A Critical Appraisal of the Ppp Model

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The idea of public and private partnership for developing public infrastructure is not new. Throughout the 17th and 18th century, there were several instances of co-financing and private financing for developing canals, transport projects and land reclamation in Europe (Hodge et al. 2018). However, this model of private involvement in creation of public infrastructure has evolved and come a long way since then. The decade of 1990s witnessed a modern rebirth of this idea into the public-private partnership (PPP) model. This decade witnessed major changes in government attitudes towards delivering public infrastructure. It was at during this era that the option of using private finance in delivering public infrastructure was turned into a policy preference (ibid). In the developing world, the PPP model has received a strong support from the World Bank and other multilateral development institutions (Bayliss & Waeyenberge, 2018; Hodge et al. 2018).

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Also recently, the development policy has become strongly influenced by PPPs as a instrument to overcome infrastructure deficits and to increase access to vital services. For its proponents, PPPs promote efficiency, innovation and provide finances. Also, PPPs offer returns to investors and appear as a win-win solution for bridging the gap between a country’s infrastructure requirements and the availability of public finances (Bayliss & Waeyenberge, 2018). Yet, the current resurgence of PPPs as an instrument is fraught with many criticisms. Critics have highlighted the high costs, the difficulty in attracting adequate interest of private investors, the long-term and inflexible nature of contracts, and mixed assessments of their performance in terms of efficiency and social impact (ibid). In this article, I analyse the PPP model and view it as a political tool rather than a technocratic tool. In the first section, I will highlight the key advantages of the PPP tool which have been put forth by its proponents. Subsequently, I will question each of these advantages and show that PPP instrument is an inherently political tool which has been used as a smokescreen to promote private sector interests.

PPP model: A Win-win solution

The decade of 1990s witnessed major changes in government attitudes towards delivering public infrastructure (Hodge et al. 2018). It was during this time that the option of using private financing for public infrastructure projects was transformed into a policy preference (ibid). The unavailability government loans due to concerns of the fiscal deficit limitations and the prevailing public preference against higher taxes led to such developments wherein private finance was the ‘only’ viable option remaining for financing the much needed infrastructure projects (ibid). Proponents of the PPP model suggest that involving private players to design, build and maintain public facilities can lead to higher levels of efficiency and a improved risk sharing arrangement. It was also believed that the usage of private finance provided stronger incentives to have projects delivered ‘on time’ and within the ‘allocated budget’, as compared to the traditional ways of commissioning projects (ibid). It was widely held that the adoption of private sector techniques and market competition; stronger contracts; formalized objectives; better performance measurements; detailed output specifications, would invariably lead to better public services (ibid).

Another belief was that the use of private finance encourages the discussion on who is better equipped to take on each type of risk over the lifecycle of the project and thus PPP model leads to a more favourable risk-sharing arrangement (ibid). The final element of this logic was that, having signed up for a long-term legal contract will shield against unwanted political influence in the project execution (ibid). To sum up, PPPs were perceived as having “the potential to close the infrastructure gap by leveraging scarce public funding and introducing private sector technology and innovation to provide better quality public services through improved operational efficiency” (Bayliss & Waeyenberge, 2018, p. 580). For the World Bank, PPP model became a part of its effort to promote growth and tackle poverty (ibid). It was thought that better infrastructure would promote growth and which in turn through ‘trickle down’, could lead to poverty reduction (ibid). Moreover, by leveraging infrastructure investments through private sector financing, PPPs could free resources which the government could use to fund other social programmes (ibid).

Probing the PPP model

The PPP model became a very fashionable idea and was promoted a panacea for much needed ‘infrastructure development’. However, I argue that PPPs are a political which promote private sector interests a tool more than technical tool to promote the development of public infrastructure. In fact, the adoption of the phrase ‘public–private partnership’ instead of using private finance was “a masterstroke of positive policy language” (Hodge et al. 2018, p. 2). In the next section, I question the supposed advantages and characteristics of the PPP model.

Focus on making projects bankable rather than infrastructure development

The PPP policy was driven, to a greater extent, by the availability of global finance than by the perceived potential for efficiency gains through private sector involvement (Bayliss & Waeyenberge, 2018). As such, the enthusiasm for PPPs is driven to a significant extent by the existence of a large pool global financial resources in the hands of pension funds, insurance companies, mutual funds and sovereign wealth funds, that could be channelled to financing infrastructure and possibly provide higher yields than government bonds (ibid). Bayliss & Waeyenberge (2018, p. 582) raises a significant question in this regard: “How, for instance, are the higher yields offered by infrastructure assets as compared to government bonds generated and what are the distributional implications of this differential cost to the taxpayer or user?”

The broad policy promise of the PPP model was that it leads to more efficient public infrastructure, however, the empirical reality was that the finance industry was more eager for bankable transactions (Hodge et al. 2018). Infrastructure policy was framed around creating projects that were of interest to investors (Bayliss & Waeyenberge, 2018). Thus, investors helped governments to design infrastructure in a way that suited their needs. The ability of infrastructure to generate attractive financial returns was central to the project structure (ibid). As a result, the social benefits of the public good becomes subordinate to the imperative of designing a commercially viable contract (ibid). For instance, in the water sector, the water utilities attracted little interest from private investors in the 1990s and 2000s. The PPP model, however, led to unbundling of water treatment plants from the rest of the utility so that an investor could produce bulk water and can sell it to the water utility under a fixed price contract for a specified time duration (ibid). This minimised the investor risk and resulted in creation of a ‘bankable’ project. This approach resulted in a portfolio of infrastructure investment projects with the most lucrative ones being allocated to private finance (ibid).

Higher Costs and reduced fiscal space as against operational efficiency

While PPPs may provide much-needed infrastructure to meet the needs of end users, this often comes at considerable cost (ibid). The evidence on efficiency improvements from introducing the private sector is far from compelling despite major cuts in employment. Private financing costs are typically higher than governments directly borrowing from banks or institutional investors (ibid). Also, PPPs have large transaction costs. These costs arise from the legal, technical and financial expenses which can sometimes reach 10 per cent of the total cost of the project (ibid). The transaction costs also include the costs incurred on contract renegotiations, the incidence of which has been high. As a result, the efficiency gains from PPPs are possibly offset by the higher borrowing costs faced by the private sector, as well as the significantly higher transaction costs of PPPs (ibid).

Thus, far from the belief that PPP would free resources and enable government investment in poverty reduction, “PPPs can absorb funds that could have been devoted directly to infrastructure investment” (ibid, p. 588). Bayliss & Waeyenberge (2018, p. 586) point that instead of “creating fiscal space, the financing costs of PPPs may exceed any other mode of financing public infrastructure”. Moreover, empirical results have shown that private investors have little interest in infrastructure investments in poor countries. Between 2003 and 2013, it was observed that low-income countries accounted for only 2 per cent of the private investment in infrastructure in developing countries (ibid). Critical scholars have highlighted how PPPs can act as a conduit for the transfer of wealth from taxpayers to private players. User fees borne by the taxpayers, at one end of the financial chain, is transformed into dividends for the investors (ibid).

PPP versus alternate methods for developing infrastructure

While it is clear that developing countries’ infrastructure development need extensive investment, attempting to fill the gap with private investment is not the only policy response (ibid). The fiscal gap could be alternatively financed through higher tax revenue, greater aid flows, improved fiscal management or through public bonds. So, it is widely stated that the PPPs should only be introduced after completing a comprehensive value for money (VfM) comparison with other financing models (ibid). But it is far from clear what this means let alone how it should be carried out. The VfM assessment process is based on a bundle of assumptions and these calculations are open to contestation (ibid). It was also observed that VfM assessment is applied to projects which are already reserved for a PPP model and thus, VfM remains a checklist rather than being tool for decision-making (ibid). Moreover, the World Bank’s evaluation study showcased that the contingent liabilities for governments such as various forms guarantees and subsidies to PPP investors were rarely fully quantified in the VfM analysis (ibid).

Measures of success: defining the goalposts

The success of a PPP model is frequently adjudged on the ‘on-time and on-budget’ metric(Hodge et. al. 2018). However, those seeking to achieve more accurate on-time and on budget results, for instance, usually fail to acknowledge financial schemes may well result in improved ‘on-time’ and ‘on-budget’ performance, and yet not be anywhere near maximum efficiency in terms of unit costs (ibid). The budget of a PPP model even when fixed through competitive bidding remains open to contract renegotiation on account of changes during commissioning and specification modification and host of other changes. The notion of on time delivery is dependent of how the goalposts of project duration are defined. Thus we can observe that each technical domain is placed into a broader context of power and politics (ibid).

These contradictions highlighted in this article call into question the merits of promoting PPPs to overcome developing countries’ public service financing gap. The PPP model fails to address long-standing drawbacks associated with privatisation and, instead, accentuates its challenges by reconstituting infrastructure as a financial asset. The article also aimed to show that the PPP is an inherently political tool which has been used as a smokescreen to promote private sector interests. Delhi-Gurgaon expressway project is an appropriate example to showcase the innate complex and political nature of a PPP project. The Delhi-Gurgaon expressway was awarded in January 2002 to a consortium of two private companies, Jaiprakash Industries and DS Construction. This project was to be executed on build-operate-transfer (BOT) basis, which meant the private players would finance, build and maintain the road. In this project, we see explicit efforts to make the project bankable for the private investor. The project was executed on the BOT mode despite the fact that its financial consultant (SBI Caps) had initially found the BOT-toll mode to be unviable. The reason for adoption of the BOT mode was that BOT-toll would attract greater private investment.

Furthermore, the NHAI assumed traffic density in “the worst-case scenario” for calculating the toll rates. Though this project was expected to be a very high traffic density corridor, the toll rates used in the bidding documents were fixed strangely on the basis of worst case scenario on the pretext of generating sufficient bidding interest in the project. Interestingly, it was a project which was won on the basis of ‘negative grant,’ i.e. the winning bidder offered to pay NHAI Rs 61 crore for being awarded the contract instead of asking government for a grant. However a ‘change in scope’ after the finalisation of the detailed project report (DPR), fully nullified that gain by incurring Rs 146.62 crore of costs. Thus, with respect to the revised costs of the expressway could still be labelled as completed on budget. This example showcases how the entire focus in the PPP model is on designing a commercially viable contract and as a result the social benefits of the project become secondary. Additionally, even the measures of success such as on time delivery and within budget completion need to be understood within the broader context of politics and private interest.

Thus, the measure of whether PPPs are worthwhile should not be based on political dimensions such as if they come in on time or on budget, but whether they increase social value relative to a traditional methods of financing. Additionally there is a need for an expansion of the ‘measures of success’ as opposed to the narrow conceptions of project budget and time. There is a need to look beyond measurement of success strictly in terms of delivering the immediate project, and focus on ongoing cooperation ‘beyond the contract’ (Hodge et. al. 2018).

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