Is the private-public partnership working? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is the private-public partnership working? 

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In this issue:
» RBI keeps rates steady
» Can India overtake China in manufacturing?
» India ranks high on illicit capital flight
» Is overcoming the fiscal cliff enough for the US?
» ...and more!

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That infrastructure in India needs a serious ramp up is a fact well known. But because of the government's excruciatingly slow pace of execution and many inefficiencies, it was felt that involving the private sector made much more sense. And so we were witness to the birth of public-private partnerships (PPPs). As per the Economist, between 2007 and 2012, US$ 225 bn was invested by the private sector in infrastructure much of it through PPPs. This is equivalent to 12% of GDP in 2012. Around 758 PPP projects are under way or complete, worth US$ 70 bn. And in this, roads, ports and electricity projects account for a larger chunk of the pie.

So has the PPP model been successful? Not necessarily in all cases. The presence of the private sector has not necessarily translated into more efficiency in execution of various infrastructure projects. Many private companies operating such projects are facing the prospect of significant losses. Issues with respect to corruption and engineering faults continue to plague these projects. Indeed, during the boom years a plethora of PPPs mushroomed and bid for projects at high prices. In the power sector for instance, this was based on various assumptions such as cheap coal, or gas from sputtering offshore energy fields none of which have given the desired benefits.

Problems of land acquisition and red tape persist, debt has bloated on the books of infra firms and banks are struggling to recover loans. On top of that, some of these projects have failed to get completed on schedule.

Despite this, the fact remains that India needs infrastructure badly and while the ideal solution would be an elimination of all the problems listed above, this seems like quite a tall order. This means that there are bound to be compromises however undesirable. And although the presence of private players have not been able to completely improve the inefficiency and execution of projects, their presence still seems a better bet than entirely relying on the public sector.

Do you think that the private-public partnership model for infrastructure projects has been successful so far? Share your views or you can also comment on our Facebook page / Google+ page

01:36  Chart of the day
China has been gaining prominence in the international arena for its manufacturing prowess and robust GDP growth. But the country appears to be gaining strides on the innovation front too. As today's chart of the day shows, China's patent office received more applications than any other country's in 2011. The dragon nation nudged US and Japan, both of whom followed behind. India on the other hand has a long way to go before it catches up with these top three countries.

Data Source: The Economist

Maintaining the status quo is something the Reserve Bank of India (RBI) knows all too well. The Indian central bank kept key policy rates unchanged during the latest monetary policy review. The repo rate was maintained at 8%, Cash Reserve Ratio (CRR) stood steady at 4.25%. Headline inflation came down to 7.2% in November, but this wasn't enough to impress the governor, D Subbarao. He maintains that risks to inflation still remain and emphasised the need to shift increasingly towards growth. The RBI has been facing pressure from the government and the industry to cut rates. A monetary cut at this rate would help improve sentiments and help revive growth. However, all hope is not lost. There is an indication that rates may get cut January onwards. The slowdown may have bottomed out and inflation is moderating. A rate cut in early 2013 will just be the icing on the cake.

First, it was Made in Japan. Then Made in China. Will it ever become Made in India? This is the million dollar question that the policymakers find themselves confronted with. As China loses its competitive edge in being the factory to the world, will India be able to fill into the huge shoes? It goes without saying that we certainly can. There are sectors like automotive where we already compete with the best in the world. And if policymakers put their head together, there is no reason why this can't be replicated in other sectors as well.

However, any policy promoting manufacturing has to aim towards giving us a long term competitive advantage. In other words, we should not blindly try and ape the low cost labour arbitrage model of the Chinese. Instead, as an industrialist puts it, we should aim to become the Germany of the East. Needless to say it will take a gargantuan effort on the part of the Government to come anywhere close to this dream. But even looking to work in that direction will be a huge step we believe.

We love to pose as victims for all things gone wrong. The latest tag is 'victim of illicit black money outflows' going into billions. As per a recent report quoted by Firstpost, the illicit outflows for 2010 alone is US$ 1.6 bn. For the decade ending 2010, the black money losses amount to US$ 123 bn! The report by Global Financial Integrity, a US based organization ranks India 8th largest victim of illicit capital flight. We are fortunate to be ranked behind China, Mexico, Malaysia, Saudi Arabia, Russia, the Philippines, and Nigeria. Together, emerging economies lost around US$ 858 bn in 2010 to illicit outflows. The irony is that despite such statistics coming out year after year, very little has been done to curb such outflows. Or for that matter to curb the generation of black money. Indian banking and tax laws have long been attempting to make black money transactions punishable. However, very little success has been achieved so far. And as long as policymakers keep taking a socialist view on taxation related matters, it may continue to remain so.

The US politicians have been huddled up in working out a deal to avert the fiscal cliff. All parties are trying to reach a common ground. But in the opinion of Mr El-Erian, CEO of PIMCO, even if US avoids a fiscal cliff, it is still looking at sluggish economic growth. As per him US would be looking at an economic growth in the region of 1.5% to 2% even if the deal goes through. The proposed tax hikes would help avert the disaster of a fiscal cliff. If this is not averted, the US would definitely head into a recession. However, economic growth would largely depend on recovery in the housing as well as the labor market. For this, the US government still needs to take action. As per Mr Erian, decisions on issues such as debt ceiling, annual budget, housing finance and labour markets are still pending. These would be the decisions that would ultimately drive future economic growth. The discussion on fiscal cliff is just a short term one. It is to avert an economic disaster which is definitely a priority.

In the meanwhile, the Indian equity markets bounced back into the positive territory during the post noon trading session. At the time of writing, the BSE-Sensex was trading higher by about 90 points with stocks from the metal and capital goods spaces leading the pack of gainers. Stock markets in other major Asian economies ended on a positive note with Japan and China ending higher by about 1% and 0.1% respectively.

04:56  Today's Investing Mantra
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    Equitymaster requests your view! Post a comment on "Is the private-public partnership working?". Click here!

    5 Responses to "Is the private-public partnership working?"


    Dec 20, 2012

    We observe that the public-private partnership, the government is pushing a lot to private players like roads and medical insurance. On short term, intellectuals might view this development as positive to public, it is vital to view and question whether the long term effect of this partnership would remain positive to public.


    bayyaram manohar

    Dec 19, 2012

    PPP is exploitation of the poor by the government and the corporate gaints. Let us oppose the PPP in our country where rich poor gap is increasing at faster rate.


    sharad sharda

    Dec 19, 2012

    It is true that development of infrastructure by means of PPP in India could not take the shape what it was expected, but still a number of infrastructure projects have completed on PPP model which other wise could not have been possible merely by Govt. alone. Hence, it is always rue that something is better then nothing. If Govt. can prove it somewhat responsive and redtapism be brought down in Govt. working a miracle can happen in India.



    Dec 18, 2012

    PPP project modle is very good without any investment from Government side lot of development can take place and also they get income finally the asset go to Government.The Government should setup SINGLE POINT clearance/approvels in timely then only the PPP model will success other wise the Developer burn their fingers n lose their Investments.

    Like (1)


    Dec 18, 2012

    And as long as policymakers keep taking a socialist view on taxation related matters, it may continue to remain so.

    is it socialistic view or their direct involvement and being part and parcel if it..they amy not be independent..

    Like (1)
    Equitymaster requests your view! Post a comment on "Is the private-public partnership working?". Click here!


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