Saturday, March 19, 2011

The PPP policy: neither value for money nor accountability

Where is 'public' in public-private partnerships?
A growing number of Indians are now living their lives through a growing number of public-private partnerships (PPPs). Did they notice the promised efficiencies, reduced corruption and improved service?
Far from that, as this article shows, the PPP policy seems to have been providing a safe environment for private interests to thrive at the cost of public interest.
This article raises and tries to answer questions such as: Are PPPs being structured in a way that allows for fair sharing of risks and rewards between the public and private partners?
What are the costs of the PPPs – in terms of public funds expended, future liabilities, government guarantees, user charges borne by citizens, social costs, etc.?
Aren't some PPP projects similar to the infamous ‘off balance sheet transactions,’ hiding government’s contingent liabilities?
How are PPPs affecting public finances?
How are PPPs affecting the rights of the citizens?

These questions have been discussed under two rubrics: (a) value-for-public money and (b) public accountability.

By Kapil Bajaj
The term ‘public-private partnership’ (PPP) would probably elicit a blank stare from most Indians, particularly in the rural areas.
In the last decade, however, the PPP policy has become increasingly hard to miss for the citizens, primarily because the ‘PPP card’ has been flashed at all three levels of the government – central, state and local – and PPPs have been used not only in capital-intensive infrastructure projects like airports, ports and roads, but also tried in e-governance, healthcare, education, tourism and urban development projects.
The policy to use PPPs in the development of physical and social infrastructure is currently going full throttle and is the reigning policy of the central government.
It is being coordinated from the very top – Cabinet Committee on Infrastructure (CCI), headed by the Prime Minister. (The states have little choice but to follow suit and implement their own PPPs.)
“Development and use of PPPs for delivering infrastructure services has now at least 11-years precedent in India, with the majority of projects coming in line in the last five years,” says the department of economic affairs (DEA) of the ministry of finance (MoF) in a ‘Note on PPP projects in India’, giving an overview of the distribution of such projects across states, sectors and according to the value of the contract[1].
Some states have undertaken far more PPPs than others and a much heavier use of PPPs in some sectors than others, says the DEA-MoF note.
“There have been at least 450 PPP projects in our sectors of focus where a contract has been awarded and projects are underway in the sense that they are either operational, have reached construction stage, or at least construction/implementation is imminent.
The total project cost is estimated to be about Rs 2,24,175.75 crore,” adds the note.
The 450 projects belong to the eight sectors of roads, ports, airports, energy, railways, urban development, tourism and education.
Roads and ports make up 70 per cent of these projects and account for 75 per cent of the total value.
If roads and ports (both of which are predominantly central projects) are excluded from the total, there is in fact a relatively small value of deal flow, at only Rs 55,757.02 crore, suggesting a significant potential upside for PPP projects across sectors where states and municipalities have primary responsibility, says the DEA-MoF note.
“The potential use of PPPs in e-governance, health and education sectors remains largely untapped across India as a whole.”
That official admission of the predominance of certain sectors and the central government in the conduct of the PPP policy should put things in perspective for us: even though PPPs are being sought to be used in almost every service that the government provides (including defence), there are factors at work that limit their hatching.
What could be these factors?
What makes DEA-MoF believe that those factors represent the ‘potential upside’ and not the ‘actual downside’?
Could it be one of the factors that PPPs are probably unsuitable to certain sectors?
Do PPP modes really offer any advantage over the traditional procurement modes?
Is there any evidence to suggest that PPP projects have delivered on their promises, such as improved efficiency brought about by the private sector?
There are more questions: Are PPPs being structured in a way that allows for fair sharing of risks and rewards between the public and private partners?
What are the costs of the PPPs – in terms of public funds expended, future liabilities, government guarantees, user charges borne by citizens, social costs, etc.?
Aren’t some PPPs projects similar to the infamous ‘off balance sheet transactions,’ hiding government’s contingent liabilities?
Do government's future commitments to private partners get reflected in budgets? How are PPPs affecting public finances?
What kind of value for public money that the Indian taxpayers are getting on PPPs?
How accountable are PPPs to the citizens? Are PPP agreements being made public?
Are ordinary people able to understand how PPPs will affect their interests?
Is there corruption in PPP deals?
This article tries to answer these questions which broadly relate to two themes (a) value-for-public money and (b) public accountability.
Value for public money
Way off the mark
The discussion of the issues concerning value for public money must begin with an examination of the stated objectives of the PPP policy.
“The 11th Plan (2007-2012) projections imply that only about 70 per cent of the infrastructure needs can be met from public resources; the remaining 30 per cent will have to come from private investment, including PPPs. Such private participation would not only provide the much needed capital but also help to lower costs and improve efficiencies in a competitive environment,” writes Montek Singh Ahluwalia, deputy chair of the Planning Commission, in an overview called ‘Private Participation in Infrastructure’, published in January 2010[2].
Estimating the requirement for private investment over the 11th Plan period to be Rs 6,19,591 crore, the same overview states that “public resources available for investment in physical infrastructure are limited, as social sectors have a priority in the allocation of budgetary resources.”
The prime driver for seeking private participation through PPPs is thus the ‘budgetary constraint’ on the amount of public funding available for building infrastructure which is needed for high rates of economic growth.
“Lowering of costs and improved efficiencies” are said to be the other benefits expected from private participation.
Stretching the budget and assuming debt is a governmental prerogative, but going by the example of NHAI seeking to build highways through PPPs, it is clear that it is a highly irresponsible gamble.
An ‘issues paper’, titled ‘Sub-prime Highways?’[3], leaking out of the Planning Commission in July 2010, showed that while NHAI’s cess revenues were about Rs 7800 crore a year, it has committed itself to the payment of Rs 9,500 crore a year in annuities! That threw the annuity-to-cess ratio of 35 per cent, set by the Cabinet, out of the window. All of NHAI’s cess revenues are likely to be meeting its committed annuity payments (which are made to the concessionaires and are essentially deferred budgetary payments) over the next 15-18 years.
To make matters worse, the payment of viability gap funding (which the Centre makes available to help a PPP project become “viable” and which could be, perversely, as much as 40 per cent of total project cost in highway projects) will balloon to Rs 25,000 crore in the next three years.
NHAI’s debt in the next three years is likely to be about Rs 30,000 crore, which may plunge the authority into bankruptcy.
The issues paper also says that public-sector banks and other financial institutions have been lending money to the road PPPs far in excess of the approved total project costs (TPC).
For example, according to the issues paper, Panaji-Karnataka Border highway stretch has an approved total project cost of Rs 196 crore, but central government-owned India Infrastructure Finance Company Ltd (IIFCL) is willing to lend Rs 832 crore, which is 324 per cent higher than the TPC.
The NHAI has been following a “flawed bidding process” causing the bids received for both BOT (toll) and BOT (annuity) to be far in excess of the estimates approved by the government authorities, says the issues paper.
The issues paper thus reveals that national highways are being built primarily with public money, including borrowed funds that largely come from public-sector institutions, with derisory investment and assuming of risks by the private sector.
In the event of failure of a project, “no matter who pays for the lapses, it is the public money that will be lost,” says the issues paper, noting that the lenders cannot sell off a road to get their money back.
Given NHAI’s profligacy, the “budgetary constraints” cited by the government in justifying the seeking of private investment through PPPs are nowhere in evidence.
And “lowering of costs and improved efficiencies” that Ahluwalia talks about in the aforementioned overview does not even cross the mind!
It is pertinent at this point to also take a look at the port sector in order to have at least some idea of the impact of the PPP policy in the two areas (roads and ports) that make up 70 per cent of the PPP projects and account for 75 per cent of the total value.
A performance audit[4] of 11 major port trusts (controlled by the central government) conducted during October 2008 to January 2009 by the Comptroller and Auditor General of India (CAG) found that while private partners, who developed container terminals on build-operate-transfer (BOT) basis, increased average daily output to touch global benchmarks, the port authorities themselves allowed “very low targets”.
“In the case of a container terminal agreement signed by Chennai port in 2001-02, the port had recommended the UK benchmark for minimum throughput of 1500 TEUs per metre quay length for the operator. However, during finalization of the agreement, the minimum throughput was fixed much below the bench mark at 1100 TEUs per metre quay length,” said CAG, citing an example.
The CAG found the concession agreements to “vary widely”, some letting off private operators of terminals without clear-cut clauses requiring installation of modern equipment, payment of royalty to port trusts, minimum guaranteed throughput (MGT), and performance security.
“Weak performance incentives” under the agreement that Cochin Port Trust (CoPT) signed with India Gateway Terminal Pvt Ltd (IGTPL, a consortium led by DP World), led to “much lower” efficiency in handling containers than any other container terminal in India. “The vessels visiting the port faced high congestion due to delays in handling containers following frequent failures of cranes.”
The CAG also found that IGTPL had not installed any modern equipment to improve efficiency in cargo handling; the agreement had neither an MGT clause, nor a penalty clause. (MGT is the minimum volume of cargo that a BOT operator needs to handle per year at the terminal.)
Having found the PPP projects to be several years behind schedule, the CAG stated: “Only one BOT project among the ones planned in the first phase of National Maritime Development Programme (NMDP; 2005-2009), namely the second BOT container terminal at Jawaharlal Nehru Port Trust (JNPT), could be commissioned, although two years behind schedule.”
Since the performance audit referred to above does not include audits of separate projects undertaken by the 11 major ports, insufficient information is available on the costs and benefits of those PPP projects.
However, a detailed case study, done by Bharat Salhotra[5] and commissioned by the Planning Commission, on Nhava Sheva international container terminal at Jawaharlal Nehru Port, Mumbai, gives a good idea of how the PPP policy is being conducted in the port sector.
The main findings of the case study are as follows.
1. The 30-year concession awarded in July 1997 to NSICT Ltd (the private partner) for a port terminal at JNPT affected the public exchequer and user interests in several ways.
The role played by Tariff Authority for Major Ports (TAMP), the regulator responsible for fixing tariffs, led to NSICT extracting inadmissible returns of Rs 524 crore over 2002-2005, which translated into annual returns of over 100 per cent on its equity, as against the permissible 20 per cent.
TAMP also allowed the burden of royalty payments to be passed on to port users even though royalty was the basis on which NSICT was selected. As a result port users paid over 80 per cent more than what was due during this period.
2. The role of JNPT as grantor of the concession was equally suspect, as it took no steps to discharge its duties under the law or the concession agreement, and allowed NSICT a free hand.
3. The department of shipping (DoS) of the central government compounded matters by issuing directions which changed the tenor and structure of the entire deal.
Against an estimated royalty of Rs 8390 crore to be paid by NSICT to JNPT over the concession period, its burden stands reduced to Rs 2560 crore, resulting in an undue gain of Rs 5830 crore which would be borne by port users.
The study on Nhava Sheva ICT concludes: “The objective of private sector participation was to mobilise the resources required for additional capacity to handle burgeoning traffic at ports and to improve efficiency, productivity and quality of service as well as to bring about competitiveness in port services.
The outcome, however, was quite different; the private partner leveraged its experience, its technology and expertise to provide high quality services to port users, but at the same time, extracted windfall and unlawful surpluses from users confronted with a monopolistic situation.”
Licence to fleece
A policy note, ‘Building capacities for PPPs,’[6] prepared by the World Bank for DEA-MoF and published in June 2006, argues that “the policy rationale for PPPs in India is often limited to the use of PPPs as a source of investment capital when the public sector lacks funds”.
“PPPs have therefore been used more in situations where substantial capital investments are required, and where user fees can be accessed to defray much of the costs,” says the policy note, warning that seeing PPPs purely as a substitute for public investment can be “illusory, since many of these PPPs will have fiscal costs”.
Making PPPs an excuse for generating additional financing through revenue from user chargers has meant that cost savings, better services, accountability – very often all three – have become a casualty.
The policy note also points out a lack of “systematic attempts to develop and use methodologies to evaluate whether particular projects are best done through a PPP route or through traditional procurement”.
“Tools such as public sector camparators[7] (PSCs) have not been used widely in India so far, even on a simplified basis,” it adds.
The absence of any methodology to compare costs between traditional procurement modes and PPPs has led to almost an ideological insistence on the latter, such as in national highways where for many years the ‘thumb rule’ has been to first consider BOT (toll) and then other modes.
That is despite the fact that the government recognizes the partially hidden costs of PPPs.
“The PPP projects typically involve transfer or lease of public assets, delegation of governmental authority for recovery of user charges, operation and/or control of public utilities/services in a monopolistic environment and sharing of risk and contingent liabilities by the government,” says the overview by Planning Commission, ‘Private Participation in Infrastructure’, referred to above.
It raises a scary scenario: Are citizen-tax payers being gradually pushed to financially supporting two sets of governments, one elected by them and the other the ‘outsourced government’?
Casting a shadow on public finances
By guaranteeing a minimum rate of return to the private investors, ensuring that they have access to long-term debt from government-owned banks and other financial institutions, and understating its own liabilities by not recording in the budget the total value of payments to be made to private partners, the government might be endangering public finances.
The PPP projects thus become a means for the government to take on what are known in the private sector as “off the balance-sheet” obligations, which are hidden behind an artificial image of fiscal prudence.
When the projects, undertaken in the PPP mode purely for financial reasons, begin to fail, they are likely to saddle the government-owned banks and financial institutions with a growing pile of non-performing assets (NPAs).
It is notable that the mere presence of the government as the guardian angel of a project leads banks to cheerfully extend loans, sometimes far in excess of what is required, as has been shown by the national highway projects.
Government guarantees to the debt extended to ill-conceived PPP projects is another threat to public finances.
In a highly dubious move, the Centre extended sovereign guarantee to a 75 million US dollar loan[8] from Japan Bank for International Cooperation (JBIC) to IIFCL for on-lending to Delhi-Mumbai Industrial Corridor Development Corporation (DMICDC), a ‘special purpose vehicle’ set up to implement a large number of PPPs under an umbrella Rs 3.6 lakh crore scheme.
The loan agreement was signed between JBIC, IIFCL and DMICDC in December 2009.
Owned 51 per cent by IL&FS and IDFC and 49 per cent by the Centre, DMICDC is designated as a ‘private company’ under government guidelines. The General Financial Rules (GFR 2005) of the central government clearly say that the “government guarantees shall not be provided to the private sector.”
What is interesting is that the finance ministry had earlier “told the JBIC that it would not be possible to extend such a guarantee as the project will be handled by a private company,” according to a July 2008 report in The Economic Times[9].
Later, on the intervention of the prime minister’s office (PMO), it was decided that the loan would be routed through a government agency (IIFCL) in order to make it acceptable to the finance ministry, reports Economic Times in October 2008[10].
“The likely assumption of contingent liability in the form of guarantees for 2008-09 will amount to Rs 36,606 crore which will be 0.69 per cent of GDP during 2008-09, higher than the target set by the rules set under the Fiscal Responsibility and Budget Management (FRBM) Act,” notes the finance ministry in the ‘fiscal policy strategy statement’[11] of the budget for 2010-11, which justifies the extension of sovereign guarantees to “leverage private sector participation in areas of national priorities.”
Clearly, FRBM Act is a non-issue when it comes to helping the private companies, but becomes a gospel to emphasize “budgetary constraints” when it comes to funding projects in the larger public interest.
The Centre’s ‘sums guaranteed outstanding’ rose from Rs 1,04,872 crore in 2007-08 to Rs 1,13,335 crore in 2008-09; it was 2.1 per cent of GDP in 2008-09 and 17 per cent of its revenue receipts, according to the CAG[12].
Most of these guarantees are used to raise money through tax-free bonds that refinances bank lending of longer maturity to PPP projects.
For instance, IIFCL was authorized to raise Rs 10,000 crore through government-guaranteed tax-free bonds in the year 2008-09 and Rs 30,000 crore in 2009-10[13].
“The issue of guarantees assumes significance in the context of the growing investment needs for infrastructure, participation by the private sector in such projects and its increasing probability of being invoked,” says the CAG in what sounds like a timidly articulated warning[14].
While the PPP advocates deprecate as “public-sector inefficiencies” the budgetary allocations and government guarantees to urban local bodies for infrastructure development, the same budgetary support and guarantees are used to reduce risk for private investors and “bridge the viability gap” of PPPs.
Highlighting the effects of the PPP policy on local governments, Amitabh Kundu, professor, Centre for the Study of Regional Development, Jawaharlal Nehru University (JNU), says municipalities are known to have been compelled to escrow some of their healthy revenue streams in order to guarantee returns for private partners in PPP projects.
“The PPP policy is pushing an urban reforms agenda that demands that public funds be granted to municipalities mainly with the aim of leveraging private sector participation in urban infrastructure; the government has assumed the role of enforcer of these so called reforms,” he told this writer.
Another threat to public finances comes from the large exposure of the government-owned banks to the high-risk PPP projects.
While the government continues its chatter about evolving ‘reliable debt instruments for long-term financing of infrastructure projects,’ banks have been made to lend large amounts to the PPP projects.
The public-sector banks contributed a whopping 88.6 per cent to Rs 3,80,122 crore lent by all financial institutions to infrastructure projects, including PPPs, in the year 2009-10, according to media reports citing official data[15].
Total lending by public-sector banks to infrastructure projects rose 38% to Rs 3,37,018 crore in the year 2009-10 from Rs 2,44,304 crore in March 2009.
The debt-equity ratios of the PPP projects have been increasing over the years and can be as high as 90:20, which means that 90 per cent of the total project cost is being defrayed through debt, most of which is likely to come from government-owned banks.
The policy environment emboldens private partners to be over-dependent on borrowings.
For example, national highway projects allow the private partners to earn a handsome profit on construction and to divest their equity two years after completion of construction[16]. Thus, the private partners are encouraged to keep their equity contributions low and debt high, making it easier for themselves to achieve their targeted rate of return and then exit the project prematurely.
The NHAI also binds itself to making ‘termination payment’[17] to the private partner, which will go to the lenders to the project, not equity investors, if the contract is terminated prematurely, incentivizing the developer to keep its debt high and equity low.
(In fact, in case of premature termination, even if it is occasioned by default on the part of the private partner, the NHAI commits itself to repaying 90 percent of senior debt after the construction phase has been completed, which represents a major transfer of risk back to the government and a significant contingent liability.)
The ‘viability gap funding’ also emboldens the private partners and lenders to negotiate higher debt for the project because they regard government grant as providing them the comfort of an equity contribution.
Indeed, given the generous amounts made available by the public-sector lenders, there is every reason for the private participants to get the ‘negative grant’ itself (the winning bidder paying the government instead of asking for grant) financed through borrowings.
Over-reliance on debt in PPP projects can mean greater chances of bankruptcy and greater likelihood of government bailout. That will often lead to a situation in which the government will be repaying its own banks.
PPPs’ long-term financing needs have exposed the public-sector banks to the serious risk of ‘asset-liability mismatch;’ while banks’ own sources of funds are savings and term deposits that typically have maturity of 3-5 years, they are called upon to lend to PPPs for 10-15 years.
That banks also do not have the necessary skills for credit appraisal of PPP projects is borne out by their eagerness to lend much more than the total project cost of the highway projects, as shown by the issues paper, ‘Sub-prime Highways.’
The government is now in the process of evolving a policy framework that will allow insurance companies and pension funds, which control long-term savings of workers, to lend to the PPP projects[18].
The framework may include a lower credit rating threshold for advancing loans to infrastructure PPPs by insurance companies and pension funds.
How such an exposure to the various risks of PPP projects, especially the ‘sub-prime’ ones, will affect the savings of the workers, not to mention the financial system, is anybody’s guess.
Renegotiation for private gains
There is growing evidence to show that government’s overzealous pursuit of the PPP policy is resulting in ill-conceived projects that end up being renegotiated in favour of undue private profits.
The private partners like to insist on renegotiation when they fail to meet the deadlines or believe that they can wangle more subsidies from the public partner.
Adverse economic climate that may lead to low demand for the services of the PPP projects is another reason for the private partner to demand renegotiation.
A case in point is the PPP project for building the Commonwealth Games village in Delhi.
The Comptroller and Auditor General (CAG) found that the Delhi Development Authority (DDA) provided a Rs 766.89 crore ‘bailout package’ to Emaar-MGF, the private partner, following the economic slowdown in 2008, even though the concession agreement did not have any provision for such a financial assistance[19].
DDA ignored the recommendation of its own evaluation committee in bailing out the developer by purchasing 333 apartments in the games village, resulting in avoidable extra expenditure of Rs 89.24 crore, the CAG noted.
DDA also allowed the developer to construct on an excess floor area of 4,40,301 square feet without recovering the proportionate fee of Rs 65.23 crore, the CAG said.
The renegotiation can thus be a mechanism by which the private partners can wriggle out of their contractual obligations, with the help of some key government officials who may have been offered inducements, and transfer the risks that they are required to bear back to the public partner.
It is noteworthy that the Commonwealth Games village hogged the newspaper headlines again in October 2010 when it was alleged that construction had been seriously defective and there were “irregularities” in the project.
Subsequently, the government ordered DDA to seize the concessionaire’s bank guarantee of Rs 183 crore[20].
Private monopolies over public assets
“The structuring of the concession agreement has a direct impact on the competition for the concession,” write Piyush Joshi and Anuradha R.V., in a study titled ‘Competition concerns in concession agreements in infrastructure sectors’, undertaken on behalf of Competition Commission of India and published in June 2009[21].
Hyderabad Metro Rail Project, a PPP, for example, shifted from being an MRTS project to being a valuable real estate project because of the development rights over 212 acres of land in Hyderabad along the route of the proposed line.
“This resulted in the consortium led by a real estate developer Maytas Infrastructure winning the bid without needing any state grant for the project whose initial projected project cost was about Rs. 12,000 crores,” wrote Joshi and Anuradha.
When the real estate market slowed down in 2009, the project faced problems achieving financial closure and an intervention by the state government to enable the initial financing and the project restructuring became likely.
(After the collapse of Maytas Infrastructure, the Hyderabad Metro Rail project was awarded afresh to L&T.)
Joshi and Anuradha also cite the Delhi International Airport project, which was structured with an upfront property development component, resulting in the bidders submitting bids based on their assessment of the real estate potential of the concession. The final selected bidder and the financial plan of the selected bidder relied on the ability to raise about Rs 2500 crores from real estate development.
Consequently, the financing of the airport project was carrying an inherent real estate risk in its financial structure. Here too the slowdown in the real estate market prompted the concessionaire to seek to impose Rs 350 passenger terminal charge on each passenger, even before the airport was completed.
“The consequence of such structuring was to adversely impact the end user of the airport. Furthermore, if the passenger terminal charge was a declared revenue stream at the time of structuring and bidding, the nature of bids would have been different,” wrote Joshi and Anuradha.
The two writers opine that such concession agreements have become legitimate subjects of review by the Competition Commission of India.
Joshi and Anuradha also flag the monopolistic provisions of the model concession agreement for national highways, which give the concessionaire three protections from competition.
There is a blanket assurance that no competing road facility would be opened before a specified period of time.
If a competing facility is opened after the exclusivity period, the concession period of the relevant concession will be increased by a certain period.
The NHAI will also ensure that the toll charged from vehicles using the competing facility shall always be 133 per cent of the toll charged on the project highway.
Joshi and Anuradha say the government’s justification of these provisions “as being necessary for attracting bidders to the national highway projects” does not really stand the test of reasonableness.
“This provision is being offered as a standard provision in the model concession agreement, thereby making it applicable to each and every project and creating a legitimate expectation among bidders that they will obtain this protection against competing facility as a matter of course,” they say.
Public accountability
Democracy diluted
By emphasizing the ‘commercial viability’ of what ought to be ‘public services’, PPP policy excludes those who cannot afford to pay; the State thus becomes unduly discriminating in its treatment of citizens of varying economic abilities.
The state-citizen relationship is replaced by service provider-customer relationship. By handing the provision of public services to commercially operated private agencies on a long-term basis, PPPs deal a body blow to the citizens’ ability to hold the government accountable.
Considering that the PPP policy is being sought to penetrate most vital of the public services, such as water supply and healthcare, public accountability becomes a matter of life and death.
Most public goods and services, by definition, have an element of being ‘non-excludable,’ which means that no one can be effectively excluded from using them.
They are also ‘non-rivalrous,’ which means that consumption by one individual does not reduce its availability for consumption by others.
PPPs try perversely to tinker with these characteristics of public goods and services in order to mould them into commercially exploitable commodities.
The complex commercial relationships and institutional structures of the PPPs scare the citizens away and allow the public authorities as well as their private partners to make money without submitting themselves to public accountability.
For example, the Delhi-Gurgaon expressway project, whose various failings have been well reported, features as many as six actors – the Ministry of Road Transport and Highways (MoRTH), NHAI, financial consultant, independent consultant, concessionaire, and independent auditor – each being used to pass the buck on[22].
During the hearings on CAG’s audit of Delhi-Gurgaon expressway project before the 15th Lok Sabha’s committee on public undertakings (CPU)[23], the NHAI refused to take responsibility for ‘policy decisions,’ ascribing them to the ministry (even though NHAI is supposed to be an “autonomous body”).
The selection of the mode of the project, a dubious and difficult-to-explain decision, was readily attributed to the financial consultant. For serious faults in detailed project report (DPR), there was independent consultant to blame.
While the road users bore the brunt of a badly executed project, and over 100 people died in accidents, the NHAI as well as its private partner refused to listen to the citizens’ complaints and take responsibility.
Dwarka Forum, a local citizen group that was directly and variously affected by the project had to fight a long battle under the Right to Information (RTI) Act, 2005, to compel the two partners to make public the concession agreement[24].
(As on September 30, 2010, the agreement for Delhi-Gurgaon expressway was the only concession agreement posted on the website of the NHAI, which has hatched the maximum number of PPP projects among central government agencies.
So much for transparency and the RTI obligations of the government!)
Regional distortions, land rights, and constitutional issues
The distribution of PPPs in national highways is extremely skewed in favour of states with higher per capita income because private partners are better positioned to recoup their investments in such states, write TCA Anant and Ram Singh of Delhi School of Economics in a paper titled ‘Distribution of Highways PPPs in India: Key Legal and Economic Determinants’, which was published in September 2009[25].
While Tamil Nadu, Andhra Pradesh and Maharashtra accounted for 45 per cent of all PPPs in the country, states like Assam, Jharkhand, Bihar, Orissa and Kerala failed to attract private investment in the form of PPPs, Anant and Singh found.
“Other things remaining the same, projects located on national highways connecting richer states and those located closer to mega cities have exhibited higher probability of becoming PPPs,” says the paper.
In discussing the options available to less favoured states, the paper says: “Either they can go for public funding of infrastructure projects or they can hope to attract private investment only by providing extra ‘sweeteners’ to investors.”
The ‘sweeteners’ may include reducing the project risk by sharing of revenue risk (such as though BOT-annuity contracts), increasing viability gap funding (government grant), lowering applicable taxes, and allowing real estate development to the private partner, they suggest.
For example, Rs 30,000 crore Ganga Expressway project in Uttar Pradesh allocates vast parcels of land to the private partner (JP Group-led consortium) to be used for commercial activities.
The paper, however, warns that giving away real estate development rights to finance infrastructure is very problematic for the reason, among others, that “such transfers are inherently susceptible to rent-seeking and corruption.”
The Ganga Expressway, which, according to the newspaper reports quoting the officials of the JP Group, will require acquisition of 33,000 acres of land of which 5000 acres will be used for purposes other than the road project[26], has been strongly opposed by the farmers who are likely to be displaced.
The farmers have alleged that the project is a conspiracy to render them unemployed and landless, besides being a plan of highly dubious legality and environmental sustainability[27].
In May 2009, the Allahabad high court had ordered the work on the project to be stopped after determining that the state government had not obtained the environmental clearance in accordance with law[28].
Many PPP projects constitute a blatant disregard for constitutional provisions of devolution of powers to local governments.
In promoting Delhi-Mumbai Industrial Corridor (DMIC), the mega scheme to build industrial areas and townships in six states through PPP mode at a cost of about Rs 3.60 lakh crore, for example, the Centre has bulldozed the planning and development rights of the local bodies enshrined in the 73rd and 74th Amendments as well as the Panchayati Raj and municipal laws.
Similarly, there is no information in the public domain that will suggest that the states were taken into confidence in conceiving DMIC scheme. Thus, the Centre seems to have used the PPP policy to assume extra-constitutional powers for itself.
By mixing the ‘public’ with the ‘private,’ the PPP projects also cause confusion and legal distortions by lending a ‘public purpose’ packaging to private interests, particularly in their potential for large-scale land acquisition, as the Ganga Expressway project and the DMIC scheme illustrate.
Both Ganga Expressway and DMIC create an ‘umbrella’ scheme sold to the people on its ‘public purpose,’ under which a number of private-profit projects take shelter.
The ostensible ‘public purpose’ of the umbrella scheme will make large-scale land acquisition an inescapable reality even for projects that have nothing to do with any public purpose and even if the private developers directly deal with the land-owners without the help of the government enforcing the Land Acquisition Act.
It needs to be borne in mind that PPP projects, by definition and legal formulation, allow guaranteed private profits; so any attribution of ‘public purpose’ to a PPP project is inherently questionable.
Hush-hush deals and corruption
The general style of most of the PPP projects in India has been to hide from the citizens all information that is vital for them to weigh the pros and cons of a project.
Despite an outcry from the citizens, obvious disclosure requirements of the RTI Act, 2005, several orders of the information commissions and law-courts, the central and states governments have shown no inclination to enforce transparency in project planning, execution and operation.
“Since the commercial nature of the PPPs demand that secrecy be maintained, the societal control over public infrastructure and services has been seriously undermined; the public authorities have been proactive in prioritizing private rights over public interest,” says Gaurav Dwivedi, a researcher at Manthan Adhyayan Kendra, an NGO based in Badwani, Madhya Pradesh, which tracks privatization projects in the water sector.
Dwivedi has been struggling for over three years to get New Tirupur Area Development Corporation (NTADCL), a PPP for supplying water to the industrial town in Tamil Nadu, to share information with him about its operations, even though Madras high court ruled in April 2010 that NTADCL was a public authority under the RTI Act and must become open in its operations[29].
Despite owned 27.89 per cent by public authorities, NTADCL has refused to submit itself to the RTI as a public authority.
Dwivedi says the Tirupur project is just one of the many PPP projects he has tracked that were planned without public hearings or consultations with the local citizens.
The tendency to keep the public in dark is also strongly evident in airport projects.
The airport operators at Hyderabad, Delhi and Mumbai obtained a stay from high courts on orders from the information commissions that held that that airport operators fall under the purview of the RTI[30].
Even the CAG has expressed concern over its inability to audit PPP deals, implying that his office too faces the secrecy that frustrates the citizens.
“Although about 50 per cent of the plan expenditure is now being purveyed through channels such as PPP, NGO and Panchayati Raj bodies, audit of such expenditure is presently not under the automatic legal mandate of the CAG,” Vinod Rai, the CAG, said at the conference of accountants general in April 2010[31].
The complexity of PPP deals, coupled with the secrecy surrounding them, has increased the potential for corruption, further alienating the citizens and undermining democracy.
A case in point is Chhattisgarh Highways Development Corporation (CHDCL), an SPV in which IL&FS holds 74 per cent equity and state government 26 per cent.
Tasked with the implementation of Rs 2500 crore Chattisgarh Accelerated Road Development Programme, CHDCL has refused for several years to be treated as a ‘public authority’ under RTI Act despite a pro-disclosure decision by the state information commission on a request for information made by Rajesh Bissa, a Raipur-based RTI activist.
Bissa, meanwhile, managed to get some information – after long struggle -- about the project from PWD department of the Chhattisgarh government, which exposed a scam running into Rs 5700 crore[32]!
The expose led to the stalling of the entire PPP project.
By depriving public service of all openness and public spiritedness, PPPs have struck at the roots of India’s democracy.
It is about time that all the presumptions, promises and outcomes of PPP policy are questioned and debated in the public.
The citizens must gain fuller understanding of the damage that PPPs have caused to the democratic and social control over public infrastructure and services.
Let the people take matters in their own hands before more damage is done.
[1] ‘Note on PPP projects in India,’ as on 15 November 2009, based on a sample size of 450 projects; PPP India Database, the online repository of information on the PPP projects of the central and state governments, maintained by the Department of Economic Affairs, Ministry of Finance, Viewed on 25 November 2010
[2] ‘Private Participation in Infrastructure’, published by Secretariat for Infrastructure, Planning Commission, January 2010, Viewed on 25 November 2010
[3] ‘Subprime Highways?’, described as an ‘issues paper’ and reported to have been authored by Gajendra Haldea, principal advisor to the deputy chairman of the Planning Commission; The contents of the ‘issues paper’ were reported by Business Standard; ‘NHAI may go bankrupt in three years: plan panel,’ Business Standard, 15 July 2010, Viewed on 25 November 2010 (; ‘The great highway robbery,’ Business Standard, 19 July 2010, Viewed on 25 November 2010 ( A more detailed article on the contents of the issues paper was published by Governance Now fortnightly magazine. (‘NHAI going for broke’, August 1-15 issue --Volume 1, issue 13, Governance Now; website:
[4] Comptroller and Auditor General of India, Performance Audit (Report No. 3 of 2009-10) 2008-2009, Viewed on 25 November 2010 (
[5] ‘Concession for Nhava Sheva International Container Terminal,’ Bharat Salhotra, November 2007, Secretariat for the Committee on Infrastructure, Planning Commission, Viewed on 25 November 2010 (
[6] ‘Building Capacities of Public-Private Partnerships,’ Energy and Infrastructure Unit and Finance and Private Sector Development Unit, South Asia Region, The World Bank, June 2006, Viewed on 25 November 2010 (
[7] A public sector comparator or PSC is an estimate of what it would cost to undertake the project using traditional procurement methods. Public entities use the comparator as a benchmark to help to decide whether an alternative procurement method using private finance would offer better value for money.
[8] ‘Japanese Contribution – JBIC loan,’ DMIC Project, Department of Industrial Policy and Promotion, Ministry of Industry, Viewed on 25 November 2010 (
[11] The Fiscal Policy Strategy Statement, Union Budget 2010-11, the Ministry of Finance, Viewed on 25 November 2010 (
[12] Growth in Contingent Liabilities of the Union Government, Management of Fiscal Liabilities, Chapter 6, Compliance Audit Observations, Report No. 1 of 2008-09, 2008-09, Viewed on 25 November 2010 (
[13] ‘Government allows IIFCL to raise Rs 30k cr via tax-free bonds’, Business Standard citing Press Trust of India report, 02 January 2009, Viewed on 25 November 2010 (
[14] Growth in Contingent Liabilities of the Union Government, Management of Fiscal Liabilities, Chapter 6, Compliance Audit Observations, Report No. 1 of 2008-09, 2008-09, Comptroller and Auditor General, Viewed on 25 November 2010 (
[15] ‘Infra financing swells 41% in ’09-10,’ The Financial Express, 07 July 2010, Viewed on 21 November 2010 (
[16] ‘Exit Policy for (Developer) Concessionaire in MCA,’ page 19-20, Report of the BK Chaturvedi Committee on NHDP, National Highways Authority of India, Viewed on 25 November 2010 (
[17] Model Concession Agreement for PPP in National Highways (Overview of the Framework), page 8, Secretariat for Infrastructure, Planning Commission, Viewed on 25 November 2010 (
[18] Report on India Infrastructure Debt Fund, 01 June 2010, page 16, Secretariat for Infrastructure, Planning Commission, Viewed on 25 November 2010 (
[19] Compliance Audit (Report No. 23 of 2009-10) 2008-09, chapter 9, Comptroller and Auditor General, Viewed on 25 November 2010 (
[20] ‘DDA to confiscate Rs 183 crore Emaar-MGF bank guarantee’, 20 October 2010, Business Standard citing a Press Trust of India report, Viewed on 25 November 2010 (
[21] ‘Competition concerns in concession agreements in infrastructure sectors,’ June 2009, by Clarus Law Associates, Piyush Joshi and Anuradha RV, a study undertaken as part of the advocacy programme of the Competition Commission of India, Viewed on 25 November 2010 (
[22] Apart from plentiful newspaper reportage on Delhi-Gurgaon expressway project, a detailed article on the project, headlined ‘PPP: Pure and Private Pelf,’ was published in Governance Now magazine, 1-15 October 2010 issue – Volume 1, issue 17 (website:
[23] ‘PPP in implementation of road projects by NHAI in respect of Delhi-Gurgaon project’, based on C&AG report No. PA 16 of 2008 (performance audit), Committee on Public Undertakings (2009-10), Viewed on 25 November 2010 (
[24] ‘PPP: Pure and Private Pelf,’ Governance Now magazine, 1-15 October 2010 issue – Volume 1, issue 17 (website:
[25] ‘Distribution of Highways Public Private Partnerships in India: Key Legal and Economic Determinants,’ Centre on Democracy, Development and the Rule of Law, Stanford University, CDDRL Working Papers, September 2009, TCA Anant and Ram Singh, Viewed on 25 November 2010 (
[26] ‘Jaypee Group to invest Rs 70,000 crore in Ganga Expressway in 5 yrs’, Business Standard citing a Press Trust of India report, 27 April 2010, Viewed on 25 November 2010 (
[27] ‘UP farmers oppose Ganga Expressway Project,’ Business Standard, 06 October 2009, Viewed on 25 November 2010 (
[28] Ibid
[29] ‘NTADCL is a Public Authority: Madras High Court,’ Manthan Adhyayan Kendra, Viewed on 25 November 2010 (; The Madras high court order can be downloaded from the court’s website (
[30] ‘RTI activists to move HC for vacating stay on airport info,’ The Times of India, 17 May 2010, Viewed on 25 November 2010 (
[31] XXV conference of accountants general, address of CAG at the valedictory function on 09 April 2010, The Comptroller and Auditor General, Viewed on 25 November 2010 (
[32] The scam was well reported in the local Hindi press. The details of the scam, based on documents obtained by Rajesh Bissa through RTI Act and press reports, have also been reported by Public Cause Research Foundation (PCRF), a Ghaziabad-based NGO that organizes RTI awards, Viewed on 25 November 2010 (

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