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    View | 25 years of public-private partnerships and the road ahead

    View | 25 years of public-private partnerships and the road ahead
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    By Sandeep Hasurkar   IST (Published)


    It is now over 25 years since infrastructure reforms, and the famous, once ubiquitous, “public-private partnership” (PPP) format was introduced in India. It is, therefore, perhaps, worthwhile reviewing this journey, its achievements, and learning.

    "No man is an island, Entire of itself. Each is a piece of the continent, A part of the main... Therefore, send not to know For whom the bell tolls, It tolls for thee." These lines by 17th-century English poet John Donne could well have been written for infrastructure in modern times.
    It is now over 25 years since infrastructure reforms, and the famous, once ubiquitous, “public-private partnership” (PPP) format was introduced in India. It is, therefore, perhaps, worthwhile reviewing this journey, its achievements, and learning.
    The Indian experiment in infrastructure has been a bag of mixed results. Socialist philosophy and policy over decades since Independence had yielded a failing infrastructure by the 1990s, unable to meet requirements for laying the foundation required for a liberalising economy aspiring for higher economic growth rates.
    Successive, fund-strapped coalition governments grabbed the conceptually sophisticated PPP model for infrastructure development as much for its realpolitik transference of fundraising, implementation and operational responsibility away from the government to the private sector as for the appeal of its arcane philosophy.
    However, academic proponents of the model found no takers in the real world then, to even experiment with the new PPP format. It fell upon a hybrid creation, a PPP itself, to take up the first projects to demonstrate the format's viability.
    The first projects and IL&FS
    The first two projects under the PPP format in India – the Rau-Pithampur Road in Madhya Pradesh and the larger NOIDA toll bridge in Delhi – were undertaken by Infrastructure Leasing & Financial Services (IL&FS).
    Irrespective of its failure to hubris, greed, and mismanagement, the fact is that IL&FS pioneered PPP in India not only through policy advice, creating required contractual frameworks and financing, but by implementing and operating on-ground projects that paved the way for subsequent projects by the private sector.
    The shortcomings of PPP
    The structural shortcomings of the PPP format on the ground in India were immediately evident.
    Successful PPP projects require a modern and independent regulatory framework, a quasi-judicial arbitrator demonstrably independent of the government, who would set standards, and tariffs, hold contractual parties to account and act as the pivot on which conflicting interests would be transparently balanced.
    That was a tough ask in the colonial-feudal administrative and judicial environment of institution-deficit India.
    Retired bureaucrats staffed newly created regulatory institutions as an extension of long years of government service, even as big corporate players undertook familiar regulatory capture.
    Mad rush for licenses
    Political capital deficit governments looked on as the old nexus of politicians-bureaucrats-big industry made merry in crony capitalism at the cost of public interest. In telecom, roads, power, ports, airports et al., no regulatory institution functioned to its public mandate independent of bureaucratic, political and dominant industrialist machinations.
    The frenzy of the opportunity, lure of windfall riches and India’s “jugaad” – if you can’t beat them, join them” – saw even small “mom-and-pop” private players join the lemming-like rush in attempting to game the system in obtaining licenses, concessions, and easily available bank funds.
    The results of judicial verdicts in the ongoing trials of coal and telecom scams are now visible.
    Large sections of this framework, viable in concept but unpractised in regulation, collapsed under its contradictions between 2012 and 2019, bringing to an end the high investment-led growth rates of the 2010s.
    PPP, as it stands today, is practically dead in the water. Most previous small and midsized players are either bankrupt or struggling to survive.
    Consequently, the infrastructure push is left to the government to undertake projects independently. And a few big private sector “national champions” in the making, in style similar to the South Korean Chaebol and the Japanese Keiretsu model of development.
    A ‘revised’ model?
    The government proposes generating resources for investment recycling through monetising existing brownfield assets to private players, hopefully, pension funds and insurance companies with long-term investible funds.
    This “revised” model may yield better outcomes in terms of asset creation.  With infrastructure projects being undertaken by the government or by select large players, the ability to navigate the many realpolitik pitfalls of project implementation and operation that shipwrecked many in earlier storms may improve.
    However, what remains unaddressed from earlier times is the question of getting independent regulatory institutions to function and prevent the build-up and abuse of monopolistic power inherent in PPP infrastructure projects, to the detriment of the public and user interest.
    Tariffs and service standards are the two public interest keystones on which any PPP project's theoretical and realpolitik arch rests. With government and an unaccountable bureaucracy as an interested party and big business interests seeking patronage, which independent institutional mechanism of even minimally demonstrated competence and trust ensure a level playing field where public and consumer interest is protected from regulatory capture? It is a question that continues to remain unanswered.
    Farming of toll collection
    A case in point is toll roads.
    In experiments of monetised farming of toll collection, first undertaken in the MSRDC-owned Mumbai-Pune Expressway, which was awarded long-term toll collection contracts in 2004, there has been little incentive for the toll collection agency to maintain service standards on the project.
    The service standards stipulated are also few and flexible, easily manipulated or fudged in connivance with those tasked with oversight of them. As a result, the focus is entirely on “milking” the project to maximise cash flows even as users suffer.
    Surplus land in proximity to toll plazas can be better used to build food courts to increase toll operator profits rather than for increasing toll lanes to prevent traffic jams from building up at the toll booths.
    There are, of course, no standards for maximum waiting time at toll plazas beyond which the operator will face a penalty and users will be compensated with lower toll charges. Similarly, part funds from toll collection that would be required to be spent on a highway policing system to ensure smooth traffic flow (trucks, for example, being fined for not driving in designated lanes, occupying all lanes and slowing down traffic) can be financially better spent on hiring food court staff. It is a problem that is increasingly evident across all highway projects.
    As a result, the user paying the toll that is theoretically based on his time and cost savings and, as elaborately and eloquently argued before, the purportedly independent regulatory authority is frustrated with the reality of the continuance of an opaque “zamindari” toll collection by an unaccountable private entity and a “hands-off” but complicit government whose only interest is revenue farming with least accountability but with all controls and a continued ability for patronage.
    The case is the same in electricity tariffs, airport user charges, telecom tariffs et al., where manipulation of the “independent” regulator is used to distribute largesse or a market dominance beyond contractual terms at the cost of user and public interest.
    Past mistakes need to be addressed
    The PPP format is now ostensibly being revisited for modifications for a more successful second run. The basic institutional issue of the lack of independent and equitable governance and regulation that caused its earlier failure must be addressed upfront and, in a workable manner, if past mistakes are to be avoided.
    For each piece is linked to the other, without which it cannot be whole and cannot function.
    Trust and equitable treatment for all stakeholders, including users, like the curve of the stone arch that uses countervailing and interlocking forces to hold keystones in place, are central to PPP and tariff-based infrastructure success. And, like the stone arch, it will have to be demonstrably built on the ground.
    —Sandeep Hasurkar is an ex-investment banker, and author of Never Too Big to Fail: The Collapse of IL&FS and its trillion rupee maze. The views expressed in the article are his own.

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