Suresh Subudhi & Karthik Valluru
How often has traffic congestion delayed you from getting to a critical meeting or reaching home on time for dinner How many summers have you spent without air-conditioning in the peak afternoons due to load shedding The key drivers for many of these problems are only expected to increase exponentially over the next few years. Passenger traffic is set to grow at around 13% per annum for the next 5 years (12th Five Year Plan). India will add 100 new cities over the next decade with their own demands for urban infrastructure. If in 2013, peak power shortage in South India is expected to be 26%, according to CEA, imagine how bad it would be in 2020!
India is facing an infrastructure choke point with no clear silver lining. Despite spending around 8% of GDP on infrastructure, India still ranks 84th on the Infrastructure Index of the World Economic Forum's Global Competitiveness ranking. So, why are we not seeing improvements if we are spending so much money The facts are that we are not spending enough and we are not spending efficiently. We consistently miss our 5-year Plan targets. And when we spend, we do so inefficiently. Many of the infrastructure projects that are under public sector management are fraught with cost and time over-runs. What India needs at the moment is a model for infrastructure development that can (a) bring significant capital with the capability to rigorously prioritise the right projects and (b) bring critical expertise in planning, development, execution and cost management of projects.
The 12th Five Year Plan's allocation to infrastructure is R57,000 billion for 2013-2017. This represents a 2x increase from the previous five-year period, translating to 10% of GDP. Where would this money come from How do we ensure we meet development targets this time India has the 3rd highest fiscal deficit in the world and a history of cost and time over-runs across infrastructure projects. It clearly needs the private sector to play a key role in bridging the monetary and capability gap plaguing infrastructure development. Public-private partnerships (PPP) could be a model to do this.
PPP is not a new concept. According to the government, there are around R4,900 billion in PPP investments that are either completed or under implementation, with an additional R6,100 billion in the pipeline. However, the PPP model has found itself caught in a vicious cycle that is impeding its ability to play the knight in shining armour. Let's take investments in roads and highways as an example. After awarding a record 8,000 km of highways in 2011-12, the NHAI has found it difficult to meet even 1/8th of this figure for the current year. Key reasons include liquidity constraints and a perception around financial attractiveness of these projects given the recent experiences. This has in turn led to a significant drop in participation of bidders.
If India is to fulfill its infrastructure requirements, it is critical to create successful PPP models. It is not an easy task. PPPs present an inherent conflict between the government objective to minimise overall economic costs while ensuring high-quality service and the private sector aims to maximise returns. This needs to be carefully managed. A study of countries that have developed mature PPP models may provide some insights. First, not every project is well suited for PPP. The decision must be based on an objective analysis of the cost and benefits to the taxpayer of alternate approaches. The risk premium sought by the private sector could make some projects costlier for the tax payer in comparison to the public sector. Also, it is better to attract private capital to projects that have a higher likelihood of financial success. The more PPP projects are successful, the more the model would attract capital. The key is not the volume of PPP projects but the volume of successful PPP projects.
Second, create an effective balance of risk between private and public sector. The regulator must balance public interests with the need to attract private financing. A regulatory approach that looks at private sector participants as super normal profit seekers to start with is not likely to create a balance. Risk should be allocated to the partner better equipped to handle it. For example, the construction risk post all clearances is better managed by the private player while the risk from right of way/access delays is better managed by public sector. Third, pre-obtain all clearances (environmental, regulator, land) before awarding the PPP contract. Public entities are better placed to manage and obtain these clearances than private players. In Indonesia, for example, the government plans to complete all land acquisition for a PPP project before a private sector partner is selected.
India's future growth and development is at stake. Can we develop a sustainable and profitable PPP model that will serve as a benchmark for others to emulate We will have to wait and see.
Suresh Subudhi is partner and director, BCG and Karthik Valluru is project leader at BCG. Views are personal