Column : Build on this Latin lesson for projects

Written by Michael Walton | Michael Walton | Updated: Aug 6 2009, 02:46am hrs
Can public private partnerships solve Indias huge infrastructure deficit Dont expect miracles. Consider the experience of Latin America, which has faced comparable problems. At the beginning of the 1990s, all countries suffered big infrastructure deficits, dismal service standards, tight fiscal constraints and deep problems with the traditional mode of public delivery. There were weak incentives for efficiency and infrastructure delivery was often embedded within patronage-driven political systems. While many governments had a reasonable capacity to get things done, there was excessive influence from private interest groups and extensive corruption, not unlike in India.

The idea of private involvement in infrastructure as the solution to both the financing and efficiency problems swept through the region, affecting almost all countries, whatever their ideological leanings. It seemed a pragmatic solution. In sectors with natural monopolies, such as ports, roads and water and sanitation, the favoured contractual form was not full privatisation but a concession: such as build operate transfer. Regulation is built into the concession, sometimes backed by independent regulators.

So did it work Results were mixed. Infrastructure got built, in electric power, roads, ports, water and sanitation. Levels of service often improved dramatically, if from awful levels. Prices were typically raised, if from highly subsidised rates for the few with access.

Increasing access actually often helped lower income and poor groups. A careful study of municipal water privatisation in Argentina found big gains in child mortality of the poor, relative to municipalities that had not privatised. But hopes that the infrastructure deficit would be tackled were dashed. Infrastructure bottlenecks remained a problem, and the infrastructure gap relative to East Asia rose. (And China overtook Mexico in exports to the United States, in part due to lower transport costs.) Moreover, by the early 2000s, privatisation had become highly unpopular, according to opinion surveys, as populations became discontented with the combination of higher prices, access issues, and tales of fat profits of private companies.

A big part of the issue lies in the contracting nexus. There were some cases of spectacular corruption and private enrichment (including a Nicaraguan president). But the more general phenomenon was of widespread renegotiation of concession contracts. According to a World Bank data base some 74% of water and sanitation and 55% of roads contracts were renegotiated by the early 2000s. Over 60% of renegotiations were initiated by the operator, and a majority were resolved in favour of the private company. So what was going on Initial bids may have been low in the expectation of holding up the government later, with bribes or other means. Even in the absence of corruption, operators and Ministries of Public Works have a common interest in getting the works done. Ministries of Finance have more of an interest in high operator profits (and so tax revenues) than in protecting the interests of all consumers. There is an exception, which is Chile. Chile also faced problems of renegotiation, and concerns over the MPW favouring concessionaires. But private involvement effectively eliminated Chiles infrastructure deficit over 15 years, and roads, ports, airports have underpinned a highly competitive economy. Chile also innovated in the design of explicit subsidies to ensure access to poorer groups. Where did success come from I think there is a mixture of two things: first, Chile has a markedly stronger tradition of rule of law and respect for property rights than most of the rest of the region; and second, there were specific issues of design, around a well-crafted 1991 concession law and, more recently, effective independent regulation. So what does this imply The broad Latin American experience illustrates the problems of PPPs. Chile may illustrate the possibility. The parallels in Indias institutional conditions unfortunately look stronger with the rest of the Latin America than with Chile.

Does this mean PPPs are a bad idea for India No. In fact, in most countries, PPPs, for all their problems, performed significantly better than public sector delivery. But it does imply that the institutional challenge cannot be underestimated. Moreover, there are not design tricks, such as have an independent regulator. The issue is understanding just how difficult regulation is, that regulatory capture or incoherence is the norm if there is not already a strong established tradition. And this has to be backed by effective courts, transparency, independent technical analysis. Last , it is crucial to build into the process public incentives for provisioning for equity, for both substantive and political reasons. Regulating this often fails, if the operator lacks incentives. Otherwise there will be a justified backlash. Indias infrastructure sector needs private involvement, but it is important to start with recognition of the depth of the institutional challenge.

The author is at the Harvard Kennedy School, the Institute of Social and Economic Research, and the Centre for Policy Research