Know your PPP

Public-private partnerships, or PPPs, received unprecedented attention in this year’s Union budget. Finance Minister Arun Jaitley pointed to the 900 PPP projects under development in India, making it the world’s largest PPP market. But he wants many more PPPs to solve all sorts of problems: from urban renewal to “rurban development”, from airports and metro rails to gas  grids, from research centres to convention centres, and even to set up the Hast Kala Akademi. But while India might be a leader in contrivance, it remains a laggard in consequence.

India still lacks infrastructure —  roads and rail, ports and airports, power, water and sanitation, communications technology, schools and hospitals —  and as it grows, the large infrastructure deficit is becoming painfully evident. Simple tinkering in the quest for a more nuanced and sophisticated approach for PPPs will not bridge this gap. Fundamental changes in the understanding of PPPs —  what they are and aren’t —  must come first. To get results, the government must ensure that PPPs are deployed only where the three Ps —  suitable and economically viable projects able to attract proficient private partners in engineering and finance through transparent, competitive processes —  are present

A PPP is not a decree of the government. Nor is it just any juxtaposition of public and private efforts. A PPP is a partnership between the government and a private entity based on a long-term contract that requires the private entity to deliver services in exchange for compensation from the government or users, tied to their quantity and quality. All the activities necessary to provide these services —  typically design, construction, finance, operation and maintenance of the underlying infrastructure asset —  are the responsibility of the private concessionaire. A PPP represents a radically different and demanding approach for procuring infrastructure services compared to traditional public procurement.

Why are policymakers in India and many other places so enamoured with PPPs for building infrastructure? Because they see PPPs as an ingenious method to obtain large infrastructure investment without making a dent in the public budget. Our railway minister announced a Rs 60,000 crore bullet train while allocating only Rs 100 crore from the railway budget. Where does he expect the balance to come from? In right earnestness, from PPPs. That, after he has got PPPs to also pay for foot overbridges, escalators and lifts; boundary walls around stations; dual display fare repeaters at ticket counters; port connectivity; passenger amenities; and private freight terminals.

But the ingenuity of PPPs lies not in private money but in private efficiency. The job of government is not to hanker after private cash but to draw out private competence to achieve public goals.PPPs must be used only when there is reason to expect that they will deliver superior —  cheaper, higher quality and more reliable —  infrastructure services. If private entities are able to deliver, a PPP mechanism ensures that the resultant benefits translate into public gain and private profit. It is this profit motive that makes the private sector partner with the government in the quest for better outcomes. It requires attracting skilled private players who can manage projects from inception to outcome.

It is tempting to look for infrastructure finance within the banking system, especially state-owned banks. However risky, long-term, illiquid infrastructure assets sit awkwardly beside bank liabilities that are safe, short term and required on demand. If infrastructure investments perform poorly, the government might find itself having to fend off a banking crisis. The budget proposal to attract capital market financing in the form of infrastructure investment trusts and pooled municipal debt obligation facilities are welcome alternatives. What is critical is that PPPs be financed with not just any private capital but “risk capital”: long-term funding that is tied to project performance and reaps profit if the project succeeds and incurs losses if it fails.

Perhaps the most important role for the government is to provide an adequate regulatory framework that is independent, fair and technically competent. Private entities cannot be allowed to exploit their monopoly power to reap inordinate profit, even as governments cannot be permitted to hold a private investor who has already invested millions to ransom. The long-term contracts that underlie PPPs usually span decades, sometimes generations, and almost always multiple governments. Regulation must provide assurance to investors about the rules of the game, even as it allows reasonable flexibility to respond to changing needs and circumstances.

The finance minister’s proposal to establish the “3P India” centre would be a step in the right direction if it can define the scope of PPPs, prepare suitable projects, attract appropriate investors using long-term financial instruments and establish a credible regulatory framework. The centre should serve as an intellectual gatekeeper of the PPP concept for new projects, as well as a repository of PPP experience with past projects. As the G-20 high level panel on infrastructure put it, “PPPs require their own infrastructure”. The finance minister has taken the first step in building that infrastructure.