PPP and other disasters

Given the enormous funding required to meet the country’s infrastructure needs (the PM spoke of $150 bn over 10 years at the New York Stock Exchange), it’s obvious the government is in no position to meet this. So, the renewed emphasis on what’s called Public-Private Partnership, or PPP, is a good thing. At the Planning Commission’s recent infrastructure conference, the list of projects already put out for PPP across the country adds up to around Rs 140,000 crore.

Apart from the capital cost, there’s also the issue of the recurring costs. In the case of the Delhi Vidyut Board (DVB), the government spent Rs 1,500 crore a year to subsidise it prior to its privatisation—this is down to around Rs 200 crore today. Naturally then, there was no question of investing to improve the DVB’s network—over the past four years, BSES and NDPL, which took over the DVB’s power distribution operations, have invested Rs 3,200 crore.

But handing over projects, either solely to the private sector or to PPP-type partnerships, has to be done in a transparent manner. Just because the government spent Rs 1,500 crore a year on the DVB doesn’t mean it can be handed over to a private firm for free, or even paying the firm Rs 1,499 crore for taking the DVB over—after all, the government would still be a net gainer! So far, however, India’s experience with PPP suggests the levels of transparency have been low. Apart from the fact that this creates an anti-PPP backlash, it also puts off prospective bidders, partly because they know there will be a backlash against them. The DVB privatisation, in fact, is a good example of how PPP projects go wrong. Ironically, in this particular project, all those concerned—the companies themselves; the Delhi government, which privatised the DVB; and the capital’s citizenry—felt cheated!

One of the problems with the process was that, when there were just two bidders left, the conditions of the deal were changed and, according to the Comptroller and Auditor General, around Rs 4,500 crore of post-bid sweeteners were added. Now it’s possible, as both the Delhi government and the two companies have argued, there was no option but to relax the bid conditions since it was obvious the original ones were too onerous to attract enough players. But the fact that the companies which had walked out were not called back to re-bid under the new conditions did create the impression that all was not above board.

As for BSES and NDPL, they felt cheated since, under the terms of the contract, they were to be allowed annual hikes of 10, 10, 10, 5 and 3 per cent—as compared to this approximately 40 per cent hike in tariffs, the regulator allowed a hike of only 11 per cent over the first four years! The companies were also not provided the special police and courts promised to reduce the 50 per cent theft levels four years ago.

And the capital’s citizens felt cheated since the Delhi government’s consultants completely misread the investments required—they said Rs 1,019 crore was required to fix the system while, in just the first four years, the two companies have invested Rs 3,200 crore! Given the guaranteed rates of return for BSES/NDPL, each Rs 100 crore of extra investment requires a tariff hike of around 0.5 per cent. Naturally then, while the citizens protest each tariff hike, the companies too have a legitimate grouse since the Delhi government’s consultants painted a completely different picture, on the basis of which the bids took place.

The DVB, sadly, is not the only such instance of poorly designed and executed PPP. In the case of the national highways programme, for instance, no company was given the land in accordance with the schedule promised, nor did the obstructions that the government was supposed to clear get cleared in time—in some cases, the delays have run into several years, so if any company chooses to go to court asking for damages, don’t be too surprised. In the case of telecom, it was precisely this inability to deliver on promises that ensured that, when private sector firms began defaulting on their licence fees, the government never cancelled their licences but chose to come up with a more liberal new policy instead of exposing itself to lawsuits!

In the case of the Delhi and Mumbai airports, which have just been privatised, similarly, the process was replete with various instances of favouritism. Top-notch airport firms walked out even before the actual bids were submitted, for instance, because the government decided to change the rules on financial guarantees. There was then the issue of excess land being given to the privatised airports—this was finally withdrawn only after a hotly-contested dispute among various arms of the government. And if this wasn’t bad enough, the whole process was vitiated by the fact that the marking criterion for bids was set (after the financial bids were made) in such a manner that it appeared to favour particular bidders. While the Reliance ADAG group, which was the firm supposed to have been favoured by the new marking scheme, has now gone to the court against this, fortunately the court has not stayed the process.

While the country’s citizens are unlikely to allow PPP projects to go ahead if they’re seen as crony capitalism, it’s also an open question as to whether bidders who feel shortchanged would wish to bid for the next PPP project that comes their way.