Can govt be a good partner to private sector? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Can govt be a good partner to private sector? 

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In this issue:
» Who is Ben Bernanke blaming this time?
» No respite for India's current account balance
» India Inc. is looking for global deals
» Insiders cash out just before bankruptcies
» ...and more!

Infrastructure development and the key role that it will play in taking India's growth to the next level cannot be emphasized enough. The government has outlined investments to the tune of US$ 1 trillion for this purpose. But given its precarious state of finances and a slew of other problems, the government could never be relied upon to undertake this task by itself. Private players had to be roped in. And that is why the public private partnership (PPP) model became very important.

But has this model worked so far? As reported in an article in Business Standard, if one takes a closer look at projects operating on a PPP basis, it becomes apparent that most of them have run into some sort of problem or the other. Among a host of issues plaguing these projects, there are two which really stand out. These are rigidity in terms of contract renegotiation and failure to understand the spirit of partnership. Let us look at the first issue. When the partnership is entered into, there are commitments that both parties make at that point of time. The duration of these commitments typically tend to be for a longer period of time. So it is normal that in the course of things, the scenario may not pan out as originally envisaged. And so adjustments will have to made accordingly. And herein lies the problem. Unlike agreements in the developed world, most PPP projects in India do not have provisions for contract renegotiation. This rigidity means that problems arising during the course of the project do not get sorted out ultimately leading to legal battles and in some cases the partnership fizzling out.

Then there is the whole concept of partnership that is misunderstood. When the government enters into such a contract with a private player, it needs to ensure that the latter earns a decent rate of return on capital invested. But a rigid mindset that once conditions are set, they cannot be altered only escalates troubles once the project progresses.

Given the recent headwinds that the Indian economy is facing, one wonders whether the government can afford to be complacent regarding such an important issue. The PPP model still remains of the best bets for India when it comes to ramping up infrastructure. Thus, it goes without saying that more care needs to be given to aspects such as understanding the proposed asset, sharing of risks and rewards, laying of proper groundwork and ultimately adopting a more flexible approach. If that happens, there is no reason why this model should not work in the years ahead.

Do you think that with so many problems the PPP model will not work for India going forward? Please share your comments or post them on our Facebook page / Google+ page

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01:35  Chart of the day
The steep slide of the rupee against the dollar has wreaked havoc on India's current account balance. Little wonder then that when compared to its peers, India is expected to have to worst current account deficit in 2013 as per estimates by the Economist. The primary reason for the deficit has been imports rising at a faster pace than exports. Large part of the import basket comprises oil and gold. And because the demand for this has not waned, the import bill has continued to increase. The fall of the rupee, thus, has only compounded the country's woes. Exports meanwhile have not really taken off at a spectacular pace and the weak global macroeconomic environment has only made matters worse. In this regard, the depreciation of the rupee should provide some relief. But from a longer term perspective, if more steps are taken to increase India's energy security and make exports more competitive, it will considerably ease quite a lot of pain on this front.

Data Source: The Economist

When the blame game starts, fingers are pointed at everyone. And this is what the Chairman of US Fed, Ben Bernanke seems to be doing. He is simple pointing fingers to appropriate the blame for the financial crisis. His choice is rather weird. He has chosen to blame Nobel award winning economists Modigliani and Miller. The two economists had come up with a theory. Their theory was that under certain conditions it does not matter how much debt a company takes on. What investors should worry about is the value of the underlying assets and not how they are financed. In Bernanke's opinion the macroeconomists in the current generation took this theory literally and piled on debt. Debt that eventually led to the collapse that we see now. In essence he blames adhering to the theory for today's problems.

Considering that the US Fed is continuing with its enormous quantitative easing program which in essence is equivalent to piling on debt; the statement of Mr Bernanke appears to be a ludicrous one. After all he too is following the theory of taking on unlimited debt. So why blame the others for doing the same?

The slowdown in the Indian economy has led many companies in India to seriously rethink their growth strategies. Armed with cash many seem to be interested in shopping for deals abroad. The fall in rupee has also added to the motivation of increasing their dollar earnings. Companies like Apollo Tyres and Hero Motocorp have already embarked on their journey to spread their footprint outside the Indian borders. As per Firstpost, Indian companies are bidding for at least US$ 10 bn of global deals. If these are successful, then it would lead to nearly US$ 13 bn of outbound M&A deals; highest since 2010. As such the idea of utilizing cash for acquisitions sounds attractive. But what investors need to understand is that an acquisition could very well destroy value rather than be value accretive. This would happen if the acquisition is made at high valuations; or if it is financed through huge amounts of debt. It would also hurt if the acquisition is completely unrelated to the company's core business. Therefore it is essential to for investors to delve into the details of the acquisition before cheering the same.

Indian regulators are no strangers to insider trading. But rarely are the company managements or 'insiders' brought to book. Taking minority shareholders for granted is a malaise that remains a key concern for Indian investors in stock markets. The US, it seems, saw an increased instance of insiders cashing out just before bankruptcy filings in the aftermath of 2008 crisis. A Wall Street Journal review of thousands of trades by insiders in their own company's stock confirmed this trend. Insiders do see the fortunes of a failing corporate declining much earlier than minority shareholders. Hence their quiet exit is not just a regulatory failure but also a moral wrong doing. But in most cases the regulators and minority investors realize things too late. The instance of insider trading in Deccan Chronicle before the debt crisis in the company hit the markets is a case in point.

A few weeks back, the US Fed had hinted about likely pullback of it quantitative easing (QE) program. This had led to significant fall in global financial markets. However, this week Ben Bernanke, US Fed chairman seems to have taken a U-turn. As per his latest comments, the central bank might be continuing the monetary easing program, for a foreseeable period of time. This resulted in sharp rally in the global markets during the week.

US Fed, believes, that it is still far away from achieving its employment and inflation targets. As a result of this, the global markets, gold as well as oil witnessed sharp increase while the US dollar plummeted. Other than this, the US stocks rallied to record high levels. In addition, as two major banks - JP Morgan and Wells Fargo, reported results above the expectations. US markets were up by 2.2% during the week.

The Indian equity markets closed the week in the green with the shares in the consumer durables and IT sector leading the gainers. The BSE Sensex was up by 2.4% during the week. The result season started on a positive note, with Infosys declaring its June quarter result which was better than the market's expectations.

Data source: Yahoo finance

04:56  Weekend investing mantra
In both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult. - Warren Buffett
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2 Responses to "Can govt be a good partner to private sector?"

Dr. Arun Draviam

Jul 14, 2013

This once again falls within my pet theory: ‘Permanent Jobs in Temporary Life’.
The employees of the Government and its Undertakings/Enterprises want to live in comfort zone of job security and further ‘rent seeking’ wherever and whenever possible. The Partner-Businessman too wants to cut short the red-tape by obliging the rent-seekers but he makes good his costs/profits in other ways –cutting the quality standards, sometimes even the quantities (mostly in contracts of civil and electric nature – such as earth filling, cable laying, etc).
The comfy zone of the government servants are disturbed by intelligent and hard working lawyers at the arbitration. I have not lost a case in arbitration; the more the contract document is voluminous, I find it more easy to crack the case, because the contract documents have over the period become a copy-cut-paste piece of work with incoherent and self-contradictory clauses. Perhaps the whole contract is structured with an eye on arbitration by both the Government and the Contractor; herein the Partner- only the terminology is different but the work culture is the same mould- Government can never be wrong, at least on paper.
Remove the comfort of permanent jobs as is the case in the US, things will become all right. I am otherwise a strong advocate against aping American in our day to day life and I preach the same to my students in the management programme. I am only 70 years young.
Dr. Arun Draviam

Like (1)

S. Manikutty

Jul 13, 2013

The rigidity of the PPP contracts is only a part of the problem with PPPs. In fact, many private parties bid low to get the contracts,, confident thatthey can renegotiate the same later on. In this sense, far from being rigid, the contracts become all too easy to manipulate, post the award. The presence of agencies such as CAG, Vigilance, CBI etc. make it also necessary to be very careful in altering the contracts, so that while, presumably for big enough considerations, contracts are altered in fundamental ways, in many other respects, when they do require amendments, the government is reluctant to do so.

The other major problems are genuine lack of capacity on part of both sides to estimate the financial attractiveness of the contracts, the contingencies needed to be provided for, and absence of monitoring mechanisms to flag when things go wrong in the early stages.

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