Why the public-private partnership model for infrastructure is broken

GDP data show manufacturing growing by only 0.1 per cent, and fixed capital formation stagnant. Rs 6 lakh crore worth of cleared projects are simply not translating into orders for machinery and construction. Lags alone cannot explain this.

Let’s face it: the public-private partnership (PPP) model for infrastructure is broken. The government is trying to somehow patch up the model. This is not working. If you can’t recognise the problem of a broken model, you can’t solve it.

The UPA boasted that India had made greater use of PPP than any other country. Alas, that now looks a mistake. The 12th Plan envisaged $1 trillion of investment in infrastructure, of which half was to come from the private sector. That now sounds a pathetic joke.

Most big infrastructure companies are deep in the red, crying out for rescues. Their gargantuan losses threaten to sink the banks that lent to them. Around 10-20 per cent of the lending of public sector banks has been restructured, or is under some form of stress. Bankrupt infrastructure companies and stressed banks cannot finance the needed infrastructure.

The government lacks the cash to fill the breach. Its own share of planned infrastructure investment assumed rapid GDP growth yielding a revenue bonanza. Alas, growth has slowed alarmingly, revenues have dried up and Plan spending is being slashed in economy drives year after year. India has stranded power capacity of up to 30,000 MW. Power plants are lying idle for want of fuel. These capital-intensive projects need high utilisation rates for viability. Forced idleness is a recipe for bankruptcy.

The road sector is in deep trouble. Companies are just not bidding for new roads and some have abandoned projects awarded in earlier auctions. No private player bid for the latest ultra mega power project (UMPP). The problem is not just lack of cash, but proven high risks in PPP projects.

Delays are Common

Historically, the government built most infrastructure. Often, its five year projects took 10 years to complete. The overruns were financed by tax revenue and obligatory bank purchases of gilts. But a private project on the basis of 70 per cent debt and 30 per cent equity can go bust if a five-year project takes eight years. The huge interest costs and lack of cash flow can be fatal.

In practice, delays have proved common. The problems include delays in land acquisition, in environmental and forest clearances, in tribal areas, and because of judicial intervention after public interest suits.Even when delays have been minimal, lack of fuel or traffic has kayoed projects. Slowing GDP growth alone has sometimes proved fatal.

Initially, these risks did not deter private companies. Experience gained in the old licence-permit raj suggested that success lay in somehow getting a licence or contract, even it looked unprofitable, and then manipulating contract conditions to ensure profitability.

This approach was especially evident in companies that had succeeded in the irrigation sector of Andhra Pradesh. Few people had heard of them earlier, but they bid very aggressively to win huge projects. Such aggressive bidding kept out bigger companies (including foreign ones) who said the bids were ridiculously low. But post-contract manipulation was possible.


Then came the public uproar over corruption in the Commonwealth Games, the Anna Hazare movement and the CAG reports on corruption. The Supreme Court followed up aggressively. Suddenly, manipulationas-usual became impossible. A slowing economy and fuel failures worsened the problem. Many projects went deep into the red and companies that had won them abandoned others.

Finance minister Arun Jaitley sees this mainly as a problem of liquidity. His ‘5-25′ scheme asks banks to roll over five-year loans five times to give, in effect, 25-year finance for infrastructure projects. This carries the seeds of potential banking disaster. Many projects are not merely illiquid but insolvent.

Can the model be fixed? One way forward has been to insist that 90 per cent of land acquisition is completed before awarding a contract. Yet, this cannot eliminate delays through agitations, state-level clearances or judicial intervention. It cannot eliminate risks of faulty projections of traffic or economic growth, or of unanticipated increases in fuel costs.

Asking companies to stick to a fixed tariff for 25 years is unrealistic, since conditions can change hugely. Yet, amending such contracts in midstream, even for deserving companies, will now bring accusations of cronyism and corruption. Some non-political institutional mechanism is required to end delays and provide honest contract changes as required. None is in sight.

Till then, the private sector cannot finance half of future infrastructure. The government share must go up. But that requires huge additional finances that can only come from a sharp pruning of subsidies and unproductive spending. This will bring protests from sundry vote-banks. The Modi government looks unwilling to upset these. It aims to improve economic performance through more honest, efficient administration, not radical change. The impact of this approach will be limited for several years. So, infrastructure will remain India’s Achilles heel for some time to come. That should temper hopes of a quick return to 7 per cent GDP growth.

What do you think?