Why PPP projects fail

As oxymorons go, the term public-private partnerships (PPP) was bound to be a winner. And it did not disappoint the public. It did not even need the current paroxysms among the holders of capital to reach this denouement. The argument against the efficacy of PPP was made years ago. At the same time, India runs the largest portfolio of such projects among developing countries. 

These were some of the thoughts that crossed my mind as I read Public-Private Partnerships in Infrastructure, a slim treatise by K V Pratap, a bureaucrat in the Department of Economic Affairs, and Rajesh Chakrabarti, who teaches at the Jindal Global Business School. The authors are well aware of the pushback against PPP. Each of the chapters of the book sports a case study to bring out in relief the recurring arguments against this vehicle for capital raising.

As the selection of cases demonstrate — including the Dabhol power project in Maharashtra, Delhi power supply and Delhi airport — Messrs Pratap and Chakrabarty have not been reticent about visiting those projects that have proved controversial. By laying out each with the details they deserve, they have done an extremely useful bit of work for students and general readers. The latter need to be warned, however, that the book is structured like a textbook, which is not surprising since both authors have been at various times professors of public policy. This means the book has to be approached in segments. 
PPP is an ambitious tool kit for policymakers, especially for those in developing countries. Also, as the authors point out, “there is no single universally accepted definition of a PPP. And the impact of this lacuna can be more than academic”. It is an important caveat. Owing to the lack of this clear understanding policymakers load PPP projects with far more and conflicting objectives than those can bear. Since PPP offers an opportunity for these countries to leapfrog over their infrastructure deficits, the attraction to jump in without understanding what PPP can and cannot do can be fatal. It is particularly lethal for a political executive that has to face regular elections. A well-executed PPP is a ticket for re-election, a failed one is a ticket for the political equivalent of an execution. 

At the heart of a PPP, therefore, is a decision to share risk. The private sector can only take up the risks of project construction whereas the ability to manage the regulatory risk is that of the public sector. “Risk transfer is at the heart of structuring of PPP project. Optimally, risks should be transferred to that party which has more control over the risk factor… Offloading some of the risks to a private party capable of managing it better can reduce the project’s overall cost to the government,” the authors write. 

Developing countries are, as the authors point out, weak in their ability to make this distinction. And this inability lies at the core of the many failed PPP projects — though as a percentage of total projects these failures are minuscule, they say. What they do not say is that often, the ones that fail are also the ones in the public eye. This is what creates a public perception of failure, even though the data shows otherwise. India has signed on 852 of these projects between 1990 and 2015. This is 13 per cent of the 6,547 such projects signed on by developing countries. 

The book is strewn with such nuggets of information. “India has caught up with the world-wide average rate of PPP project cancellations. [A]s a percentage of total investments, India has seen 4.6 per cent of these investments cancelled compared to the world wide rate of 3.6  per cent”. They argue that this is inevitable: “…freedom to fail is part of the reasons to turn to the private sector in infrastructure provisioning. Some project cancellations should be expected, since some projects or concessionaires will underperform.”

The authors stop here, without getting into the role of political signalling in the signing of PPPs. Discussing this issue would have enriched the analysis, since this is a book targeted at public policy practitioners. Not that those aspects are totally absent. Talking about why PPP projects once discarded are left to rot, they make an interesting observation: “...The renegotiation route to financial sustainability of PPP projects is closed. Corruption wary decision makers are circumspect about giving relief through the renegotiation route and therefore there is no option of the project sponsors that bid aggressively but to walk out of the projects to cut losses….Giving the renegotiation relief to many of these projects would have been problematic….”
These are wise words. This is a volume that is an essential companion piece for anyone who plans to write on PPP, most certainly in India. I cannot think of any other volume that takes the reader through the theory and practice of PPP so diligently. It is worth its steep price.

Public-Private Partnerships in Infrastructure: Managing the challenges
K V Pratap, Rajesh Chakrabarti
Pages 354; Rs 12,059