Sunday, April 13, 2014

Fixing the PPP model

Private public partnerships were to be the answer to our investment problem, especially in the infrastructure  sector. Nearly half the investment in the current five-year Plan is supposed to come through PPPs. Sadly, the model is broken and this explains the slump in investment in the last couple of years. One of the biggest challenges for the next government is fixing the PPP model so that growth can revive. (Where it can't be fixed, we have to find ways for government to fund investment).

EPW has a though-provoking article on the subject, with several interesting proposals for reform. The piece is written by an office in the ministry of finance, so it is not as if the government lacks ideas.

As the author points out, the government has been a on re-negotiating binge in several PPPs. In the power sector, for instance, the regulator has revised tariffs upwards. This sort of re-negotiation makes nonsense of the bidding process- those who lost out can always protest, saying that had the more favourable terms extended later been known, they would have bid differently. Secondly, any private operator who finds a project unviable can go running to the government and ask for re-negotiation, saying he cannot proceed otherwise. Effectively, project risk is transferred to government- this is conceptually no different from government bail-outs of banks.

The author spells out three elements needed in the reform of the PPP model: upholding the sanctity of the PPP contract, creating more regulatory certainty, and increasing the value for money (to government) from PPPs:
The answer to this opportunistic behaviour (of private parties) is not renegotiations, but to cancel bad projects and re-tender them to the private sector in a transparent manner. While this would be time consuming and could also reduce the inflated premia generated for the public sector, it would incentivise more realistic bidding....

One of the frequently cited reasons for seeking renegotiations is traffic overestimation. To ameliorate traffic risk incidence on the private concessionaires in the road sector, the government may consider introducing a new bidding parameter: least present value of revenues (LPVR). Under this bidding parameter, the user fees and discount rate are predetermined and the concession is awarded to the firm that bids the least present value of toll revenue. The concession ends when the present value of actual toll revenue is equal to the winning bid.

Then there should be a requirement of value for money calculation at three stages – at the appraisal stage (to decide whether it is worth going for the PPP option), at the operation stage (because the promised benefits may not materialise as in renegotiated contracts), and finally, at the end of the contract period (to compare the actual value for money with the projected). 

To further improve PPP project performance and VfM as also transparency, the concession agreements should be in public domain. This will enable all interested parties to monitor the project, which should improve performance and VfM. The direct liabilities created by PPP projects (as in annuity projects)4 should also be reported in the budget, which would provide a level playing field to all procurement options for provisioning public services.

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