A relationship that works

Public-private infrastructure projects should be restructured to enable better distribution of risk, more efficient and transparent price discovery

The Planning Commission estimates investments worth $1 trillion to flow into the infrastructure sector over the 12th Five Year Plan. At least half the investments are expected from private sources. Accordingly, governments have been aggressively pursuing public-private partnerships (PPPs). However, experience from across the world suggests a need for caution.

A comprehensive study of more than 1,300 infrastructure concessions and PPPs in Latin America and the Caribbean by World Bank economist J. Luis Guasch finds that renegotiations are the norm, even when awarded through competitive bids. The same could be said about India. In recent months, a number of large road and power projects have either been terminated or gone for renegotiation. In all these contracts, the developer either badly overshot the construction period or miscalculated heavily on revenue streams. Similarly, bank balance sheets have come under strain in the face of unsustainably high exposure to infrastructure projects and a rise in the restructuring of debt advanced to the sector.

In these circumstances, a more effective way to finance these projects may be through a two-stage process. In the first stage, a professionally managed special purpose vehicle (SPV) could be established to construct the project using short-term bank loans or through takeout financing by a consortium of banks. This may require the government to provide some form of guarantee or credit enhancement. Once the construction risk is offloaded, short-term loans can be swapped for long-tenor debt. Private participation can be introduced either through long-term concession grants to operate the entire project or parts or it, or by outsourcing certain services. Another strategy would be to capitalise the assets by taking the SPV public.

This arrangement is likely to be effective in sectors like water and sewerage, solid waste, power transmission and distribution, and public transport, where the project construction and stabilisation risks are substantial and most often outside the control of the private developer. Historically, such projects suffer inordinate delays due to problems in acquiring possession of site and right of way, protracted litigation and regulatory uncertainty.

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