PPP – Promoting Private Profits?

Just after the first railway budget of the Modi Government, Mr. Laloo Prasad Yadav, in his inimitable style, commented on the budget, “just singing PPP…PPP…PPP, railway projects will not come up”. Mr. Yadav might have sounded funny but his comment cannot be ignored. After the railway budget, the media cheerleaders, as expected, put up a headline, “Modi government offers bullet trains”. The reality is, the budget allocated Rs100 Crore only to conduct a feasibility study. Not just Mr. Modi and his railway minister have bullet dreams, but many earlier Railway Ministers, including Laloo and Mamata also had bullet dreams. Even Laloo wanted railway stations that would look like those in Europe. And yes, Laloo also sang, “PPP…PPP…PPP”!

The idea of PPP is not new. It started in the US in the 1970s. Under the World Bank patronage, it became popular in several developing countries in 1980s and 1990s. Other developed countries also picked up the idea by that time. In India, it started in late 1990s but picked up in current century. The Word Bank sponsored Public-Private Infrastructure Advisory Facility (PPIAF) played an important role in this.

Private investors, their cheerleaders and the World Bank attempted to sell the PPP idea with the promise that private investors will bring professionalism and efficiency in management and operations, while involvement of the public sector will ensure that the infrastructure projects will maintain their social and public interest orientation. In reality, it was a clever ploy to kill two birds in one stone.

Outright privatization in services, particularly in sectors where huge social and public interest issues are involved was facing strong opposition in several countries, particularly when the private companies concerned were of foreign origin. The PPP idea was to pacify such opposition and assure that public assets are not being sold out. On the other hand, in many private projects, investors were not getting the return that they expected as the markets were not able to bear the prices they were charging. Hence, the involvement of the public sector was necessary to ensure that private investors got high returns on their investments. This can be corroborated from the fact that in all PPP projects, private investors get a rate of return that is much higher than the government’s bond rate, even though most or all of the income risks associated with the projects are borne by the public sector. In fact in most PPP projects, a high rate of return is guaranteed and hence the private investors bear no risk at all.

The Indian policy in PPP is quite in line with this approach. As mentioned before, PPP model of infrastructure development started in India in the 1990s, but PPP investment was not picking up as private investors considered these investments to be commercially unviable. The government in love with private investments, therefore introduced the viability gap funding scheme to make such projects commercially viable. Under the scheme, government provides grant to finance up to 20% of capital costs. The sponsoring Ministries or the State governments can provide another 20% of capital costs. Thus total capital subsidy in such projects can be up to 40%. Don’t we hear again and again that government must cut down on subsidies as our fiscal deficit is quite high and it has to be brought down? Don’t we see railway fares going up as the government is unable to provide subsidy? Don’t we hear public sector units and railways not taking up new projects as they are not commercially viable?

Viability gap funding is not just about subsidies. It is of course a question as to why government will provide 40% subsidy when the major argument for bring private investment is that the government does not have the money? Another important issue is while we talk about efficiency as one of the reasons to bring private investors; it is anybody’s guess if private parties will attempt to be cost effective when they are given a high return and high subsidy. One can expect gold plating of investment. The scheme also opens up a new area of corruption. Even though there is a provision for competitive bidding, we all know how subjective assessment is used in technical bid to qualify or disqualify certain parties. We also know how often technical assessment criteria are changed to favour preferred bidders.

Ironically, even such attractive scheme with huge subsidy could not bring enough private investment probably because they wanted more. There has been significant increase in private investment in some infrastructure over the successive plan periods; it is still much lower than what the government expected. While there has been significant private investments in sectors like electricity and airports, in sectors like roadways and railways, it was far lower than planned.

The much talked about dedicated freight corridor projects are virtually languishing as private investors have not shown much interest. Many road projects got delayed as private investors did not show interest and finally government had to chip in. In projects like dedicated freight corridors, investment requirement is so huge that private investors find them unattractive. In roadways, collection of high toll charges often gets politically and socially controversial, and hence some feel it better to avoid them.

We may take pride in swanky airports in Delhi and Mumbai, but often we do not recognize how airports have increased landing charges. Since airport charges are not collected separately but paid at the time of buying tickets, often they are not noticed. In any case airports are used largely by the elites. Nevertheless, according to many experts, most airlines are now making losses and a major reason for that is increase in airport charges which the airlines find difficult to pass on to the travellers. In fact, some airlines wanted to shift their operations from Terminal 3 (the swanky one) to Terminal 1 (the ordinary one) at Delhi Airport that is now allocated to low-cost airlines. Of course they were not allowed to do so.

The Delhi Airport Express Metro Line, once publicized as the best example of PPP project has now become a classic example of what can go wrong with PPP projects. The private party, when realized that it will be difficult to make profit, found a pretext to get out of the project. Delhi Metro had to take it over. The private company has now gone for arbitration and it is quite certain that they will get back their investment along with handsome return. Meanwhile, the debts raised by the company from banks remain un-serviced. This of course brings another issue to the fore. If government does not have money, then private investors do not have money either. They raise finance from the banks most often from those in the public sector. Moreover, apart from 40% subsidy, the government owned India Infrastructure Finance Company Limited provides up to 20% of finance in PPP projects. Hence, government does not have money is a specious argument to promote private interests.

Meanwhile PPP is losing popularity in several countries particularly in US and Europe due to public protests. In the US, many state and local governments have brought back several services under government operations that were under PPP arrangement for many years. In many European countries, PPP concessions were not renewed and in some cases they were even terminated. For example, privatization of the water services of the city of Paris increased tariff without any perceptible improvement in the quality of service. At the end of 2009 the city did not renew its contract with two of the French water corporations. After one year of being controlled by the public, it the water tariff was cut down. The same corporations now seek markets elsewhere!

Incidentally, water sector has been most controversial worldwide in the context of PPP. This sector saw a wave of privatization through PPP mode in several developing countries in the 1990s. However, the big water corporations did not bring the promised investment and improvement in quality. Instead, they increased water tariff so much that water connection became out of reach for many households. Despite all these, water and sanitation remains a priority sector for private investment in India. Fortunately, this sector did not receive much of private investment.

While, the current government is more or less following the path charted by the previous government, it seems that it has become more aggressive with privatization and PPP. To make it work (?) it is likely that the Modi government will provide further incentives. Its emphasis on bullet train through private investment looks even more dangerous. Nowhere in the world bullet train infrastructure has been made by private companies. If they do that India, they will surely demand huge grants from the government. The Prime Minister must not waste such huge amount of public money to finance his personal dream shared by a few elites who might not even use it after all.

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