oppn parties Reverse PPP or Asset Recycling: Flexibility in Terms Will Make it a Success

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oppn parties
Reverse PPP or Asset Recycling: Flexibility in Terms Will Make it a Success

By Sunil Garodia
First publised on 2016-03-07 12:04:28

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator. Writes for a number of publications.
The Kelkar Committee had come up with a brilliant idea for a reverse PPP which would make infrastructure projects work in a different way. Now, the process is that private players construct and run the facilities and transfer it to the government after a few years. This means that the private players put in some equity and the rest is contributed by banks in the form of loans. Since there are always delays in completing the projects and hence costing goes haywire, private players are stressed which in turn stresses and stretches the banking system. Often, private players are not able to recoup their investments, let alone make a profit, because in the initial years the interest burden is too high and the revenues are uncertain. This is clear from the state of the balance sheets of private infra players like GMR and Lanco, to name just two.

The Kelkar Committee proposed that the government build the projects. It can easily access funds, get land and other clearances and ensure that delays and cost overruns are kept to the minimum. Once the project is up and running, it can be transferred at a good price to a private player. That way, the government will not be saddled with the burden of running an infra project and its funds will also not be locked in such projects. It will recoup the investment it makes, maybe even make a profit, as the running projects will fetch good prices. It can then invest the sale proceeds in a new project. Finance Minister Arun Jaitley has called this “asset recycling.” The private players will get a going project and will be able to manage it efficiently as revenues would be certain as opposed to interest payments on loans in building projects.

This idea has been accepted by the Finance Minister in the budget. The Niti Aayog has been tasked with identifying assets for recycling. This will be a good scheme if successful as it will release government funds for further development and will take it out of the business of maintaining assets, of which it is doing a poor job in any case. But there is a catch. The revenue generation capacity of certain infra projects, take roads for instance, is not infinite. Say the government sells a particular stretch of a highway to a private player. If it is allowed to levy toll for just an X number of years and at Y rate which will not be linked to inflation, it might not be able to recoup investments or make profit. Numbers would have to be crunched with a high degree of flexibility to provide private players room to make profits on their investments. Only then will they come forward to bid realistically for such assets. Simultaneously, the public would have to be educated that pay-per-use is going to be the mantra of the future if creation of new assets and maintenance of old ones is to happen at the rate required for a developing economy like India.