If the past is any indication, realising an estimated Rs 44,19,500 crore investment in infrastructure during the 12th Five-Year Plan will require substantial private sector participation.

The share of private sector investment in infrastructure, estimated at about 20 per cent of the total investment of Rs 9,63,451 crore during the Tenth Plan, increased to about 30 per cent of the total estimated investment of Rs 22,71,623 crore during the Eleventh Plan.

PRIVATE INVESTMENTS

Much of the private sector investment in infrastructure has occurred in the roads sector. According to the Ministry of Finance statistics, road projects accounted for 60 per cent of the 450 Public-Private Partnership (PPP) infrastructure projects and 45 per cent of Rs 2,24,000 crore project costs of all the infrastructure projects.

A recent study by IIT-Madras yielded interesting findings on the effect of involving private sector in the road sector. Using a database of 521 public sector and PPP projects that covered a span of 15 years and having a total cost of about Rs 2,00,000 crore (2010 values), we were able to do a comparative analysis of public sector and PPP road projects in India.

The chart provides a comparison of road length and unit project costs for public sector and PPP projects. PPP projects, which comprised 68 per cent of the projects in the sample, accounted for 79 per cent of the total length of projects being implemented, indicating that the average length of a PPP road project is higher than that of a public sector project.

As seen from the chart, average length of a PPP road project is 73.11 km whereas the average length of a public sector road project is only 39.47 km. This clearly indicates that the private sector has developed substantial managerial and operational expertise to develop large projects.

Since the PPP projects are substantially longer than public sector projects, the average cost of a PPP project would also be higher than that of a public sector project. Since most of the projects use leverage from financial institutions and banks, the results also indicated that domestic financial institutions have over the years developed the capability to appraise and fund private projects in the road sector. Such capacity development by the domestic financial institutions is critical if we have to achieve the targets set for infrastructure investment.

Interestingly, our study yielded results contrary to the general perception that private projects are costlier than public sector projects. A comparison of unit road costs (Rs lakh/lane-km) indicated that the unit cost of a public sector project was 45.07 whereas that of a PPP project was only 40.28, indicating that unit cost of public sector projects was 12 per cent more than that of PPP projects.

The reason can be attributed to the economies of scale that exist in the road sector. It was observed that unit cost decreased by 1.23 per cent for PPP projects as against a 0.14 per cent decrease for public sector projects for every lane-km increase of the project. Since PPP projects have a much higher average length as compared to public sector projects, they are able to achieve lower unit costs by taking better advantage from economies of scale through better project management.

LOOKING DEEPER

To ensure a more like-to-like comparison, we analysed the impact of public or private ownership on unit costs after controlling other factors such as road length, time, type of road (greenfield or brownfield), road network density , and the level of corruption in the state. The results indicated that under similar conditions, PPP projects have an effect of increasing unit project costs by 12 per cent.

Our research also yielded two more interesting and related findings. First, the presence of a foreign partner had an impact of increasing unit costs by 9.14 per cent as against projects that had only domestic partners. This indicates the need to develop a strong domestic industry that can implement PPP projects as it would have an effect on reducing project costs.

Second relates to the impact of corruption. Petty corruption in States had a significant role in determining the interest of private player to involve in the project.

It is observed that in the States with higher corruption indices (taken from India Corruption Study 2005, Transparency International India and CMS), there has been a predominance of public sector projects, and which indicated a reluctance on the part of private sector to invest in such States.

Our study indicated that the cost differential between the most corrupted state (Bihar) and the least corrupted state (Kerala) can be as high as 72 per cent.

THE WAY FORWARD

On a whole, it can be seen that PPPs have made a significant contribution in bringing in capital, capacity, and the much needed efficiency in the sector.

However, there is a need for further increase in efficiency in the PPPs to make them competitive as compared to public sector. Developing a strong domestic private industry and efforts by the State to tackle corruption can go a long way in reducing the project costs.

(The authors are Associate Professor, Department of Management Studies and Graduate in Infrastructure Engineering, IIT-Madras, respectively.)

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