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Great Expectations: Public-Private Partnerships in Urban India
Jessica Seddon1
Ashwin Mahalingam2
Introduction
Urbanization will be one of the defining transitions of the twenty-first century, presenting
opportunities for sustainable, equitable development as well as potentially having the opposite
effect. Countries’ and cities’ infrastructure investment choices, implementation capacity, and
ability to manage increasingly complex combinations of infrastructure and services will play a
key role in shaping urbanisation’s impact. Infrastructure mediates economic and social
integration of urban areas, peri-urban, and the surrounding regions. It affects economic
geography and the prospects for inclusive labor markets; energy use and the extent of
emissions. Infrastructure and services determine the openness of access to opportunities to
move out of poverty. The financial, institutional, organizational, and political challenges
inherent in planning and delivering this basic scaffolding for sustainable, inclusive urban
development, however, are daunting.
India’s urban agenda is especially challenging. While the historical rate of urbanization has been
slow in comparative context, the absolute magnitude of the urban population is striking.
Roughly 17% of India’s population lived in urban areas in 1951; today India is now over just over
31% urban. A third of the population still means nearly 380 million people in urban areas,
however, and some have estimated that as many as 200 million more people live in “nearurban” conditions on the periphery of metropolitan areas or in large towns that other countries
might classify as urban areas. Observable changes in land cover and business location suggest
that substantial growth in population and economic activity is taking place in peri-urban areas
that are considered rural in the census, but are functionally urban.3 If one uses the urban
agglomeration index developed by Uchida and Nelson (2010), for example, India was 52% urban
as of the 2001 census, and it appears that the large “near urban” population is expanding. This
pattern of rapid growth in smaller cities and towns, many of which are institutionally
unprepared to manage infrastructure, services, ecosystem services, and social safety nets, will
test the ability of policymakers and institutions at all levels of government to adapt.
1
Corresponding Author. Okapi Research & Advisory, Villgro Innovations Foundation, Indian Institute for Human
Settlements. jseddon@okapia.co
2
IIT Madras, Okapi Research & Advisory.
3
IIHS (2011). Urban India 2011: Evidence. Available at www.iihs.co.in.
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India requires substantial infrastructure investment, and policymakers are increasingly seeking
to draft the private sector’s collaboration in financing, creating, and managing urban
infrastructure. The Rakesh Mohan Committee Report on Infrastructure (1996) was one of the
first to highlight the need for private financial and other contributions to infrastructure to grow,
with specific attention to urban infrastructure in order to meet development targets, but these
calls have only intensified. The Eleventh Five Year Plan called for 30% of the overall (rural and
urban) investment target to come from the private sector and achieved 38% of the plan target
from private sources. The draft Twelfth Five Year Plan document expects 48% of the Plan
investment to come from private sources, conditional on several national policy initiatives to
restore investor confidence.4 India’s Urban Awakening, an influential report published by
McKinsey Global Institute in 2010, calls for $1.2 trillion of investment in urban infrastructure by
2030, to be financed by monetizing land assets, leveraging debt and public-private partnerships
(PPPs), and accessing private finance (enabled and encouraged by policy reforms) in addition to
more public investment. The Government of India’s High Powered Expert Committee Report
(referred to here as the Ahluwalia Committee Report) calls for Rs. 39.2 lakh crores of
investment in urban infrastructure over a similar time period, with increasing private financing
and reliance on public-private partnerships. The draft Twelfth Five Year Plan echoes the
emphasis on public-private partnerships in urban transport, water and sanitation, solid waste
management, and other infrastructure.
Is this realistic? What kinds of policy reforms and institutional capacities will this vision of
public-private collaboration require? This paper analyzes the current state of private
contribution in constructing, maintaining, and managing urban infrastructure as well as
organizational and institutional reforms that will be required for public-private partnerships to
contribute significantly to India’s urban development. While much of the current discussion of
PPPs in urban India (and India in general) focuses on the number and value of projects, we
emphasize a different measure of success: the extent to which PPPs in urban India are able to
augment management capacity, share risks, enhance operational efficiencies, and serve as
institutional structures that create performance and reform incentives.5
Our approach echoes the global framework for PPPs as a form of risk-sharing and capacity
building as well as a vehicle for private finance of public infrastructure. Starting in the 1930’s,
governments across the world entered into PPP agreements in infrastructure in order to
supplement a lack of public sector capacity and to accelerate economic growth. Governments
relied on regulation to drive socially beneficial outcomes. Post 1950, urban governments
particularly in the USA and the UK, invited the private sector to assist with local development
4
Paragraph 1.87.
We have previously used this definition as the benchmark for “success” in more policy-oriented work for the
Government of India, Ministry of Finance, on building PPP capacities. See Mahalingam, Rajan, Seddon, et al 2011.
5
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both from a need to augment public sector finances and a growing belief that local business
and civil society stood to benefit from, and thus needed to play a key role in urban
development. This ideology was then replaced by the New Public Management (NPM)
approach in the 1980s, which stressed government failure and the virtues of market-induced
competition as the key drivers for private sector involvement. This view led to the creation of
programs such as the Private Finance Initiative in the UK. More recently, in the 1990s, the
collaborative strategic advantage of working with the private sector under the presence of
strong accountability systems, heightened transparency and citizen participation has developed
into a defensible rationale for PPPs. The logic of PPPs has, in some sense, moved from being a
tool to compensate for public sector inadequacies to one wherein synergies between public
and private operators can lead to improved service delivery. (Bovaird, 2010)
Access to finance is actually one of the weaker reasons to enter into PPPs. Governments are
generally able to access finance at lower cost than private companies, and any departure from
this norm may be due to distortions in intergovernmental relations that should be directly
addressed rather than alleviated by market borrowing.6 Private borrowing also creates longterm economic liabilities that may be difficult to justify if private sector efficiencies do not
reduce the overall financing required relative to public finance and implementation (Hellowell,
2010; World Bank, 2007).
We seek to unravel some of the factors that have limited private participation in urban
infrastructure and to indicate policies that might increase the volume of PPPs in the urban
sector and, more importantly, ensure that they meet their potential for improving
infrastructure creation and service delivery. We argue that the recent attention to building
public sector capacity through training individuals and providing standardized project
templates, as highlighted in the Ahluwalia Committee Report and draft Twelfth Plan among
other places, is a step in the right direction. However, these efforts need to build a broader
range of organizational capacities than is currently envisioned as well as address how newly
trained individuals will be incorporated into urban institutions. Second, while there is good
reason to believe that relieving capacity constraints will support a continued increase in the
number and value of PPPs, the present federal context for cities will limit the potential for PPPs
in urban India to achieve the broader goals of efficient, effective service and infrastructure
delivery.
The discussion is organized as follows: following this introduction, the next section discusses
the urban PPP record in India. The following section lays out a typology of the challenges PPPs
face in India’s urban governance and socio-economic setting. While some of the observed
6
Evaluations of privately financed programs such as the PFI in the UK have shown an excess cost of private finance
of the order of 2.4 percent (PwC-Franks, 2002), for example.
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urban PPP failures can arguably be traced to weaknesses in individual-level capacities such as
contract drafting, project design, and assessment of political risks, addressing these capacity
gaps, however, will not be enough. India’s urban economic, political, and institutional context is
forbidding and may discourage PPPs from even being attempted without significant and costly
inducements that ultimately defeat the purpose of partnering with the private sector in the first
place. The next few sections review the history of PPP enabling efforts in India and draw on
international experience as well as economic and institutional logic to suggest some potential
ways that obstacles to urban PPPs in India can be overcome.
2. Urban PPPs in India – An Overview
Public-Private Partnerships started to be promoted as a potential delivery mode for
infrastructure services in a variety of sectors in the 1990s.7 The roads sector took the lead by
utilizing PPPs as a part of the National Highways Development Program (NHDP), resulting in an
initial wave of private sector involvement in infrastructure development. Following this, several
other sectors have experimented with PPPs, and the particular potential for PPPs in higherincome urban areas (with more potential for cost-recovery through user charges) has been
noted.
Much of the current policy impetus for state and local governments to enter into public-private
partnerships (PPPs) appears to stem from the general pressure to raise funds for infrastructure.
The national Plans and urban flagship investment schemes - the Jawaharlal Nehru National
Urban Renewal Mission (JNNURM) and the Urban Infrastructure Development for Small and
Medium Towns (UIDSSMT) - call for urban governments to consider PPPs in the same breath as
private investment in infrastructure and services. The draft Twelfth Plan, for example, states
that “Traditionally, infrastructure development used to occur through the public sector.
However, given the scarcity of public resources, and the need to shift scarce public resources
into health and education, efforts have been made to induct private participation in the
development of infrastructure.” (Para 1.86) Performance is measured in terms of the number
and value of PPPs underway.8
According to these metrics, PPPs in urban India has been progressing. Government
departments appear to use varying definitions of “project” and to calculate financial
7
See Seddon and Singh (2012), for a more detailed description of the transition in the transport sector, for
example.
8
See, for example: http://www.urbanindia.nic.in/DMU/UIDSSMT/DMU-UIDssmt.pdf, accessed 19 September,
2011. The draft 12th Plan’s first chapter also notes that India is “first in the race for PPPs” in terms of value.
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commitments differently, but all sources show an increase in numbers and value. The Minister
of Urban Development, Shri Kamal Nath reported that 548 urban PPP projects had been
“sanctioned” and 127 completed as of March 14, 2012 in his response to a Lok Sabha question
that day. The Ministry of Finance’s Department of Economic Affairs (DEA)’s PPP Database lists a
total of 181 Urban Development PPP projects. Most of these are relative recent projects: 49 of
the listed projects are in operation, 88 under construction. The remainder are listed as in the
Bidding or Expression of Interest stage.9 The Planning Commission figures are higher than those
of the DEA: 197 urban projects as completed or underway and 228 Urban Development PPP
projects were “in the pipeline” as of March 31, 2011. The total value of projects listed as
underway or “in the pipeline,” at Rs. 107,000 crore, is more than twelve times the value of
completed projects in this database, even without including figures for some of the highervalue projects that did not have complete records in the database. The Gujarat International
Financial Tech City (GIFT), one of the projects with value “not indicated,” is reportedly valued at
over Rs 72,000 crore.
While the increase in the number and value of projects is encouraging, as is the shift in project
type, financial commitments are at best a partial indicator of success. Public-PrivatePartnerships (PPPs) go beyond simply channeling private finance into public projects to require
public-private collaboration in constructing and managing infrastructure and services. How
successful has this collaboration been in contributing to infrastructure?
India is home to some of the more ambitious urban PPP projects in the world, including the
Hyderabad, Delhi, and Mumbai Metros, some of the highest-value transport projects in the
world. Details of the Hyderabad Metro PPP’s financing were documented as a “featured
project” in the World Bank’s September 2012 newsletter on sectoral trends in PPPs. The
project, which just started construction, has also been selected as one of the “Global 100”
strategic projects for the Global Infrastructure Leadership Forum in March-April 2013. Yet
nearly half of the completed projects, as of March 2011, in terms of value, were in various
forms of real estate development such as residential developments, hotels, commercial
complexes, amusement parks, or malls and office complexes. These areas of infrastructure
typically do not feature in the global rankings such as the World Bank’s Private Participation in
Infrastructure Database, and are often limited as “partnerships” outside of the initial
construction of the building or complex.
The nature of partnerships is evolving from real estate development to include more traditional
“public” infrastructure and services such as solid waste management, bus stations, parking
garages, and water supply and treatment, but this trend varies from state to state. Andhra
9
http://www.pppindiadatabase.com/, database last accessed April 2, 2012; search engine currently not
functioning.
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Pradesh and Tamil Nadu were early leaders in water supply and water treatment projects and
Gujarat and Madhya Pradesh followed with projects currently under implementation, but no
other state had any water-related projects listed as anything other than “in the pipeline.”10 A
number of states have ventured into PPPs in bus shelters, but Gujarat and Punjab are only one
listed with PPPs in more sophisticated ‘transport nagars,’ larger bus terminals, or ongoing O&M
of these facilities. Gujarat, Assam, Andhra Pradesh, Tamil Nadu have larger-scale solid-waste
management PPPs and other states have specialized bio-medical waste facilities, but most
states have not ventured into PPPs in the area. Gujarat is the only state with PPPs that go
deeper into municipal process re-engineering, with an energy efficiency PPP project currently
under implementation across 159 municipalities as a partnership with IL&FS and USAID. Real
estate development-type projects still accounted for nearly 30% of the value of projects under
implementation as of March 2011 and sixty-nine out of 228 projects listed as “in the pipeline”
were in real estate development.11
The next few subsections discuss some of the lessons learned from infrastructure projects that
are perhaps more representative of the hopes for PPPs than are the current collection of
commercial and office complexes. Many of the infrastructure projects are relatively
technologically simple projects, particularly those that have been implemented outside of state
capitals and larger cities. While this is a reasonable adaptation to the kinds of investment
context that we describe in Section 3, it is not commensurate with the expectations for the role
of public-private collaboration in infrastructure.
Solid Waste Management (SWM)
Several municipalities across India have undertaken PPP efforts in the SWM sector. While the
basic tasks involved in solid waste management are common across the sector, the PPP forms
vary considerably. In certain cases, the private operator is in charge of waste collection, while in
other cases they are tasked with managing the collected waste. In still other instances, private
operators are asked to provide Integrated Solid Waste Management (ISWM) solutions,
involving collection, transportation and treatment of solid waste. At this stage, it is difficult to
comment on the success of these PPP programs given that they have only been in existence for
a few years, but in some cases it does appear that opening up this sector to competition and
market forces has led to a reduction in the cost of solid waste management.
10
The Planning Commission dataset listed a tertiary treatment wastewater recycling plant valued at Rs 200 crore
as under implementation in Rajasthan (Jaipur), but there is no other evidence that this project has proceeded.
Ministry of Urban Development presentations on wastewater recycling in India from as late as February 2012 do
not mention any such project nor do government of Rajasthan websites.
11
The tally for value of projects “in the pipeline” is hazy since many of the largest projects do not list financial
value.
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SWM projects are generally relatively straightforward candidates for PPPs. They are relatively
low-technology and most parts of the business do not require intensive sunk capital
investment. Both factors make it difficult for either partner to hold up the other over the long
run. Impasses do happen: A strike by the private company’s workforce in Chennai led to a piling
up of garbage and raised questions on whether PPPs were robust enough to secure the
interests of citizens against the vagaries of the private sector. Private sector gaming in terms of
mixing solid waste with other waste in order to boost collection volumes and therefore revenue
is another risk that this sector often faces. The strategy adopted by Alandur in Tamil Nadu to
address this issue is noteworthy. Rather than paying the operator based on the amount of
waste collected, payments were tied to certificates of performance awarded by the residents.
This ensured participation and ownership by the citizens of Alandur and also ensured that the
project’s objective of keeping streets clean was met.
The short-term nature of contracts, at least on the collection side, also ensures that these
arrangements can be re-bid relatively frequently, thus avoiding the potential contextual
hazards of monopolies forming among private providers and limiting either public or private
expectations of long-term commitments that transcend political cycles. Still, embeddedness of
cities in a federal context creates hazards that need to be addressed in contracts. In Tirupur, the
introduction of new national MSW Rules in 2000 and the consequent need to segregate waste
prior to collection changed the economics of the project. The public sector had to segregate a
much larger quantity of waste in order to meet its contractual obligations regarding the amount
of waste to be passed on to the private operator for processing.
Transport
The urban transportation sector is home to PPPs at both ends of the complexity spectrum.
Simpler projects have fared well. The construction and maintenance of technologically simple
assets such as bus shelters has been attempted in cities in 11 states. These arrangements
represent the simplest form of contracting-out. Costs can easily be estimated, risks are evident
and manageable, and advertising revenue removes any financial interface with the users of the
service.
More complex PPPs have not performed as well. PPPs in urban roads, for example, have run
into problems with land acquisition as well as mistakes in projected demand. The case of the
Karur toll bridge has been highlighted earlier. A bypass around of the town of Coimbatore ran
into problems of less-than-expected demand the project had to be refinanced – a more general
problem across roads contracts in India. However, when these arrangements are de-risked and
the government bears most of the land acquisition and demand risks through the payment of
an annuity such as in the Chennai Outer Ring Road partnerships appear to last longer. The need
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for the public sector to assume nearly all risk calls one of the main benefits of PPPs – risk
sharing – into question.
High-profile PPP metro rail projects are underway in Hyderabad and Mumbai, but both offer
mixed results. Work on the Hyderabad metro, for instance, has been delayed due to land
acquisition issues. Work was scheduled to begin in March 2011 began only in summer 2012.
The private partner (Indian company Larson & Toubro) declined to start work until right of way
issues were resolved.12 The Mumbai metro-rail, another ambitious project by global
comparison, has also been significantly delayed due to challenges in securing the right of way as
well as in construction of metro-related infrastructure. The project design and financing
arrangements have also been through several rounds of revision by various authorities ranging
from metropolitan development to the national government13 and Indian Bank also had to
restructure the loan account in 2012 due to project delays.
Other smaller metro projects such as the Delhi metro-airport link have also run into problems
with resolving disputes between public and private partners. Service on the airport-metro link
began in February 2011 after at least a year’s delay, but was closed in summer 2012 when the
private partner alleged that the structure was unsafe due to default in the Delhi Metro Rail
Corporation’s civil works. Many observers speculated that lower-than-anticipated passenger
demand also played a role in the private operator’s decision to suspend service after the
construction had passed other inspections by the Commissioner of Metrorail Safety and been
used for a year. Service remains suspended at the time of writing.
To be fair, metro-rail projects are complex. High fixed and operating costs almost inevitably
necessitate fare increases in order to provide for cost recovery. In Bangkok for instance, this led
to the metro being too costly for a particular segment of the population to use, thus affecting
ridership and the socio-economic benefits. Furthermore, the technological differences between
building a metro (which requires in-depth knowledge in areas such as tunneling, civil, electrical
and mechanical construction) and operating one (requiring knowledge of logistics, running train
systems, fare collection and so on) raise the question of whether both of these tasks can be
bundled into one package, even if it makes sense in principle to link these to ensure builders’
incentives to deliver a maintainable project.
The PPP mode has drawn unfavorable comparisons with the Engineering, Procurement, and
Construction contracts used for most of the Delhi metro system. Bangalore’s metro began as a
PPP project but authorities moved to an EPC after difficulties designing a mutually agreeable
12
According to B.V. Shivshankar, “Metro rail: Hyderabad Metro Rail Limited proposes, L&T disposes,” in Times of
India. April 1, 2012. Accessed online April 2, 2012.
13
See, for example, Sudhir Badami (2012). “Mumbai Metro project attracts modifications by Centre,” in Moneylife,
March 13, 2012 for a journalist’s account.
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contract with the concessionaire. The next line of the Mumbai metro will reportedly be under
EPC rather than PPP.14 Chennai’s metro-rail is being built by a joint venture between centre and
state government. Its director reportedly considered partnering with the private sector to
operate the metro but then decided that the public sector could operate the metro at lower
cost.15 Chennai’s monorail may be launched through PPP.
India’s experience in transportation reinforces the conventional wisdom that dispute resolution
is an essential foundation for more complex PPPs.
Water Supply
Water and sanitation has long been the focus of efforts to bring in private involvement. It is also
one of the sectors in which urban PPPs have tended to be more successful internationally.
Studies focusing on developing countries show that private sector participation leads to
enhanced connectivity, increased productivity, improved quality and reduced losses. Similarly,
PPPs have also led to a larger proportion of citizens being connected to sanitation networks
(Marin, 2009). Projects such as the Sofia Water and Wastewater Concession project in Bulgaria,
adjudged as the Best International PPP project in the Public Private Finance Awards in 2001,
stand as testimony to these views. This particular project was characterized by detailed
feasibility studies, a clear and transparent bidding process, strong political commitment and a
partnership philosophy which involved post-award negotiation and government shareholding in
the concession vehicle (Grimsey and Lewis, 2004).
However, observed outcomes in India thus far are not encouraging. Take the case of the water
supply PPP scheme proposed in the city of Tirupur in the 1990s. The presence of a thriving
water-intensive textile industry coupled with poor rainfall persuaded the Government of Tamil
Nadu and the municipality of Tirupur to enter into a PPP agreement with a private operator to
provide water. Given that the project was the first of its kind, considerable time was spent in
bringing it to financial closure, as might be expected. However, once the project became
operational, problems surfaced, mostly due to poor characterization/allocation of risks.
Industrial users were expected to pay a higher fee in order to cross-subsidize domestic users. In
the end analysis, revenues generated were a fraction of what was expected, throwing the
financial calculations off-balance. Smaller industrial providers’ unwillingness to pay for water
treatment, good rainfall in the post-construction years and an inability to enforce the
prevention of groundwater extraction led to lower revenue receipts. The resulting project
economics clash with the state’s environmental objectives: the price per 1000 liters of water
was cut in half in the first year, and incentives were given to use more water than contracted
14
15
"Ministry rejects Plan for Mumbai Metro-3". Daily Pioneer. 17 August 2012. Retrieved 30 December 2012.
K. Rajaramam, cited in “RIPPP,” The Economist. December 15, 2012.
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even as the Tamil Nadu High Court urged industries to reduce net water use. The project also
gave the private partner the exclusive right to develop, treat, and distribute water in the service
area; which meant that the state and local governments have not been able to strengthen
services in the face of new court-ordered environmental standards and increasing local
demand.16 A similar industrial water supply scheme in Vishakhapatnam met with similar
revenue-related challenges – basically unwillingness to pay at a level where cost-recovery
would be possible - and the government took over the project.
There have been several cases of urban water supply PPPs being proposed but not tendered
due to political and social opposition. In many cases the cause of cancellation is often the
unwillingness to charge on the part of the government as opposed to unwillingness to pay on
the part of the citizens. In other cases, pilot projects have been undertaken with some success –
the 24x7 water supply initiatives in Hubli-Dharwad, Belgaum and Gulbarga in northern
Karnataka are cases in point. However, these projects currently cover only 10% of the
population in each of these cities and scaling up these efforts is proving to be difficult.17
Replicating success has also been difficult. Nagpur’s 24x7 scheme, for example, started work in
March 2012, originally the month in which it was to have been completed. Costs of the projects
have reportedly escalated by 46% from when it was first approved in 2009.18
Housing
Very little has been attempted in India by way of PPPs for urban development and housing.
However the RAY Guidelines issued by the Ministry of Housing and Poverty Alleviation state
that “Given the massive needs for affordable housing and the capacity constraints faced by
public agencies like housing boards, urban development authorities and municipalities to take
up group housing on a large scale, it is necessary to involve private sector entities in the
creation of affordable housing stock on ownership, rental or rental-cum-ownership basis and in
scaling up the programme to the desired scale.”19 Once again, there are no inherent problems
with PPPs in housing. PPPs for affordable housing have been undertaken in various parts of Asia
(e.g. the Philippines and Malaysia) and Latin America (e.g. Guyana and Guatemala) with
moderate success.
16
Madhav, Roopa (2008). “Tirupur Water Supply and Sanitation Project,” International Environmental Law
Research Centre Working Paper 2008-1.
17
WSP (2010) notes that the sections were chosen to “represent a cross-section of consumers.” Media reports,
other sources, and the general spatial patterns of poverty in Indian cities suggest that these are, in general, more
affluent areas.
18
Anjaya Anparthi. (2012). “What is the Exact Cost of the 24x7 water project?,” Times of India December 27, 2012.
Accessed online December 28, 2012.
19
http://mhupa.gov.in/w_new/RAY%20Guidelines-%20English.pdf, Accessed September 19, 2011.
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It must be noted that in almost all of these cases, governments have provided private
developers with lands, grants or development rights in order to incentivize housing
development for the poor. Low-income housing is unlikely to be self-sustaining. Therefore,
unless a compromise between the housing and development authorities can be worked out,
and unless a policy on development rights can be evolved, PPPs in this sector may not be
sustainable. Regulatory intervention is key in this sector as land rights, the rights of squatters
and settlers, resettlement and rehabilitation are particularly contentious issues. If such issues
are not resolved prior to embarking upon project development through PPPs, the transactions
costs and the risk premium sought by the private developer is likely to be extremely high.
Taken together, a pattern seems to emerge with regards to the success of urban PPPs in the
Indian context. Projects that are technologically simple, span smaller time horizons, have clear
output specifications, and where the majority of the preparatory and demand risks are borne
by the public sector – such as the case of the bus shelter or SWM projects – appear to deliver
on their expectations. On the other hand, projects such as those in the water and sanitation
sector that are beset with concerns regarding equitable access, where revenue streams are
uncertain, and where the transaction complexity is high are considerably more challenging to
govern.
While this might lead us to the conclusion that simple forms of PPP transactions might be more
suitable for the Indian environment, the fact remains that India’s urban infrastructure
requirements are complex and demand considerable investment in transportation, housing,
and water and sanitation infrastructure. There is also a temptation among public officials to
deliver larger projects through PPPs due to the ability to shift the financing of this asset off the
more visible parts of the balance sheet (though not the ultimate public sector liability). In order
to solve this paradox, India’s institutional environment needs to be strengthened to support
more complex types of PPPs. We now turn to a discussion of this issue in the next section.
PPP Challenges in India’s Urban Context
The first part of this section discusses the challenges involved in a) PPPs in general, b) PPPs in
less developed countries (in other words, countries with lower incomes and more recent
deliberate20 efforts to involve the private sector in infrastructure provision, c) PPPs in urban
areas, and d) PPPs in urban areas in India. We examine how PPPs of varying complexity might
be expected to fare in these contexts. In principle there are many logical explanations for why
we have seen few PPPs in urban India and why the ones that we have seen not always been
20
We use the word “deliberate” to distinguish policy efforts to attract private investment and private partners
from de facto private provision of services to cope with gaps in public provision.
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resounding successes. Each additional adjective describing a PPP – location in a developing
country, urban infrastructure, urban India - adds new challenges.
As discussed above, the number of urban PPPs in India is limited, suggesting that some
partnerships were simply never attempted due to the inhospitable context. This pattern has
two implications: First, that there is substantial room to improve the prospects for relatively
simple PPPs though building individual and organizational capacity to write contracts that
adequately foresee and manage risks as well as clearly specify performance criteria. Second,
while these first steps may ensure success for simpler projects, ensuring sustained success for
more complex PPPs is likely to require more in-depth reforms. The challenges posed by urban
India’s political, economic, and social context suggests that institutional changes in the
relationship between urban governments and the rest of the federal system will be important
to support a wider range of more ambitious PPPs. The following sections discuss some
approaches.
There are two key challenges that PPPs face in general, irrespective of sector or environment –
the first is to ensure that the private service provider, once selected, does not ‘hold-up’ the
project due to the monopolistic nature of most infrastructure services or due to the
prohibitively high transaction costs of cancelling and re-tendering the contract. The second
relates to the ‘obsolescing bargain’ problem (Vernon, 1971). Here the challenge is to ensure
that the public sector sponsor does not expropriate the asset, once the private sector has sunk
in its investment to create it. The key to meeting these challenges is to be able to allocate risk
equitably in the concession agreement, and the ability to enforce contractual provisions.
However, PPPs are long-term contracts that are often drawn under conditions of great
uncertainty, thus necessarily rendering them incomplete (Williamson, 1979; Hart 2003). It is
therefore either impossible or prohibitively expensive to predict and mitigate all of the
challenges that such projects face. Even in stable institutional environments with strong judicial
systems, exogenous events can lead to a change in project parameters that can affect the
returns of one or more parties engaged in a PPP. Garvin and Mahalingam (2011) illustrate this
in the case of road transportation projects in the US, where a decrease in demand after the
award of PPP concessions for the development of interstate highways, and the consequent
reduction in toll revenues, led to the private sector facing great difficulties in continuing to
operate projects.
These issues are compounded in the developing country context where institutions that
enforce contracts are unreliable. Indeed, institutions that draw up contracts are often
unreliable, non-transparent and unpredictable leading to an erosion of private sector
confidence. In the first instance, this can lead to a poor response to a call for bids. In recent
road transportation PPPs in Karnataka for instance, the average number of bidders per project
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was just over one, indicating reduced private sector confidence (Mahalingam, Rajan, Seddon et
al, 2011). Consequently, it is likely that private sector capacity to develop large, complex
projects may also not exist in these contexts. The threat of project expropriation and project
cancellation looms large. Woodhouse (2006) and Henisz and Zelner (2005) have noted large
numbers of cancelled Independent Power Producer projects in many parts of Asia. A newly
elected Tamil Nadu state government cancelled a fourteen year toll concession that the Karur
Municipality had given a local private developer to construct and maintain a toll bridge.21 Such
experiences also serve to increase the risk premium that private investors place on projects
thereby increasing project costs. In many cases these premia can be high enough that they
effectively cancel out efficiency gains brought in by the private sector, making it more efficient
to execute these projects in the public domain. Another issue related to executing PPPs in the
developing country context relates to the financing of the project and the ability to recover
costs. Given that the ability to pay in developing environments might be low, PPPs may be able
to survive only if the transactions are structured creatively. Consequently one often observes
land development rights being thrown into PPP contracts for projects in India, to ‘sweeten’ the
deal.
Urban environments create additional challenges. Theoretically, the rationale for PPPs is based
on efficiency and thus better quality of service that can be provided by the private sector, but
urban areas challenge the incentives to provide better quality of service since it is hard to
exclude non-paying customers in densely populated areas. The fact that water supply,
sanitation, and other services are important for public and private goods in urban areas means
that basic market mechanisms are unlikely to motivate the optimal level of investment.
Complex cross-subsidy arrangements that public providers have historically used can be difficult
to untangle, while new arrangements combining public subsidies with commercial models
require additional design expertise.22 Private providers are often tempted to cater to the more
affluent sections of urban societies, and tight, outcome based specifications are necessary to
prevent cherry-picking of customers or exclusion of poorer sections of society.
The geography of cities also affects the scale of infrastructure projects and thus the extent of
opportunities for leaders to learn over time. Urban infrastructure projects such as an airport, a
metro-rail, a landfill and waste management system, or a water treatment plant are often large
21
The contract between the Municipality and the private developer was cancelled when the approach road to the
bridge was damaged during a flood in 2005. The government said that the private developer had not fulfilled their
obligation to maintain the bridge; the developer argued that it had not been given the chance to repair the road
after the floods. A December 2008 Tamil Nadu Government Order (No. 250) found in favor of the company and
ordered compensation for the foregone toll revenues. Available at
http://www.tn.gov.in/gorders/maws/maws_e_250_2008.pdf, accessed December 24, 2012.
22
Annez (2006)’s study of lessons from global experience in private provision of infrastructure focuses in particular
on the challenges of cost-recovery for infrastructure with public good characteristics.
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single-shot undertakings. These are high-value public projects where the partnership must work
the first time. Third, the consequences of failures in urban infrastructure and service provision
are more obvious than the consequences of failure in rural PPPs: traffic jams when roads and
transport are inadequate; epidemics when sanitation and solid waste management doesn’t
work, for example.
Finally, governance capacity for PPPs seems to be lower at the municipal level than at other
higher levels of government. This is particularly problematic since urban PPPs are often more
complex (due to the technological innovations required to develop projects in congested areas,
integrate existing investments and minimize disruption to daily activities), more politically
sensitive (PPPs in water for instance are highly contested), and provide for very visible failures
or success. Projects such as the Cochabamba water concession in Bolivia showcase the
difficulties in structuring urban PPPs in developing countries, particularly in the water sector
(Nickson and Vargas, 2002). Heavy rioting led to the cancellation of that concession and
underscored the perils of structuring a project without community participation, particularly in
the face of ideological opposition and tariff increases.
India’s urban areas are particularly challenging terrain for public-private partnerships. First,
local government, both urban and rural, is constitutionally under the states’ jurisdiction. State
governments, historically jealous of their political, financial, and bureaucratic powers,
determine the roles, responsibilities, and revenues that local governments have. The 74 th
Amendment recognized urban local bodies and a list of possible responsibilities was added to
the lists of state and union government responsibilities, but states have been slow to devolve
“funds, functions, and functionaries,” as the rallying cry goes. State governments still
substantially control the politics, finance, and administration of urban areas in spite of various
efforts to motivate them to devolve more power, including linking some of the centre-state
transfers to levels of devolution.
Urban areas, particularly the increasing number of urban agglomerations, are also fragmented
jurisdictions. The Kolkata Municipal Corporation, for example, oversees just 31% of the
population in the Kolkata Urban Agglomeration, and the Mumbai Municipal Corporation covers
68% of the Urban Agglomeration. The peri-urban areas most in need of infrastructure and
service improvements are often under separate administrative arrangements from the core city
and overarching planning bodies such as the Metropolitan Development Authorities. ULBs,
state-level infrastructure and service providers (“parastatals”), and state industrial
development bodies are still negotiating their de facto domains.
This half-devolution and fragmented authority, well-known and oft-decried in analyses of urban
development and governance in India, affects the autonomy of ULBs as well as states as
partners in urban PPPs. The shift from management to contracting is especially problematic in a
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setting such as urban India’s governance, where infrastructure and service provision is
determined, financed, maintained, and monitored by multiple agencies across three levels of
government in addition to an increasingly vigilant and demanding public.
Urban local bodies in India still have limited own-source revenue23 and even “own revenues”
are also substantially affected by state policies regarding the property tax base, method of
assessment and state provision of resources for improving tax administration. The collection
ratios are often low as is the elasticity of property tax revenue to property value. These factors
make it difficult for local bodies to independently commit resources as well as to structure
projects so that partners can recoup part of the property value gains that their investments
enable.
India’s civil service rules and structure also affect the ability to build capacity at urban levels.
Not only are cities at a disadvantage compared to national or state governments in attracting
skilled professionals, but current civil service norms complicate lateral hiring. States and ULBs
tend to hire experts as consultants rather than full time employees. Finally, city administrators
from the Indian Administrative Service and state civil services often rotate through jobs and
cities leaving little room for building up institutional memory.
This discussion illustrates some of the challenges that urban PPPs in India face. PPPs are often
selected ideologically. Obtaining concurrence from the various government agencies involved is
a time-consuming process, often requiring regulatory change. The Rajiv Gandhi Salai (Road) or
“IT Corridor” PPP in Chennai is a testament to this – the first stretch opened three years behind
the scheduled completion and project costs have tripled as various agencies involved have
issued permissions. Land acquisition can be problematic. Project structuring is often a longdrawn out process that is influenced by weak ULB capacity. The duration of the construction
phase is often lengthy due to the physical challenges involved in building in congested areas.
The willingness to pay, the ability to pay and the willingness to charge are often low, leading to
returns that are at the margin of acceptability to private investors, given the risks that these
projects phase.
In summary, urban PPPs in India are feasible, yet unnecessarily complicated by the context. In
several cases ostensibly simple projects have failed due to some of the concerns highlighted
here. The Chennai Metropolitan Development Authority, for example, attempted several PPPs
to modernize bus terminals and metropolitan rail stations. Issues regarding the procurement of
development permissions, the uncertain nature of demand, the capacity of the private
23
Data collected by the Thirteenth Finance Commission show an average of just 40% of urban local body revenues
are from “own sources.”
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developers to execute, and relatively low internal rates of return all led to a failure to award
technically uncomplicated projects.
Creating an Institutional Environment for Urban PPPs: Existing Efforts.
The initial approach to developing PPPs in India across sectors was to create and showcase pilot
PPP projects as a ‘proof of concept.’ Many of the initial PPP attempts, with the exception of
those undertaken by the NHAI were stand-alone, ad-hoc, champion-led projects. In some cases,
such as the Alandur underground sewerage project, this non-programmatic approach
succeeded despite institutional constraints, mainly due to the leadership shown by officials who
championed this project. In several other cases – the Coimbatore bypass project and the
Tirupur water supply project to name a few – significant challenges arose, particularly in the
urban context, and merited a re-think of this strategy to focus more on establishing conditions
under which PPPs could survive even when not showcased/accelerated as pilots. (Mahalingam
and Orr, 2008).
The next generation of efforts to create a favorable institutional environment for PPPs in India
has focused primarily on creating legal/policy frameworks, capacity building initiatives and
providing financial support for PPPs (Mahalingam, 2010). Taken together, India’s approaches to
strengthen an institutional environment for PPPs are quite typical of what is generally
advocated when countries start their PPP programs. Most commentators on urban PPPs in
developing countries allude to formal PPP enablers such as the presence of a robust legal
environment, the creation of transparent and fair processes, the presence of PPP coordination
units and so on, as critical success factors for urban PPP programs. The United Nations (2002)
and the American Chamber of Commerce (2002) suggest with particular reference to emerging
markets, that appropriate legislative frameworks must be established, that experienced
practitioners are needed and that financing needs for PPPs must be met. The National Audit
Office in the UK emphasizes the need for standardized procurement processes (NAO, 2001),
while a report commissioned by the Treasury Task Force (Arthur Anderson, 2000) points to risk
management as one of the key drivers of successful PPP projects. We briefly review the various
categories of actions that have been undertaken in India thus far.
Policy environment: state actions
Experts agree that PPPs must appear as a legitimate mode of project procurement in order for
public sector officials to opt for PPPs without fear of recrimination from Audit and Vigilance
committees (e.g. Noumba Um, 2010). Simultaneously, legitimization of PPPs would also infuse
confidence into the private sector to enter into PPP arrangements with the government due to
the perception that a formal apparatus would exist to resolve potential disputes if any, and
protect their interests. Accordingly there has been a thrust towards developing legislation
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around the use of PPPs. Some Indian states – notably Gujarat and Andhra Pradesh have
successfully undertaken this exercise. In the absence of legislation, several states have resorted
to the development of a detailed policy and associated guidelines for the use of PPPs, to fulfill
the same need. Although not as legally binding as legislation, policies serve several of the same
needs identified above. Some states are in the process of upgrading these into legislation
and/or combining them with existing Infrastructure Acts.
Capacity-building: various models
In addition to setting out a legal/policy framework that defines PPPs, the boundaries of their
intended use, roles and responsibilities, and a dispute resolution framework, much attention
has been given in the Indian context to the development of capacities to undertake PPPs (Dutz,
2007). Three separate sets of strategies have been popularly undertaken to develop capacities
or to fill in expertise-voids: Developing detailed model documents and guidelines, setting up of
PPP Cells, and conducting training programs.
Considerable effort has been spent in developing detailed Model Concession Agreements
(MCAs) for a variety of sectors including areas such as water and sanitation.24 These MCAs,
which require context- and project- specific modifications, are intended to reduce the time
required to prepare project documentation, bridge the experience/knowledge gap in an urban
services department where the expertise to develop a PPP agreement may not exist, and to
achieve a standardized risk allocation scenario that the private sector can strategize upon while
submitting bids, thereby reducing transactions costs with regards to document preparation and
negotiations.
However, this approach has come with its own share of problems. Government departments
may directly use MCAs without appropriate customization and without a thorough
understanding of the content of these documents. Projects are thus often poorly structured
and there is a perception among sponsoring government agencies that all risks are taken care
of ex-ante. When issues surface as the project progresses, government departments often find
themselves ill-equipped to handle them. The Alandur underground sewerage PPP is a case in
point. After the project was awarded, the Tamil Nadu Urban Development Fund – the agency
that had helped structure the project – handed the project over to Alandur municipality. When
a dispute arose on who was to provide the ‘last-mile’ connectivity to the sewage system, the
24
Many of these are available on the PPP website maintained by the Planning Commission:
www.infrastructure.gov.in
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municipality found that they were unaware of the contractual provisions and unable to deliver
their obligations.25
Much attention has also been given to the subject of risk allocation and project structuring,
particularly in training programs that have been organized. Deriving from Knight’s (1921)
typology of calculable risks and non-calculable uncertainties, it is widely accepted that PPPs are
subject to considerable uncertainties over their long-term life span that cannot easily be
quantified (Grimsey and Lewis, 2004). Yet, most of the treatment focuses on conceptualizing
uncertainties as risks and applying probabilistic calculations to assess the impact of these risks
on the project, ultimately leading to the design of the financial structure of the project. We
have observed earlier that PPP contracts are necessarily incomplete. While awarding
construction contracts, the degree of completeness often dictates the type of contract that can
be awarded. Where uncertainties are less, and eventualities are known, fixed-price contracts
are often awarded, since such contracts can lead to a reduction of costs in the face of
competitive behavior. This is usually the case in the Indian construction industry. On the other
hand, when uncertainties abound, cost-plus contracts which are more relational in nature can
be used. Given the incomplete nature of PPPs, a mindset-shift is again required from viewing
contracts as fixed-outlay, zero-sum games, to a more relational approach. In addition, local
governments must figure out how to structure these relational contracts such that they achieve
cost-minimization and expected social outcomes simultaneously.
In addition to these efforts, PPP Cells have been set up within each state government and at the
level of the central government in order to enable line agencies to develop PPP projects. These
cells have been set up with the assistance of the Asian Development Bank and consist, at the
minimum of a PPP and an Information Systems Expert along with a nodal officer from the
concerned government. The cell’s mandate is to help agencies identify and develop projects
and to contribute to the institutional strengthening of the state as a whole through a
combination of vetting documents, crafting guidelines and organizing training programs.
Various state governments have also undertaken organizational strengthening measures by
organizing several training programs on PPPs, often in conjunction with the PPP cells. Although
most of these programs are not sector-specific they draw in representatives from urban
departments and provide an overview of the need for and definition of PPPs, how PPPs can be
identified and ways in which they can be structured.
These efforts are not focused purely on the urban sector and represent a set of necessary
conditions to promote PPPs in infrastructure service delivery. Certainly the presence of
25
The global IWA Water Wiki cites Alandur an example of the importance of building deep local capacity for PPP
governance rather than developing projects based on transplanted-then-removed PPP expertise. See
http://www.iwawaterwiki.org/xwiki/bin/view/Articles/StructuringandGoverningtheUseofPublicPrivatePartnerships
inWater, accessed December 29, 2012.
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legislation or capacity building initiatives is advantageous. However, PPPs are also part art and
part science. They involve embracing a culture of uncertainty and a philosophy of transferring
roles that were hitherto held by the public sector, to the private sector in order to create a
partnership with shared goals and objectives. The capacity to conceptualize PPPs in this fashion
and to modify actions to suit this paradigm is therefore of paramount importance to the
successful implementation of PPPs.
Unfortunately, most capacity building measures thus far, be they the training programs or the
documents and guidelines that are issued by central government ministries, are focused more
on the mechanics of project structuring and process compliance, and do not address the
broader, underlying issues of creating a culture that would facilitate partnering with the private
sector on contractual arrangements fraught with uncertainty. We now explore this issue
further.
Next Steps: Deepening Capacity-Building
The first step towards more effective capacity-building involves broadening the range of
capacities under consideration. As we have observed, many of the capacity-building efforts
under discussion focus on project preparation ability, not without good reason. Setting tariffs
such that cost recovery is possible while at the same time meeting the needs of the urban poor
and not affecting performance incentives on the margin is an important mechanism design skill
that should be incorporated into capacity building initiatives that focus on the urban sector.
In addition, training also needs to build capacity to identify PPPs. Such a shift could then lead to
PPPs being selected rationally as opposed to ideologically, and being monitored towards their
logical end, while delivering value to the citizens who use the services that the PPP
arrangement provides. Private sector capacity and willingness must be appraised before
entering into PPP arrangements, and PPPs can only deliver when they are shown to provide
better value for money. PPPs are an appropriate choice when contestability exists in the
market, when asset specificity and size are not high, and when the ability to specify quality
exists. When there is high political discontent and a lack of competition, monitoring capability
and citizen engagement, turning towards PPPs might prove to be a costly choice. Central to this
debate is the issue of whether or not services need to be bundled or whether it is economically
beneficial to unbundle urban services and award them as separate contracts. In order to ensure
that the right decisions are taken, it is important that PPPs become a policy option and are not
the ‘only game in town’. Capacity to take such decisions should be built.
A related capacity is that of monitoring projects post-award. Noumba Um (2010) in a review of
the World Bank’s experiences with PPPs in developing countries suggests that one of the key
reasons for project failure is the inability to develop and monitor outcome based contracts.
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Parker and Figuera (2010) observe that Latin America has attracted much more private
investment in urban services than Sub-Saharan Africa despite a greater need for infrastructure
in African cities. While income is probably an important factor, they attribute this to the fact
that in addition to possessing formal rules and procedures, several Latin American states have
also developed good project oversight institutions that can adequately govern incomplete PPP
contracts and focus on service delivery metrics.
We have already noted that the monitoring processes involved in governing PPP contracts will
vary widely from monitoring schemas in traditional procurement arrangements due to the
incomplete nature of PPP contracts and the consequent relational strategy that must be
adopted. This is often due to the fact that design and in some cases operational responsibilities
are taken by the private provider leading to the need to shift from measuring outputs to
measure outcomes. One of the critical elements of monitoring PPP contracts therefore involves
the setting up of service specifications and the assessment of service delivery (Sclar, 2000;
Siegal, 1999) taking into account the uncertain and incomplete nature of the arrangements as
well as the ability to monitor service level parameters. This exercise is often very different from
the contract management undertaken in traditional engineer-procure-construct contracts.
Several scholars emphasize the fact that the government should engage in relational
contracting in order to ensure that monitoring is an ongoing process (Kavanagh and Parker,
1999; Sclar, 2000). Furthermore, studies have found that contract monitoring costs in PPPs are
often as much as 20% of the total project costs (Pack, 1989; Prager, 1994). However, hardly any
attention has been paid to developing project monitoring capabilities in the Indian environment
thus far.
Franceys and Weitz (2003) also point to community partnerships being a key to PPP success in
urban Asia. Building such partnerships may require new political and diplomatic skills. Service
delivery of urban infrastructure touches the lives of people who use these services. The
incorporation of the voice of citizens into the planning and delivery of these services is
therefore crucial to the success of these projects. Kay and Reeves (2004) discuss how the deficit
of such debate undermines the legitimacy of PPP programmes and how public sector
accountability to citizens is compromised if meaningful stakeholder involvement is absent. They
emphasize the importance of communication strategies for PPPs. Hefetz and Warner (2004)
point out that successful PPPs often involve government bodies that are de-politicized and are
run by professional managers, who in turn recognize the need for public engagement in service
delivery. In general successful PPPs feature government bodies with decision makers who can
address issues such as citizen interests, political opposition and market management – “They
balance technical and political concerns to secure public value” (Hefetz and Warner, 2004,
2011). Sanderson (1998) echoes this view and suggests that citizen voice is important. However,
there is a general consensus that this is often not taken into consideration when contemplating
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PPPs (Warner and Hefetz, 2002). Once again, training programs and broader ‘sensitization’
campaigns in the Indian context have thus far focused mainly on civil servants and elected
representatives and have ignored communities-at-large.
Capacity building needs to move beyond augmenting individual capacity to enhancing
organizational capacity. PPPs change the provision of infrastructure from a management
problem within an organization to a contracting problem between organizations, with
consequent managerial implications. Infrastructure provision by delegation, especially within
the public sector (even when a private firm is contracted to build the asset), rarely rests on firm,
detailed ex-ante project plans. To the extent that a project plan exists to meet statutory
requirements, it is subject to change through negotiation within the organization. PPPs, on the
other hand, require project plans and resources to be laid out in advance, along with clear role
assignments. Changing these requires an agreement by several parties, rather than intraorganization accommodation. Similarly, PPPs require project risks to be laid out in advance and
assigned to the contracting parties. It also changes the dynamics of action – on traditional
projects, public sector implementers can unilaterally cancel a project if unfavorable scenarios
are realized; this is harder to do when part of a partnership. Contracting also creates a public
relationship between two organizations that is subject to greater scrutiny and possibly
suspicion as compared to internal managerial relationships within the public sector. In short,
moving from delegation by management to delegation by contract requires new skills for
managing uncertainty and risk.
In traditional methods of contracting wherein the public sector provides a specific service that
may be implemented by a private contractor, most of the risks, with the possible exception of
construction risks such as time over-runs are borne by the public sector. The contracting
interface with the private sector is therefore short-term and is restricted to the monitoring of
well-defined specifications and milestones. The public sector then manages the asset. Over the
years, public and private organizations in India have enhanced their competencies to work
within these arrangements. At the other end of the spectrum, when public agencies
contemplate full privatization, risks are almost completely transferred to a private provider,
significantly reducing the contracting and monitoring role that public agencies play. Public
Private Partnerships on the other hand, lie between these two extremes where a greater
portion, but not all project risks are transferred to the private sector (for instance, financing
and operational risks in addition to design and construction). Public sector accountability
however, continues to be a major concern. Managing PPPs therefore present a unique set of
challenges since the approach can neither be as control-oriented as in the case of traditional
public sector procurement, nor can it be as arms-length as in the case of privatization of
services. A series of capabilities to meet these challenges must therefore be developed.
Stability of tenure is perhaps one key aspect of administrative reform that can help create this
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shared culture of PPPs. Otherwise, while some knowledge may be imparted, real learning on
dealing with PPPs may be impeded. Furthermore, frequent transfers of officials often
undermine the training imparted during capacity building programs.
Finally, steps must be taken to address the institutional vagaries of being urban in India.
Institutional reforms that make the “urban India” phenomenon more typical of “developing
country PPPs” rather than a special risk class of its own would play an important role in
enabling urban leaders to seek PPPs to serve their constituents. Urban India will inevitably be a
challenging site for PPPs because of variation in income levels and overall relatively low mean
income, relatively inexperienced policymakers and a limited history of PPPs, but the level of
fragmentation of responsibility could be reduced, the autonomy and own revenue sources
could be improved through changes in tax assignment or the terms of the State Finance
Commissions, and state Municipal Finance Acts, among other changes that would lead to
simpler environment and therefore increase the chances for successful PPP implementation.
Conclusion
We began by highlighting the difference between the need for and the rhetoric on urban PPPs
in India on the one hand, and the actual numbers of PPPs that had been awarded in the urban
sector on the other. We then turned to discuss the quality of infrastructure and services
provided under PPPs. India’s experience has been mixed.
Overall, the international evidence on the extent to which PPPs have delivered their potential
benefits is mixed. A Standard & Poor survey in 2005 found that 88% of the PPPs under
surveillance (across a variety of sectors, most in developed countries) were delivered on time
and budget. Several reports from the National Audit Offices in the UK have also found PPPs to
perform better as compared to projects under traditional procurement (NAO 2000,2001). On
the other hand, several studies in the UK and elsewhere also find that privatization has been
unable to bring about several of the benefits promised (e.g. Hellowell and Pollock, 2009; Greve,
2003). Estimo (2007) supports the latter view with particular reference to water supply in Asia.
India must follow two sets of strategies simultaneously in order to ensure that PPPs are not
only a viable solution in urban areas, but that their benefits are optimized as well. On the one
hand, structural changes in urban administration such as passing legislation relating to PPPs,
setting up PPP units and so on must be pursued. At the same time, considerable emphasis must
be given to the development of ‘softer’ capabilities such as the ability to work in partnership
with private operators, the ability to meaningfully consult stakeholders and so on.
Grimsey and Lewis (2004) contend that government bodies must change their mindset to view
PPPs as the purchase of services as opposed to the purchase of an asset, and where risk and
responsibilities are shared. Furthermore, it is imperative that the mindset towards PPPs is
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relational and embraces iteration and negotiation, in contrast to the traditional competitive
mindset that is present on most infrastructure projects. Given that risks are shared, and that
theoretically, risks have been allocated to the party best able to manage these risks, both the
public and the private sector must work together in partnership to negotiate risks that arise and
ensure that value is delivered to the end-user of the services. However, as Klijn and Teisman
(2004) point out, such partnerships are very difficult to achieve in practice, since fundamental
goal incongruities exist between public and private organizations. As Jacobs (1992) notes, public
organizations are characterized by a guardian syndrome and are committed to protecting the
public interest, while private organizations are characterized by a commercial syndrome where
they are intent on maximizing profits. A culture of trust between public and private
organizations must therefore be built in order to achieve the ideals of PPPs.
Our recent study commissioned by the Department of Economic Affairs (DEA) on the
characteristics of an ambient environment that can support PPPs highlighted similar issues. We
identified stakeholder acceptance, project governance and political willingness as capabilities
that need to be present in the environment in order to sustain successful PPP programs
(Mahalingam, Rajan, and Seddon, 2011). Despite the growing literature on these issues, scant
attention has been paid to developing these capabilities within the Indian context. This has
been exacerbated by the fact that the current culture of contracting, inclusion and monitoring
is deeply rooted in historically-shaped work-practices. These practices are highly resistant to
change and considerable effort will be required to develop these capabilities. Of late, the DEA
has acknowledged these issues and some efforts have been taken in this direction. For instance,
an extensive capacity building program focused on project monitoring, as well as a
communications manual on PPPs have been commissioned.
While these efforts are creditable, more will be required to ensure that these capabilities
diffuse deep into the institutional structures that govern the development and management of
PPPs. Investor interest and financial commitments do appear to be increasing, the challenge
will be to convert these early prospects into successful development of infrastructure for the
public good. More interventions along these lines and others identified in this chapter are
necessary to successfully leverage private participation to meet India’s urban infrastructure and
service needs.
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