Earlier this week, Kiran Mazumdar Shaw, founder of biotechnology giant Biocon formally announced the company’s plans to adopt the Hebbagodi Station under Phase 3 of Namma Metro. The plan, which will unravel through a PPP model with BMRCL, will allow the latter to provide the world-class amenities that the average Bengalurean hopes to see. They’re not the only ones, Infosys will adopt the Electronics City station, also under Phase 3, with the Embassy Group likely to follow suit.
A new wave of corporate citizenship is sweeping across the city, greatly welcomed by the government. The privatisation of essential services seems to result in a certain public disquietude, not entirely unfounded in the light of shoddy PPP models incapable of balancing public needs with those of demand-driven private investors. PPPs herald the dawn of a new era in India, throwing open new avenues for economic infrastructure like roads and public transport systems and social infrastructure like schools and hospitals, models that have been conceptualised and replicated to great success abroad. However, sustainable models and carefully-chosen projects that minimise the risk of market-driven exploitation are the need of the hour.
The most important aspect of a PPP model is the long-term nature of the product or service in question. Profit-oriented projects need to be economically viable and self-sustaining, so that they meet market expectations and costs. Social projects are the other variety. These include essential goods and services, which directly satisfy the needs of the public and also enable auxiliary businesses. Electricity is a good example. Power shortages cause the common man a great deal of inconvenience and affect other businesses too – for instance, glitches in power supply will affect, apart from the common man, factories, small entrepreneurs and hospitals.
Working out a sustainable model is the most critical aspect of a PPP project, along with a plan to recover costs. China seems to have found some success in PPP models for economic infrastructure projects, with the NDRC releasing two sets of guidelines in 2014. The Belt and Road infrastructure initiative is the most recent addition to this. Under these guidelines, project operators create a revenue model and solicit funds directly from the capital market. According to a report in Xinhuanet, a Chinese, state-run news agency, social security funds and insurance premiums can be invested in these projects. Public transportation infrastructure has been constructed under this model and traffic counters have been set up at intervals to measure traffic and ascertain toll rates. Appealing to the capital market takes away the demand-risk that private players who make their own investments are forced to adhere to, making them market-driven, often at the cost of the public.
The government differs from a private player largely due to the former’s high-risk appetite. If they cannot handle a certain project, inviting private participation is logical recourse. However, great care needs to be taken with this, as one project cannot interfere with another. The agreement binding Kempegowda International Airport says that no other airport can be built within a 150-km distance, which means HAL cannot alleviate air traffic congestion by catering to shorthaul flights.
PPPs in Karnataka have had a choppy history, with a failed, decade-old attempt at the privatisation of electricity in collaboration with the Karnataka Power Corporation Limited. The two sides found themselves at odds over an increase in the agricultural tariff, a sector that received unmetered supply. However, a hike would have resulted in lower demand, a risk for a private player. Today, with solar power gaining popularity as a viable, alternative energy source and more houses installing rooftop panels to generate their own electricity, privatisation of Escoms is even riskier, what with the obvious difficulties in forecasting demand. This is why I firmly believe that project design is of the essence. India has a tendency to mix the good apples with the bad, so the only way to go about this is to correctly estimate and predict project costs.
The NICE project is another great example, done under a Build-Own-Operate-Transfer (BOOT) model. NICE requested the government for land in return for building the road, which the latter did without anticipating that real estate prices would shoot through the roof. This resulted in several controversies. The government would do well to subsidise the price of land, instead of mixing up road and land development projects.
At the end of the day, PPPs are a fine balancing act, which keep in mind the interests of consumers, the state and private players. Private investment shouldn’t be used as a financial crutch and the government shouldn’t have to cow down to private diktats either.
The writer is former senior director at Deloitte Touche Tohmatsu India Pvt. Ltd.
