The new buzzword in development planning circles in the country is 'Public Private Partnerships' (PPPs). The 11th Five Year Plan (2007-2012) document mentions the term at least 249 times, advocating it in sectors ranging from water management, forestry, education and health to protection of monuments and sustenance of arts and crafts. However, its key role is seen in infrastructure.
Infrastructure bottlenecks are often presented as the major hurdles restricting the booming Indian economy from achieving 8 per cent plus GDP growth rates. The Preface to the 11th Five Year Plan document says that "Poor quality of infrastructure seriously limits India's growth potential in the medium term and the Eleventh Plan outlines a comprehensive strategy for development of both rural and urban infrastructure." The 11th Plan estimates that to maintain an average annual growth rate of 9%, the investment in infrastructure would have to rise from Rs.259,839 crores in 2007-08 to Rs.574,096 crores in 2011-12 at constant 2006-07 price, aggregating to Rs.2,011,521 crores over five years. In the terminal year, this works out to be 9 per cent of the GDP, up from 5 per cent of the GDP in 2006-07.
This is a huge amount, and the Government claims that it can't mobilise this without increased contributions from the private sector. Moreover, it argues that its first priority is expenditure on social sector and livelihood support programmes for the poor, "the strategy for infrastructure development has been designed to rely as much as possible on private sector investment through various forms of PPPs."
The Government of India's Committee on Infrastructure which monitors PPPs notes that 244 PPP projects are ongoing and another 76 are in the pipeline in the country. These projects are in various sectors like roads, ports, power, water and urban infrastructure.
What is a PPP
PPP is a relatively new term, implying that public and private sectors work in partnership, complementing each others' strengths, covering for each others' weaknesses, sharing risks and profits. Part of the rationale is that often, infrastructure projects are high risk, low return projects with long-gestation projects, so the private sector is loath to invest in them. To attract private investment into these sectors, therefore, it is important for the public sector also to be involved to mitigate some of these risks.
With this argument, several concessions are being offered to PPP projects. One of the most important is Viability Gap Funding. Under this scheme, the Government gives a grant of upto 40 per cent of the capital cost of the private project to make it viable and encourage the private sector to invest in it. Another important step is the creation of India Infrastructure Finance Company Limited (IIFCL), a wholly Government-owned company to provide long term finance for infrastructure projects. According to the IIFCL website, it would provide loans upto 20 per cent of the project cost and projects "awarded to a private sector company ... through Public Private Partnership (PPP) shall have overriding priority".
Clearly, substantial public resources would be flowing into PPPs. Governments argue that with only a small input from their side, they can leverage much more money into infrastructure, as the private companies will use Government support to raise more money on their own, in the form of borrowing. This raises two questions. First, whether this is raising any additional resources or the private sector is accessing the same resources that the public sector could access. Second, whether the private sector is able to raise these resources on the strength of its superior management and efficiencies as compared to the public sector.
The reality is that much of the money raised by the PPP or private projects is from public sources - publicly owned banks and financial agencies, public sector insurance companies and Governmental aid agencies. This money is available to the public sector too. Further, often it is not the superior capabilities of the private sector that allows it to raise the money but rather the guarantees and concessions given by governments.
Let us look at the example of the Tiruppur Water Supply and Sewerage project (Tiruppur Project), India's biggest PPP project in the water sector. This project in Tamilnadu draws water from the Cauvery and supplies it to the industries in Tiruppur Industrial Estate. It also provides bulk water to Tiruppur Municipality and several village panchayats. The project has a total outlay of Rs.1023 crores, out of which Rs.323 crores is equity and Rs.700 crores is raised as debt. Tamilnadu Government is giving Rs.55 crores towards equity. It is claimed that with this, the Government has been able to leverage 19 times more investment. But a closer look presents a different picture.
Out of the total equity of the project of Rs.323 crores, a total of Rs.90 crores - or 28 per cent - is directly from public resources: the Government of Tamilnadu, as well as state-owned insurance companies Life Insurance Corporation, General Insurance Corporation, and others. There has been no information on the debt component of the Tiruppur project lately, but earlier reports suggest that the debt of Rs.305 crores was to come from more public sources - such as IDBI, SIDBI, LIC, SBI and HUDCO. Apart from this, over Rs.100 crores were raised from the US bond market and has been guaranteed by USAID, a US Government body.
This means that close to 66 per cent of the borrowings are from public sources. In addition, much of the remaining equity and debt is from IL&FS, an organisation with significant government ownership.
Further, there are many concessions given to the project. First of all, there is an assured market - the knitwear industry in Tiruppur. Secondly, the project has been given the exclusive rights for selling water to the area. Moreover, the Tamilnadu government has set up two funds, the Water Shortage Fund and Debt Service Fund with its own money for protecting the project's revenues and profits in case of a shortage of water and other contingencies. These funds are respectively Rs.70 crores and Rs.50 crores. Third, the bonds raised in the US have been guaranteed by USAID. These are only some of the important special considerations given to the project.
With all this in place, it is clear that the project has been able to raise money not due to any inherent superiority of the private sector, but mainly due to the concessions and support provided by the Government to the project. Nor is the example of this project unusual - in most cases, a detailed analysis of the various sources of funds reveals the same structure - plenty of money put in directly or guaranteed by governments, and usually much less generated by the private sector itself.
That being the case, there are serious questions about the how much additional (non-public) resources the private sector brings in to the infrastructure PPPs - one of the main rationales for promoting them.
Other flawed presumptions
The other rationale that governments have offered in support of PPPs is that they provide a cheaper option of investment, and allow governments to save funds which can be invested into other priority sectors. In fact, however, in real money terms PPPs can be more expensive than traditional public contracts, for a number of reasons.
To begin with, the profit margins at which private corporations are attracted to PPPs generally fall in the range of a minimum of 15-20 per cent. In the Tiruppur project, for example, the base project return is estimated at 20 per cent per annum by the project company. Secondly, the cumbersome procurement process involved with PPP contracts is more expensive, both financially and in terms of time, than direct government procurement would be. A third factor in driving up PPP costs is that the cost of capital is always higher for private sector than for the government alone.
The 'superior efficiency' of the private sector is also questionable, and numerous examples are available to show this. An IMF study of 2004 says , "It cannot be taken for granted that PPPs are more efficient than public investment and government supply of services ... Much of the case for PPPs rests on the relative efficiency of the private sector. While there is extensive literature on this subject, the theory is ambiguous and empirical evidence mixed".
In the water sector, there are many examples of efficient public water utilities and inefficient private corporations. An Asian Development Bank study published in 2003 compared key service parameters for water supply in 18 Asian cities. In two (Manila and Jakarta) the system was privatised, and in the rest it was in the public sector. In all the parameters like percentage of population with piped water coverage, area with 24 hour water supply, non-revenue water etc., the public systems on the whole came out to be much superior.
A further argument in favour of PPPs is that the involvement of the private operators increases transparency and accountability. On the contrary, real-life experiences prove that such projects remain opaque, hiding behind the plea that publicising information about the project will affect the commercial interests of the private promoters. This denies citizens access to crucial information about projects handling public services like infrastructure.
A World Bank report quotes that, "Despite the fact that there are nearly 90 PPPs in India under construction and operation, there is no publicly accessible database providing even the most straightforward information on them". Our own experience in the Tiruppur project shows that access to information related to a PPP project is very difficult. We have been unable to get information about even basic facts like the actual quantity of bulk water that the company is supplying, the schedules of water supply to the industry, municipality and villages etc.
It is noteworthy that much of the information that citizens would like to have about PPPs would be mandatorily available to them under the Right to Information Act if those projects were carried out by the government itself. Viewed in that light, it seems that PPPs are in fact vehicles by which to subvert the demands for transparency.
All this belies the arguments put forth in support of PPPs. Much of the resources raised by the PPPs are from public sources, and it is the strength of the public sector that allows the PPPs to raise additional funds cheaply. The 'efficiency' and 'accountability' arguments too are specious at best. On one hand, massive public resources are flowing into these projects, and major risks are taken by the public sector or guaranteed by it. On the other hand, the promised better service, efficient management and transparency and accountability are not assured, especially for the weaker sections of the society.
The Planning Commission has warned that the "PPPs must aim at bringing private resources into public projects, not public resources into private projects." But it is exactly the latter that seems to be happening. If we're going to pursue PPPs, we'll first need to find some good reasons to do so; the one we've heard so far aren't borne out by the evidence.