Public Private Partnership Projects: The Indian Experience

Introduction

Infrastructure is crucial to the growth and sustenance of the Indian economy. With the country being a developing one which is just now beginning to enter the trajectory of economic growth that would catapult it into the league of developed countries, it is vital for massive investments to be made in infrastructure and the construction of airports, ports, highways, and public housing.

Since the Indian government is perennially strapped for cash, which is the case with other developing countries as well, there is a need for the private sector to pitch in and contribute to the development of the economy. Having said that, it must also be noted that for such private sector participation to actualize, they need to be incentivized economically and financially as well as assured returns on their investment.

Public Private Partnership (PPP) Projects

PPP projects are defined as partnerships between the state and the private sector, which cannot be called, either as complete privatization or complete governmental control. This means that the PPP projects are essentially partnerships that are formed for a specific purpose through the creation of a SPV (Special Purpose Vehicle) that has private sector equity as well as governmental stake in the form of land, water, and other resources that the government can offer the concessionaires to develop infrastructure around them and in them.

As has been mentioned in the introduction, PPP projects are the way forward for India, which has limited resources and hence, needs private sector participation as far as possible. Further, given the need to develop infrastructure on a war footing, the private sector with its deep expertise and experience in executing such projects would be in a better position than the government in this respect.

Problems with PPP Projects

Having said that, the experience of the PPP projects in the infrastructure sector in India has been a mixed bag with more failures than successes and the succeeding discussion highlights the problems and suggests some solutions. It would suffice to state here that future partnerships can learn from the successes and avoid the pitfalls that led to the failure of the other projects.

Perhaps the biggest problem that bedevils the infrastructure sector and the issue of the PPP projects is that the whole process is not transparent to the various stakeholders other than the governmental bureaucrats. Further, it is also the case that in instances where the PPP projects have failed, the blame game that ensues in the aftermath is usually directed towards the private players.

This creates perverse incentives for the other players who might reconsider their investments. Moreover, with so much of red tape and decision-making paralysis in recent years, investors are reluctant to invest in the PPP projects in India.

Apart from the problem mentioned above, the other risk that private players carry when they execute the PPP projects is that of the political uncertainty factor. It is indeed the case with many projects such as the Hyderabad Metro Rail, the Airport in Bangalore etc that a change in the government meant a review of the project leading to uncertainty over its continuance. This can lead to losses for the private players, as they would have invested substantial amounts of money, which are at risk if the project is cancelled.

Given the pervasive nature of corruption in India, promoters and the private players tend to recoup the losses that they have incurred by way of bribes and lobbying to the public at large meaning that the costs are inflated without a scientific appraisal of such projects. Moreover, given the tentacles of the underground economy, which is estimated to be as big as the official economy, the sources of finance and funding are concerns for both the government and the other stakeholders.

In other words, there is no mechanism in place that assesses whether the funding and the financing of the PPP projects is entirely from legitimate sources.

This is a tricky issue as PPP projects entail massive investments and with the chances of failure being high, they are high-risk projects. Therefore, there must be a proper mechanism in place where the risks are identified and allocated in a scientific manner. Shifting the risks on to the private players would be counterproductive as is the placing of too much risk on the government. As would be discussed later, a proper risk and reward system needs to be instituted for this purpose.

No PPP project can be executed without the sovereign guarantees extended by the government, whether at the state or at the central level. The experience of some private players in the PPP projects has been that governments change the terms and conditions of the contracts midway as well as withdraw them in some cases. Having said that, the governmental guarantees cannot become White Elephants as was the case with the Enron plant in Maharashtra.

Conclusion

The preceding discussion has made it clear that unless India embraces PPP projects wholeheartedly, it cannot make the “Great Leap Forward” which China did as far as infrastructure is concerned. Apart from this, the fact that the government is seen as the problem instead of the solution as far as the infrastructure sector is concerned means that the new government has its task cut out in attracting private players to invest in the infrastructure sector.

The preceding discussion has highlighted the problems associated with the PPP projects in India and has suggested some solutions. It is evident that most of the problems are systemic and structural in nature, which means that there is an urgent need to overhaul the archaic laws and remove the bureaucratic bottlenecks that stymie the PPP projects. Any discussion on the PPP projects in India is incomplete with a mention of the issue of corruption. Considering the fact that corruption at all levels adds costs to the PPP projects in addition to inflated project appraisals and other deleterious effects, it is indeed the case that this scourge must be tackled immediately.

Apart from these issues, the PPP projects must not be held hostage to political uncertainty and volatility.

In other words, a conducive investment climate is the need of the hour in India. In conclusion, India is at the “take-off” stage as far as economic growth is concerned and if it is serious about joining the league of developed nations, it must immediately ramp up investments in the infrastructure sector and actualize the kind of growth rates that are being forecast.

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