Public-private partnership (PPP)

The 15-year history of public-private partnership (PPP) in India is mainly about creating an enabling environment to get private capital to invest in infrastructure assets:  result-we now have a fairly large basket of operating assets. The flip side is that we have begun facing the problems associated with operating contracts.

These contracts are for periods ranging from 15 to 60 years. The problem is there is an ostrich-like belief that once negotiated, ground conditions will continue to hold forever; that the terms of the agreement between the private party and the state are cast in stone; and that any changes required can only attract charges of crony capitalism. So, even while economists find it extremely difficult to predict growth and inflation for the next quarter, assumptions on project cost, traffic, tariff, input costs, et al that go into preparing a winning bid, are expected to be inviolate and unchanging.

Why? Because, simply put, it is the job of the private sector to forecast the future and take risk. That may indeed ring true for a wide range of market goods, where there is flexibility to morph, enter and exit. But for strait-jacketed, lumpy, fixed infra projects in regulated environments, the truth is that the task of forecasting for PPP bids gets highly complex  often, just intelligent guesswork packaged professionally.

One, bidders who lost out could take government bodies to court saying the incentives arising out of renegotiation were not extended to them at the bidding stage and, thus, they were unfairly edged out;

Two, the sanctity of a bid-out contract is violated and may encourage many more project developers to expect post-win renegotiation;

Three, there is a moral hazard in that private bidders know their losses will be wiped clean by subsequent government largesse while their profits do not have to be shared;

Four, distinguishing between projects that are unviable because of genuine unforeseen developments and projects that are unviable because the bidders bid at predatory prices or made commercial errors of judgement, are difficult to sift.

COMMON ROADBLOCKS

Public partner risks Political decisions Natural disasters Force majeure Land acquisition* Statutory clearances* Poor concession-design** Private partner risks Revenue (traffic) Financing (interest rate and currency) Construction Other project costs Input costs Operations Change in regulations Unanticipated competitive projects Political interference at local levels Significant change in economic landscape, and macroeconomic shocks 41.5 per cent have undergone renegotiation;

The government is clearly listening. On May 16, the PMO issued a statement saying, To speed up infrastructure development, the prime minister has asked the Planning Commission to draft legislation that would establish an institutional mechanism to resolve disputes in public contracts.