governance, political economy, institutional development and economic regulation

Archive for January, 2016

SmartCities: Making the rich smarter

The latest public “dog and pony show”, unveiled on Thursday in Delhi, is the selection of 20 cities across the richest 11 states of India for accessing the governments Smart Cities fund.

smartcitiesindia

Photo credit: smartcitiesindia.com

The near-complete exclusion of the poor “cow belt” states, except Rajasthan and Madhya Pradesh, can be explained by the need to first push public money to where elections are to be held in 2016 — Assam, Punjab, Tamil Nadu and Kerala — West Bengal being a surprising exclusion.

But what takes the cake is the inclusion of the New Delhi Municipal Council (NDMC), comprising just three per cent of Delhi’s area, which is directly administered by the Centre. The Central government owns nearly 90 per cent of the 44 sq km it comprises with marginal ownership in and around the prestigious Lutyens’ zone of power brokers, lobbyists, old-economy business people, big time realtors and other hangers-on of this rarified ecosystem — the Indian equivalent of the Washington DC Beltway.

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Lutyens Delhi a lush, green bubble in the heart of the capital. photo credit: indiatravelite.com

The NDMC is already a profitable municipality, as indeed it should be. It spends over Rs 3,000 crore ($450 million) every year on serving just 300,000 people — a per capita expense of Rs 1 lakh ($1500) per resident, per year. Compare this with the average spend in the other three municipalities of Delhi of just Rs 7,300 ($110) per capita per year — all currently managed by the Bharatiya Janata Party. More starkly, the average spend for all urban areas, across India, is a shockingly low Rs 1,000 ($15) per capita per year.

Why is the selection of NDMC for yet another barrel of “pork” so disappointing? Three reasons strike out:

First, that this should happen days before the “reformist” budget expected to be presented by the Union minister of finance for 2016-17 is unnerving. The budget is, or should be, about spending public money well and wringing out the maximum public value from it. Allocating subsidies to the rich cannot be part of a pro-poor paradigm. It symbolises all that is wrong with a bureaucracy which is all “spin” and no heart.

crown

Second, the bane of China style “big government” has been soft budget constraints and poor accountability. Big budgets lead to profligate spending. Bureaucrats are more interested in shovelling money out of the public door into private pockets and marking up their “performance” sheets, than in ensuring that the money is spent in areas where growth and poverty reduction can most be impacted. The casual allocation of Rs 500 crore to the richest local body in India, with the highest per capita income, just so that it can shine even better, speaks of a pernicious tendency in new public financial management to mimic private finance by allocating money where it can be quickly absorbed, rather than risk it where it would create the maximum social and economic value.

Third, it is no one’s case that redistribution of wealth can be done by pulling down those who are well off. But Reserve Bank of India governor Raghuram Rajan’s recent diatribe against the lack of public concern about the optics of vulgar displays of wealth strikes a chord.

Lutyens’ Delhi is the “Kohinoor” of Delhi. A small self-absorbed bubble of power, privilege and wealth. One acre of land here costs Rs 500 crore and sales happen rarely. Why can’t the power elite pay for the privileges they enjoy? Why is it so difficult to convince the 4,000-odd large private property owners — each with a minimum net wealth of at least Rs 100 crore — to pay for retrofitting their beautiful municipality? Isn’t that what participative governance means? Why must poor Trilokpuri in east Delhi comprising the marginalised, poor and the shabbiest of public services pay for keeping Lutyens’ Delhi shining?

 

Trilokpuri

Trilokpuri, East Delhi, a festering sore where only the marginalized exist. Photo credit: Indianexpress.com

Had Thomas Piketty been part of the Smart City selection committee he would have torn out his hair in a fit of Gaelic rage at the callousness with which public money has been wasted and inequality worsened. What indeed was the selection process which has generated such a warped result?

The allocation instrument is a “challenge fund” devised by the usual suspects: Fly in, fly out consultants. As expected, on paper, the process appears transparent and efficient. It is a beauty contest. Municipalities send in their proposals seeking Central government funds for up to Rs 500 crore ($75 million) over four years. But they must match the Central government allocation and also meet the criterion of performance efficiency which includes standard metrics like collection efficiency, proactivity, etc. Nothing wrong with that at all. The killer is that there is no criteria on what impact the project will have on reducing urban poverty or on reducing the depth of deprivation in access to basic public services in poor localities.

Is it any surprise then that the Smart City fund is merely ending up elevating the “boats” which are already afloat? And how is that so different from the infamous National Rural Employment Guarantee Act (NREGA) of the United Progressive Alliance, which similarly incentivised the ability to use funds quickly? Rich states like Tamil Nadu, with average informal wages way above the national average national, quickly pulled out most of the funds, whilst the poor, badly organised states faced an empty treasury by the time they got their act together. As before, the mightiest wins yet again.

Political pork, lazy bureaucrats, the use of public funds for private gain by the elites is all old hat in India and across the developing world. Nothing new in that. The pity is that it needn’t be this way. The anguish is that old style cornering of public funds with no regard for ensuring equity, persists like a deep-seeded rot.

Prime Minister Narendra Modi of all people, should know the negative feeling generated from being excluded by the establishment. He must have experienced the chagrin of public money being wasted on “gilding the lily” whilst millions of poor children, like him, had to make do with a subsistence existence. Or is human memory so frail that one quickly forgets the bad times? Former Prime Minister Manmohan Singh was fond of establishing his humble roots by saying that as a child he studied under the village lamp post. But in the 10 years that he was in power, millions of children continued to study in exactly the same way.

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The preoccupations of the “Delhi Durbar” are pretty compelling. That is why they say you can wear a crown in Delhi. But don’t sleep easy — it isn’t permanent.

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The lonely statue of King George V after it moved from under its domed canopy  in India Gate – since awaiting another incumbent-and relegated to a museum.

Adapted from the authors article in Asian Age January 30, 2016http://www.asianage.com/columnists/exclusive-cities-715

President Hollande’s musings on India

You have to hand it to the French. They look effortlessly stylish- think Christine Lagarde, the French Managing Director of the IMF.

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Even when they wear plain work clothes they come encased in an inherited frisson of elegance- the 1789 French revolution, it seems,  diffused aristocratic elegance more evenly rather than destroying it all together, as in Russia. But scratch the coiffed surface and an au natural savage surfaces, readily comfortable with the oddities of humanity existence – cigarette smoke, food smells, passions and emotions. This being the one real French connecion with India.

It is not surprising them that art, fashion and spiritualism constitute areas of instant rapport between Indian and France.

Amrita sher gill

Indian artists- Amrita Sher Gill in the early part of the 20th century; Fashion and art ace photographer Prabudda Dasgupta towards the latter half;

Prabuddha Dasgupta

and current enfant terrible of the fashion world- Manish Arora all made Paris their karambhoomi (home away from home)

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But art and fashion were far from President Hollande’s objectives. So what were the  first impressions from his three day, Indian safari

Hollande 1AIt must have struck him that there is no easy familiarity between the French and Indians. It goes beyond the language barrier. At the heart of the difference is the romantic, liberalism of the French, naively combined with a deep allegiance to preserving their culture. In India, traditional ways are so deep a social barrier for two thirds of Indians that the great hope is for rapid urbanization and industrialization to erode the embedded biases against women, the poor and the marginalized. Disruption rather than continuity is the order of the day in India today.

Too shy to Bhangra?

This difference showed, he must have ruefully thought. There was no spontaneous affection between the visiting French and the Indian people, unlike, he ruefully pondered, what was powerfully on display when Bill Clinton danced the Ghoomer with Haryanvi villagers in 2000. Nor did the French capture hearts and minds, in the manner Michelle Obama did last year, with her ready laugh and radiating warmth.

French President in Chandigarh

The French are formal people and their Presidents do not go around grabbing babies or unknown dancers. The familiarity never extends beyond a glacial airbrush, double kiss. Elegance, grace and exclusive glamour is the French game and it was played well, in Delhi, as President Hollande supped with the beautiful people.

Beautiful people

But the President banished such negative thoughts as he slipped off his shoes- hopefully made in France, unlike his spectacles. Sinking into the warm familiarity of his customized Airbus A 300-200, whilst reaching languidly for his favorite seafood aperitif and a well-deserved glass of French wine, he rooted around for “learnings from India” as all diligent leaders must.

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The brooding edifice of the Indian state

His overriding emotion was of envy at how solidly the State is in control in India and how deeply stabilizing is the role of our elites. Delhi, a city state of 10 million people was effortlessly turned into a fortress by 60,000 security personnel. It worked without a hitch. Compare this with Paris, where even his delegation may have had difficulty in getting a cab back home on arrival, because taxi drivers were on strike against the ubiquitous Uber’s entry into France. If only, the President must have thought, I had more Indians in France, things would work better.

Illusions are the reality

Second, he brooded over the new Indian Rope Trick by which diversity and tradition are kept alive as a fond memory- a static picture in the head- whilst the real life incentives are all to become part of a national mainstream. The colorful floats, the folk dancers and the serried rows of soldiers- all marching in age old regimental silos in a manner reminiscent of 19th century India- all serve to highlight that they have transcended traditional cleavages. That their nationalism is not about one dress; one food; one drink, one language. It is something deeper and visceral. The President shook his head. Such flippant, multi leveled, varied allegiances to social norms would never do in France, where one culture is the leitmotiv of nationalism.

Social stability and change

Third, President Hollande mulled over the resilience of the feudal order in India, albeit mutated away from ancient entitlements to merit based access to State resources, with family and clan networks, patrimony and inherited wealth as the currency of convening power. Quite like Africa he must have thought.

He smiled at the contrast between the muffler clad, “peoples”, Chief Minister of Delhi, Arvind Kejriwal, with his socks insolently peeking through his open sandals loping around to be noticed at the Indian Presidents party and the haughty power exuded by the powder blue, baby soft, finely embroidered Kashmiri shawl, wrapped around a seated Finance Minister Arun Jaitley, like an impregnable cloak of influence.

Give me some air please

Fourth, he coughed as he felt the the smog and pollution which had literally taken his breath away. Despite the chirpy commentary on Republic Day, which ignored the oppressive mist and spoke joyfully of the bright skies, he could smell the smog through the glass screen and feel one’s throat constricting. Nuclear power, the President thought, is what India needs and the French can provide.

Money, money, money…

Fifth, the business potential warmed President Hollande’s heart. But could French business, used to high margin deals and troubled with low cash reserves work in the price sensitive Indian markets. Indians worry about the cost of fuel whilst buying a Porsche. How, the President, thought, can I make French business nimble and lean like the Chinese or the cash flush Japanese who casually drop down investment in dollops of $10 billion. How to shake the French industrial aristocracy out of their complacence?

Instant graphics

Sixth, Hollande reflected over how good Indians were at escaping into selective retention- their movies, our politics, our social norms all pay obeisance to this particular facility. They have retained Gandhijis spectacles-on top of a tractor float, as a symbol but discarded the topi; simplicity; erudition and the open windows of his mind. They air brush reality at will. Goa, it seems from their float, is a paradise of saree clad Indians dancing decorously to undistinguished folk music. But is that is the culture more than 1 million Indians and foreigners go to see over Christmas and New Year! What about the week long carnival of eclectic music; 24X7 partying; food for the mind, soul and spirit and sociable company right there on the redolent beaches! How lucky India is, Hollande thought. If only he could similarly airbrush away France’s social upheavals with just one master stroke of graphics!

The soothing ambience of his air-home away from home, relaxed the President. His beguiling, spaniel eyes drooped in weariness. His horn rimmed, foreign made spectacles slipped off. As he turned over he surrendered himself to the muted, distant roar of a Lion electronically mixed into the soothing, lapping sounds of the waters of a swachh Ganga- must build bridges around water was his last thought.

fly past

Prime Minister Modi smiles whilst President Hollande strains to find a French aircraft in the fly past finale- Republic Day, New Delhi, India, January 26, 2016

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TRAI: Misplaced rage against Facebook

Even as Davos was worrying over the haemorrhage of international capital from emerging markets and Finance Minister Arun Jaitley was at pains to point out that India was different, a different narrative was unfolding in the Telecom Regulatory Authority of India (TRAI) in Delhi. It had to do with a consultation paper issued by TRAI on “Differential Pricing for Data Services” inviting responses from the public. The consultation process closed on January 7.

The breaking news a few days back was the quixotic outburst by a senior TRAI official in a letter addressed to the $260-billion social media giant, Facebook, harshly rebuking it for inundating TRAI with template responses from nearly 2 million users in support of the Facebook-promoted Free Basics. The senior official was apparently outraged at the manner in which Facebook used its brute “majoritarian” muscle to intimidate TRAI with overwhelming public opinion and asserted that if such tactics were accepted, “it would have dangerous ramifications for policy making in India”

Facebook CEO, Mark Zuckerberg (AP Photo/Jeff Chiu)

Readers will remember that last year a TRAI consultation paper on Net Neutrality was similarly responded to by net neutrality fundamentalists to demonstrate the ground swell of opinion in favour of a strict version of neutrality. At the time TRAI was indulgent of this innovative way of crowd sourcing opinion. This time around it is Facebook, not indigent activists, on the front foot; the leadership in TRAI has changed and it seems to be open season for charges and counter charges.

Zenophobia or pique?

The “establishment” and a large swathe of Indians, bred on traditional distrust of the “Ugly American”, are quick to take offence at the in-your-face lobbying. To be fair, Facebook clearly went over the top in pushing its case. Americans play hardball and have to be restrained when dealing with other cultures, like ours, where soft, behind-the-scenes contact achieves far more.

In the instant case, Facebook’s evangelical assertion that Free Basics is all about giving free access to the “poor” lacks credibility. Free Basics is a process innovation to improve business for Facebook and the telecommunication service provider (TSP), which provides the access. But isn’t that what all successful businesses are supposed to do. Why else would you invest in them?

TRAI has developed a solid reputation for being a savvy, growth-oriented regulator. The recent outburst is quite out of sync with its image and one hopes that it remains an outlier.

The case against free access “walled gardens”

Now, on to the substance of the matter. The case against “walled gardens” like Free Basics is built around two reasons.

First, in a price-sensitive market like India, a freebie is habit forming – like reading a free newspaper which provides selective news. But it is insulting to readers to assume that they cannot see that they are getting only limited stuff. For getting a child married, they are unlikely to use the freebie and instead insert an advertisement in a popular daily, if they can afford to do so.

The second argument is that TSPs are likely to favour content providers who pay them in return for free access and shun or disadvantage others who do not. This discriminates against start-ups which do not have the financial muscle to reimburse the TSP for free access. Thereby innovation itself will be stifled, like great art which remains undiscovered because the big galleries will only stock established artists.

These are powerful concerns in an ecosystem which has grown around unhindered and near real time access to innovation via the internet.

Strict net neutrality imposes unnecessary costs on the final user of the net and sharply constrains assess in poor countries which walled gardens can help breach   

There are three counter arguments why fears that innovation will be stifled by walled gardens.

First, internet-based content is a growing market-especially in India. Only 25 per cent of Wi-Fi subscribers in India access it via a mobile. Less than a 100 million people in India have a 3G or a 4G enabled handset (one of every twelve persons). This illustrates that the potential for new business via new and better content providers is virtually unlimited.

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Second, creating content is a highly competitive business like tailoring. If your trousers don’t fit, you are unlikely to order repeats. Similarly, if the content on Free Basics fails to keep up with content in the same space available elsewhere, you will switch your TSP or opt out of Free Basics. If enough apps on Free Basics are duds, it will eventually negatively impact Facebook itself, as users will either migrate to another “free walled garden”. Even if walled gardens are habit forming, they will compete with each other, possibly even on the same TSP network.

Third, the IT ecosystem automatically filters out non performers. The TSP needs data traffic to make its returns. Content providers need eyeballs for successive rounds of funding or they are forced to shut shop, merge or sell out.  This is not an ecosystem which is kind to those who are not on-top.

If the concern is to ensure voice for minorities, there is nothing to stop a walled garden from coming up specifically targeted at socially important, but fringe, groups – the lonely blogger writing on about the rights of the Rohingyas; social activists raging against growing inequality and other such laudable causes. There is nothing to stop a government-supported entity from launching a free wall where anyone can post and to which access is free. This has a parallel in public service broadcasting. Facebook’s social objectives may be doubtful. But surely non-state actors can fill that breach.

Light touch regulation requires nerves of steel and a deep resolve to not be influenced, either by public opinion or ideology. It also requires technical expertise and industry experience to drill down from motherhood concepts like “net neutrality” and contextualize its application to the market and the regulated entities. So long as the regulator remains neutral, the net is safe.

Net Neutrality can be breached if it is in national interest; does not result in dominant monopoly and is the outcome of technical or business innovation. Let’s not hang our hat by outdated ideological shibboleths. Sometimes majoritarian opinion is worth considering even if it comes via an industry biggie.

Adapted from the authors’ article in Swarajyamag http://swarajyamag.com/biz/trais-misplaced-rage-against-facebook/

Startups: Keep the adrenalin flowing

Being workaholics and 24×7 people, Team Modi must be avid coffee drinkers, with a yen for espresso. For the uninitiated, espresso is the end product of forcing boiling water through ground coffee, thereby concentrating the caffeine content and enhancing the “kick”.

espresso

photo credit: http://www.utube.com

India’s “espresso” moment happened last Saturday in New Delhi with the grand inauguration of “Start Up Stand Up”, the new campaign with the unfortunate acronym SUSU. This new mission focuses government resources and effort around the creation of new entrepreneurs. Established businessmen were not welcome to join the party at Vigyan Bhawan. And some confusion prevailed whether startups in the old economy space were on the guest list, or it was restricted to the “new economy” subset of IT-enabled startups.

But the crowd of young “been there and wannabe” entrepreneurs were not quibbling about such nit-picky issues. They were there to bond, stamp their feet and whistle their approval at being noticed and included in the national mainstream.

The presence of the founders of Uber, WeWork and Softbank was icing on the cake, which undoubtedly was an extended opportunity for “selfies” with Prime Minister Modi.  Expectedly, older inhabitants of this charmed business space were not impressed by the ground swell of support from the young. They spent their time warning against the danger of expecting too much from this space, which is already clogged. Apparently of the 500 e-commerce startups launched in India, only 10 survive — a survival rate of 2 per cent. Internationally, the survival rate for startups is better at 40 per cent.

But India’s burgeoning, literate, young “wannabe” entrepreneurs would have no truck with such pessimism. They pushed and shoved and cheered their way into the frisson of excitement which Team Modi had carefully generated for the event. Hope sprung eternal in every ones’ heart as Prime Minister Modi stoked the embers of youth entrepreneurship. So how long will the “espresso moment” last?

Adrenalin has a self-regulating mechanism for ramping down. The Prime Minister’s gesture is a welcome beginning to look beyond the “big men in suits” for business solutions. Mr Modi is right when he looks to the young and the intrepid to take risks, follow their dreams and escape the golden handcuffs of contracted servitude. If we want to scale up jobs and disperse commercial opportunities across the country,facilitating small startups is likely to give the biggest bang for the public buck.

Indian corporates- too many tiny ones

India is not short of business enterprises. We have 1.4 million registered companies though 30 per cent are closed, being liquidated or not functional. In comparison, our workforce is around 700 million. Just one working company per 700 workers is way too low. Even worse,75 per cent of the operational companies have an authorised capital of less than Rs 25 lakh ($38,000) and one-third have less than Rs 1 lakh ($1,500). This illustrates their limited potential for adding to gross employment. It also explains why only 1.5 per cent of the workforce is in formal, private employment, with the government providing jobs for another 2 per cent. Incentivising new entrepreneurs makes sense.

The Prime Minister announced a package of goodies to induce those present to just go and do it — tax breaks; venture capital; easier entry and exit processes and innovation hubs. These are the basics for any industry to grow. But startups need more. By definition, a successful startup is small but poised for explosive growth company. This is what attracts investors to accept the higher risk in anticipation of the huge rewards from added volumes and scale.

Government best placed to scale up social sector startups

The government is best placed to help in adding scale. However, care must be taken that government finance does not dilute the financial discipline which private finance imposes. One option is for the finance minister to encourage ministries to spend a small proportion of their purchase budgets for this purpose. The Union government has a residual budget of around of Rs 7 lakh crore ($100 billion), after accounting for salaries and pensions, overheads, interest payments and transfers to state governments. Even a 1 per cent allocation for buy-back arrangements with startups translates into performance-dependent support of Rs 7,000 crore ($1 billion) annually. This amount could usefully provide a revenue cushion to around 500 startups.

The Prime Minister proposed to provide Rs 2,000 crore ($300 million) annually as a public grant for institutional finance and a guarantee of around Rs 400 crore ($60 million) to de-risk venture capital.  Letting actual user departments contract directly with startups using their individual budgets is preferable.

Four next steps to embed the startup culture in government

First, encouraging government departments to work with startups has the hope that some of the private sector mojo will rub-off on them. Indeed, government officials who participated in the inaugural function seemed a far cry from the stodgy, grumps that “babus” are presumed to be.

Second, organically linking actual government users with startup founders bridges the chasm between small business and government. Startups are nimble problem solvers and disrupters. They can be used beneficially to enhance the effectiveness of public spending. But babus have a deep aversion to be fingered by audit. Only an explicit budgetary direction to engage tangibly with startups can nudge departmental secretaries to risk public money.

Third, it makes sense to de-concentrate the mandate for growing startups across the entire government architecture. Embedding this objective into central schemes further extends this mission to the state governments which manage these schemes.

Lastly, government should focus on encouraging startups in enhancing the rule of law, social protection, human development and agriculture. Commerce and industry are already well serviced by established mentors and private venture capital funds.

Last Saturday’s fever in Vigyan Bhawan was just the froth at the top of a cup of espresso. Keeping the adrenalin going will take far more grounded effort to keep those who stood up from sitting down again.

Adapted from the authors article in Asian Age January 20, 2016 http://www.asianage.com/columnists/how-keep-start-ups-standing-009

Salvaging the PPP: Kelkar Committee

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photo credit: http://www.rediff.com

So what is a Public Private Partnership (PPP)? And why have industry insiders declared it as broken even though India has 1200 such projects in operation (the largest number internationally for any economy) with a total investment of over Rs 7 lakh crores (US $ 100 billion)? And does it matter?

PPP defined

We really do not have a peg to hang the definition of PPP on. This is where  the report of the Vijay Kelkar Committee on Revisiting and Revitalising PPP Model, submitted in November but  made public last week, does salutary service. It presents a simple definition which can be paraphrased as follow

A PPP is a large project in which the government, or a subordinate authority of the government, has not more than a minority share; which provides a public good or service; which is operated for a defined time period – usually medium term – by a private firm, under a “concession”, which defines contractual, mutually binding obligations and provides to the concessionaire a market-determined revenue stream to ensure commercially viability.

By proposing a definition, the report makes four important distinctions from what the practice is today.

First, it highlights the need for a PPP policy duly presented to Parliament, so that an appropriate regulatory regime could be specifically designed, possibly under a new legislation. The report is mindful of the current political economy, which has created an impasse in Parliament. This is why it recommends against an immediate resort to legislation to solve implementation problems, as has been the trend in recent times, albeit ineffectually.

Second, it recognizes that for a PPP to work majority ownership must be with the private party. This is how PPPs are designed. This design advantage is completely subverted when government uses a notional PPP route to set up a special purpose vehicle with a state owned enterprise (SOE), even if the latter is incorporated under the Companies Act. The report warns against this fudge. It thereby implicitly acknowledges, what is internationally accepted, that SOEs are just not as efficient or nimble as a private firm. Nor would they be able to pull-in the additionality of managerial experience and private investment, which is one of the main objectives of a PPP.

Third, not all instances of public-private joint investment are PPPs. A firm producing steel and set up with an assured buy-back arrangement from government would not be a PPP because steel is a private, and not a public, good. This is how Tata Steel’s Jamshedpur plant was set up way back in 1907. But what of units proposed to be set up for defence equipment, under the “make in India” route, on a similar basis? This remains unclear and hence the need for a policy.

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PM Modi seals the Rafale “buy and make in India ” deal in France. Photo credit: www. timesofindia.com

Lastly, by specifying the need for a “market-determined” revenue stream and commercial viability, the report deftly strikes a three-in-one blow for transparency, competition and efficiency. All three are hallmarks of a successful PPP. Related body blows are struck against crony capitalism and gold-plating through the emphasis on long term, high quality service as a monitored output linked to the revenue stream, rather than just one-time payment for construction of an asset.

What needs to be fixed?

So what ails PPPs today? Industry pundits ascribe deep problems with the manner in which PPP projects are designed, bid-out, financed and implemented as key reasons for the logjam in private investment, along with an unfavorable international economic environment after the 2008 financial crisis.

Happily the report also acknowledges that the PPP ecosystem has come a long way from when it all began in the mid-1990s.

—There are now standardised documents for every stage of the procurement  and contractual cycle, introducing transparency and predictability for investors. Development finance is also available under the India Infrastructure Project Development Fund to meet the significant transactions costs of doing a “good” PPP.

—An Appraisal Committee weeds out early flaws in PPP proposals.

—Financing of projects is supported by the India Infrastructure Finance Company.

—The Reserve Bank of India (RBI) has been continually adapting banking norms to facilitate PPP lending.

A great deal of capacity building has been done through training programmes, tool kits, outreach, pilot projects and structured exchange of learning along with real time support from PPP cells in state governments and at the centre.

So with all this under our belt, why is the PPP model broken?

First, the domination of public sector banks often results in less-than-sensible due diligence and risky lending for large, politically important PPP projects. The report has studied this aspect in some detail. Here, mere words are unlikely to help, till the governance structures of the public sector banks are made autonomous of government, something the RBI is trying to do. Banks must strictly not finance, and government must not bid out, projects till all clearances and authorisations have been received. Ministry of Surface Transport data shows that 40 per cent of highway projects overshoot time and cost targets resulting in commercial disputes due to regulatory delays.

Second, 85 per cent of the PPPs have been in the highway sector. Not surprisingly, the concessionaires are realty and construction firms. The downturn in the realty market since 2012 has hit them hard. This has significantly reduced their financial capacity to invest in new ventures and they are selling, not creating, assets.

The report suggests that “monetizing” the existing public assets can help by leasing out the operation and maintenance functions. O&M concessions are less capital intensive and also less risky since the project is operational. Alternatively, the government could front load the proportion of public financing in a PPP – an evolution of the existing viability gap funding – with the concessionaire repaying the government for the enhanced support, over time from the revenue stream earned by it or by resort to “take out” financing from risk averse finance companies. This is a good suggestion.

But a new ecosystem of O&M service suppliers would need to be evolved and supporting documentation standardised. Also the inefficiency, gold-plating and poor quality associated with public asset creation would continue to present serious problems. The revealed cost of privately maintaining poorly-built public assets to ensure high service quality will always be higher than what the government spends to provide poor quality service. This leads to the myth of private management being more expensive, as the report has noted.

Third, improved and time-bound dispute resolution systems can reduce regulatory delays. According to Assocham, Rs 12 lakh crores (US$182billion) of investment in infrastructure is stuck because of regulatory delays. The report recommends that independent regulators could also help solve some disputes and oversee contract management. According to Crisil, more than one-third of highway PPPs get stuck because actual revenue earnings from traffic are less those assumed in the bid documents. The expectation that independent regulation can solve commercial problems is not justified by the experience over the last two decades. With honourable exceptions (mostly at the central level) independent regulators tend to be handmaidens of the government of the day. Worse, they adopt a narrow bureaucratic, defensive approach to recognizing and working with private developers to resolve unforeseen business risks, which inevitably crop up.

Why do PPP’s matter?

Lastly, why does a robust PPP eco-system matter? Rewind to the dwindling years of the UPA government, specifically to 2012 when the 12th Five Year Plan (2012-17) was prepared. The government had adopted a twin target for infrastructure – a significant scaling up of investment in infrastructure and a never-before-achieved share of 48 per cent in investment for private investors. This was significantly more than the 37 per cent share achieved in the 11th Five Year Plan (2008-12) also under the UPA government and 25 per cent in the 10th Five Year Plan (2002-07) under the NDA-1. But achievement has been tardy over the first two years of the 12th Plan – 2013 to 2015. Public investment is 20 per cent lower than target and private investment is 40 per cent below target. Low investment adversely affects economic growth which, in turn, squeezes new job creation.

The conundrum

Here, then, is the conundrum. India needs to invest 8 per cent of GDP in infrastructure. We invest one half of this proportion. The only way out is to shrink the scope of direct ownership and management of public assets by letting the private sector have a larger share. The trick is to keep a close eye on the heightened macroeconomic and project risk the government would incur, should a more aggressive fiscal policy be followed.

This is why the report suggests first picking the low hanging fruit. Speeding up statutory clearances, improving dispute resolution mechanisms by rationalizing the risk incurred by government negotiators and decision makers of being unfairly fingered as being corrupt and, simultaneously, increasing accountability along the governance chain to also reduce petty corruption (which usually has a disproportionately higher fiscal impact).

The options

This report makes 49 key recommendations across the three pillars of institutional development, transparency and financing, all of which deserve careful consideration.

Two recommendations herald bold new beginnings in governance. First, removing the hanging sword of Damocles of government audit of a concessionaire’s accounts, post the award of contract, subject, of course, to the highest standards of corporate governance being followed and the quality of service being maintained. This can substantially reduce risk for the private partner. Second, making concessions majority owned by government and SOEs ineligible for PPP benefits can contain “gaming” and avoid unfair capture of centrally-provided viability gap funding.

But four others reek of defensiveness and could be abandoned. First, banning the Swiss challenge option is unnecessarily conservative. Second, a 3PI (a PPP institute of excellence) is a public waste. Instead, facilitating a virtual network of academic and consulting talent in IIMs, National Law Schools and IITs could provide competitive, high quality learning and evidence based research at lower cost.

Third, the recommendation of avoiding small PPPs is regressive. At the heart of decentralization and local government are small infrastructure and social sector PPPs which provide local jobs and build local entrepreneurs. Simpler regulations for these projects work well without diluting accountability since the community oversees implementation closely.

rural

photo credit: http://www.businesscalltoaction.org

Fourth, there are good reasons why PPPs need to be fast forwarded. But scaremongering that India could “grow old – lose the demographic dividend – before it becomes wealthy” is not one of them. If we remain poor, we will not grow old. Wealth creates the impetus to constrain population. Poverty has no disincentives for population growth. In the modern world, all cultures think of babies as “wealth”. But only poor countries keep producing them.

babies

photo credit: http://www.snopes.com

Adapted from the authors article in Swarajyamag January 6, 2016 http://swarajyamag.com/economy/kelkar-ppp-report-saving-government-from-itself/

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