PPPs: Tall claims, but little evidence
The many arguments offered in support of Public Private Partnerships don't stand up to close examination. The private sector is not more efficient than its public counterpart, nor is cheap money accessible to it as readily, write Shripad Dharmadhikary and Gaurav Dwivedi.
The new buzzword in development planning circles in the country is ‘Public Private Partnerships’ (PPPs). The 11th Five Year Plan (2007-2012) document mentions the term at least 249 times, advocating it in sectors ranging from water management, forestry, education and health to protection of monuments and sustenance of arts and crafts. However, its key role is seen in infrastructure.
Infrastructure bottlenecks are often presented as the major hurdles restricting the booming Indian economy from achieving 8 per cent plus GDP growth rates. The Preface to the 11th Five Year Plan document says that “Poor quality of infrastructure seriously limits India’s growth potential in the medium term and the Eleventh Plan outlines a comprehensive strategy for development of both rural and urban infrastructure.” The 11th Plan estimates that to maintain an average annual growth rate of 9%, the investment in infrastructure would have to rise from Rs.259,839 crores in 2007-08 to Rs.574,096 crores in 2011-12 at constant 2006-07 price, aggregating to Rs.2,011,521 crores over five years. In the terminal year, this works out to be 9 per cent of the GDP, up from 5 per cent of the GDP in 2006-07.
This is a huge amount, and the Government claims that it can’t mobilise this without increased contributions from the private sector. Moreover, it argues that its first priority is expenditure on social sector and livelihood support programmes for the poor, “the strategy for infrastructure development has been designed to rely as much as possible on private sector investment through various forms of PPPs.”
The Government of India’s Committee on Infrastructure which monitors PPPs notes that 244 PPP projects are ongoing and another 76 are in the pipeline in the country. These projects are in various sectors like roads, ports, power, water and urban infrastructure.
What is a PPP
PPP is a relatively new term, implying that public and private sectors work in partnership, complementing each others’ strengths, covering for each others’ weaknesses, sharing risks and profits. Part of the rationale is that often, infrastructure projects are high risk, low return projects with long-gestation projects, so the private sector is loath to invest in them. To attract private investment into these sectors, therefore, it is important for the public sector also to be involved to mitigate some of these risks.
With this argument, several concessions are being offered to PPP projects. One of the most important is Viability Gap Funding. Under this scheme, the Government gives a grant of upto 40 per cent of the capital cost of the private project to make it viable and encourage the private sector to invest in it. Another important step is the creation of India Infrastructure Finance Company Limited (IIFCL), a wholly Government-owned company to provide long term finance for infrastructure projects. According to the IIFCL website, it would provide loans upto 20 per cent of the project cost and projects “awarded to a private sector company … through Public Private Partnership (PPP) shall have overriding priority”.
The reality is that much of the money raised by the PPP or private projects is from public sources.
• Power to the rich, literally
IIFCL will be able to raise its own money through borrowings for which it will have sovereign support. In other words, the money will be guaranteed by the Government. The World Bank, another source of public money, is also proposing to give Rs.2700 crores to IIFCL.
Leveraging resources?
Clearly, substantial public resources would be flowing into PPPs. Governments argue that with only a small input from their side, they can leverage much more money into infrastructure, as the private companies will use Government support to raise more money on their own, in the form of borrowing. This raises two questions. First, whether this is raising any additional resources or the private sector is accessing the same resources that the public sector could access. Second, whether the private sector is able to raise these resources on the strength of its superior management and efficiencies as compared to the public sector.
The reality is that much of the money raised by the PPP or private projects is from public sources - publicly owned banks and financial agencies, public sector insurance companies and Governmental aid agencies. This money is available to the public sector too. Further, often it is not the superior capabilities of the private sector that allows it to raise the money but rather the guarantees and concessions given by governments.
Let us look at the example of the Tiruppur Water Supply and Sewerage project (Tiruppur Project), India’s biggest PPP project in the water sector. This project in Tamilnadu draws water from the Cauvery and supplies it to the industries in Tiruppur Industrial Estate. It also provides bulk water to Tiruppur Municipality and several village panchayats. The project has a total outlay of Rs.1023 crores, out of which Rs.323 crores is equity and Rs.700 crores is raised as debt. Tamilnadu Government is giving Rs.55 crores towards equity. It is claimed that with this, the Government has been able to leverage 19 times more investment. But a closer look presents a different picture.
Out of the total equity of the project of Rs.323 crores, a total of Rs.90 crores - or 28 per cent - is directly from public resources: the Government of Tamilnadu, as well as state-owned insurance companies Life Insurance Corporation, General Insurance Corporation, and others. There has been no information on the debt component of the Tiruppur project lately, but earlier reports suggest that the debt of Rs.305 crores was to come from more public sources - such as IDBI, SIDBI, LIC, SBI and HUDCO. Apart from this, over Rs.100 crores were raised from the US bond market and has been guaranteed by USAID, a US Government body.
This means that close to 66 per cent of the borrowings are from public sources. In addition, much of the remaining equity and debt is from IL&FS, an organisation with significant government ownership.
Further, there are many concessions given to the project. First of all, there is an assured market - the knitwear industry in Tiruppur. Secondly, the project has been given the exclusive rights for selling water to the area. Moreover, the Tamilnadu government has set up two funds, the Water Shortage Fund and Debt Service Fund with its own money for protecting the project’s revenues and profits in case of a shortage of water and other contingencies. These funds are respectively Rs.70 crores and Rs.50 crores. Third, the bonds raised in the US have been guaranteed by USAID. These are only some of the important special considerations given to the project.
With all this in place, it is clear that the project has been able to raise money not due to any inherent superiority of the private sector, but mainly due to the concessions and support provided by the Government to the project. Nor is the example of this project unusual - in most cases, a detailed analysis of the various sources of funds reveals the same structure - plenty of money put in directly or guaranteed by governments, and usually much less generated by the private sector itself.
That being the case, there are serious questions about the how much additional (non-public) resources the private sector brings in to the infrastructure PPPs - one of the main rationales for promoting them.
Other flawed presumptions
The other rationale that governments have offered in support of PPPs is that they provide a cheaper option of investment, and allow governments to save funds which can be invested into other priority sectors. In fact, however, in real money terms PPPs can be more expensive than traditional public contracts, for a number of reasons.
To begin with, the profit margins at which private corporations are attracted to PPPs generally fall in the range of a minimum of 15-20 per cent. In the Tiruppur project, for example, the base project return is estimated at 20 per cent per annum by the project company. Secondly, the cumbersome procurement process involved with PPP contracts is more expensive, both financially and in terms of time, than direct government procurement would be. A third factor in driving up PPP costs is that the cost of capital is always higher for private sector than for the government alone.
The ‘superior efficiency’ of the private sector is also questionable, and numerous examples are available to show this. An IMF study of 2004 says , “It cannot be taken for granted that PPPs are more efficient than public investment and government supply of services … Much of the case for PPPs rests on the relative efficiency of the private sector. While there is extensive literature on this subject, the theory is ambiguous and empirical evidence mixed”.
In the water sector, there are many examples of efficient public water utilities and inefficient private corporations. An Asian Development Bank study published in 2003 compared key service parameters for water supply in 18 Asian cities. In two (Manila and Jakarta) the system was privatised, and in the rest it was in the public sector. In all the parameters like percentage of population with piped water coverage, area with 24 hour water supply, non-revenue water etc., the public systems on the whole came out to be much superior.
A further argument in favour of PPPs is that the involvement of the private operators increases transparency and accountability. On the contrary, real-life experiences prove that such projects remain opaque, hiding behind the plea that publicising information about the project will affect the commercial interests of the private promoters. This denies citizens access to crucial information about projects handling public services like infrastructure.
A World Bank report quotes that, “Despite the fact that there are nearly 90 PPPs in India under construction and operation, there is no publicly accessible database providing even the most straightforward information on them”. Our own experience in the Tiruppur project shows that access to information related to a PPP project is very difficult. We have been unable to get information about even basic facts like the actual quantity of bulk water that the company is supplying, the schedules of water supply to the industry, municipality and villages etc.
It is noteworthy that much of the information that citizens would like to have about PPPs would be mandatorily available to them under the Right to Information Act if those projects were carried out by the government itself. Viewed in that light, it seems that PPPs are in fact vehicles by which to subvert the demands for transparency.
Rethink needed
All this belies the arguments put forth in support of PPPs. Much of the resources raised by the PPPs are from public sources, and it is the strength of the public sector that allows the PPPs to raise additional funds cheaply. The ‘efficiency’ and ‘accountability’ arguments too are specious at best. On one hand, massive public resources are flowing into these projects, and major risks are taken by the public sector or guaranteed by it. On the other hand, the promised better service, efficient management and transparency and accountability are not assured, especially for the weaker sections of the society.
The Planning Commission has warned that the “PPPs must aim at bringing private resources into public projects, not public resources into private projects.” But it is exactly the latter that seems to be happening. If we’re going to pursue PPPs, we’ll first need to find some good reasons to do so; the one we’ve heard so far aren’t borne out by the evidence.
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Cite this article
Shripad Dharmadhikary, Gaurav Dwivedi (2008) ‘PPPs: Tall claims, but little evidence’, India Together, 6 October 2008. https://indiatogether.org/ppp-economy/
23 reader responses
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Dr. R. Shashi Kumar · 11 October 2008
It's a highly commendable paper - refers to all aspects of PPP.
Sudeshna Chowdhury · 16 October 2008
The PPPs ensure profitability to the private sector in the name of social responsibility where risks are taken primarily by the public sector .This not only draws our attention towards the existing loopholes of our system but can also be termed as "explloitation".Initially it was the "poor people" of our country who were unwillingly exploited by the rich but now we see it is our own "government"who are willingly getting exploited by the so called modernisation weapons of our society.
Manasi Phadke · 16 October 2008
A very informative article. One of the prime arguments for PPPs is that private bodies are much more efficient than government enterprises. But unfortunately, this efficiency will not show in PPPs because as the article points out, the money involved is not of private bodies. One of the major reasons for the efficiency of private bodies otherwise is the large amounts of private funds involved. There is also very little accountability in PPPs as it is a perfect venture for the government and the private bodies to pass on the buck to each other. This can be seen in many infrastructure projects riding on PPPs. Take the Bandra Worli Sealink in Mumbai for example. This project in collaboration with Hindustan Construction Company was supposed to have been completed in October 2004. However, due to unforeseen problems the deadline was pushed several times and the project is now expected to be completed in December 2008. Also thus is just the first phase of the entire Bandra-Nariman Point sealink project. Thus, this PPP did not bring in any better efficiecny. The cost has also escalated from Rs 800 crore to Rs 1300 crore owing to the delay and the government and HCC are engaged in a blame game.
Zoya Thomas · 17 October 2008
It might be true that, PPP raising resources from public sources does not benefit the poor and can be termed as exploitation in most of the sectors. However PPP in the health sector can be a different game all together. The contracting of NGOs for some key health services might actually improve the health outcomes in our states. For instance Uttar Pradesh already has a PPP model to provide better access to health care services in remote rural and under served areas - a major problem in India which lacks large numbers of doctors and nurses in rural health centres.
Sruthi Tetali · 17 October 2008
Public Private Partnership is one of the most attractive terminology which has been termed from years. The implementation and the effect of this partnership till date, however, remains a mystery to be unveiled!!! The article indeed points out a fact that most of the funds raised for this venture are from public resources and not private.Furthermore the article states an interesting viewpoint when it talks about the World Bank report. Lack of public accessible databases even after having 90 PPPs indeed adds to the mystery attached to the whole issue and heightens the level of inaccessibility which is well brought out here. It is high time to create awareness about the same and to think about the pros and cons and then proceed with it.
Priyanjali Ghose · 17 October 2008
PPP is like a coin with both sides.It has its vices as well as virtues. However,the ideology behind private-public collaboration for the betterment of the people would have been successful if the policy had more accountability. But sadly this policy reflects loopholes that paves way for exploitation of the poor. With neither the public nor private sector taking full responsibility, chances of the poor getting exploited increases. Instances in the article where this policy has failed gives an insight to the loopholes. The article being informative gives a clear picture of both the positive and negative aspects which can give the readers a better insight as to what PPP is all about and how it can or cannot benefit.
Sonali S Desai · 17 October 2008
There is a news story that I read, which is covered by THE HINDU on Sep 26, 2008 says that most of the PPP projects in Bangalore have resulted in loss of properties to the Bruhat Bangalore Mahangara Palike (BBMP). It has lost properties at Langford Town, in Magrath road and also in K G road. In the month of September, the Cabinet had allowed Maverick Holdings and Investments to rebuild the Economically Weaker Section (EWS) quarters under the PPP model. The planning of the proposed model was to build 1,640 flats for the residents on seven of the 14-acres of land and the rest was to be used for commercial purposes (In this project, the developer has to build flats and the commercial complex and also maintain it for 30 years and then transfer it back to the BBMP). There is, however, a small ray of hope for the BBMP to get the property back. Also, the agreement with Shayamraju and Company to build Divyashree Chambers to construct a complex with two-basement floor, where the company was entitled to 60 percent of the land. The BBMP sold its interests on the land to the builder allowing construction of four more floors. It clearly shows how the civic bodies are acting like a puppet in the hands of the developers, who seem to be doing business alone.
Kishore S.U · 17 October 2008
The article is a eye opener, many of us thought that PPP is a best option to pool in quality and efficient project in to the country as it has partnership of private bodies the idea was through such projects we can have control over corruption from the govt side and can provide high quality projects that are of public interest but ironically this has proven to be wrong by the article as it clearly questions the very authenticity of these projects. What really surprising is till today lack of information on level of investment from both the sides to the project. This shows clear implications of how our country is moving towards corporate governance. What even more surprising is that govt being quiet about this venture, this makes me feel there is some foul game behind it.
Konthoujam Sarda · 17 October 2008
PPP essentially implies sharing of risks and rewards of a venture. PPP was introduced considering the private enterprises are more efficient than the public sector and hence Government undertakings will speed up. However, the article brings out that the PPP works in favour of the private sector, in one way it is boosting the private economy using public's money. If we go by the article till now what the government has been doing (from the time PPP was introduced) was watching public's money consumed by the private sector. Thanks to the Planing Commission for taking notice now!. Why go for PPP if money involved for developing infrastructure of the country can be generated by the Government alone?
P. Krishna Murthy · 17 October 2008
A very informative article which clearly indicates the misconceptions of PPP projects in India. 1) Based on the article, the very basis of formation of a PPP is questionable. The Public participation in a PPP project ensures that it mitigates the risks of the private companies.But when there is hardly any investment done by the private secor, the element of risk seems unlikely. 2) The part of article which I found very interesting was where it talks about the creation of IIFCL. When govt. itself offers loans of upto 20% to private companies, why can't it invest that money directly into a PPP? 3) The myth of efficiency in a PPP has also been proven as baseless in this article. A classic example of inefficiency can be indicated in the delay of the construction of Bangalore Metro Rail project. 4) The article also focuses on accountability issue which is a major cause of concern. When private parties are involved in projects relating to roads, ports, power and water, accountability and transparency becomes mandatory. Lack of transparency paves ways to unlawful activities.
Debdutta Mohanty · 17 October 2008
In the article it is basically written how the PPP is favouring the private sector using the public money. However the main focus for creating a PPP was that private sectors are more efficient than the public sector, so such a step was taken, so that the Government work would speed up. But by reading this article it can be concluded no such improvement has happened, rather the PPP generally favours the private sector in which massive public resources are flowing. It does not even focus on its aim of transparency, better service and do not even assure its accountability to work for the weaker section of the society. Then what is the use of having a PPP, if there is no improvement? If the government can itself take up steps for the development of the country then there is no need for a PPP.
Devarchit Varma · 17 October 2008
The procedure was started considering that it will be very easy to conduct the development projects in the country. But the very essential aspect is still hidden, the necessity for the projects to be clear. Also, the profit earning opportunities are seemingly very low, being 15-20%. As for the booming economy, everyone needs progress and development at the end of the day. The aid which IIFCL provides is also low being only 20%. The IMF report which was consulted was of 2004, demands a new analysis. Planning Commission has enlighted the important fact of private sectors taking the public resources, which is alarming. Superior water supply projects in Manilla and Jakarta set a good example of the effective implicatioon of the project. World Bank's comments on the Indian projects reflects the impression of the project. it needs to be more clear.
pooja nair · 17 October 2008
A very informative piece, which gives us a real picture of PPPs. We always assume that private sector is very efficient and its management good and that it raises money because of its efficiency but the fact is that the money is raised partly because of the support by government. PPPs can prove to be more expensive than the government projects.
baishali mishra · 17 October 2008
This article tells that PPP was plying the public and private sectors work in partnership, complementing each other's strengths, covering for each other's weaknesses, sharing risks and profits. But it is not practically implemented and leads to the exploitation of poor. Though a heavy sum of money is invested in this plan still there are risks involved in it and thus it is not successful.
Ashpreet Sethi · 17 October 2008
Indeed an informative article which not only enlightens us with the PPP projects and the misconceptions of it being implemented successfully. It can prove to be successful if the government demands private sectors to contribute more rather than depending on them for the loan. If loans seem to be the only solution for the projects to work efficiently then logically private sectors should not be given the access to be a part of the initiative. In some areas if we do our research the plan has been successful as in some villages the infrastructure in respect to food and growth has improved to some extent. Still we have our doubts as the schemes are not implemented. We surely cant deny that the government is dancing to the tunes of private developers. Along with the Government we need to put in our heads as well.
Hemant Gairola · 17 October 2008
PPP - Public's Precious money Perishes. Public Private Partnership exemplifies neo-corruption. It's yet another scheme that looks good on paper, deceives the public, while there is more to see than what meets the eye. As the article tells, work done under PPP is of abysmal proportion, when compared to billions spent/wasted on it. Whereas the intention of PPP was to encourage private participation in development of public projects, it is serving as public funds serving private projects. And because of the 'private' tag, these projects are kind of insulated from RTI Act. PPPs hold little accountability to public. Indian bureaucrats are really innovative.
Debanjan Nath · 17 October 2008
The article reveals the truth of a presumption that should be cleared, to get a overview of current status of development in India. It is true that if the Government puts in all effort, then there would be no need for PPPs. The only reason why private sector companies tie-up with public sector is because they have assurance from the government of profitable returns. However, it should not be overlooked that even though the government could accomplish all tasks by itself, why would it opt for PPPs? Simply because the public sector companies do not have skilled workers with better technical knowhow, than the private sector companies. It is quite clear when we see the end product of a private sector and public sector companies & it is also true that the public sector alone cannot complete every developmental projects in a nation. Private sector companies will work towards profit maximisation. But then comes the part when we get to know about the truth of PPPs in this article which makes us think whether we really need them. The resources that goes into the hands of the private bodies are from the public and their transparency is thus essential for the knowledge of the public. But since this is not what's happening, maybe government should rethink its policies for PPPs. For all that it's worth, government should reconsider making policies for PPPs.
Pavan KUmar H. · 17 October 2008
Public private partnerships have been a great effort to bring out the public and private parties together for the welfare of the country. However the implementation seems to be lax as many other ventures in India. This article provides insight into the functioning of the same and even reveals fascinating facts about the PPP. It further highlights the loopholes the system faces by mentioning the mere fact that maximum allocation of resources is through public parties and not private. Further more the fact that in spite of having 90 PPP's under construction lack of a regularised accessible database takes away the credibility of the venture. There needs to be heightened awareness to weigh this issue and then bring it out with proper implementation for it to succeed and profit all.
Monika Monalisa · 17 October 2008
This article is quite a fair and useful article. The writer has tried to show the both sides of the coin, rather than just giving biased veiw. PPP might be a sounding to be a profitable project but shows certain ambuguity in it. I think that it is quite unfair to invest the public sector money in the private sector. This project has neglected the poor people of our country, the most neglected and suppresed class.
samarth saran · 17 October 2008
The very argument of government that increasing of GDP would improve livelihood of citizens does not hold any value. Data compile by Center of Science and Environment shows that whenever there has been an increase in GDP of country there was a rise in poverty. So this argument of government fails. No coming to PPP, government is taking for a ride the citizens of this country, because it's the tax payers money that is invested in the projects and the profits coming out of it are reaped by big corporate houses. The alliance between public and private does not make any sense, if time after time the money raised for these projects is the public's money. Moreover issues about accountability have also been raised in this alliance. Government needs to reconsider their decision before venturing into such alliance.
Swati Batra · 18 October 2008
Public Private Partnerships are thus not only in the interest of the enterprises, they also generate added value from a development point of view. The article The article reveals that there are lacunae in the system, but the fact is that maximum allotment of resources through public itself not the private. Though it is widely accepted that India's education system has and continues to fail the vast majority of its population. Ironically, the country's success in establishing a globally competitive service sector has underscored that failure. Poor quality, is not the only problem. The other is access - vast numbers of children simply do not enter the primary education system or leave it too early. Literacy and enrolment are particularly low among females and other marginalized groups. This failure is most glaring when comparing India with China where illiteracy, at least, has been substantially eradicated.
Swati Batra · 18 October 2008
Public Private Partnerships are thus not only in the interest of the enterprises, they also generate added value from a development point of view. The article the article reveals that there are lacunae in the system, but the fact is that maximum allotment of resources through public itself not the private. Though It is widely accepted that Indiaâs education system has and continues to fail the vast majority of its population. Ironically, the countryâs success in establishing a globally competitive service sector has underscored that failure. Poor quality, is not the only problem. The other is access - vast numbers of children simply do not enter the primary education system or leave it too early. Literacy and enrollment are particularly low among women and other marginalized groups. This failure is most glaring when comparing India with China where illiteracy, at least, has been substantially eradicated.
amit and jayashree · 19 October 2008
nice article exposing the PPP design. would have liked to read a more clear financial analysis. The debt part does not come out clearly. Many would argue that even if 66% is public money at least 33 -40 % more is coming in. need to counter this. Another comment on PPP in health being good for villagers. One should come to MP to see this.