Public Private Partnerships have commenced their second journey in the Indian context. The first journey was commenced somewhere in the mid nineties where the PPP concept was being understood and found its feet thereafter in certain doable sectors like roads - 4 laning / 6 laning, some port projects and fairly popular and visible sector like airports. At present 300 odd PPP projects valued at Rs 135, 876 crores (or US$ 30 billion approximately) as per PPPinIndia database represents a sizable number of projects achieved in India since inception of the concept.
The post 15th Lok Sabha elections defines PPPs in their second phase of growth and importance in the Indian infrastructure scenario. The President in her speech to Parliament on June 4, 2009, has clearly outlined the role of "Infrastructure as a fundamental enabler for a modern economy and infrastructure development will be a key focus area for the next five years of the Government". The President stated "Public-private partnership (PPP) projects are a key element of the strategy (on infrastructure creation). A large number of PPP projects in different areas currently awaiting government approval would be cleared expeditiously." The President further stated "The regulatory and legal framework for PPPs would be made more investment friendly."
There is more than a subtle hint in the President' speech. In effect the incumbent Government has made PPPs core to its infrastructure creation. There is much to be read in the statement " The regulatory and legal framework for PPPs would be made more investment friendly." At present there is no PPP regulator for various sectors and the absence of a Regulator makes the Government who is the sponsorer of a PPP a party to the regulation process. The regulation, if any, is at best through the Concession Agreement ie, regulation by contract. This requires to change in order to make PPPs more transparent and meaningful to investors.
Regulation begins from the germination of a PPP idea. Once the idea is conceived by the Sponsoring Government Authority it must pass the PPP Test. This means that a technical, financial, legal and economic review must be done to verify the doability of the project. Whilst it can be argued that the current process of PPP project assessment does all three, it must be understood that there is no reference point against which such assessment is conducted. It means that the Indian public / Authority / participant Concessionaire is not made aware that (a) this project is done a PPP basis because it is cheaper to instead of the public sector(b) the efficiency gains in doing so exceeds the public sector. This assumption in today's context is based on the premise that the private sector is more efficient both in creation and maintenance of a public infrastructure project. This assumption would need to be validated through a financial exercise wherein "a Public Sector Comparator" is created where the project costs as done by public sector is compared to a possible bid scenario by the private sector.
This means that a reference points of "Costs" would have to created for the public sector to verify the bid of the private sector on the project. However, this is not that simple - as the project risks in a PPP would be transferred to the private sector the bid price of the private sector would not only include the project costs risks but the risks it perceives it faces during the course of the PPP concession period.
These risks would be in the form of - traffic risk, interest rate risk, change of government policy risk, land acquisition risk, environmental risks to name a few. If some risks are to be borne by the Sponsoring Authority it would not be priced to the project bid. Therefore to make the PSC comparable, similar risks must be added to the PSC costs to make it equivalent to the bid price of the concessionaire (in some countries Govt advantages in the form of lower taxes, duties are also added to PSC to make the comparison effective). If this risk assessment is done in a transparent manner for the PSC, then the bid value of the concessionaire can be better understood from the project cost quoted and the risk value (type and quantum) added to its bid price.
This kind of comparison helps in (a) transparent assessment of bid price by a variety of concessionaires (b) their cost and risk perceptions on the project (c) whether Value for Money (VfM) is achieved on the project ie, where VfM = Risk adjusted PSC less Bid Price. This exercise would certainly make "The regulatory and legal framework for PPPs more investment friendly" as stated by the President of India.
The PSC model is being practised by other nations following the PPP route to finance infrastructure particularly - South Africa and the UK. It is more than comparative financial exercise but a political one where the doability of a PPP would not be questioned any time during its concession period if VfM is achieved through the PSC model. Australia too has vigorously adopted the PSC model.
For India the PSC will bring in credibility to the bid process. The possibilty of getting irresponsible bids would be eliminated and competition would be structured around project implementation and risk mitigation efficiencies. Let us hope this happens sooner than later..........
