Tehelka.comtehelkahindi.com criticalfutures.org

Search for archived stories here...


    SocialTwist Tell-a-Friend
    Posted on 12 July 2012
    CURRENT AFFAIRS  
    ECONOMY

    PPP Financially Unsound

    Dr Mahesh PS Gandhi suggests a drastic modification to the way the public-private partnership model is currently implemented in India, saying this would go a long way in saving public money

    PALMISTRY AND astrology flourish because humans are risk-averse and would always avoid taking any risk if they could do so under the garb of rationality. But most ‘rational’ decisions are also contaminated by the desired result: Desire affects the rationale and moves it in the direction intended. Hence, there is no rationale that is independent of subjectivity — and when it comes to large projects and risk management thereof, it becomes urgent that the supposed rationality be put to test.


    Over the last 10 years, we have accepted the rationality of public-private partnership (PPP) in infrastructure development without realising the subjective element of wishful thinking in it. The time has come to make changes in the model to reflect a new perspective. We have developed a predetermined notion that the project should be ‘sold’ or ‘granted’ to the private entrepreneur. This writer proposes a mix or midway path between the two. It would lead to real value addition for the national enterprise by making available to the people state-of-the-art infrastructure at low or no additional cost.

    The model can be flipped, taking into consideration two fundamentals of the PPP business. First, that there is a market capitalisation potential in the project as soon as it is awarded to a contracting company; second, there is profit in EPC that is always churned back into the project as promoter equity. Over and above, the market-cap potential of the construction company, which is usually in-house, adds to the wealth of the promoter (read contractor) who would have been awarded the PPP project. It is safe to construe that the existing support in the political system to PPP models in the current format is the result of inefficient reading of the cash management and market process

    This author would not take more words or time of the readers in explaining the models used at present, but would rather proceed to commend the small steps of a Union Ministry that have already been taken in this direction, by progressing towards an engagement for development of very large socially imperative infrastructure project. The said Ministry agreed to consider following a modified version of the PPP model, where the private sector supports step-up-valorisation in the hands of the national enterprise, which would then utilise the resources for implementation of the project on a more citizen-friendly model with no additional charge for provision of modern facilities that today’s citizens deserve.

    PARTNERSHIP POW-WOW

    The current model of public-private partnership, as implemented in India, entails a huge cost to the exchequer

    The new model suggests a method in which a lot of this cost does not go to the main contractor who sub-contracts it to someone else and walks away with a fat profit

    An example of this is how the Antwerpen railway station in the Netherlands has been developed

    There are usually two arguments against government taking upon itself the role and responsibility to raise the necessary finance for the development of infrastructure projects. First, that the government has no upfront equity to invest in such projects — the burden on public exchequer cannot be enhanced; and the second is that it is not the business of the government to get into business. The author can demonstrate the need of ‘no upfront equity’ from the national enterprise through an efficient cash-flow management process as also achieving useful collaborations with such capability providers as is required for implementation of the project. The author also submits that making such arrangements as would enhance the social infrastructure at no additional cost to the society is the ‘real business’ of any government and the revision to the exigent model of PPP is imminent in this process. For this, there is a need for the national enterprise to take upon itself the role and the responsibility of being the infrastructure provider to the nation rather than just being an ‘auction house’ to fund the General Budget deficits and poll promises.

    A successful enterprise is one that not only predicts the risk, but also mitigates it, rather than avoiding going on the path of development, growth. Risk management is as important as doing business itself. For national enterprise, it becomes all the more important, as they are responsible to the society, citizens as also the future generations. PPP in its present form is a model that has been implemented out of the erroneous rationale of finding short-term solution for long-term problems. Before valuing an infra project on toll/annuity basis projects and auctioning it off as a PPP, efforts should have been made by the concerned national enterprise to mitigate the risks that it does not wish to take by developing such infrastructure on its own — rather than feeling elevated by collecting billions of dollars as premiums from the bidders. What has been missed is that the national enterprise has merely passed on the cost and burden of developing critical infrastructure back to the citizens and the society who will have to follow and obey. If the risks that it did not wish to take upon itself were suitably mitigated, and if it had reviewed the cash flows and the fundraising mechanism objectively, we could have already had a better system, an improved model of PPP maybe similar to the one as is being proposed by the author.

    MORE SO, to the disadvantage of the commoner, e.g., nhai that is responsible for road infrastructure in India has had policies of sharing excess (over the average projected by the concessionaire) revenue from a given project during its concession period with the Concessionaire, rather than letting the excess revenue, if it would come, reduce the tenor/applicable user fee of the concession as also the burden on the user(?). Such policies take birth from the erroneous rationale that public auction of PPPs shall enable the exchequer to raise capital that can be used to fund such projects which are not so commercially viable. The capital may also have been raised by the national enterprise by constructing the project as a cash contract and using the valuation or the market cap or securitised earnings of such yielding assets for development of additional infrastructure without posing additional taxes on the users and common citizens. Besides, the likes of the levy of Rs 1 per litre of petrol, which we all have been contributing for the development of roads in India, could have been more prudently used as the seed money for launching extensive infrastructure development programmes under the proposed modified model. That also goes to the yield from valorisation of ribbon rights etc., — to take an example, ribbon rights valued at over $14 billion were granted to one developer in India for a less-than-200-km stretch of a highway!

    Some of the best opportunities for utilisation of the modified public-private partnership (MPPP) can be such urban development projects where the valorisation proceeds can effectively fund the cash flows required for the projects to take off. Such projects entail development of real estate appurtenant to the project site. This could include ribbon rights along a new road, lease or sale of air and land rights in transportation hubs including bus and train stations, the utilisation of available spaces more efficiently on the metro subways and stations and the like. There is a classic example of such redevelopment in the Antwerpen Rail Station project where the entire budget for redevelopment of the station as well as its surrounding area could be successfully raised from the project itself, as efficiently as a private developer would have done, but without putting any burden on the exchequer or the ordinary user. Post redevelopment, the erstwhile dead-end station boasts of a through high-speed line to Amsterdam as also a world class Diamond Centre at the station itself.

    The step-up-valorisation, as is proposed, ensures substantial returns leading to more viable infrastructure development process. The national enterprise is thus able to minimise the financial burden as also maximise the social profit from such infrastructure development process. It is the responsibility of the national enterprise not to create new lines of financial burden on the palms of our already deprived social majority but to try and read through those fate lines which would have promised them a right to have better, world-class living and working environment through a knowledge based upright method and process and not just by auctioning valuable social and national resources by contractor friendly mechanisms; unwittingly, not just the present, even the future earnings and resources of the society have gotten mortgaged for the benefit of the faulted PPP model. India was always the land of palm readers, saints and astrologers — we probably couldn’t read it right for ourselves this time…

    The author is Managing Director of India operations, AFII.
    [email protected]


    Getting ahead in the numbers game

    Things are moving, he says, but not in the right direction. Manjula Lal meets a consultant who seems capable of stopping the haemorrhage of public money into contractors’ pockets

    DR MAHESH PS Gandhi is a man who crunches numbers and doesn’t mince words. A chartered accountant by training with a PhD from Delhi University, he took off for Singapore to work for Arbeiten Für India Inc, which he later bought and transformed into afii Corporate Advisors in 2005. As Managing Director of the India operations and Chairperson of the worldwide operations, he is now deep into financial management of complex infrastructure operations in India.

    Gandhi represents public infrastructure firms of Israel and Belgium in India, bringing the expertise of these countries to India for power, water and railway projects. This, of course, has to be done by ‘building strategic alliances and partnerships with various state government, ministries and big corporate players.’ With the spurt of build-operate-transfer projects, AFII is right in the thick of infrastructure-building in India, and can draw on the expertise of over 70 global associates with which it networks.

    The new model is already working in West Bengal on a 2,000-mw power project of NTPC

    “I want to bring something innovative and path-breaking on the table for both sides,” he says, talking about the talks between Euro Immo Star NV and Eurostation NV for the development of world class railways stations in India. And no, the Belgians are not impatient seeing the pace of work in India. They are in it for the long run and can wait it out.

    One of the startling points that Gandhi can throw at you is that the Rs 1.76 lakh crore figure given for the 2G scam is nothing – several multiples of that number have been lost by the exchequer by using PPP in its present form. Because here again, the company that gets the contract merely sub-contracts at a lower price, walking off with a major part of the payment without lifting a finger. In his modified model for PPP (which he calls MPPP), the government will itself get the work done, there will be no investment by the state on a project as most of the initial capital will be brought by the foreign government company, and all the benefits will accrue to the public entity.

    “Most of the projects under MPPP can be cash-surplus projects for the state and will not require any viability gap finance from the government of India,” he says.

    So in his mission to save the taxpayer’s money, has he achieved much success. Gandhi is sanguine, and confident that he can convince the powers-that-be. Already, there are triumphs under his belt. “When the Prime Minister had the railway portfolio three years back,” he says, “he put his signature to kick-start the transition process in the format presented by us that will bring new life into railway infrastructure development” MoUs are now going to be signed for redevelopment of stations at New Delhi, Mumbai and Howrah on the new financial and project management model,” he says.

    In West Bengal, he says, the new government must be given some time to fix the water and power deficits.

    His company is supporting IEC for a new 2,000-mw power project in West Bengal for which only 400-450 acres are being requisitioned as compared to other similar-sized power projects in India which are being and have been built on 1,500-2,000 acres of land.

    When he is riding his hobby horse, the sincerity of his effort to prevent the Indian public from being cheated comes across pretty strong. “What is the cost? What is the social cost?” he asks. “My efforts are mainly directed at getting things done at the right price.”

    He can also wax eloquent also subjects like cushioning sewerage pipes under railway tracks and highways, land requirement for sewage treatment at the Malad (Mumbai) facility at minimum cost and community toilets. His focus is welcome, as civic facilities in India are crumbling under the weight of increased urbanisation and inability (or unwillingness) of the municipalities to tackle the job at hand.

    [email protected]

    SocialTwist Tell-a-Friend
    Posted on 12 July 2012
 

ADVERTISEMENT


ADVERTISEMENT


 
  About Us | Advertise With Us | Print Subscriptions | Syndication | Terms of Service | Privacy Policy | Feedback | Contact Us | Bouquets & Brickbats