5. PPPs: The Indian scenario

A distinct and visible policy shift in favour of PPPs in various sectors, predominantly in infrastructure, is evident in India. The primacy given to private sector participation in developing infrastructure is reflected in the figures of the 12th Five Year Plan: 50% of the planned investment of about US $1 tn is expected to come from the private sector. According to the World Bank (2010), India is now the largest market for private participation in infrastructure in the developing world. Study by the Cambridge University and Royal Bank of Scotland (RBS, 2011) concluded that emerging countries will spend about US $20 tn in the next 20 years on infrastructure, registering a growth of 158%; India is listed as one of the countries that is expected to benefit substantially from this growth.

Despite these expectations of private investments and predictions, available evidence for the sectors that have dabbled more extensively in PPPs suggests that it may be yet too early to arrive at any firm and lasting conclusions regarding the future of PPPs in India. The highways sector which has the largest share of PPPs within the infra pie is showing signs of weakening interest by the private sector. NHAI has recently informed that 33 projects awarded during last two fiscal years have not taken off. Furthermore, 17 BOT (Toll) and 3 BOT (Annuity) projects failed to generate any response last year primarily due to lack of equity with the private partners. From the days when PPPs were the norm and EPC an exception, to the recent decision by the Ministry of Road and Transport to award more than 50% of the road project through the Engineering Procurement Construction (EPC) mode (PIB, 2013)- this perhaps needs deep political rethink at the policy level. GMR pulling out of the much publicised Kishangarh-Udaipur-Ahmedabad highway project (CAG has pegged the loss caused by this termination at INR 32,500 crore), NHAI terminating its partnership with Delhi Gurgaon Super Connectivity Limited (DGSCL) for the Delhi-Gurgaon expressway (Committee on Public Undertakings (COPU) constituted to look into PPPs in highways has made scathing remarks against NHAI regarding the contract management and administration of this project, in 2009), failure to meet targets of awarding projects under PPP mode, and NHAI’s remarks recently that  it has ‘no funds to award projects’ (Times of India, 2013) need to be studied deeply to understand not only their operational but also their wider and more lasting policy ramifications regarding the future of PPPs in India.

Evidence from the Railways does not seem to be any more encouraging. Several projects have either found no takers or are progressing at snail’s pace.These include development of 100 world class railway station with private capital of INR 10,000 crore (announced in 2007); only 5 are being planned. The 540-km stretch between Sonnagar in Bihar and Dankuni in Bengal, part of the 1839 km Eastern Corridor, has evinced no response from the private players. It is reported that some of the infrastructure majors such as IL&FS, GMR and L&T who had shown interest in the INR 21,000 crore Mumbai elevated corridor project, are now re-evaluating the project. Railways’ plans to attract private investment of INR 10,000 crore for their 20 multi-modal logistics parks also seem to be coming a cropper. Even with this poor private sector response to its already announced projects, recently Railways has announced accomplishing its targets in the renewable energy projects within the PPP mode. How these would be different in terms of attracting the waning interest by the private sector in varied infra projects, has however not been outlined.

Evidence from PPPs in the aviation sector in the country points to faulty structuring of PPPs, which has resulted in severe escalation in airport user charges which the passengers have to bear. In addition, several instances of land grabbing have been reported in the aviation sector where many airports are being developed under the PPP model (e.g. Delhi International Airport). In the case of the GMR built Delhi International Airport, the CAG has pointed towards financial manipulation by the developers to benefit the promoters. The CAG report of 2011 points to loss of at least INR 1185 crore to the government in land development of 48.5 acres (196,000 sq m) of land nearby the airport. Recently the Airports Authority of India (AAI) has charged Delhi International Airport Ltd. (DIAL), the private consortium operating the Delhi International Airport under the PPP model, with faltering with the revenue sharing arrangements.

6. PPPs in India: Some crucial findings

Several reasons underlie the growing poor response by the private sector in the burgeoning infrastructure market in the country. What does differentiate them however from the experience of PPPs in the industrialised countries is that many of the factors causing this dismal scene seem to be emanating from the public partner; the recent sagging interest by the private players has however been put down to the global economic slowdown. Although the PPPs in highways seem to have a structured approach regarding the selection and approval of the concessionaire through model concession agreements, viability gap funding mechanism, formation of high level committees for approval of PPP projects and many state governments ‘encouraging’ these partnerships through profitable land deals, my research reveals that a crucial reason for the huge delay in these projects is that the public partner has passed on a large share of its responsibilities to the private partners in matters of land acquisition, getting necessary administrative and environmental clearances from the concerned government departments, and shifting the underground utilities (such as water, sewerage and gas lines, telephone and fibre optic cables etc), that lie in the right-of-way. Based on the principle of allocation of risks to the partner most competent to bear them, there is a fairly clear division of roles, responsibilities and risks in the model concession agreement. Evidence from the field however reveals that these risks are generally being borne by the concessionaires instead of the government in addition to their own share of risks. Concessionaires note that as any delay to commence operations seriously jeopardises their revenue collection, they have no option but to take on these responsibilities and the associated risks, in addition to bearing their own share. The big private players may be able to manage these in view of the larger gains, but the smaller partners are finding it difficult to factor in these contingencies. The under-staffing of NHAI at the regional offices has been revealed to be a major causal factor; due to less number of staff effective coordination with other public and private agencies/stakeholders, and timely follow up is being seriously affected. A significant finding of my research is that there appears to be a tacit understanding among the public functionaries that the concessionaires are ready to do ‘almost anything’ to ‘assist the government’ to expedite the project, as any delay would adversely affect their revenue collection and hence the profits.  Anecdotal evidence suggests that some public functionaries deliberately delay clearances and approvals, and are slack in coordinating with concerned departments as this action increases the chances of ‘speed-money’ changing hands. The other significant reasons contributing to the delay include weak coordination among concerned departments of the state government due to poor follow-up, inadequate devolution of powers to NHAI field officers, differing priorities between national and state governments within a federal set-up resulting in lack of ownership of projects, and prevailing mindset of a large number of public functionaries that still consider the concessionaires as ‘glorified contractors’ rather than ‘partners’, as generally described in literature on PPPs. In addition to this, a general feeling of distrust persists within these departments where the private agency is seen to be constructing something ‘for the government’ and not ‘in partnership with the government’. This at times appears to be the result of the self-seeking profit-driven behaviour of the private sector which still has not found acceptability within the public functionaries. 

In addition to the organisational factors as mentioned above, land acquisition has emerged as the biggest stumbling block in most infra projects; the issue is multi-dimensional and has several social-politico-economic nuances which make it time consuming and complicated. Moreover, land is a state subject which needs coordination between the client department/ministry of the central government and the state government. Poor coordination between these two is generally found to cause substantial delay in acquiring land. Archaic land laws, poor compensation packages, and different compensation by different client organisations such as the NHAI, Railways and Defence have also led to confusion and difficulties in land acquisition. It is expected that the new Land Bill will expedite land acquisition while adequately compensating the landowners. The concession agreement for PPPs in highways stipulates that 80% of the land, free of encumbrance, shall be handed to concessionaires before construction begins; most concessionaires begin work as soon as 50% of the land is made available as 80% land is never made available during the time of construction.  In addition to this, the inter-ministerial differences and delay in according environmental clearances has caused delay of as much as 2-5 years in many projects. Although the norms have now been relaxed and the Cabinet Committee on Investment (CCI) has been constituted to expedite the infrastructure projects, many projects have languished for a long time due to the administrative hurdles. The delay in getting environmental clearance resulted in GMR pulling out of the Kishangarh-Udaipur-Ahmedabad project.

As a result of the reasons analysed in the sections above, PPPs have not been able to overcome the time and cost over-runs which PPPs are argued to accomplish. The CAG has pulled up NHAI for its ‘tardy progress’ in meeting its targets (Economic Times, 2011). An extensive study of 227 new road projects in the EU also concluded that PPPs were 24% more expensive than estimates and the cost-overruns were comparable to those in traditional procurement mode (Blanc-Brude et al., 2006). Other studies (e. g. Flyvbjerg et al., 2003)  suggest cost-overrun of 28-50% in large infrastructure projects, predominantly transportation.

Emerging evidence from the PPPs in the highways and the other infrastructure sector such as Railways, and the findings of my research reveal that private capital is not the predominant feature of all PPPs. This has been argued to be the distinctive feature which distinguishes PPPs from the traditional contracts and claimed by the proponents of PPPs to be the primary reason for their wide acceptance. Many PPP projects in highways and railways could not take off due to dearth of private equity. Focus on long-term funding for PPP projects is assuming top priority within the policymakers as lack of long-term sustainable finance has been a key constraint in scaling up of many projects. My research has revealed that financial closures are delayed in many highway PPP projects due to unwillingness of banks and financial institutions to finance projects on account of revenue risks as projected by concessionaires. The delay in completion of PPP projects is also making the funding agencies wary of their sustainability and viability. Due to such delays the difference between the estimated Total Project Cost (TPC) and the actual cost varies, and the project fails to take off in absence of long-term financing. Moreover, often the high cost of debt service tends to affect ability of concessionaire to raise cheap long-term capital because of the still poorly developed domestic bond market for long-term debt instruments. Long-term funding of PPPs is an issue as concession periods typically last about 25-30 years, and banks in India do not have long-term funding options. As a result of this, contrary to the claims of advocates of PPPs, in the highways sector, NHAI is reverting back to the EPC (Engineering Procurement Construction) model; it plans to award more than 50% of the projects through this mode in this fiscal (PIB, 2013). This marks a distinct departure from their earlier policy of 2011 of developing more than 95% of national highway projects through PPP and 5% through EPC (Indian Express, 2011). 

In addition, available evidence also points to increased instances of land grabbing by the private developers through the route of PPPs. The government has been providing premium land surrounding infra projects as in incentive to the private partners, often due to the purported non-viability of the project. There have been many reported cases of large scale land scams where the State machinery acquires prime land surrounding the projects for stated ‘public purpose’ and offers it to the concessionaires at very low prices as an incentive to invest in the highway projects. In fact, so rampant has been the role of government functionaries in acquiring land on behalf of the private sector, that the State has been called ‘the real estate agent’ of corporate India (Business Standard, 2010). While the private developers make substantial profits through commercial exploitation of land, the landowners are poorly compensated. Worse still, many of the original landowners lose out almost their entire livelihood and the compensation received is not sufficient for them to generate alternative livelihoods. e.g. the Yamuna Expressway. Evidence through my research indicates collusion of the public agents with the private sector developers and a deep-seated bureaucratic-politician-developer nexus driven by strong power-money combination contributing to this situation. Reports also suggest cartel formation among big infrastructure development companies that limits competition for smaller companies in order to obtain large projects.

7. Discussion and concluding remarks

Given the projected need for infrastructure development in the country, partnership with the private sector where their efficiencies in asset construction and management are utilised for the larger public good, will be useful. However, investigation into PPPs in the infra sector in India has revealed that we do not have conclusive proof to the claim of superior gains and efficiency of this mode of provisioning of service within the present governance structures. There have been no analytical studies in India to examine the comprehensive cost of construction and operation of a transport facility throughout its life cycle although policymakers and analysts have expressed concerns about the enormously high investments in PPP projects. Some analysts are of the view that whatever evaluation is on record is rather subjective, and that PPPs seem to be ‘driven by more [reasons] than public-sector deficits, debts and scarce resources’ (Boase, 2000: 77). Systematic evaluation and analysis of PPPs developed so far will aid in reaching this conclusion, which however has not been undertaken. Such an evaluation of the gains accrued by adopting this mode may serve policymakers in planning the road ahead in terms of the investments that are committed. This will also provide us with the answers whether this mode is the most appropriate and suitable mechanism for development of infrastructure. For example, the high powered Working Group on Urban Transport of the Planning Commission under Mr. Shreedharan (Planning Commission, 2012) has rejected the PPP model for developing core urban infrastructure projects, particularly metro-rails. It has argued that unstable revenues of these projects make them commercially unviable and the private developers cannot sustain them without significant government assistance. The Group further noted that metro-rail services in as many as 88% of the 113 cities across the world are developed and operated by the public sector. It has recommended government procurement of these essential services arguing that the PPP mode results in high project costs and high user charges.

Furthermore, it will prudent to carefully consider each case and decide whether PPP is the appropriate mode of delivery of public services in that case. Instead of following stereotypes, government agencies may explore innovative ‘mixed’ or ‘hybrid’ collaborations with the private sector that would meet different developmental goals of the country and not try to fit one size to all. In view of limited private interest in some sectors (such as urban transport projects where the revenue models are not sufficiently attractive for private investment), it may be worthwhile to identify the best form of partnership with private sector in order to derive maximum benefit from the usage of private sector resources and expertise.

Any decision regarding PPPs needs to keep in mind the differing ideologies of the two sectors-whereas one is driven by social goals the other is market and profit driven. Merging these sectors with a common public objective may require a relook at the basic fundamentals that govern the State and the market, while creating governance structures and mechanisms that ensure accountability of both the partners; capacity of governments to effectively manage these complex new relationships thus acquires importance. Advocates of PPPs claim that these forms of partnerships, in addition to providing mix of resources of both the sectors, are devoid of their dysfunctions (Börzel, 1997). A growing body of evidence, including my study of PPPs in highways in India, however suggests that such is not the case- the private sector has been found to manipulate the concessions and incentives towards self-seeking goals, whereas the public agencies still need to establish sturdy structures of effective governance of these new forms of service delivery. Furthermore, although PPPs are argued to have mutually agreed goals, the ‘mutual benefit theory’ when applied in practise is not so straight forward and conflicts may arise from division of benefits and command of resources (Streeten, 1983: 877). Care also needs to be taken that the gains from the projects are not capitalised. PPPs should not lead to a situation where the ‘gains in income are accompanied by losses in welfare’ because of inequalities the division of benefits generate (Streeten, 1983: 877).

This leads to a strong case for an active and leading role of the State in governance of PPPs. This is all the more so as PPPs are likely to constitute an increasingly significant component of public policy in India, and the State is the key source of constitutional legitimacy with legal authority and social mandate to seek and protect public interest, ensure equity, continuity and stability of services, prevent discrimination or exploitation, and ensure social cohesion. Growing support and wide consensus for a significant role of the State in partnerships with the private sector is being observed in literature on PPPs. Following (Rodrick, 1997: 413), ‘we are at the threshold of a serious reconsideration of the role of the state in development, one that will lead to an improved understanding of the role that governments can (and have to) play’. Whereas Kettl (1993: viii) argues that, '... public reliance on private markets is far more complex than it appears on the surface. In these relationships, government inevitability finds itself sharing power, which requires it fundamentally to rethink not only how it manages but how it governs'. An enlarged role of the State has been advocated for engaging in wider process of formulating policies and mechanisms for allocating and coordinating recourses, influencing and structuring economic and market space, in addition to ‘tightly’ governing PPPs through stringent oversight mechanisms. Moreover, the State will need to ensure that reliance on private sector is not blindly followed and PPPs are not treated as a panacea for the problems of infrastructure deficit and service delivery.

Published in the IIM Bangalore proceedings of the 8th Annual International Conference of Public Policy, August 2013.

About Author 

 Dr. Manisha Verma, a Civil Servant, is working in the Government of India. She has a PhD from the Institute for Development Policy and Management (IDPM) at the University of Manchester, UK. Views are personal.

She can be contacted at - v.manisha@gmail.com 

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