Revisit PPPs for reviving investments

A robust revival of private investment is a major challenge for the Indian economy. Getting the investment rate to being over 36 per cent again is imperative to get sustained growth of over 8 per cent. One option for attaining this goal is to revisit PPPs (public private partnerships) and to try and use them as a major instrument for reviving investment and meeting critical infrastructure needs to take India on to a higher growth trajectory.

There were difficulties with many of the earlier generation of PPPs, especially in the road sector where the projects were conceived at a time of high growth expectations. The execution phase came in a period of more modest growth making quite a few of the bids non-viable. There has been commendable progress in addressing these problems by the Ministry of Road Transport and the new hybrid annuity model has had success. However, these difficulties led to PPPs going out of favour altogether.

Risk perception

Better understanding of risk perceptions of investors and lenders and mitigating these along with adequate safeguards against windfall profits are essential for success in designing workable PPPs. Genuine and transparent stakeholder consultation at the project and contract design stage with an open pragmatic approach would naturally help. Inadequate risk mitigation and faulty design may well be the major cause of the default by IL&FS which has been the leading investor in PPP projects.

So far, the standard template for PPPs envisages the private investor recovering user charges determined through the bid process for a facility, say, a toll road, and this income stream making the investment financially viable. If required, some capital subvention through VGF( Viability Gap Funding) could be provided.

However, there are a wide range of facilities and services where actual recovery of user charges to make the necessary investments viable is not practically feasible. Investments for treatment of sewage, augmentation of water supply for cities, completing the canal network for large irrigation projects, are all examples of needed investments which cannot be made financially viable through recovery of user charges.

Such projects have, therefore, been considered as not being suitable for PPPs. However, if the state, or, a public institution came in as an intermediary by agreeing to pay user charges after a transparent and fair bidding process, private investment could be brought into these non-traditional areas. This parastatal body, in turn, could decide to recover user charges to the extent that is politically feasible and acceptable to the public, or, even decide not to recover any user charges.

After all, State governments do provide free irrigation water through their canal networks and in many cases free electricity for pump sets so that farmers get, in effect, free irrigation water. With actual user charges having no relation to the payments being made to the private service provider and his profits, public acceptability on a sustained basis for such PPPs would be there, especially if the profits appear reasonable and have been competitively and transparently determined.

The key lies in restricting the risk of the private investor to efficient project execution, operation and maintenance and the risk of uncertain cash flows through user charges being borne by the State. With this approach a wide range of projects could see early execution through private investment. To illustrate, the goal of treatment of urban sewage with private investment becomes feasible. So does the setting up of common effluent treatment plants to treat polluting waste water from industrial clusters.

The bid parameter for such projects could be the simple one of the cost of treating a cubic meter of sewage/industrial effluent. Full treatment of all effluents in the country within five to seven years with PPPs then appears an attainable goal.

Similarly, the Railways could get new high speed freight and passenger corridors along with the stations on the corridors through private investment on payment of track usage charges which are determined through a competitive bid process.

Another promising sector is the development of new areas for tourism. Usually the development of new tourist destinations is problematic due to the chicken and egg syndrome; tourists do not come in large numbers because decent affordable hotel accommodation is not there and new hotels are not being built because a sufficient number of tourists are not coming.

A win-win project

It is useful to recall how in the pre-reform era, the two Taj hotels in Delhi came up. The NDMC and DDA provided the land and the bare structures on a lease rent plus revenue-sharing arrangement to the Taj group who then undertook the investment in finishing, furnishing and running of the hotels. These have been win-win projects for both partners.

Providing land free through a reasonable lease rent and revenue-sharing arrangement in somewhat developed and promising locations may suffice. In other undeveloped sites, a two-tier PPP structure may be needed. A private builder could on a rental basis do the bare structure of the hotel for the development agency. The agency could then get a hotelier, like the Taj case in Delhi, to do the finishing and furnishing and then run the hotel on lease rent with revenue sharing.

For the development agency, there may be a net revenue outflow for some years to meet the gap between the payments to the builder and the lower revenue from the hotelier till such time as the tourist inflows rise sufficiently. Then the revenue share would go up and start generating surpluses.

The key would be to create the critical mass of hotel rooms and other related infrastructure of international standards, and then promote the destination. Tourism is labour intensive and creates a large number of satisfying jobs. India is nowhere near tapping its vast potential, whether in the Buddhist circuit, the temples of southern India, or the wonderful forests and wildlife sanctuaries.

The potential for additional investment is enormous. The challenge is to have the ambition and pragmatism to actually get large projects going with private investment.

The writer is Distinguished Fellow, TERI, and former Secretary, DIPP.