Collaborating to Construct India: The Role of Public-Private Partnerships in Infrastructure Development

Collaborating to Construct India
The Role of Public-Private Partnerships in Infrastructure Development

Interview with Ashwin Mahalingam
May 9, 2012

Throughout India there is tremendous need for new and better infrastructure–roads and ports, schools, power plants, and telecommunications. India’s Finance Minister Pranab Mukherjee and Planning Commission Deputy Chairman Montek Singh Ahluhwalia have both emphasized that investing in infrastructure and accelerating its development are vital to growth. To achieve this aim, India’s 2012–13 budget reiterated a commitment to spend 50 trillion rupees ($920 billion) on infrastructure development during its 2012–17 five-year plan, with roughly half this investment expected to come from the private sector.

Some, however, doubt the feasibility of the government’s five-year infrastructure spending goal, particularly the ability to attract $500 billion in private investment. While India is second only to China in the number of ongoing public-private partnerships (PPPs) and second only to Brazil in PPP investments, bottlenecks remain. NBR spoke with Ashwin Mahalingam of the Indian Institute of Technology Madras about the role of PPPs in Indian infrastructure development and what advances must happen to make these partnerships more capable of meeting India’s vast infrastructure needs.

Can you please describe India’s infrastructure needs and the role of public-private partnerships in developing these public assets?

The Government of India’s planning commission estimates the country needs to build $1.2 trillion worth of infrastructure over the next five years in order to maintain a target growth rate of 8% GDP. India requires a large amount of infrastructure across many sectors such as transportation, telecommunications, power, education, and urban services. It is clear that the government cannot finance all of this based on tax revenue alone.

More importantly, the central, state, and local governments do not have the capacity, both in terms of quantity and quality of manpower, to deliver this vast amount of infrastructure. PPPs therefore certainly have a role to play. The planning commission and other sources have suggested that 50% of India’s infrastructure needs over the next five years will need to be met through PPPs, a non-trivial amount of infrastructure asset creation and service delivery.

Which sectors have shown the most promise for PPPs?

Thus far, several PPPs have been undertaken in the roads sector, particularly as part of the National Highways Development Project (NHDP). Other transportation-related sectors such as airports are also seeing a growth in PPPs. The same can be said for urban infrastructure and parts of the energy sector.

It is difficult to measure the success of these partnerships at this point. Public-private partnerships are usually 20–30 year contracts. The success of a PPP can be measured only once it has been operational for 10–15 years and can be judged if it is delivering its intended societal benefits. Indian agreements are in a nascent stage, and it is not possible to determine whether its PPPs have been successful thus far.

How conducive is the structural and regulatory environment in India for PPPs in infrastructure? What types of bottlenecks do private firms face, if any, and how could these impediments be mitigated?

As I remarked earlier, India will require significant amounts of private sector participation in infrastructure development, but this may not translate into half of infrastructure developed through PPPs. However, India is slowly creating an enabling environment for public-private partnerships across sectors and states. At the national level, several schemes are already in place, such as viability gap funding and the creation of the IIFCL (Indian Infrastructure Finance Company Ltd) to provide financing for PPPs. In addition, model concession agreements have been created in several sectors to standardize the procurement process for PPPs. Anecdotal evidence shows that the private sector welcomes these moves and there may be increased private participation in the tendering stage.

At the state level, several governments, such as Gujarat, Karnataka, and Andhra Pradesh, are in the process of creating enabling legislation or policies for PPPs, and most states have a PPP cell to facilitate infrastructure development through these partnerships. There are certainly aspects of the environment that can be improved upon, but by and large, the ambient environment to enact PPPs is being strengthened across states and sectors.

However, there are issues not addressed that may increase the transaction costs of undertaking PPPs and discourage private participation and investment. The first among these is a lack of capacity in India to structure and undertake PPPs, found primarily in the public sector but also in the private sector. Second, both the public and private sector lack understanding of the dynamic nature of PPPs, as well as the nature of risk sharing, as these arrangements are different from engineering, procurement, and construction (EPC) contracts that the private and public sector have traditionally entered into.

Therefore, a culture of partnering between the public and private sector needs to be built that is currently absent. Capacity building could perhaps be the most potent tool here. There are not many initiatives in this area, which may act as a limiting factor to the growth of PPPs in India.

Both the public and private sector should agree that it is impossible to predict eventualities across the agreement’s 20–30-year horizon and must be open to being flexible and renegotiating a contract along the way. To be effective, PPPs should not be governed strictly by an initial contract, and strong relationships between the public and private sector should play a key role.

Many point to difficulties in financing as the principle constraint on PPPs in India and argue that a more advanced financial system may be the best way to develop reform in infrastructure. Do you agree? If not, why?

Financing is an issue but is perhaps not the most critical issue today with regard to the success of partnerships between the public and private sector in infrastructure. If there is a favorable environment and good projects, money will follow.

By this I mean an environment that is transparent and predictable, where the capacity to enact partnerships exists in the public and private sectors, and where risks are allocated equitably. Such an environment can foster projects where the private sector earns a reasonable return on investment, while simultaneously providing services more efficiently to citizens than what the government is able to do. Certainly today, it is the environment and the quality of projects that matter more than the innovations that drive financing.

Are there any successful PPP models for infrastructure development elsewhere that India might learn from? If so, what are the key lessons and how might they be implemented in India?

The world over, there have been examples in every sector where PPPs have succeeded and where they have failed. In fact, unfortunately the failures might even outweigh the successes.

However, there is often a preoccupation with the build-operate-transfer (BOT) approach to partnerships while other “lighter” forms of PPPs, such as operations and management (O&M) contracts, are often ignored or not considered. These lighter forms of PPPs are often easier to enact, carry lower risks that can be more easily allocated and mitigated than the BOT type, and are more likely to succeed, thereby building capacity and awareness for PPPs. BOTs could then be a logical next step in India’s PPP trajectory.

In water, for instance, conventional wisdom and experience seems to indicate that capital investment from the public sector and operational investment by the private sector can lead to successful PPP models. One lesson for India to consider might be to start with lighter forms of PPPs, such as O&M contracts, and then, as the environment and understanding of PPPs improves, to migrate toward more complex forms of partnerships.

Ashwin Mahalingam (PhD, Stanford University) is Assistant Professor in the Building Technology and Construction Management division of the Civil Engineering department at the Indian Institute of Technology Madras. His research interests are in the areas of public-private partnerships in infrastructure planning and management, visualization and automation of construction processes, and sustainable development.

This interview was conducted by Sonia Luthra, Assistant Director for Outreach.