Pvt missing from PPP model in transport projects

A critical “P” seems to have gone missing from the 3 Ps of the Public-Private Partnership model that’s being sold as the panacea for India’s infrastructure woes.

A critical “P” seems to have gone missing from the 3 Ps of the Public-Private Partnership model that’s being sold as the panacea for India’s infrastructure woes. A study published in the McKinsey Quarterly has revealed that a mere 4 per cent of the total planned investment in transportation infrastructure in the country between 2005-10 is being contributed by the private sector.

PPPs are recognised as the way for transforming public services, ringing in competitiveness and creating additional financing capacity, but the private sector is still reluctant to fund transportation projects. “A $10-billion of private investment in transportation is nowhere enough to sustain infrastructure growth in the sector,” said K L Thapar, director of the Asian Institute of Transport Development and a former Planning Commission member.

“These projects have a long gestation period and yield returns slowly. But wherever assets are moveable, the private sector is more willing to invest, like in aviation, which has over 60 per cent private ownership” he said.

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Some industry experts believe poor private investment in transportation is also an outcome of lack of opportunity. “Only 10 per cent of the roads coming up have traffic projections that can make a project viable for us,” said Rafi Khan, general manager of D S Construction. “Unlike in some countries, there are not too many ways for the private sector to exit such infrastructure investments prematurely, making them risky.”

Land acquisition problems have been another dampener. While the current norms call for 80 per cent of the acquisition work to be undertaken by concerned agencies like the National Highways Authority of India, the private sector has long been demanding 100 per cent acquisition to facilitate speedy start of work, says Khan.

Absence of long-term debt funding at reasonable rates is also acting as a major deterrent. “In the past year, interest rates have gone up from 8 per cent to over 12 per cent. For a sector relying on debt for 80 per cent of its financing, an interest rate hike spells big trouble,” said Ankineedu Maganti, director of Soma Enterprises. Recent hike in interest rates has meant a massive cost jump of 20- 30 per cent for many companies.

He also said while the gestation period for such projects is anywhere between 20-40 years, lending is usually for just 10-12 years.

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While China and Russia do not fare much better in attracting private participation in public transport (see box), India’s case is different as it is structurally “most ready” to embrace PPPs. Unlike China, where the McKinsey research reveals poor transparency and predictable mechanisms for structuring and awarding public-private partnerships, India can has a robust institutional framework.