Public-private-partnership: no panacea

Public-private-partnership (PPP) is a favoured fashion. Its newly discovered virtues endow it with almost magical qualities to resolve the many ills in our infrastructure. Thus, the recent workshop on PPP in infrastructure industries and regulation, hosted by the National Council of Applied Economic Research, was quite timely. It brought together leading experts from reputable European institutions to interact with academics and policy makers. They covered a wide gamut of subjects, like institutional capacity, forms of private partnership, regulatory regime, financial engineering and problems in the electricity sector. This project, when completed, will enhance domain knowledge on a complex set of issues where our experience is limited.

PPP is perceived as avoiding the inadequacies of public and private sectors. Excessive reliance on the former fosters inefficiency, while the latter is inequitous. In the European context, it is a mechanism for delivery of public services where the government buys services from private operators, whereas in a conventional arrangement, it is the government which buys the assets and jointly builds these. In India, the finance ministry defines it as ?a project based on a contract or concession agreement, between a government or statutory entity on the one side and a private company on the other side, for delivering an infrastructure service, payment of user charges.? Viability gap funding has been defined as ?a grant one-time or deferred, provided under this Scheme with the objective of making a project commercially viable.? Typically, this mechanism supports greenfield investment and goes beyond mere hiring of private delivery services. The virtues of this arrangement include:

• fiscal space, leaving adequate resources to finance inescapable commitments on schemes which do not lend themselves to such partnership;

• attracting private investment, which may be otherwise hesitant;

• efficiency gains through improved private management;

• more equitable distribution of access to output and services at affordable cost;

• creating a more competitive environment, and thus, improved governance.

These cannot be pursued independently, nor divorced from improving the overall investment climate and sectoral reforms to address policy deficiencies.

The scheme for support to PPP in infrastructure, along with the features of a special purpose vehicle for funding infrastructure announced by the finance ministry in July and November 2005, broadly lays down the coverage, eligibility criteria and approval procedures for securing financing. Clearly, the government recognises that ?the development of infrastructure requires large investments that cannot be undertaken out of public financing alone, and that to attract private capital, as well as the associated techno-managerial efficiencies, the government is committed to promoting PPPs in infrastructure development.? And ?infrastructure projects may not always be financially viable because of long gestation period and limited financial returns, and that financial viability of such projects can be improved through government support.? Within the infrastructure category, supporting the road sector would be the easiest, while in other areas like power, gas pipelines and special economic zones, the pace of progress would be conditioned by sectoral reforms.

However, excessive enthusiasm for a PPP approach must recognise the complexities of several issues. First, intrinsically, this is a sub-optimum solution. It recognises that public consensus for outright privatisation remains elusive, but partnering the private sector is more acceptable. However, these special arrangements are no substitute to ongoing sector reforms. There is inherent danger that redressing endemic sector-specific issues, particularly on subsidies and rates, get postponed under the pretext that investments are being secured by this special mechanism. For instance, implementation of mega-power projects is no substitute to resolving issues of open access, enhanced competition and elimination of distortionary cross-subsidies, to name a few.

Second, evolving a model concessionaire agreement, in which risk assignment and unbundling combine the virtues of equity and efficiency, need to be benchmarked with the best international practice, as well as the stage of the sector- specific reforms. There could be wide variations across sectors, regions and states.

Third, ensuring the quality of service stipulated in the concessionaire agreement is problematic. Assuming adequacy of the monitoring mechanism, short-term contractual arrangements may not secure financial closure, while longer-term contracts make ensuring assured service quality and penalty imposition more difficult.

Fourth, the application of user charges, which combine financial viability with distributional and equity considerations, make rate rebalancing a complex issue. The timeframe for application of market-based user charges and its calibration during the transition period needs consultation and the consensus of stake-holders. Given market imperfections, asymmetry of information and information rent-making in the public sector can create serious ?moral hazard? concerns.

Finally, regulatory and legal issues are critical. While some of this is embedded in the broader context of our legal reforms, alternative measures of dispute resolution and contract enforcement would remain a precondition for large private flows.

PPP is at a nascent stage. We must get these issues right for making it a powerful tool for infrastructure improvement. Enticing private investments and improving managerial efficiency depends on how credibly these concerns are add-ressed. PPP is not a panacea for our multiple infrastructure ills. There are no fixed paradigms on the most preferred modes of such an arrangement. We can shape it to meet our needs and more broad-based reforms would make the transition more acceptable.