JULY 02, 2014

By TIOL Edit Team

THE NDA Government is set to give a fresh impetus to public-private partnership (PPP) projects both within and outside the ambit of the regular Budget for 2014-15, if official intent is any indication.

In his address to Parliament after the formation of new Government, President Pranab Mukherjee stated: "Public-private partnerships will be encouraged for expansion of physical infrastructure such as roads, ports, airports, power, railways, water supply and sanitation. Public investment in infrastructure will be enhanced and subsidies in such investments will be explicitly provided through the budget."

Mr. Mukherjee also disclosed that the Government intends to facilitate setting up of "at least one industrial training institute in each development block of the country through creative public-private partnerships."

There is thus expectation in business circles that the Finance Minister Arun Jaitley would announce certain PPP initiatives including incentives in the Budget. Before dealing with scandals-ridden PPP sector, Mr. Jaitley might well find it worthwhile to pay heed to Finance Ministry's former Chief Economic Advisor, Kaushik Basu, who is currently serving as World Bank's Vice-President-cum-Chief Economist.

In a working paper ‘Fiscal Policy as an Instrument of Investment and Growth' released by WB in May this year, Prof. Basu says: "We pay lip service to PPPs or public-private partnerships, without attention to detail. This partnership between the private and public is however fraught with risks, because it is like bringing two very different animals inside the arena. If the design of incentives and boundaries of action are not well-specified, PPPs can be a disaster, with one side draining the other or totally stalling its functioning. Remember, crony capitalism is also a form of public-private partnership."

Though a UPA Government insider, he has refrained from citing specific cases of crony capitalism in the airports, toll roads and other sectors.

Prof. Basu has focused on making PPP projects a success through clustering of synergetic projects and provision of judicious government guarantees to projects to help them raise cost effective capital from the markets.

As rightly put by him, "Designed in an intelligent way, government guarantees can boost investment in infrastructure and encourage growth without causing government finance to spin out of control."

This brings us to the need for transforming PPP from crony capitalism to truly PPP projects that benefit the public, entrepreneur and the economy.

The Government at present encourages PPP projects by doling out grants, equity support or soft loans under the garb of viability gap funding. It also selectively provides government guarantees for commercial borrowings made by PPP projects.

UPA Government never disclosed how it allocated PPP budget among these four funding components. It neither made public the criteria for giving guarantees nor disclosed the names of beneficiaries of guarantees. It never made public the instances where post-tender or post-contract changes in PPP projects were made to favour private sector promoters of PPP projects.

UPA did not create an institutional, independent mechanism for due diligence of proposed PPP projects for identifying over-invoicing of project cost both before and after the signing of PPP agreement.

The Modi Government must demonstrate its commitment to transparency and its abhorrence for crony capitalism by issuing a white paper on PPP projects. The paper must disclose how much money the Government has disbursed and committed under PPP projects. The paper must disclose how the cost of services provided by projects has risen in deviation from contractual terms and how much it has hurt the public. It must disclose whether any PPP project has resulted in competition and affordable services.

Before launching fresh PPP initiatives, the Government must first frame national PPP policy, whose draft was unveiled in September 2011 for public comments. The draft policy was vaguely worded and lacking on specific commitments on transparency, audit, professional due diligence of project cost and the norms for making amendments to contracts.

It is really disappointing to find the Government has not yet finalized and unveiled a national PPP policy. It is lagging behind even African countries such as Nigeria and Ghana that have national PPP policies that are far better than the draft policy unveiled by UPA.

NDA also must create a uniform structure, rules and accountability for all regulators as envisaged in the Regulatory Reforms Bill (RRB) 2013 that was unveiled by Planning Commission for seeking public comments.

There is also an urgent need for putting Government funding of NGOs within the PPP framework to bring in transparency and accountability in utilization of funds.

Lastly, Modi Government must demonstrate BJP's promise to strengthen democratic institutions by acceding to CAG demand for enactment of a new law for latter's empowerment in the changed economic situation where thousands of crores of expenditure doled out to PPP projects and NGOs is kept out of purview of audit.

Mr. Jaitley should disclose his Government's stance on a comprehensive draft of the new act that CAG submitted in November 2009 to replace the The CAG (Duties, Powers and Conditions of Service) Act, which was last amended in 1994.

If the Government opts for governance status quo in the PPP domain, then it runs the risk of getting flak as patron of crony capitalism.