Category: PPP

Public Private Partnership

Fixing Indian PPPs: Limit on private sector opportunism

~ Swapnil Garg ~ Leave a comment

First it was the road to Gurgaon (NH-8) and now it is the road to Noida (DND Flyway)! The early PPP projects in the country seem to be falling apart like a pack of cards, but only after an ugly public spat. In both these projects, the public played a major role in demolishing them. In the NH-8 case, it was public outrage against the traffic jams at the toll booth on Delhi Gurgaon border that eventually compelled the government to force an out of court settlement among the stakeholders. In the case of the DND Flyway, the public directly took up toll collection issues with court, and won court room battles in both the High Court and the Supreme Court. The paradox lies in our attempts to raise the countries ranking on the index of doing business in India[1], while we work around contracts or set them aside through courts.

However, these two projects do not represent the transport PPP projects in the country. Both these projects had been conceived in the early stages of the countries PPP journey, they had experienced good demand, and have practically no monopoly rights. As early stage projects they had faulty conceptualization. In the case of NH-8 the fault lay in the assumption that we could operate an access controlled road within city limits, while in the case of DND Flyway it was the contractual promise for 20% return on project cost (and not on the equity invested). Since then transport planning and contractual clauses have evolved significantly, addressing these conceptual errors. NH-8 had faced good traffic demand from the first day due to the boom in Gurgaon, whereas DND was slow to pick-up but finally it did could attract good traffic. This is in sharp contrast to most other road projects in the country which suffer because of optimism bias in traffic estimates. Both roads have numerous alternatives such that monopoly returns are not possible, unlike most highways which are the only ones connecting two cities. In retrospect those fighting for removal of the toll plazas claim that these projects should have been done by the government itself in the first place, leaves one to wonder where would the Indian PPP journey stand today had this been the case! We need recognize that these projects helped us learn a lot, and learning happens at a cost!

Beyond the obvious contextual similarities, the projects are also similar in two additional assumptions regarding the role of the public and the private agencies in a PPP.  The first being an assumption about foresightedness of the government, and it quick decisions, none of which ever happens in real-life. Understandably, this also does not raise eyebrows, as it is expected that the government would falter on these aspects. However, our core argument here focuses on the other assumption — opportunistic behaviour by the private sector. Once again, this should not raise any eyebrows as private sector is expected to act in an opportunistic fashion. This is where our argument differs. PPPs are different! Different in regards to the public service that they involve and the public asset that they create. However, we are seldom able to fully comprehend what this entails.

PPPs are not operated in a free market. Here the risks and rewards do not solely lie with the private sector to enjoy and suffer! PPPs are about optimal risk sharing. Businesses do not take up all the risks, the evidence of which lies in the numerous appeals by the industry for loan refinances, bank guarantees, deferments of loans, single window clearances, allowances for non-performing assets, new PPP models and the like, all aimed at forcing the government to bail out bad business decisions. But, when it comes to rewards, the private sector closes its doors—this is my money and I am free to pocket it, and this is as per the contract.

This is what had happened in these two cases. The concessionaire capitalized all future toll revenues in the NH-8 project and picked up a loan of Rs 1600 cr, but made no sincere efforts to address the toll booth traffic jams or maintain the expressway. The same happened, when NTBCL (the concessionaire for DND Flyway) kept adding its 20% assured return to bargain for extended life for the project and giving veiled threat for staking its claim for the land that it had been promised as part of the contract, but not yet been handed over. In the case of NH-8, the industry further repeatedly warned the government not to attempt a project takeover, as it would disrupt the investment sentiment of the country. Every trick in the book was tried to ensure that every paisa that one is entitled to as per the contract, is pocketed!

As the conceptual motivation behind PPP projects lies in leveraging private sector efficiencies, hence wringing the inflows to extract the last drop should be acceptable. However, what remains unclear is the extent to which one can behave opportunistically, while working in a public service context! An example of a hospital project in UK comes to my mind i.e., Norfolk & Norwich University Hospital that opened as a PPP in 2001. Like NH-8 and DND Flyway projects, which were one of the first in the Indian transport sector, it was also one of the first sizeable PPP deals in the UK health sector. The government, which was very keen to attract the private sector for infrastructure investments, bent over backwards to get the private sector to commit in the project and gave it a very favourable deal. The concessionaire within two years of running the hospital got a cheaper mortgage and made a gain of  £116 million. The shareholders of the concessionaire were pressurized to contribute to the hospital out of this abnormal gain, but the only one to respond to this call was a maintenance and catering staff of the hospital who held a small number of shares in the concessionaire’s parent company. Finally, the concessionaire did handover £34 million to the hospital trust, though it was not required to make any such payments contractually. The concessionaires recognized the limit of opportunism that they could get away with!

PPPs are not Apple! When the project fails, private sector is not the only loser. The externalities associated with the project rope in the public and force it to bear a part of the loss directly or indirectly. So, when projects succeed, why is the public not pulled in to be a part of the gains.

While, the argument about private sector’s accountability and responsibility to the public in general may be convincing to some, other do not buy it! For them a contract is a contract. Why should the private sector pay, if it is not required to. However, firstly they fail to recognize that the public context has its nuances. It needs to be given its due for the unique contributions that it brings in. For those uninitiated, these lie in easy policy frameworks, interest free loans, investment tax holidays etc. initially or bail outs, waivers of loans, accountal of non-performing assets, debt refinancing etc., when disaster strikes! Secondly, business management repeatedly argues for stakeholder management and underscores the need for stakeholder involvement and satisfaction. Hence, even if one views the contract as being sacrosanct, and would only like to work within its framework, one cannot avoid stakeholder management, and specially while working with the public sector.

Hence, there is a limit to private sector opportunism when it takes up work in public sector. Specially, in the PPP context the risk allocations and attributions through expected to be optimal, they are unlikely to be so. Sharing risks, one may need to come to the aid of the other and accommodate one another. While contracts would remain sacrosanct and need to be rigidly adhered to, if one does not indulge in adequate stakeholder management (and here one does not refer to bribing) one should be prepared to be manhandled: set aside by the courts in public interest, or forced into out of court settlements.  This is also a warning sign for all those who bank on the helping hand of the government! The government hand of support comes with a lot of written and unwritten agendas, and one should be ready to service these agendas before one decides to take this helping hand!

[1] One of the doing business aspects is “Enforcing contracts”, where India ranks 178/190.

Fixing Indian PPPs: Questioning the proposed options!

~ Swapnil Garg ~ Leave a comment

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:

  1. http://swarajyamag.com/economy/here-is-what-subir-gokarn-suggests-to-fix-the-flawed-ppp-model
  2. 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
  3. http://www.economist.com/news/finance-and-economics/21568397-indias-love-affair-public-private-partnerships-faces-stern-test-rippp
  4. 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!

 

World class railway stations through PPP.. A case for Lucknow

~ Swapnil Garg ~ 2 Comments

I am on a 5 week project assignment. I choose the topic of day dreaming for a world class railway station at lucknow. After having wandered about and talked to a lot of people on the subject, I have written a detailed report on the same titled “ Rethinking PPPs : Building a world class railway station. A case for Lucknow Charbagh station“.

What I propose is

a) Need for us to rethink PPPs on a fundamental level

b) World Class stations through PPP route are possible, but station use charge would be required. Even a nominal charge of Rs 10/- for unreserved passengers  (10% of average ticket cost) and Rs 20/- for reserved passengers (4% of average ticket cost) CAN MAKE IT POSSIBLE.

The report is attached below. The executive summary is as below:

EXECUTIVE SUMMARY

There exists a ubiquitous need for the railways stations in India to change and they need to become more user friendly while leveraging the benefits of technology. Numerous proposals and reports exist for carrying out this much required up-gradation. Lack of funds often gets cited as the most important reason for these proposals not taking off, and ‘The PPP route’ is often suggested as THE solution. However, the poor performance of PPPs in the country does not bring confidence in this choice.

In this study, I reexamine the PPP concept from a definitional perspective, and question the path taken and the assumptions made in the nations PPP journey. I argue that whereas the primary PPP concept has only a few mandatory conditions, the subsequent understanding has converted them into a massive bundle of activities, governed by set of long term rigid contracts. This results in PPP based projects taking up a monolithic form for delivery of a monopolistic public service, and this entity getting transferred into private hands. Further, such entities are left to fend for themselves despite the imposed structural limitations, with little emphasis on ways to manage and resolve them. This path is identified as the source of many of the PPP problems in the country.

Departing from this route it is proposed that the complexity and uncertainty of PPP projects is required to be managed by converting them into numerous small modules, each of which independently and together form a flexible and adaptive entity. This is a standard route by which managers address complexity in organizations or alliances. While on one hand this breaks the large project into modules based upon size/scope dimensions to reduce their complexity, it also creates a market of PPPs by creating distinctive modules along the time dimension. A market of PPP, where PPP projects can get freely transacted, introduces the much required control system on PPP performance, based on market mechanisms. This approach is next shown to be consistent with the basic elements of the PPP concept and is also in line with the original thoughts which saw benefits of PPPs manifesting when a market of PPPs emerges.

The unique conceptual framework proposed is next interpreted in respect to conversion of a station into world class railway station. The context chosen is to convert Lucknow/ Northern Railway station into a world class facility. It is shown that by decomposing a large project of Rs 670 crore into small projects of Rs 200 crore or less, we can find viable PPP delivery modes for them.  While the road infrastructure needs to be paid for by state governments and railways as a part of ROB/RUB access, the new station building can pay for itself as a commercial complex, the passenger amenities (waiting areas can be paid for by user charges) and parking lots can be worked on an independent PPP basis. Contrary to routine PPP proposals, cross subsidization here is frowned upon- you get what you pay for, such that responsibility and accountability gets properly matched. Parking a car needs to pay for itself, usage of station facilities is to paid for by station access fees and platform tickets, and road access is to paid for by users of the prime commercial property.

The justification for user charges follows from the analysis of users of railways stations.  Preliminary figures show that the station is routinely handling 1-1.5 lac people per day, but needs to be upgraded to handle 2 lac passengers per day to cater to the peak loads. A railway passenger with reserved ticket was found to pay an average ticket price of Rs 500/-for his journey. Similarly, an unreserved passenger is proposing to pay Rs 100/- (on average) for his journey. Like airports, a station usage fees of Rs 20/- for reserved classes and Rs 10/- for unreserved classes, yields an additional revenue of Rs 70 cr per year, and is more than enough for what is required to provide world class facilities to our station users.

Besides proposing a conceptual departure in the PPP concept, the report also fulfills three other objectives. Firstly, it provides an updated inception report for making Lucknow station world class. This is quite in contrast to the original inception report which was written over 5 years back and is very sketchy in nature. Secondly, the report serves as a one stop place for an exhaustive reference list in regards to world class stations, as understood in Indian railways. And lastly, the report makes a broad and first cut business case for Lucknow station upgradation, opening up a platform for initiating a dialogue on how Lucknow station can be made world class and what all would be required to carry out an exercise.

Attachments:

Final Project Report

Inception Reports for Railway Stations of Lucknow (Railway Document)

My Dissertation research — emerging relevance

~ Swapnil Garg ~ 1 Comment

Yesterday, I came across the ongoing dispute about the NH-8 Delhi Gurgaon PPP project (details can be found at http://www.nhai.org). Reading through the FAQ’s there, the letter for termination issued by NHAI, the revised MOU, the court orders etc, it emerged that a major part of the dispute can be attributed to the working of the PPP— which is what I study in my dissertation.

To cite a few things, NHAI has issued a 17 page termination notice  in Februvary’2012, and this letter liberally uses terms like ” fundamental breaches to the concessional agreement”, “fraudulent nature”, “behind the back”, ” concealed and surpressed”, ” fraudulently concealing”, “gross violation”, “diversion of moneies”, “misrepresented” etc.

Now, what had I studied in my dissertation and why does it suddenly become relevant!!.

1) This case is of a PPP agreement signed in 2002, engineering work completed in 2008, dispute arisen in 2011 i.e., dispute during the working of the PPP.

2) As part of the contract agreement both parties had to fulfill their parts of the commitments. But, along the way both faltered, whereas the termination notices brings out that only the contractor has misbehaved and dishonored his commitments.

3) How was the PPP agreement to be worked? As per my dissertation PPP working is all about coordination of the activities between the agencies. And, this coordination could have been done simply by emphasizing the contractual elements, by proper scheduling and planning, or by social interactions.All the three aspects exist in every work, however the emphasis and the basis on which the work gets primarily performed vary from project to project and is likely to affect how work gets accomplished.

I go a little deeper, and donot make any argument claiming that any one of these methods of coordination is better then the other. It is not so! Instead, I argue that the method of coordination emphasized comes from the experience profile of the managers doing the work. My study helps us better understand how the work that is being done gets done.

Examining this particular PPP project ( NH 8 Gurgaon New Delhi)  in the context of my dissertation research;

i) Emphasis on contractual provisions: While the final dispute gives enough evidence that contractual provisions have been violated from the contractors side, previous land availability problems in the project (project took 6 years for construction) and NHAI having only woken up once the courts forced it, are enough evidence that the government has also not adhered to the contractual provisions. This precipitated into the contractor, escalating the project cost from Rs 600 crores to Rs 1600 crores and seeking additional finance from financial institutions and also readily getting the same.

ii) Emphasis on planning: The project planning and scheduling has also run amock. For a project initially conceived as a 2 years project and taking 6 years to execute, the expectations have changed during the intervening period. However, transparent evaluation of this project planning emerges as the only possible solution to this issue.

iii) Emphasis on trust : Reading the termination notice, it emerges that the trust aspect has taken a summersault. Whereas, previously almost minimal things were being emphasized in writing, the same are being questioned. Here, I will like to digress a bit. In the Indian society, when we say work with trust and social connections, we mean ” violate all the contractual provisions and get your work done tactfully asking the other person to turn a blind eye”. This is not what I mean my social interaction in my dissertation.  What is implied here is , ” contracts are primarily incomplete– so when there is nothing specified about an aspect resolve it with social interaction. Further, trust or social interaction no where conflicts with contractual provisions. Contract aspects have to be honored and followed by one and all.

The Indian understanding of social interactions needs to be modified , and emerges as the first lesson while carrying out this exercise of mapping theory with practice. I am sure many more will follow, as and when I get time to look them up.

Swapnil Garg