PPP – Public Private Partnership (Privatization)
Has 'privatization' really worked? This question is lingering in my mind since the Modi government has come in power. the outlook of this government is pro-corporate. The government is also pushing towards privatization. In the wake of these events, I would like to review the PPP model.
Has ‘privatization’ resulted in any net public benefit?
India has one of the largest transport infrastructure in the world with the road network of 4.2 million km. The earlier government was the major source of operating and financing for transport infrastructure like metro, road project etc. As the rise in traffic volume boomed government failed to provide transport infrastructure. Historically transport infrastructure and service have been provided by the public enterprises. The reason that private sector not interested in such projects is the requirement of massive investment, the uncertainty of return, long gestation period. With the reduction of the budget for transport infrastructure (comparing % of total budget) from the government, alternate sources for investing, building, operating these projects were looked upon. To remove such paucities and upgrade the infrastructure government at different level have taken various measures. The government has introduced structural reform and fiscal incentives to promote private participation in such projects.
Returning to the question, there is the mixed effect of ‘this privatization’ of transport infrastructure on net public benefit.
Due to restrictive practices, the public enterprises have operated as “natural monopolies” providing poor quality of service and infrastructure at low prices and most of the time incurred in heavy losses that were borne by the government. These reasons paved the way for the introduction of private partners in transport infrastructure. Other reasons were, involving private partnership support innovative project design and deliver value for money by better controlling project risk. It also help in improving the quality of infrastructure service, upgrade the technology, lower the cost and price of services.
The main feature for the success of privatization is following.
Private partnership helps to achieve higher allocative and productive efficiency. It also helps to strengthen the role of the private sector in the economy. According to Eytan Sheshinski and Luis F. López-Calva (Privatization and Its Benefit: Theory and Evidence, 2003) “analysis have shown important efficiency gains and productivity improvements in privatized firms – for well-defined measures – and allow us to evaluate the privatization experience from a microeconomic, partial equilibrium perspective”. Higher private sector participation improves public sector financial health and also enables the government to free resource for allocation in other projects of greater public interest. Public managed projects generally do not perform as efficiently and competitively as compared to privatized projects do.
‘The major benefactor of enhanced transport infrastructure is manufacturing sector which has been constrained by inadequate transport infrastructure and hence industries could not get the maximum benefit of the liberalization reform. (Gupta et al. 2008, Gupta and Kumar 2010, Mitra et al. 1998).’ Greater private participation has helped in expanding transport infrastructure which in turn helped paved the way for the development of other sectors.
I want to take the example of Golden Quadrilateral (GQ) joining four mega cities Delhi, Mumbai Chennai and Kolkata with 4-6 lane highways, with a total length of about 5,850 km. It was part of the National Highway Development Project (NHDP). The expected cost of NHDP was Rs 540 billion. The project was a Public Private Partnership (PPP). The private sector participation in the form of investment was about Rs 40 billion (7.4% of the total)
The benefits of the GQ is: better movement of people and goods, more choice of locations for starting the industrial activity and decrease in vehicle operating cost and time. “Better quality road can carry more load so transporter can use multi-axial trucks. This reduces overall cost as they could transport more goods at a marginally higher cost.”
The positive impact of GQ are –
- Positive impact on the organized manufacturing sector. The number of manufacturing unit within 10 km of GQ network has increased tremendously compared to the pre-GQ situation.
- DE-centralization of industries. The studies have shown that some industries move from urban to rural areas or from core to peripheries of cities. It may have helped with the efficient distribution of industries and plant.
- Highways and spatial development. GQ upgrades have increased the number of new entries the most in high- and medium-density districts that lie 0-10km from the GQ.
Even though privatization provides solution to a number of problems but it itself surrounded by the number of problems. The main problems with privatization are
- The privatization program lack transparency. There is a lack of important details about the project to the public. Most of the time limited detail are made available on website and inquiries are not entertained. Most of the time conflict of interest information is not shared.
- The Proper competitive process should be insured. To ensure best market access partners should be hired openly through a competitive bidding process and should be insured in each process. A full cost-benefits analysis of the project undertaken should be done. The government should ensure a clear privatization strategy.
- PPP in infrastructure is unlikely to be successful unless authorities have assured themselves beforehand that the envisaged undertaking is in public interest and are acceptable to consumer and another stakeholder.
- Poorly drafted contracts and lack of understanding of the complexity and dependencies of the contract. This leads to the undeserving advantage to the private partners.
World Bank in one of its report pointed out the certain issues which constraints the private sector involvement in infrastructure projects-
- Poor policies and inadequate regulation.
- High contracting and bidding cost.
- Expensive financing terms.
- Few sub-sovereign government is creditworthy.