A 2013 report by a Delhi-based think tank concluded that there are seven prerequisites in supporting the implementation of public-private partnerships and infrastructure development. One, the lack of a strong public sector capacity to identify, structure and monitor projects. Two, the presence of private competence to design, construct and operate large projects. Three, the need to involve the community in a location where the project is to come up. Four, the competence to raise finances and ensure the commercial viability of projects for which tariff commitments have to be made 25 to 30 years in advance. Five, the ability to share risks. Six, the knowledge to ensure that all in the society at a location are included in the project. Seven, the sustainability of the project.

But they ignore Indian context, mindsets, procedures and attitudes. India, since Independence, claimed to be ‘socialist’ and enshrined it in the Constitution. This meant public ownership of resources and state regulation and control of all investments including their capacities, location, technology, royalties paid to suppliers, salaries to employees, etc.

In addition, government schemes to supply essentials (foodgrains, kerosene, cooking gas, diesel, fertilisers, etc) free or below cost, and cross-subsidies to save government the expense led to macroeconomic policies that ensured low growth, rising government debts, high interest rates and continuing poverty of many.

In 1991, the enterprises were given a freer role in the economy with the abolition of industrial and most import licensing. Public sector monopolies were challenged by new private entrants in infrastructure. Rising demand for long-term debt capital for increasing production had few sources. High domestic household savings, plus growing corporate profits and savings, did not alleviate the shortage of capital. Development finance institutions stopped receiving government capital support; foreign investment inflows were not adequate. Much of the long-term borrowing was from commercial bank lending, mainly from short-term deposits. Interest rates were as for other commercial borrowings, and high.

In many countries, long-term savings are invested in ‘utilities’, mainly infrastructure. These earn low but steady interest and the investments are secure. But not so in India. Savings in insurance, provident, pension and gratuity funds have not been available for long-term investment in private industrial ventures. High capital costs added to other constraints to infrastructure investments. The major ones were numerous government permissions and frequent inspections, corruption, restrictive labour laws, constraints on free movement of goods because of varying indirect taxes, environmental regulations and interminable wait for government go-aheads, in addition to state government bureaucracies holding up projects. Time overruns meant cost overruns. With debt at 66-80% of investment, delays made many infrastructure projects unviable.

Partnerships between public and private investments in infrastructure projects were a way forward. The government asked public sector companies to get initial clearances. For example, power plants and power distribution, roads, ports, airports and metro rail required large tracts of land, many a times in irrigated and inhabited areas. Thousands of farmers had to be persuaded to part with their land for compensation. Local politicians intervened to make further delays. For many whose livelihoods came from working on the land, alternative skills had to be developed and gainful employment found. Considerable resettlement and rehabilitation of people was required. In most cases, there were adverse environmental impacts that had to be mitigated and approvals taken from local, state and central authorities. Militant local NGOs had to be countered. Roads, airports, ports had to be built to bring in raw materials and fuel, again needing many government approvals. However, the public sector companies tasked to get these clearances also delayed matters.

Viability gap funding was an idea that allowed bidders to forecast tariffs for the next 25-30 years and revenues that might arise from advertising, land development, etc. The bidder then quoted forward tariffs for the period (with escalations) and how much financial support he would need from the government to build the project. Whoever asked the least, got the project, if other conditions were met.

The innovation failed to rapidly add to infrastructure. No project was without delays. The government could not deliver on promises. Private developers saw capital locked up. Payback periods got extended as costs rose. Most infrastructure projects failed in their economic assumptions for the duration of 25-30 years for which bids had been made at fixed tariffs (‘levellised’, i.e. averaged with escalations). Imported coal prices went beyond assumptions; aggressive bidders for road projects found their quotes unsustainable; forecasts of traffic or advertising revenues went awry; land development revenues weren’t achieved; railways took interminable time to approve under and over bridges; fuel availability was uncertain; coal mines allocated for UMPPs got mired in controversy; barren land given cheap for ports on which the developer lavished expenditures on hinterland development and was accused of crony capitalism and favouritism when the developed land values soared. Where there were statutory regulators, they were ineffective. Profit share to government in oil/gas fields and airport development were diverted to private revenues.

All these led to delays and even abandonment of many projects. Banks were left with vast unserviced loans to these delayed projects. The economy suffered. Hence the question as to whether there is hope that we can ever develop infrastructure at the required pace?

Our bureaucrats and politicians should deal with all clearances in a timely fashion. There must be compensation to the developer who suffers because of delayed clearances. Tariffs should not be quoted for 25-30 years when financial closures require 12. Land acquisition should be simplified—a difficult task with so many political and do-gooders involved. Land required for projects should be minimal and not result in vast surplus lands. Contracts must be designed to account for most eventualities and provide an authority to rewrite them where necessary. Assumptions must include forward interest or exchange rates and rewriting contracts if they are exceeded or fall. Sources for long-term capital should be made much larger. Long-term savings must be allowed to be invested in them, perhaps with government guarantees, and at lower interest than current rates.

India has many hurdles to overcome before infrastructure development (and PPPs as one direction) can take off. There is no sign of administrative and procedural changes to enable this.

The author is former director general, NCAER, and the first chairman of CERC