Are Public Private Partnerships still viable in India?

Akshay Iyer

Jun 28, 2014, 03:58 PM | Updated Apr 29, 2016, 12:45 PM IST

The debate on public-private partnerships has largely evoked partisan views. As many developed nations now look at public private partnerships to fund major infrastructure projects, there has been a renewed interest in PPPs not only in India but also worldwide. A public-private partnership offers a wide scope for project financing and innovative delivery approaches through access to capital markets, implementation of new technologies, expedition of project delivery in time-bound phased manners, operations and maintenance in cost-effective ways.

India’s experiment with PPP has been around for roughly 20 years where the focus has been predominantly on asset creation. There is no surprise that most of the PPP concessions have been given to development of national highways and ports. The World Bank cited in its 2011 report that private participation was highly concentrated only in India. It ranks India as the largest market for PPP in the developing world, accounting for over half of the total investments in new PPP projects mapped across developing countries when it implemented 43 projects which attracted a total investment of $20 billion.

The general drivers for interest in PPPs are the use of private finance to provide investment that the public sector otherwise cannot afford, maximising value-for-money through appropriate risk allocations between the private and public sector, attaining greater efficiency, lower costs, higher quality and faster delivery of public infrastructure projects, building capacity of the private sector and promotion of innovation not only in technical and operational matters but also in financial and commercial arrangements.

The country’s first PPP project in railways was the Reliance Infrastructure-led concessionaire Airport Express Line of the Delhi Metro. The Delhi Metro Rail Corporation (DMRC) had built the basic civil infrastructure and took over operations upon Reliance’s withdrawal. The project had been deep in controversies like failed safety clearances and technical glitches which led to a turf war between Reliance Infrastructure and DMRC on the issue of penalty for delays.

Post its commissioning in February 2011, several glitches had appeared in the girders which forced suspension of operations for six months. Operations resumed when Reliance agreed to run the line as an agent paying the DMRC a fee, for which, Reliance slapped a penalty of Rs. 795 crore on the DMRC in the wake of the line being suspended for six months. While one of the main factors that was attributed to the failure of the project was an inflated traffic projection made initially. The estimated footfall was to exceed 40,000 but the actual footfall did not cross 20,000 on a daily basis. A week before DMRC took over the line in July 2013, the ridership was less than 11,000 per day which skewed projections of financial viability for Reliance.

The Urban Development Ministry as part of the 12th Five Year Plan had submitted a report on “Innovative Financing of Metro Rail Projects” which suggested that PPP has not been successful in Metro projects. The report further stated that a study of global experiences in urban rail transit provisioning illustrated that PPP in Metro projects had failed. “In 113 cities across the world having Metro rails, 88% have been developed and are being operated in public sector mode whereas in only 12% cities, some form of PPP exists,” the report observes.

Global experiences with PPP on metro rail have not been favourable. The models have suffered cost overruns and losses despite government support. They have often failed to meet the core objective of increasing passenger volumes. Low ridership, increased operational cost and fare hike lead to their near collapse. The governments, otherwise keen on private capital, end up becoming liable for their debt repayments and also run them.

The Kuala Lumpur based metro lines, Star and Putra, had to be nationalised due to failing agreements caused by low revenues and large debts. The financial crisis that rocked Asia in 1997 destabilised them which led to a restructuring exercise by the government which made them a public owned infrastructure holding company. Similarly, the departments of transport and communications, and finance assisted the Hong Kong Metro Rail Transit Corporation (MRTC) in negotiating lower lending charges by guaranteeing their lease payments. The interest rate was reduced. The government paid US $60 million in guaranteed loans to the MRTC consortium. It eventually became unviable. In 2009, due to heavy debt and recession, the government of the Philippines proposed to take over the operations of Manila Metro.

One of the key elements of successful PPP projects is a clear understanding of the proposed asset and prudent risk sharing and rewards associated with the project. Due to inaccuracies in these, risk-sharing and mitigation measures prove inadequate and inappropriate. Better preparation before the bidding process for a PPP project is the key point. It is a known fact that technical data availability and its quality has been a constraint in the way PPP projects are planned across India. Another reason can also be that consultants who are often ill-equipped are selected through the lowest bids.

Public-private partnerships in India fail mainly due to poor preparations, flawed risk sharing, inappropriate business models and poor fiscal uncertainties which are often linked to vested interests thus leading to the rise of a skewed qualification criteria. The solution, therefore, lies in clear understanding of the proposed asset and a careful sharing of risks and rewards associated with the asset to ensure key elements to ensuring a successful PPP project. It is not appropriate to dismiss an entire concept of PPP on the basis of a few failures as each project and the demand it brings forward is different in each sector.

The road ahead for PPP projects in India is proper integration wherein the lesson to learn is that designs and construction should be taken care on the life cycle basis. Better preparation before the process of bidding and transparency with regard to dissemination of technical data and its quality and the elimination of ill-equipped consultants will go a long way to revive investor confidence. Ensuring clearances especially for projects that have led to a slowdown due to delays in decision making. The new government at the helm of affairs in Delhi should mend the problem of delayed decision making and implement projects which have been stuck due to slowdowns even more aggressively.

The time is ripe for initiating adequate safeguards and a strict regulatory supervision. Indian cities must draw lessons from the failures of the Delhi Airport Express Line and subsequent PPP projects in cities like Manila and Kuala Lumpur and must follow it up with effective monitoring and safeguards such that it does not place high-cost public transport projects at risk.

Akshay Iyer is a Strategy Consultant in a multi-national company based in Gurgaon. He is an alumnus of Indian Institute of Management Ahmedabad.

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