India today has 337 public-private partnership (PPP) projects in infrastructure, accounting for $124 billion in investments, which places it among the first five developing countries by the number of projects and magnitude of investment. But do these PPPs provide value for money to the government or they are merely moving liabilities into the future?

Value for money (VfM) to the government is ascertained by comparing the projects? discounted whole life cost with the counter-factual?the discounted whole life cost of conventional procurement.

The two main methods for implementing ?build, operate and transfer? road projects in India are BOT (annuity) and BOT (toll). The difference between the two relates to the allocation of traffic risk, which is assumed by the government in ?annuity? projects while it remains with the concessionaire in ?toll?.

In ?annuity? projects, construction, operation and maintenance of roads are done by the concessionaire who gets annuity payments determined by competitive bidding to recover his investment. Annuity payments are borne by the government through deferred budgetary expenditure and the concessionaire receives a fixed sum directly from the contracting agency, National Highway Authority of India (NHAI), biannually. In ?toll? projects, investment is recovered through toll revenues, and budgetary support is restricted to an upfront grant to the concessionaire, up to a maximum of 40% of the project cost. This upfront grant compensates the concessionaire for undertaking projects that are economically viable but fall below financial viability threshold.

We have analysed all the eight BOT (annuity) projects and nine BOT (toll) projects developed under the National Highways Development Programme (NHDP) Phase-I that are under operation. The following assumptions have been made in the VfM analysis, using the simplified public sector comparator (PSC) method:

* Estimated project cost by NHAI has increased by 25% on account of optimism bias (optimism in project estimates arises from underestimating project costs and duration or overestimating project benefits);

* Operation & maintenance (O&M) cost is Rs 1 million per km per year at constant prices;

* The BOT (annuity) payments are made for 15 years after the construction period of three years in most cases;

* Discount rate is 11% (6% for VfM plus 5% for inflation).

Tolls are foregone by the government for concessionaire in toll projects. Toll collection has been assumed to be Rs 4.1 million per km per annum (in constant terms). The growth rate of toll revenue has been assumed to be 6% per annum?60% of the potential toll receipts have been considered.

Toll collection after the end of the concession period and the residual asset value of projects are not counted in the study and no adjustments are made for differential taxation and transaction costs.

Overall, there is a positive value for money to the government from these 17 BOT projects (about 8% of the present value of estimated project and O&M costs for annuity projects, and 36% for toll projects). The estimate of VfM is conservative for several reasons: possibility of higher-than-assumed optimism bias in cost estimates, timeliness of delivery of PPP projects, and the limited risk of cost-overruns in PPPs. Finally, given the fiscal crunch, it may not have been possible for the government to undertake all these projects. So, the overall economic benefits should be much higher.

The following conclusions follow from our analysis:

There is value for money to the government in road PPP projects (average 25%). But not all projects provide positive VfM. So, government should be mindful of the key drivers of VfM [risk transfer, the long-term nature of contracts (including whole-life costing), the use of an output-based specification, competition, performance measurement and incentives, and private sector management skills].

PPP projects perform significantly better in terms of timeliness of delivery. A quarter of the projects were delivered before their due date. Finally, BOT (annuity) projects perform significantly better than BOT (toll) projects. There is limited cost-overrun in PPPs as construction cost risk is passed on to the private sector.

A sensitivity analysis shows that VfM to the government increases with increasing discount rate (owing to large future annuity liabilities) and optimism bias, and, ironically, reduction in the assumed efficiency of toll collection by the government.

?The writer is a research scholar at the University of Maryland, College Park, USA