Most States unprepared for PPPs

Most Indian States do not have the necessary mechanisms in place to deal with the complexity of public-private-partnership (PPP) infrastructure projects.

Yet, they are aggressively allowing PPP projects, leading to governance issues and an overall mess. There is no uniform or consistent approach to handle PPPs at the State level, resulting in huge deficiencies in State-level readiness.

Taking the PPP debate to the State level, we have come out with the country’s first ever ‘PPP Infra Index’, comparing the PPP environment for infrastructure development across all 30 Indian States (including Delhi and Puducherry).

This is the first ever comparative assessment of individual States’ overall environment for PPP projects in India.

Till now, most studies in India have compared States only in terms of total number or value of PPP projects being undertaken. Our attempt has been to capture both the qualitative and quantitative aspects of PPPs across States.

Andhra Pradesh and Gujarat are the leading States with scores of 76.4 and 70.3 out of 100, whereas Karnataka comes third with 57.3, followed by Haryana and Maharashtra. The overall environment across the States is highly imbalanced with only 2 states scoring more than 70, four states scoring more than 50 and five states scoring more than 40.

The remaining 19 states have scored below 40. Small States --- Haryana and Odisha --- have a better macro-level environment compared with many large States like MP, Rajasthan, Tamil Nadu, Uttar Pradesh, West Bengal, Bihar, etc.

A close look at category-wise scores reveals that only 10 States have a working institutional mechanism in place. AP and Gujarat are in top 3 across all categories; however, Tamil Nadu has the best investment climate. Small States like Punjab, Haryana, Assam, Odisha, Arunachal Pradesh have done comparatively better than large States in putting legal and regulatory frameworks for PPP development (see tables) .

RESEARCH METHODOLOGY

The composite index captures States’ scores on five categories spread over 21 indicators. The categories are - 1) Institutional Framework, 2) Regulatory and Legal Framework, 3) Investment Climate, 4) Operational Maturity, 5) State of the Economy.

The first three categories deal with a qualitative assessment of the overall PPP environment in the State and other two categories deal with quantitative assessment of the same. With an objective to balance the overall scorecard and neutralise any indicators’ biased impact on the index, the bracket of categories with qualitative assessment and the bracket of categories with quantitative assessment have both been assigned equal weight, or 50 per cent weight each.

The model has been constructed from 21 indicators, 12 of which are quantitative and 9 are qualitative, scored from 0-4, where 4 is best. Each indicator is normalised from 0-100 where 100 is equal to best.

The list of indicators includes the status of State PPP units, clarity and capacity of States to plan and oversee PPPs, comprehensiveness of the policies and guidelines, number and value of PPP projects, foreign investment in PPP, per capita investment through PPP, GSDP growth rate, public funding, political stability and business climate.

The study has not dealt with project-level governance issues and the focus is on the systems and frameworks.

Data was collected extensively through various primary and secondary data sources. Data for the quantitative indicators are drawn from the Government of India’s Department of Economic Affairs’ centralised online database of PPP projects across the country, IBEF State Reports and other government agency databases. Qualitative indicators have been scored with the help of details gathered from a range of primary sources (government web sites, press reports, project reports, case studies, legal texts and interviews) and various secondary reports and data sources.

SYSTEMIC ISSUES

The index model has been devised after studying global best practices in PPP, which establishes the importance of necessary frameworks, systems and processes to deal with the complexity of PPP and infrastructure.

Infrastructure development operates in a very complex environment as multiple factors --- political, legal, economic, regulatory, social, and technical --- play a critical role in ensuring the success or failure of projects.

Interestingly, as infrastructure projects have long gestation period, these factors keep changing and cannot be foreseen during conceptual and contract formation stage. It has led to the failure of many PPP projects across emerging countries including Latin America and India and also raised questions on their governance mechanism.

This is where the study of overall PPP environment for infrastructure development in terms of frameworks plays a key role. Frameworks manage the overall environment, similar to what a constitution does for a country.

There is a strong need to think beyond project-level statistics. It establishes the need for strong institutional, legal and regulatory frameworks which can take care of changing environment with changing times.

The study assumes significance in the context of India’s plans to invest over $1 trillion over next 5 years to bridge its infrastructure deficit. The Planning Commission has projected that over 48 per cent of this investment will come from private investment, a major chunk as PPP.

(Gowda and Mukherji are Professor and Assistant Professor, respectively, at IIM Bangalore. Reddy is a participant at IIM Bangalore’s public policy programme.)