Southern States - Tamil Nadu   

Infrastructure Development: Govt. role must be defined

By V. Jayanth

CHENNAI May 20. The new mantra in infrastructure development is `private sector participation' — PSP for short. With the State Governments going through a fiscal crisis and finding it difficult to invest in development projects, they are increasingly turning to multilateral agencies and financial institutions, which in turn advocate PSP.

According to official sources, the private sector may be keener on industrial projects, where it can hold a higher stake and control the entire process. But in infrastructure development, investors are a little wary because the success of the project depends on user willingness to `pay' for the `service'. This is perhaps one reason why World Bank missions and financial institutions are asking the States to push through the second generation reforms and accept the "inevitability of user charges".

From major projects like development of a container berth or expansion of a port, to upgradation of highways, water supply and even sewage and drainage schemes, PSP seems to be the order of the day. Officials explain that government agencies and local bodies are finding it extremely difficult to implement "viable projects and levy reasonable user charges". When the burden of levying and collecting the charges gets shifted to a private agency or partner, it will become easier for the political leadership at the local level to pass the buck to the investor.

To lay down the ground rules and provide a legislative framework for PSP, the Tamil Nadu Government has decided to bring in a new law to govern private investment flows for infrastructure development. It will look at the whole gamut of concessions to be granted, the method of bidding, and the question of tolls/charges and provide the framework for encouraging the flow of private investments in the infrastructure and services sectors, official sources explain.

In the context of the problems some of the `joint venture' projects have run into in the past, both the private sector and officials have a few suggestions to make in preparing this framework. While the entire canvas of infrastructure and service projects can be opened up to private investment, the government role needs to be defined and understood, they say.

The private sector wants the Government or its designated agency to be part of the undertaking, to provide a `back-up' for the project, instead of being "exposed" to the users by itself. This is true especially of sensitive projects in the services sector, where the `users' may be a vocal community. The investors feel more reassured with some sort of `guarantee' from the State or Central Government, depending on the project.

`No risk, no returns'

But a former chief engineer of Metrowater argues, "It should be left to the Government or the private sector. User charges are higher when the private sector is involved and if that is so, they must also take the risk. There can be no returns on investment without risks and I do not see any reason for the Government to guarantee returns on a project after letting the private sector implement it". He cites the Enron muddle and calls for a "completely transparent" negotiating, tendering and pricing processes.

Taking the Tirupur water supply project as an example, he says if Metrowater can implement the New Veeranam scheme to bring drinking water to Chennai, there is no reason why the TWAD Board cannot take up the Tirupur project. "That is a unique venture because 70-80 per cent of the users are industrial consumers, who will pay much more than domestic consumers. So the returns are guaranteed by the higher tariff. Further, the loan component accounts for two-thirds of the project cost and this will come mostly from banks and financial institutions. So what is the risk the investors are taking?"

Official sources say the Government must define both its role and that of the investors. "We need to take a look at market realities. It is now a single-digit, low-interest regime. So, the private sector cannot be allowed 15 or 20 per cent returns on investments anymore. And they need to take the normal risks involved in any investment, without having to depend on government guarantees," argues a senior official, who has been involved in negotiations with the World Bank and the private sector.

His contention is that ``users'' will pay if the ``service'' is good, reliable and essential. It is up to any investor or implementing agency to ensure this.

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