Evaluating public-private partnership, the right way

An effective regulator and robust PPP law would ensure greater confidence of private investors

Radha Krishna Tripathy | January 17, 2020


#infrastructure   #PPP   #Public-Private Partnerships   #finance   #procurement   #NPA  
Infrastructure is a key sector where the PPP mode has been deployed. (Illustration: Ashish Asthana)
Infrastructure is a key sector where the PPP mode has been deployed. (Illustration: Ashish Asthana)

Public-Private Partnerships (PPP) projects are always under scrutiny, given the options of alternative of traditional procurement for the government. The value-for-money debate is one of the essential parameters to judge any PPP. In the absence of any credible data on this regard, it is very difficult to establish whether the PPP is a success or not.

PPP is a private finance initiative for procurement of any assets or services by the government. It is perceived to be highly innovative in terms of driving technological interventions in key infrastructure projects. It is also used as an effective procurement tool in the hands of government. While some of the projects are performing well in certain sectors, many projects are not delivering the results as intended. Thus, sometimes it raises concerns whether PPP has delivered better value for money as compared to traditional procurement options.

In the absence of a cost comparator from the government side (sub-national/municipal), it is difficult to establish and compare cost of government to the private costs for the project. While the private sector effectively prices the cost incurred by the personnel involved in terms of operation and maintenance, government departments find it hard to include the administrative cost, personnel costs, logistics cost, cost of monitoring equipment/vehicles  which is not billed to the project. They are budgeted to general heads of the department and difficult to establish the unit cost particular to the project. There is no cost centre apportionment of indirect costs and only variable/direct costs under revenue expenditure are used.

In PPP projects where the lifecycle cost of the project is key factor, there is no clear fixed lifecycle used as a financial indicator for government projects. It is simply expenditure budgeted and incurred for government projects. Hence, there is little evidence to compare the cost of the traditional procurement vis-à-vis PPP procurement. In addition, PPP procurements effectively prices the construction as well as the operating costs bundled into one contract transferring the additional risks to the private players. It is very different from the traditional procurement where construction and O&M projects are different and budgeted separately. There are no financing costs to public funds, as they do not carry the interest rate component.

In the absence of any valid comparison base, it is easier to pass the blame on to a PPP project for higher cost estimates to the public exchequer, denounce it for political gains, and make it a ground for further renegotiation of contract, which is not fair. The lifecycle cost of a bundled PPP has many contours while comparing with two distinct projects awarded by the government authority for the same work. So, rejecting PPP projects on the ground of corrupt practices and higher costing parameter are not a good way to judge them. It also does not take into account the gains made by avoiding delays and cost overruns over the public procurement method. The time specific contracts with a rider to penalty for PPP projects make it unique while comparing to projects granted through traditional procurement.

In addition, the cost of providing quality of service is not accounted for in government projects. Quality of service includes a benchmarked, pre-decided and verifiable service delivery mechanism which is an integral part of the PPP project. For example, creating and maintaining a tracking system to record service related parameters, redressal of complaints to customer satisfaction, time taken to resolve glitches/breakdowns if any, and measuring down time for service have costs both in terms of capital expenditure for automated systems and operational expenditure in terms of staff costs to discharge various functions related to quality. It also has a variable cost component per complaint redressal which is generally budgeted into a PPP project which is absent in a typical government project. Thus, a traditional government project suffers with poor quality of service and upkeep of equipment. Additionally, the government has no accountability (in the narrow terms of the project) and cannot be sued for quality. Private services can be sued for lapses in services and penalized for service deficiency. All these add up to quality of services that are significant.

However, there is no clear comparison for costs between traditional and PPP procurement. Some experts claim that PPP projects save around 25-30 percent of the project cost which is purely anecdotal in nature. This claim needs proper evidence based research to establish the facts from assumptions based on robust data gathered over a period for some selected PPP projects vis-à-vis the same type of traditional projects. Examining quality of services improvement may be the first step to start with such an experimentation with cost comparison. It will also push government agency and independent reviewers to focus on outcomes rather than spending. It will be a welcome step for the government authority to establish PPP and create awareness among public regarding the cost vs benefit for a PPP project.  

PPP projects are generally of long term with huge exposure to public debt. In the context of a weak domestic financial market, debts are becoming very expensive and difficult to access for private developers. Banks and FIs are reluctant to fund new projects due to the fear of the project becoming non-performing assets (NPA) and possible cash flow issues. In such a scenario, PPP projects that would be subjected to renegotiations midway due to political reasons would undermine the sanctity of contracts and lead to a loss of investor confidence. Any such negative overtone along with unjustifiable cost comparison to PPP projects will do no good for the economic prospects of a state or country. This will only add in creating more chaos and degrading overall investors’ confidence in the system.

Any dispute needs time-bound resolution. Contracts that are well defined are supposed to have little problems. Some issues may get raised possibly due to factors accounted under ‘force majeure’ conditions and not directly linked to service provision issues. Any breach of contract by either party would lead to litigation, which can incentivizes corruption. A project of 25-30-year period is expected to have some legal issues. The solution lies in identification, acceptance of the issue and mutual discussion to find an amicable settlement by both the parties without harming each other’s interest in the larger benefit of consumers. An effective regulator and a robust PPP law would ensure greater confidence of the private investors to stay invested for long term. Greater commitment with strong leadership would be paramount for PPP projects to be sustainable on a long-term time horizon.

Radha Krishna Tripathy is Senior Fellow, CUTS Institute for Regulation and Competition, and PhD scholar from RGIPT, Jais, UP.

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