Renewing faith in Public-Private Partnerships

The big push to PPP projects as a part of the fiscal stimulus package is welcome.

Renewing faith in Public-Private Partnerships
Trump is pushing to rev up the U.S. economy which four months ago was the centerpiece of his argument for a second term.

By Kumar V Pratap

The finance minister recently announced several measures aimed at boosting Public-Private Partnerships (PPPs) in infrastructure sector:

Twelve more airports are to be bid out on PPP basis;

Power distribution companies (discoms) of Union Territories to be privatised as PPPs;

Viability gap funding (VGF) limit of the ministry of finance has been increased to 30% for social infrastructure compared to 20% for economic infrastructure.

These are long-overdue measures, and would improve the efficiency of infrastructure investments and associated infrastructure services. Let us consider the Indian experience in this regard. The PPP airports at Delhi and Mumbai, from being the worst airports in the world prior to privatisation, now figure among the best (as per 2019 Airport Service Quality rankings). In addition, the revenue share from Delhi and Mumbai airports to Airports Authority of India (AAI), at Rs 3,040 crore in FY19, is more than the profit after tax (PAT) of AAI for that year (Rs 2,271 crore).

The inference is that, but for the revenue-share from Delhi and Mumbai airports, AAI would be a loss-making entity. So, PPPs in airports provide a better user experience and give high returns to the government. Therefore, the PPP arrangement needs to be replicated across airports in India for the user and revenue implications that would enable AAI to increase air connectivity to remote areas through the UDAN (Ude Desh ka Aam Nagrik) scheme.

Power distribution is the weakest link in the power sector. There is a loss of about 40 paise per unit of power sold in the country, which makes the power distribution segment bankrupt, while also leading to stranded investments in the power generation segment. The exemplar of power distribution privatisation in India, which compares with the best in the world, is that of Delhi. It has been estimated that the reduced explicit subsidies for power distribution in Delhi, compared to business-as-usual, are $4 billion.

While the private sector started with over 50% Aggregate Technical and Commercial (AT&C) losses in 2002, it was able to reduce it to sub-10%; the public sector (NDMC) started with 16%, and its losses are at about the same level even now. Besides, the reliability of power supply, unscheduled outages and overall consumer satisfaction have also improved significantly. This natural experiment demonstrates the vast returns from private participation in power distribution.

So, replicating the Delhi example across Union Territories (UTs), which come directly under the Ministry of Home Affairs, may be useful. However, it would require a lot of effort on the part of the ministry of power, ministry of home affairs, the UT administrations, and the transaction advisers to be able to get outcomes akin to Delhi. Odisha also privatised its power distribution segment, but is widely considered a failure.

As per the private participation in infrastructure (PPI) database of the World Bank, India is second in the developing world, both in terms of the number of PPP projects as well as the associated investments (1,096 PPP projects, accounting for an investment of $273 billion, since 1990). The Indian success in PPPs is built on a robust policy framework, the financial incentive (VGF) scheme, and the standardisation of procurement (Request for Qualification and Request for Proposal) and substantive (Model Concession Agreements across infrastructure sectors) documents.

However, if we see the sectoral break-up of PPP projects, we would find that almost all of the projects have come up in economic infrastructure (power, transport, and telecom) compared to social infrastructure.

Social infrastructure (like water supply, solid waste management, health and education) have low cost-recovery and, consequently, face massive resource-crunch. There are examples across the world where PPPs have brought about sanguine results in social infrastructure, for example, Manila Water Supply PPP and health and education PPPs in developed countries like the UK and Australia. By increasing the ministry of finance VGF limit to 30% of the total project cost (TPC), which can be matched by a further 30% of TPC by the project authorities, the non-commercial aspect of social infrastructure would be addressed, and it is expected that the success of PPPs in economic infrastructure in India (in terms of augmenting resources and improving service delivery) will also be replicated in social infrastructure.

As per the PPI database, India has experienced a slowdown in annual PPP projects contracted in recent years (from 129 in 2012 to 34 in 2019, with commensurate levels of investment, at $32 billion and $7.6 billion, respectively). Therefore, the big push to PPP projects as a part of the fiscal stimulus package renews the faith of the country in PPPs and for good reason.

However, just to reiterate, PPPs in power distribution and social infrastructure would be extremely challenging. It would entail careful crafting of sector-wise Model Concession Agreements with a balanced risk-return framework for the public and private sectors.

Besides, there would be a clamour for autonomous regulation of social infrastructure sectors, once private investment comes in. However, care should be taken that demand for autonomous regulation does not translate into setting up independent sectoral regulators. There are other regulatory options like ‘regulation by contract’ and multi-sectoral regulators to mitigate regulatory risks faced by infrastructure players.


Joint secretary, Ministry of Home Affairs, and former JS (Infrastructure Policy and Finance), Ministry of Finance. Views are personal

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First published on: 12-06-2020 at 06:15:49 am