Characterized by large financial outlays and long gestation periods, infrastructure investments involve high upfront costs and long term financing. As governments are highly constrained in raising resources, a possible solution to constraints associated with traditional approaches to infrastructure development is said to be found in the PPP approach. This short note briefly discusses the factors promoting PPP in infrastructure, proficiency of private sector, potential costs and benefits of PPP, and its potential for use.

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“Infrastructure contributes to economic development, both by increasing productivity and by providing amenities that enhance the quality of life.”

Availability of adequate infrastructure facilities is essential for acceleration of the economic development of a country. Governments have traditionally been well aware of this and have accorded high priority to the investment in sectors such as railways, roads, power, water telecommunications, ports, sanitation & sewerage, airports etc. Infrastructure services are often monopolistic in nature; usually involving high upfront cost and long payback periods; and investments are typically bulky and lumpy. They are also characterized by the existence of externalities that make it difficult for infrastructure entities to recoup the investment costs and the operational expenses through levy of user charges.

A wave of privatization and deregulation has been sweeping the infrastructure sectors around the globe over the last few decades. New approaches to promote improvement in efficiency and service quality are increasingly being considered for infrastructure projects. Though the possibility of commercialization & privatisation of infrastructure investments and services has increased tremendously, the role of public sector in investment; delivery of the services and regulation will continue to be vital.

Characterized by large financial outlays and long gestation periods, infrastructure investments involve high upfront costs and long term financing. As governments are highly constrained in raising resources from the market for providing budgetary support to the departments or PSEs engaged in infrastructure development, a possible solution to constraints associated with traditional approaches to infrastructure development may be found in commercialization / privatisation of select projects.

Factors Promoting PPP in Infrastructure

With the wave of privatization & deregulation sweeping infrastructure sectors around the globe, bold new approaches promoting improvement in efficiency and service quality are being explored. It is believed that there are five basic pragmatic and non-ideology-related factors leading economies all over the world to consider enhanced commercialisation / privatisation of infrastructure provision:

• Massive Investment Requirements: arising from rising economic growth rates is pushing countries to look for additional sources of financing against the backdrop of fiscal stringency in most countries.
• Importance of Efficiency in Infrastructure Investment: rising awareness is resulting in economies world over to rethink on the ability of government-owned entities to supply infrastructure services in a businesslike manner.
• Changes in Technology: easier to charge marginal use of infrastructure services, leading to introduction of competition horizontally and unbundling of services vertically.
• Competition in Global Marketplace: pressure on countries to provide efficient infrastructure services to their businesses in a cost-effective and competitive manner.
• Integration of World Capital Markets: increased possibility of raising large funds for infrastructure investment on a commercial basis whereas, earlier, it was governments which had better access to resources, now, in many cases, it is the private sector, which has the capability of sourcing large funds internationally.

Proficiency of Private Sector to Undertake PPP Projects

For ascertaining private sector participation in infrastructure projects, the preparedness of private sector may be measured on following parameters (relevant on case to case basis):

• Technology for construction and maintenance of infrastructure projects
• Ability to garner financial and managerial resources, since in infrastructure projects, larger investments are required as compared to other land based projects
• Patience in implementing and operating long gestation projects
• Professional management and competence

Infrastructure projects differ from many other types of private sector investments. They mostly have long lives, are large, immobile, generate only local currency revenues, buy from or sell to government agencies directly, are vulnerable to regulatory changes, and have politically sensitive tariffs. Private financiers are understandably cautious, yet they have been responding vigorously when presented with appropriate opportunities. Clearly, many of the risks private investors confront are considered manageable.

Potential Costs and Benefits

Private investment in infrastructure generally offers four potential benefits:

• Reduced risk for the public sector;
• Greater efficiency and innovation in construction and/or operations along with reduced burden on public sector management (when investment is linked to private ownership and operation);
• Additional funding for investment; and
• Positive externalities-tangible and intangible

Having a greater private sector presence in the economy leads to a better image in the world investment community, more responsive and appropriate public policy, improved management attitudes and practices, and greater exposure to outside ideas and market developments.

Reduced Government Risk

A central feature of PPP projects is limited recourse to government financing, in which owners and creditors receive no government guarantees, but can lay claim only on the project company’s assets and revenues. To the extent that project risks are borne by private financiers, government risk is reduced. In well structured projects, government risks are usually known to have reduced substantially.

Efficiency

Efficiency benefits from private infrastructure investment can come in either low – cost, more innovative design and construction of the physical infrastructure or in a more conscious, market-sensitive and dynamic management. These benefits however, might be partly offset by the preclusion of construction in stages.

The first benefit is most likely to be significant for a PPP project for which bidding is competitive and specifications are general. But, high negotiating costs, endemic uncertainties, and the nature of PPPs with unsolicited proposals (with frequent informal commitments at early stages) always makes competitive bidding difficult or ineffective. So efficiency gains at design and construction stages may not be substantial.

Potential for Use

Some types of private investment have more promise than others. Slow implementation of established PPP structures indicates some fundamental obstacles. First, regulatory systems should be developed enough to ensure that definitions of rights and obligations of private investors and the state is straightforward, leading to transparent contract negotiations with minimal/ no gaps and ambiguities. Change of government further complicates the matters, leading to large transaction costs.

Infrastructure remains highly vulnerable to government interference; hence limited private investors in infrastructure appear willing to bear the kinds of risk that they accept in other investments.

The success of PPP projects is dependent partly on the availability of extensive data on demand for the infrastructure facility in question. Also, creation of a separate authority to conduct tendering, valuation of bids and awarding contracts greatly facilitates the process. Failures to quickly and satisfactorily distribute risk among various constituents of PPP project have made PPP projects unsuccessful.