Infrastructure

The Trojan horse

Print edition : February 05, 2016

Terminal 3 of the Indira Gandhi International Airport in New Delhi. The Airports Economic Regulatory Authority of India recently asked DIAL, the company which operates the airport, to reduce user charges by a whopping 89 per cent. Photo: V. Sudershan

The promotion of public-private partnerships, which goes hand in hand with the state withdrawing from its responsibility of discharging its basic duties to the citizens, is essentially privatisation by other means.

Privatisation is the ultimate refuge of the stubborn neoliberal. The outright privatisation of nationally owned assets is often reckoned to be the pinnacle of the neoliberal dream. But this need not be so, especially if the relationship between private interests and the state is “flexible” and the state is ever willing to accommodate the interests of capitalists while placing at their disposal the might of its machinery and the resources at its command.

In India, as elsewhere, the mantra of public-private partnerships (PPPs, more fashionably known as 3P) has been touted as the panacea for a farrago of problems across a mind-boggling array of sectors. The concept of PPPs is being waved as the magic wand to address the massive deficit in not only the infrastructure sector —roads, ports, railways, airports, and so on—but also what is often condescendingly dismissed as the “social” sectors—health, education and, incredibly, even the government-administered midday meal scheme for school-going children in some States. Even basic services such as sanitation and water, which have always been considered a part of the state’s basic responsibility to its citizens, have come under the PPP hammer. But its scope extends even further, into manufacturing, in areas such as defence production, which the Narendra Modi government recently opened up even more to Indian and global companies in the name of furthering friendly partnerships. Indeed, this range of activities is predicated on the logic of the state withdrawing from what has historically been regarded as its primary duties. In effect, the shifting of these responsibilities would not have been possible without the state vacating the space in favour of private interests. This, in turn, has been aided by the mindless pursuit of fiscal obscurantism, especially the inordinate importance given to fiscal rectitude regardless of the state of the economy. The fiscal fundamentalism that goes with this approach is what is responsible for the pace at which the state has vacated the space traditionally assigned to it in favour of a plethora of private operators masquerading as “service providers”. Seen from this perspective, PPPs are nothing but privatisation by other means. Critically, from an ideological perspective, the cause of neoliberalism is helped by camouflaging the march of private capital in the garb of furthering public interest and welfare.

PPP rose to prominence in the 1990s, aided by the World Bank’s evangelical espousal of the idea. The concept was used to justify the opening up of services in several areas to private operators, particularly those relating to basic infrastructure such as roads, airports and ports, which were regarded as “public goods”. The logic was that since the market mechanism was more “efficient” in the use of resources, and the state was better positioned to allocate services in an equitable manner to all citizens, a marriage of the two would be the best solution. That is, the state would defend public interest in a project while the private operator would ensure that money was spent in the most efficient manner (please see “Are public investments serving the poor in India?” by Chandrima Mukhopadhyay in the Journal of Infrastructure Development, June 2011, Volume 3, No. 1).

In 2007, a study by two researchers, Graeme A. Hodge and Carsten Greve (“Public–Private Partnerships: An International Performance Review”, Public Administration Review, May/June 2007, Volume 67, Issue 3), observed: “We are certainly now drowning in promises by governments around the world that PPPs will provide public sector services more cheaply and quickly, with reduced pressure on government budgets.” They pointed out that the “reforms” promised greater accountability, better monitoring and stronger business confidence. Instead, the study determined that “serious evidence on the veracity of these claims and counterclaims is less voluminous—indeed, it is one of the surprises of the existing PPP literature to find that for the size of the financial commitments to PPPs being entered into by governments around the globe, the evidence on cost and quality gains…seems limited.”

The study pointed to a significant “evaluation deficit” in not only the academic literature but also the wider business circles, which resulted in a serious exaggeration of benefits over costs from such projects. It pointed out that the “early claim that private financing of public infrastructure reduces pressure on public sector budgets and provides more infrastructure than is otherwise achievable is seen, therefore, to be largely false”. In fact, the characterisation of 3Ps as “Problem, Problem, Problem” by its opponents in Canada best captures the sceptical approach to such claims.

The thrust on PPPs acquired significance after the United Progressive Alliance (UPA) assumed office in 2004. The string of controversies surrounding the “strategic sale” of several public sector companies during the earlier National Democratic Alliance (NDA) government under Atal Bihari Vajpayee (1998-2004), and the significant presence of the Left in Parliament meant that outright sale of public enterprises was a highly discredited policy option. However, the Manmohan Singh government, in 2005, established the institutional arrangements for a PPP programme by setting up the PPP Appraisal Committee (PPPAC) under the Department of Economic Affairs, Ministry of Finance. Crucially, it was entrusted with the task of laying down norms for Viability Gap Funding (VGF) for infrastructure projects.

Lack of transparency

The VGF was institutionalised at a time when private industry was clamouring that the returns from infrastructure projects such as roads were too low to justify investment. The VGF enabled the government to provide grants to private investors so that they could implement projects without being constrained by the prospect of low financial returns. There are serious issues of transparency in such modes of funding. Since infrastructure projects are highly location-specific, benchmarks to correlate costs are difficult to find. Moreover, the risks associated with the actual revenue streams that would accrue after the completion of a project—such as how much traffic a new tolled road would actually carry—are borne by the state rather than the investor.

Since VGF arises from the gap between what is economically necessary and what is financially viable, there is a perverse tendency to overstate economic benefits in order to draw financial grants from the Centre’s VGF pool. In fact, the recent report of the Committee on Revisiting And Revitalising Public Private Partnership Model of Infrastructure, headed by Vijay Kelkar, Chairman of the National Institute of Public Finance and Policy, observed that in several States even projects that are not suitable for being implemented in PPP mode have been undertaken simply in order to avail themselves of the VGF grants from the Centre. The VGF, which was initially capped at 20 per cent of the total project cost —which was itself quite high—has been further hiked to an additional 20 per cent, conditional on government approval. This has been justified on the grounds that a good project should not suffer merely for want of financial resources. The question then arises as to why such projects cannot be implemented directly by the state, with a great deal more of transparency and public accountability. The fact that information on how much money the government has spent cumulatively on VGF over the years is not available in the public domain indicates the utter lack of transparency.

Delhi, Bengaluru airport s

PPPs are structured in a manner that keeps them away from public scrutiny. Typically, the “joint” venture is legally structured as a Special Purpose Vehicle (SPV), which is a private, not a public, entity. This is significant because it puts such private entities beyond the pale of legislative oversight, resulting in a significant erosion of public interest. For instance, the Delhi International Airport Limited (DIAL), a joint venture company in which the dominant partner, the GMR Group, holds a 54 per cent stake, also has a 26 per cent stake in the Airports Authority of India (AAI), the original public sector organisation that traditionally operated most airports in India. However, the structure of the partnership is such that many of the prime revenue-earning activities of the airport are outside the scope of the joint venture company, which effectively means that the AAI does not get a share of those receipts. In fact, tariffs—not just the user charges that airline passengers pay at the airport but even the charges paid by the airlines—are considered so high that the airports regulator, the Airports Economic Regulatory Authority of India (AERA), recently asked DIAL to reduce user charges by a whopping 89 per cent (the airport operator has challenged the order in December). DIAL had sought a 42 per cent increase in rates during 2014-19, over and above the 346 per cent rise that was granted to it during 2009-14.

In fact, speaking to this correspondent in 2012, a top official of the global aircraft manufacturer Airbus pointed out that unjustifiably high user fees at airports such as Delhi were a factor inhibiting air travel in India. Referring to the newly established T3 terminal in Delhi, he said, “Delhi is perhaps the second most expensive airport in the world for airline companies. It is a fine airport, but it is not paved with gold. Another top official of an airline pointed out that the practices adopted by the operator at the Delhi airport were at variance with those around the world. In fact, several airlines have appealed against the tariff hikes sought by DIAL. Incidentally, DIAL was indicted in 2012 on several counts by the Comptroller and Auditor General for causing losses to the public exchequer.

The new airport project at Bengaluru, also implemented in PPP mode, has also been roundly criticised on several counts. In 2009, a year after the airport commenced operations at Devenahalli, a Joint Legislative Committee of the Karnataka Assembly which studied the scope of the project observed that the State government had spent a substantial amount of money on the project without getting any returns. It pointed out that three promoters of the project—Siemens, Larsen and Toubro, and Unique Zurich Airport (Flughafen Zurich AG)—benefited significantly through unfair means. It pointed out that the State government, which had a 13 per cent equity stake in the joint venture company running the airport, had provided 4,000 acres of land and an interest-free loan of Rs.350 crore to the project. Almost three-fourths of the project cost of Rs.1,932.60 crore was awarded to entities close to the three promoters. The committee observed: “All is not well with BIAL [Bengaluru International Airport Limited].” Contracts, it remarked, were “entrusted” rather than “tendered”, which resulted in cost-padding and an undue burden on airport users.

The committee estimated that the State government spent at least Rs.600 crore on the project. In effect, the project, billed as a PPP, was essentially a private project as far as returns were concerned. The three promoters exited soon after the new airport was launched, and the company that operates the airport is now controlled by the GVK Group.

Local governments in PPP grip

The rapid expansion of PPPs not only in terms of their number and the consequent impact on the public exchequer but also the ever-expanding range of activities that they now embrace has major consequences. This mushrooming of PPPs, without virtually any public, media or legislative oversight, bodes a financial and social crisis that could seriously undermine the nature of democratic conduct. By tightening the fiscal space, the Union government has, in the last decade, pushed not only State governments but also local governments into such partnerships. Thus, municipalities are being forced to “outsource” basic amenities such as garbage clearance, provision of water and sanitation services in Indian cities and towns to a host of new private operators. The high, and escalating, user charges and the utter lack of accountability are now a common urban theme.

Meanwhile, even in the field of technical education, industry associations (more accurately termed lobbies) are taking over vocational education institutions and running them in PPP mode. Much of this is happening without virtually any oversight. Indian universities, squeezed by lack of funds, are being pushed into the arms of vested interests that are redefining the very nature of curricula in these institutions; this is, again, happening in the name of fostering PPPs.

Meanwhile, many States, prodded by the Union Finance Ministry, and having established their own “cells” to promote PPPs, are in danger of serious financial overreach as they leak funds with virtually no monitoring. The Twelfth Plan (2012-17)—or whatever remains of it after the dismantling of the Planning Commission and its replacement by an emasculated NITI Aayog—is in danger of running aground because of the over-reliance on PPPs as a means of implementing its objectives. The share of private investment in infrastructure—mainly through the PPP adventure—had been projected to increase from 37 per cent in the Eleventh Plan to almost half of overall investment in the Twelfth Plan. That is evidently a pipe dream, given that private investment in the first two years of the Plan period had registered a shortfall of 43 per cent.

Industry’s complaint that the failure of timely government clearances and lack of funding are responsible for the stalled projects has not been critically evaluated in the media. Instead, the NITI Aayog’s faith in the notion that better institutional arrangements could clear the logjam appears misplaced. For instance, its own finding (in February 2015) of an analysis of road projects showed that a concentration of companies were bagging road contracts, which implied that they were “over-leveraged”. What this means is that these companies are too indebted to borrow further from funding agencies without jeopardising the banks themselves, a problem that has assumed serious proportions for Indian banks, most notably public sector entities.

Recent media reports indicate that Union Road Transport and Highways Minister Nitin Gadkari has sought an allocation of Rs.85,000 crore in the forthcoming Union Budget, an increase of more than 85 per cent over current year’s allocation. Over-optimistic traffic projections in the case of many road projects and cost escalation are the primary reasons for stalled projects.

The recent relaxation of norms for road projects has empowered the Ministry to approve projects in which the civil construction cost is up to Rs.1,000 crore without waiting for approval from the Finance Ministry. In the last few months, more than 200 stalled projects, valued at more than Rs.3 lakh crore, have been cleared quickly by the Ministry because of the liberalised norms. Little is known about how, and on what terms, these projects are being funded.

Addressing a conference on infrastructure in August 2013, K.C. Chakrabarty, the colourful former Deputy Governor of the Reserve Bank of India, who has a reputation for speaking his mind (he resigned in March 2014, before completing his term), dismantled the notion that banks had let the country down. He pointed out that the outstanding bank credit to the infrastructure sector increased from Rs.7,243 crore in 1999-2000 to Rs.7.86 lakh crore in 2012-13, a compounded annual increase of more than 43 per cent. The share of the banks’ finance to infrastructure in gross bank credit increased from 1.63 per cent in 2001 to 13.37 per cent in 2013, he said, and their exposure to the infrastructure sector in the five years since 2008 have more than trebled.

He pointed out that there was little to show by way of improvement in transparency and accountability in PPP projects. Pointing out how companies operating in the infrastructure segment had brought little by way of equity, relying instead on debt, he said: “In my view, the ‘public private partnership has, in effect, remained a ‘public only’ venture. Lack of equity investment in the project means that the promoter-developer has little ‘skin in the game’ and the motivation for the success of the venture is that much limited.”

In a curious turn, even a person such as Finance Minister Arun Jaitley, who has always espoused the wider play for markets, has called for a greater role for public investment. In a situation where there is no evidence of such a boost—on the contrary, the latest data on industrial output indicate a further slowdown—one can perhaps only hazard a guess that government money —termed “public investment”—is being shovelled into projects that are being controlled by private operators. For instance, a significant portion of the Indian Railways’ investment in new projects such as station modernisation is going to be implemented by private players. This is disturbing, for several reasons. For one, this is going to result in higher tariffs, thanks to profit-gouging by private interests; the new tariff regulator for the railways is only meant to aid this process. The proposed projects also run the risk of not being viable for the reasons Chakrabarty explained.

The espousal of PPPs as a readymade solution to India’s backlog of underdevelopment is not only foolhardy but also dangerous. It promises to unleash a new class of carpetbaggers that threaten to prey on a society sorely in need of basic services. By allowing the exchequer to bleed without elementary oversight, it threatens to seriously jeopardise national finances and unleash a spiral of cuts in funds that erode services even more. Even more significantly, by placing national, regional, and local governments at the mercy of shady operators, PPPs threaten to undermine democracy as we understand it.

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