Public private prank

By Sunita Narain
Last Updated: Thursday 11 June 2015

waterGrowth is back on the agenda, says the government. It is hoping that with pushy announcements foreign and Indian investment will miraculously start pouring in and infrastructure will be the name of the game once again. But this assumption ignores one crucial detail: currently, public-private partnerships (PPPs) in infrastructure are on the cusp of disaster. The country needs a different strategy to build public services infrastructure.

This is because in India, which has a large population of poor and relatively poor middle-class, public infrastructure has to be affordable to build and to run. But since we do not think about the nature of the asset we need to build, we make standard, capital-intensive infrastructure plans in the hope that someone will cough up funds to build. This then justifies the need for private investment. But in reality little private money comes. Worse, the private player is unable to run the public asset—be it water supply, public transport or a swanky airport—without substantial recurring funds. So the private sector’s interest is to make profit by building the infrastructure and then stay clear of the responsibility of making the system work. In this way PPP stands for public investment and private profit.

Take water and sewage. The country has a huge infrastructure backlog in this sector. The High Powered Expert Urban Infrastructure Committee, set up by the Union Ministry of Urban Development and headed by economist Isher Judge Ahluwalia, came up with a mouth-watering estimate for this sector. According to its estimate, building water, sewage and drainage infrastructure requires Rs 5,70,000 crore over the next few decades. In the past five years, the Centrally sponsored Jawaharlal Nehru National Urban Renewal Mission that has been a game-changer, pumped in some Rs 43,000 crore in water and sewage infrastructure. But this is far below what is needed in a country with a backlog and an exploding “front log”—out-of-control urban growth that needs services fast.

The need for finances to build the public water and sewage infrastructure of the present and future is apparent and urgent. But the fact is that private partnerships in this sector are going horribly wrong. It is always a sign of trouble when experienced players sit out and new fly-by-night-type operators take control. In the case of this sector, this is exactly what is happening. We should ask why.

In cities where water supply (never sewage) contracts have been awarded, private parties are realising they underestimated the capital cost of building infrastructure. The reason partly lies in the way contracts are designed. The detailed project report is made by one party to estimate costs and bids are tendered on this basis. This works when the quality of existing assets is known or when the work is for a standard design specification. Since that’s rarely the case, the bid is opened and the lowest bidder succeeds, even if he is wide of the mark in terms of costing.

The situation is made worse by the fact that there are few players with experience or expertise. So there is an opportunity to make deals to “share” the market. The recently opened bids for water distribution in certain pockets of Delhi is a case in point. All bids had one common Indian player—Subhash Projects—with combinations of foreign players. But once such projects get off the ground, they are unfeasible, hence negotiations begin. Private concessionaires ask for changes in the awarded contract. One by one all the original conditions are done away with in this mother of all scams. Read the Comptroller and Auditor General of India’s report on the implementation of PPP in the case of Indira Gandhi International Airport to know the game.

All this could even be justified (especially by the growth-at-all-costs proponents) if the project ends up getting private equity and delivers the goods and services to people. But in the water-waste sector private investment is a chimera. In Shivpuri where Doshion-Veolia and in Khandwa where Vishwa Infrastructure have been awarded projects to ensure 24x7 water supply, 90 per cent of the investment is public. In return for the 10 per cent capital investment, high tariffs have been fixed in this relatively poor region. The catch is that the operator must recover money from operation and maintenance. Given that the state of supply is unreliable and full of holes, the meters faulty and collection difficult, it is near impossible to break even in the business of supply. Everybody, including the concessionaire, knows this. The profit, therefore, is in building the project—in the cement, steel and pipes. It is not in the water that is to be supplied.

What is worse, these projects cream off the most lucrative part of the sector—water supply—and leave the expensive sewage, waste collection business to the stretched municipal supply system. The system crumbles further because now it does not even have the money from water to pay for sewage—and remember 80 per cent of the water leaves homes as waste. The public system takes a further hit and the private system does not benefit. Development does not happen. What happens is loot in the name of growth.

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  • Yes, in view of the

    Yes, in view of the liberations in the investments, it is expected flood of investments from both Indian and Foreign Agencies. As indicated, the present system of working through PPP is rising several doubts about the security and accountability. In addition to these issues, affordability another factor to be kept in mind. The system of PPP is welcome but it needs strict MOU covering DIME (Design, Implementation, Monitoring and Evaluation) Model with better access and utilization. The status of the Metro in Delhi is the living example before us to plan further in this direction.

    The investment from the Private should be used for people & environment oriented development rather than the BUSINESS TO BUSINESS (B2B).

    Hope some modification in the PPP will get better acceptance from the people which leads for sustainable development.

    Posted by: Anonymous | 8 years ago | Reply
  • Couple of things: 1. Water

    Couple of things:

    1. Water supply projects - anywhere in the world - especially South & South East Asia, have always depended on substantial capital subsidy, whether paid in the form of CLP (construction linked payments) or in the form of annualized (or periodical payments) through out the contract period. In India, the second option becomes relatively difficult, as subsidy schemes like JNNURM offer subsidy that is to be spent in the construction period itself. This is why Design-Build-Finance-Operate-Maintain-Transfer contracts are not viable for local Governments. This is compounded by the fact that most local Governments are in a hurry to show 'utilisation' of expenditure and not in a state to actually map out and collect the basic information that would be used to design a good service. If the task of designing is given to the concessionaire, he loads a huge risk premium oin the design and 'front loads' it on to construction period linked subsidy or viability gap.

    2. The problem is not about public-private partnerships, but the state of readiness of the public sector insofar as entering into PPP arrangements is concerned. Even the strongest proponents of PPP arrangements will agree that PPP arrangements are not supposed to substitute basic governance functions, but free up Government resources for dischargingf their part of the obligations. In the case of Khandwa, the actual length of piping required was found to be over twice of what the local Government has 'estimated', since the local Government did not maintain any updated plans, maps or control over its jurisdiction. This is not something that is expected to be done as part of discharging the PPP arrangement, but before one enters into it.

    So - how right is it to blame a PPP arrangement entered prematurely, as opposed to helping local Governments improve their preparedness?

    Posted by: Anonymous | 8 years ago | Reply
  • Our PM says that only foreign

    Our PM says that only foreign Private parties have the funds and expertise to run schools, hospitals, insurance and also for erection of storage systems for grains. But if everything is to be done by private parties then what is the use of the Government collecting taxes and spending it on their hefty salaries.Every year the Government is reducing expenditure on healthcare and education by bringing laws like the RTE wherein it is putting its responsibilities on the Private schools. Why is the Government adamant only on FDI in retail when we have big players in India who with some help from legislation could do wonders in creating backend infrastructure. Atleast then the profits earned would remain in India and not go to some other country. This would make us a self-reliant economy and not dependable on US funds.
    It seems that all the learned politicians have grown too old to think and the new crop is ready to sell India. Once Lord Mountbatten had told Gandhi, that we will come back one day and control India again. The day is not far behind when his saying will become true as we will be a sellers market unlike China which is a manufacturing hub.

    Posted by: Anonymous | 8 years ago | Reply
  • Nicely explained why we

    Nicely explained why we should not have PPP. I heard on some TV debates recently about having something to settle conflict of interests in the reform process.
    Luckily there is a Bill available to work on introduced by the MP rajya Sabha, the Bill need to be nurtured and matured and India deserves it. World Health Assembly has called for such a policy in place for nutrition interventions.

    Junk the Junk Food, a campaign that should remain there, and add on the flavour of "Babies Need Mom-Made Not Made" to it. Hope and dream for wider success in coming years.

    Posted by: Anonymous | 8 years ago | Reply
  • Most of the companies in

    Most of the companies in infrastructure sector do not possess the technical or financial skills to undertake huge projects which are the norm in PPP projects.Even the financial instituitions are not well equipped to evaluate the projects and are too willing to lend to projects based on extraneous considerations.In order to hide losses of one project the developer secures multiple projects at loss making rates and operates something like a Ponzi scheme with the help of good chartered accountants.
    Now due to the slowdown in infrastructure works, such manipulation is now beginning to show when all of sudden infrastructure companies are starting to show heavy losses.This is the stage when a helpful govt steps in to revise the terms of the PPP agreements to bailout the private parties and the financial instituitions

    Posted by: Anonymous | 8 years ago | Reply
  • In any case, most these

    In any case, most these projects are subsidized and funded by debt (long term as well as working capital) taken from public sector banks, a large chunk of which comes from public savings. Barring an L&T or a Tata, India's private sector is generally run unprofessionally by families and their minions. If, indeed, the private sector is so efficient, the banks would not be stressed by unpaid loans that now stand at close to rs 200,000 crore.

    Posted by: Anonymous | 8 years ago | Reply