Fixing Indian PPPs: Questioning the proposed options!
Yesterday, my brother shared an article with me wherein my favorite subject of PPPs (Public-private Partnerships in infrastructure) was addressed. [1] The article discussed ways to fix the flawed PPP model by converting them into FPTP (First Public, Then Private), as proposed by Mr. Subir Gokarn ( a front-runner for the post of RBI Governor). This catches my attention as this is not the first time that PPPs in India have been discussed with acronyms. The Economist in 2012 labelled Indian PPPs as RIPPP [3], Mr. Shailesh Pathak (with impressive governments and private sector credentials) has called them TTT (Taxpayer to Tycoon Transfer) [2] and Mr. Laloo Prasad Yadav, in his extreme wisdom has wondered during a press interaction, “What are these Ppeeeeees (pun intended)”!
The common thread running through these discourses is that something is fundamentally amiss with PPPs in India, and something need be done. Both, the FPTP concept and Mr. Shailesh Pathak’s recommendations argue that PPPs need be reconfigured, and broken up. The atypical Indian conditions require that the government build an infrastructure and then ask for a private partner to come in to operate it and service it through user service charges. It is argued that this would resolve many of the issues that Indian PPPs face. While, I share their concerns about Indian PPPs fully, I only agree partly with their proposed solution. That is, I also see problems of PPPs lying in bundling, and see a solution in unbundling PPPs. However, while my arguments are theoretically motivated, they specifically argue for unbundling of a different kind. I recently presented a paper on this at the World Conference on Transport Infrastructure and it would soon be published as part of their proceedings.[4] The sketch of my argument as given below, with my primary difference of opinion with the experts views highlighted.
Let me start from the beginning!
The theoretical drivers for PPP have been intensely debated in the literature. When one claims that PPPs are easy source of money for the government, the argument falls flat when one recognizes that the government has access to the cheapest debt credit. When one argues for private sector efficiencies, one soon realizes that these can be better purchased in arms-length contracts. The PPP rationale lying in practices driven rationale like possibility of off balance sheet financing by the government, or political inclinations to ribbon cutting, are short-lived in nature as audits and public soon see through them and they lose their sheen. What however stands ground is the inherent value creation driven by the innovations which happen when the construction and operational phases get combined together.
Coming from the management field, I argue that bundling increases complexity and one of the most recognized ways of negotiating complexity is by bringing about modularization, which involves unbundling. One can see evidence of this all around. Let it be products (computers, cars, space-crafts etc) or processes (programming languages like C, sophisticated process controls, etc). It appears that no matter how complex a thing, we can build it using independent and self-sufficient building blocks. It is all like LEGO! However, there is a difference…..
As our needs grow, things become more and more complex as we start bundling features together. To address the complexity, we have to necessarily unbundle, however when one starts to unbundle one no longer unbundles along the same axis, or along the same lines along which bundling had been done. For an example, just look at the phone in your hand! Our phone is a bundle of voice recorder, watch, camera, phone, video recorder and blah blah blah. But when the ensuing complexity of the phone is unbundled by its designers, it is unbundled as hardware (with mic, camera lens, speaker, keyboard, screen etc), operating systems, and applications (our apps). The complexity of the phone is not unbundled by separating out the camera, video recorder, voice recorder, and the phone, and just putting them together in one place! And, as I see it the meteoric rise in the value of a mobile phone as come from this simultaneous bundling and unbundling, but along orthogonal axis.
Then why are our PPP experts recommending unbundling along the same axis along which value creation was initially argued for!
For me, PPPs are bundles of construction and operation phases, and it is this bundle which can potentially drive value creation. This bundle becomes complex due to the myriad of activities and people involved. It is required to be unbundled, but not into construction and operation phases. We have to search out alternate ways of unbundling PPPs, and along orthogonal axis. And, your suggestions of what these could be are as good as mine! These would be highly contextually driven, and one would be required to search out the best such axis in each case!
What happens if one follows the advice of our PPP experts and unbundles along construction and operational aspects? Some preliminary observations…. The first thing we would sacrifice would be value creation through innovation. While describing the atypical Indian system, one finds abundant evidence of non-professional government, lack of government’s technical competency, inflexibility in working, risk averse nature etc. (I would argue that these are not atypical of India but typical of the public systems world over). If this is the case, then putting the onus of designing detailed specifications for infrastructure which is to last for 25-50 years, and executing the work though the L-1 contracting within time and cost, does not seem to be a possible alternative within the government systems. Further, what would happen when we transfer a government asset to a private contractor for the operational stage? The same thing which happens in every college food mess through-out the country or even in government housekeeping contracts! The lowest bidding service contractor steps in, makes all possible shortcuts, hires underage boys, runs them 12 hour shifts, uses substandard material, and when you question him….he cites the abysmally low rate that he quoted as an excuse! Despite our best efforts, uncover the shades and you would find this rampant all around, and right under your nose.
Ironically, the PPP regime had aimed for growing contractors into concessionaires, but the proposed unbundling aims to reduce the erstwhile contractors into small time government general order suppliers! One just wonders — do we want to get into this situation!
Hence, fundamentally splitting or unbundling along the operations and construction interface is not a viable option, as it is a fundamental innovation driver for the PPP system. The same inefficiencies and immaturity which are today driving our unbundling arguments, would haunt us in the new public constructed and private run setup (FPTP). Splitting or unbundling is necessary, but only to address the increased complexity of the system and not address the deep-rooted ills of our system, which need to be addressed outside the PPP regime. There are no specific recommendations of how it is to be done, as this would depend upon the context one is working in.
REFERENCES:
- http://swarajyamag.com/economy/here-is-what-subir-gokarn-suggests-to-fix-the-flawed-ppp-model
- http://economictimes.indiatimes.com/news/politics-and-nation/ppps-are-good-in-theory-but-in-india-they-are-a-failure-in-practice-shailesh-pathak-ed-bhartiya-group/articleshow/47940584.cms
- http://www.economist.com/news/finance-and-economics/21568397-indias-love-affair-public-private-partnerships-faces-stern-test-rippp
- Garg,S & Garg, S (July’ 2016) Rethinking Public-private Partnerships: An unbundling approach. Abstract selected for presentation at the 14th World Conference on Transport Research at Shanghai, China, 10-15th July’ 2016. (Will soon be available online)
NOTE: I have serious concerns with both the data and the views stated in Swarajyamag article, but I purposely decide not to direct this piece at these aberrations. For instance, it talks of 188, and 248 road projects. I have identified 660 PPP road projects in India, and I am studying them. It writes, “The FPTP model aims to achieve the objective of optimal allocation by allocating the risk to the participant who is well-equipped to deal with it in its normal course of business” — this is exactly the same aim and objective by which PPPs had come! So what is different. Mr Gokaran is stated to be talking of FPTP for a couple of years, which is 2 years. Mr. Shailesh Pathaks’s working paper is dated 2012, which is five years back!
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