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Dec 15th 2012 | CHENNAI | from the print edition
THERE is still time for free-market types to enjoy the journey in India that
will make them feel the smuggest that from Delhi to Chennai, the southern city
of 9m people once called Madras. You leave a gleaming airport terminal in the
capital, built and run by a private firm and opened in 2009. You land at an
airport run by the government and are taken by bus to a building that should
have been retired along with Leonid Brezhnev. When it comes to creating the
infrastructure India needs, the lesson seems clear: private sector good, public
sector bad.
The contrast will end when Chennai s new airport terminal opens, which is due
to happen in 2013. Work started in 2008. Yet even if the opening ceremony is
delayed forever, the triumphalist view of the private sector s role in
infrastructure has begun to look hollow. Nothing illustrates this better than
the woes of several trophy public-private partnerships (PPPs) defined here
broadly, as deals for private firms to build or run public infrastructure that
fall short of outright privatisation.
That smart new airport in Delhi is losing money. Related property deals were
criticised by an anti-graft agency in August. The new express-train link
connecting it to Delhi has been shut as a result of engineering faults. The
service s operator, Reliance Group, says it is financially ruinous. In India s
far west a giant new power plant, one of the biggest investments being made in
India, is in trouble, due to soaring coal costs. Its owner, Tata, has taken a
write-off.
As with America s 19th-century railways boom, some worry that investors are
doomed. Even sober voices admit there are problems. Deepak Parekh, the boss of
a financial firm and an adviser to the government, says: In some ways we ve
been successful. In others we have not.
The boom was quite something. In the 1990s the political class agreed that PPPs
were a panacea. After all, India s public sector, unlike China s, is skint and
often seems to struggle to tie its shoelaces. In Latin America in the 1990s
existing, or brownfield , assets were privatised. In India it was all about
greenfield , or new projects, from roads to power stations.
Between 2007 and 2012, $225 billion was invested by the private sector in
infrastructure, equivalent to 12% of GDP in 2012, much of it through PPPs.
Official figures suggest 758 PPP projects are under way or complete, worth $70
billion. Roads, ports and electricity projects account for the lion s share.
These are contracted at both the federal and state level and often involve
multiple public bodies. A lot of improvisation took place, with perhaps only
40% of projects using the standard contract framework that the central
government recommends. Firms range from big listed outfits to provincial
builders on the make.
The condition of these projects is murky, partly because most have their
finances ring-fenced and do not reveal them in public. Gajendra Haldea, an
official who helped design India s PPP framework, says that outside the power
sector there is no systemic problem . But even he worries there are signs of
strain, particularly at projects with badly designed contracts. The banking
system is grappling with dud loans related to PPP projects. Big infrastructure
firms have seen their debts soar and share prices fall. Many have subsidiaries
often individual projects that are lossmaking. A.M. Naik, the boss of Larsen &
Toubro, an engineering conglomerate, fears that a long trail of unlisted small
firms are in particularly poor shape.
Fresh activity has stalled. Vinayak Chatterjee of Feedback Infra, a consulting
firm, compares the industry to a boa constrictor after a meal. The value of the
pipeline of new projects fell by 52% last fiscal year, according to the central
bank. The government s hope that investment will rise smoothly to Chinese
levels seems wildly unrealistic (see chart).
What went wrong? Lots of super roads have been built but during the bubble
firms bid too much for the right to build and levy tolls on new projects, says
Mahesh Nandurkar of CLSA, a broker. Plenty of contracts won in 2007-10 will not
make a profit. In electricity generation many firms wrongly assumed they could
get cheap coal from the state-run coal monopoly, or gas from sputtering
offshore energy fields (which are themselves largely operated under PPP-style
contracts). Delays due to red tape and problems acquiring land are endemic.
Only a quarter of all projects are on or ahead of schedule. High debts mean
many lack the flexibility to cope when things veer off plan.
Fans of government-run projects are cock-a-hoop. They argue the state can cope
better with financially marginal projects and with red tape. Delhi s metro,
built and run by a state body, is the shining example. It loses money but was
built quickly and it works. Chennai s metro, due to arrive in 2015, is
following the same model. A public body is in charge and subcontracts
construction to private firms, including foreign ones. Down a big hole in the
city centre, Muscovites in hard hats can be found directing earth-boring
machines. Its boss, K. Rajaraman, considered inviting private firms to run the
completed project but reckons the state can do it more cheaply.
Even some fans of PPP say that India has got things the wrong way round.
Shailesh Pathak of Shrei Infrastructure Finance, a financial firm, argues that
the state should build things (using private contractors). It should then sell
the right to operate completed, and thus lower-risk, projects to the private
sector, raising funds to pay for more construction. Kamran Khan of the World
Bank agrees. There is an inherent disconnect between what investors want and
the wildly unpredictable business of getting a big greenfield project done.
Yet India s rickety public finances, its need for infrastructure and the
stately pace with which its policy moves mean that greenfield PPP will remain
essential. In the short term the government will try to revive things through
some smelly compromises. Contracts for unfinished projects may be tweaked to
benefit private firms, even though this will draw accusations of cronyism.
State banks will be encouraged to roll over dodgy loans, even though this means
taxpayers subsidise business folk.
Beyond this there is only one solution: to reduce the risks projects face, from
red tape and land-acquisition problems to meddling politicians. Making India
predictable is impossible but conditions on the ground can be improved. That
should cut the cost of capital and see cash, including from abroad, flood back
in to what should be one of the great investment opportunities of the century.
from the print edition | Finance and economics