Mains Paper 3 : Investment Models |
From UPSC perspective, the following things are important :
Prelims level : Nothing Much
Mains level : Lessons from UK in following PPP
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As India deepens private participation in infrastructure through Public-Private Partnerships (PPPs), it is an opportune moment to explore the lessons from the UK, the pioneer in the use of PPPs and privatisation in infrastructure.
Public service analysis after following PPP model
- A National Audit Office (CAG equivalent) assessment of the UK’s pioneering Private Finance Initiative (PFI) found that schools and hospitals built with PFI are 40 per cent and 60 per cent more expensive than their respective public sector alternatives.
- Using the government’s lower borrowing cost to discount the cost of projects, it found that very few PFI projects would have passed the Value for Money test.
- It concluded that the country had “incurred billions of pounds in extra costs for no clear benefit”.
2.Railways, water and sewage
- The balance sheet on service quality is not much better.
- Over 2000-11, the reliability and punctuality of British rail increased from 88 to 91 per cent, a small increment given the advances in digital technology and massive public investments.
- Skimping on investments on the less salient parts of the privatised water and sewerage utilities has taken its toll on the environment.
An early 2018 poll by Legatum Institute found that 76-83 per cent favoured renationalising the railways, energy, and water industries.
The Labour party has announced that it would renationalise the utilities. Finally, in his 2018 Budget speech, after 716 projects since 1992, the Chancellor of Exchequer formally brought down the curtain on PFI saying he would never sign a PFI contract.
Relevance for India
1.The difference in public sector efficiency –
- In the UK, the starting point in terms of efficiency and service quality was high, and corruption in service delivery low.
- The Indian public sector suffers from peculiarly Indian constraints.
- Political interference in recruitment, competitive trade union activity (witness the posters in every railway station), rigidities on salaries and writs in courts on service matters, reduce the efficiency of personnel management in the public sector.
- Activities of oversight agencies — Vigilance, Comptroller and Auditor General etc — cause extreme risk aversion in decision taking, reducing efficiency of procurement and operational decisions.
A stronger case for PPP
- The starting point in India may often be a public agency which is inefficient, corrupt at the point of contact with the citizen and providing very poor service.
- With a much lower starting point, it is quite conceivable that private providers may be operationally more efficient and give better service.
- To that extent, the case for PPP is stronger in India than in the UK.
Weak regulatory approach
- On the other hand, the regulatory capacity in India is weaker.
- The unambiguous lesson from the UK is that capable regulators could not prevent asset stripping and skimping on investments.
- There is nothing to suggest that this would not be repeated in India.
- Also, using PPP purely for off-balance sheet financing to reduce the short-run fiscal deficit, is penny-wise and pound-foolish because the cost of borrowing of the private sector is much higher.
Way forward for PPP
1.Improve service quality – For a start, PPP must not be a short cut only to save money or bridge fiscal gaps or transfer risks; it should be used to improve service quality or bring efficiency improvements.
2. Careful selection –
- Second, project design and the PPP components need to be carefully chosen.
- For instance, outsourcing labour-intensive and customer-service operations, while retaining pricing and investment in public hands, may bring in efficiencies without under-investment or over-pricing.
- Given the higher cost of private capital, and the inevitability of delays and related cost over-runs, construction is best financed with public borrowing though the operating asset could then be privately operated.
3. Principles for renegotiations –
- Third, since it is impossible to write perfect long-term contracts, renegotiations are inevitable.
- Clear principles and a mechanism for renegotiations without moral hazard need to be planned for
A PPP Project means a project based on a contract or concession agreement, between a Government or statutory entity on the one side and a private sector company on the other side, for delivering a service on payment of user charges. The rights and obligations of all stakeholders including the government, users and the concessionaire flow primarily out of the respective PPP contracts.
Unlike private projects where prices are generally determined competitively and Government resources are not involved, PPP projects typically involve transfer of public assets, delegation of governmental authority for recovery of user charges, private control of monopolistic services and sharing of risks and contingent liabilities by the Government.
The justification for promoting PPP lies in its potential to improve the quality of service at lower costs, besides attracting private capital to fund public projects. For creating a transparent, fair and competitive environment, the Government of India has been relying increasingly on standardising the documents and processes for award and implementation of PPP projects.