Institutional issues related to project governance of infrastructure PPP projects in India

Transcription

1 1481 Institutional issues related to project governance of infrastructure PPP projects in India Venkata S.K. Delhi 1 and Ashwin Mahalingam 2 1 PhD Research Scholar, BTCM Division, Dept. of Civil Engineering, Indian Institute of Technology Madras, Chennai, India ; venkatasantosh@gmail.com 2 Assistant Professor, BTCM Division, Department of Civil Engineering, Indian Institute of Technology Madras, Chennai, India ; mash@iitm.ac.in ABSTRACT Public Private Partnerships have gained popularity as a mode of delivery for infrastructure projects in India. The institutional contexts surrounding these projects constrain or enable the smooth execution of these projects. In this article, we explore the key capabilities that need to be present in the institutional environments surrounding the projects - clear rationale, legitimacy, political willingness, advocacy, predictability and commitment in decision making and capacity to develop and monitor projects - which can be developed through a variety of institutional forms and actions. We then assess the institutional environment in the state of Tamil Nadu in India, in terms of these key capabilities and examine 6 PPP project case studies in the light of this capabilities framework. We focus on the impacts of the various capabilities on the PPP infrastructure projects. Based on this empirical evidence, we conclude that the gaps in institutional environment surrounding a PPP project can cause significant governance issues in projects and actions of the project proponent s aim at filling out these gaps in the environment to tackle these issues. The paper contributes to our understanding of the impact of institutional environments on the governance of PPP infrastructure projects. INTRODUCTION Public Private Partnerships have gained popularity as a mode of delivery for infrastructure projects in India over the last decade (Wallack, 2009). The private participation in infrastructure projects was deemed necessary due the rapidly expanding economy and lagging infrastructure in the country. India plans substantial investment in the order of $1 trillion in the next five years and a substantial portion of this would come from the private sector. In this context, successfully managing PPP projects in infrastructure poses a key challenge for these projects to deliver the intended benefits to the public at large. PPPs are usually complex long term contracts and come with their own unique challenges. The institutional environments surrounding these projects either constrain or enable the smooth execution of these projects. There is a need to study the key aspects of the institutional environments which can pose significant challenges on these projects, in order to mitigate these challenges successfully and effectively govern these projects. We do this by first reviewing the extant literature on PPPs. We then develop key capabilities framework of institutional environment. We then look at empirical evidence of six PPP case studies from the state of Tamil Nadu. We conclude by suggesting a few testable propositions and suggesting directions for future research.

2 1482 THEORETICAL BACKGROUND Public private partnerships have attracted the attention of various scholars over time. Initially, the research was focused on the applicability of PPPs in various aspects of service delivery (Gómez-Ibáñez et. al. 2009, Froud 2003). Researchers focused their efforts on the conditions which would favor for the award of projects on a PPP basis compared to the usual in house public sector delivery of the projects (Grout 1997, Hall 1998). These studies predominantly make use of the transaction cost framework (Williamson 1979) to structure their arguments. Most of the studies aim at the right structuring of the projects and the development of ex-ante mechanisms to deal with the failures of projects. They highlight the importance of risk transfer mechanisms and use of various contractual mechanisms to deal with the issues that arise in PPP projects (Grimsey and Lewis 2002). These studies concentrate on the structuring of strong contracts to govern PPPs (Edkyns and Smith 2006, Zhang 2005). But strong contract structuring is not synonymous to success of these projects (Orr, 2005). PPPs are complex long term contracts executed in dynamic institutional environments which involve lot of uncertainty during the project lifetime. This essentially means the contracts written for the projects are essentially incomplete in nature (Hart 2003). Furthermore, turbulences often arise from the institutional environment surrounding the project (Mahalingam 2010). The institutional environments can cause substantial governance issues ex-post to the award of the contract, and these challenges need to be mitigated. Study of the institutional environments surrounding PPP project have gained momentum recently. Jooste 2011 examines the development of PPP enabling fields surrounding PPP programs in different countries. This work studies the evolution of the PPPs at a macro field level. There is a need to translate the macro field level perspective to the project level where the interaction between the institutional environment and the projects are captured. In this present study, we try to fill this gap by looking at projects and the influence of institutional environments on these projects. RESEARCH QUESTIONS Based on the above discussion we set our research focus to the following questions. 1. What are the key capabilities required in the institutional environment for the implementation of PPP projects in India? 2. How do the institutional environments in India influence the infrastructure projects delivered through the Public Private Partnerships? Particularly we concentrate on the ex-post governance issues which the institutional environments can cause on the projects. METHODOLOGY The research objectives mandate us to look at different PPP infrastructure projects in a great detail. This amounts to the investigation of the contemporary phenomenon where the researcher has little control over the events. Case study approach is suitable for such situations when the researcher has little control over the events (Yin 2003). Moreover, case study as a research strategy helps in capturing the

3 1483 dynamics of the settings. So empirical case study based research methodology is chosen to investigate these objectives. The methodology included two distinct phases of data collection, one pertaining to the data about the institutional environment and second pertaining to the PPP projects enacted in this institutional environment in the state. We selected the state of Tamil Nadu in India for purposes of answering our research questions. Within the state of Tamil Nadu, 6 PPP projects have been selected for investigation. In the first phase, the institutional environment of Tamil Nadu was assessed by the means of a two part study. In the first part, existing literature on PPP institutional environments, guidelines for government PPP cells were studied to develop a tentative list of key capabilities. This was followed up by semi structured interviews with key stakeholders in the PPP arena. Semi structured interviews were conducted with government representatives, consultants and transaction advisors, private developers, financiers and academicians. The interviews started off with open ended questions about their views on ideal institutional environment supporting PPPs. The interviews then focused on the list of key capabilities initially developed. The interviewees were asked to rate the capabilities required as high, medium or low. Capabilities which are not rated low by the interviewees and consistently rated high are taken as key capabilities to be explored further in the research. This helped us to identify six key capabilities of institutional environment for PPP projects in India. This is followed up by the second part, where we tried to assess the institutional environment in the state of Tamil Nadu along these key capabilities. For this, we did an extensive review of publicly available data on PPP related policies, procedures, media articles, government press releases and government website. Semi structured interviews, guided by this initial investigation and the key capabilities identified in the first part, were then conducted with representatives from the state government and the private sector who have worked extensively in the two chosen sectors Roads and Water & Sanitation in this state. Interviews included the representatives of the PPP cells in the state, the private developers, transaction advisors, the sector specific public agencies responsible for implementing these projects, the financiers which are active in the state. Interviewers were asked about their views on the key capabilities of the institutional environment in the state. The interviewers were asked to rate the key capabilities as highly developed, medium and not developed in the state. In the second phase of the study six PPP projects were studied. These projects are implemented in roads and water sector in the state of Tamil Nadu in India. All the projects are conceived at the state level making them comparable in the terms of institutional environments they were conceived. The projects are currently operational enabling us to capture various issues at various stages of the projects. For this, we first used secondary data in the form of archival reports, newspaper reports and other publicly available data to map the history and culture of each state with respect to private provision of infrastructure. Project related agreements were studied where available. Following this, semi structured interviews were conducted with various stakeholders in the PPP enabling fields of the state, in order to ascertain the current configuration of the PPP enabling field in each state. Interviewees included representatives from project sponsors, financiers, local community representatives,

4 1484 transaction advisors, local NGOs, and government officials. The interviews with various stakeholders were intended to help us to remove particular biases in the data collected. An average of 20 hours of interviews was conducted per project. The interviews were compared with each other and the secondary data sources to ensure the internal validity of the data. Detailed case studies of approximately 10,000 words on the evolution and the current state of the environment for PPPs in the state were then prepared. The compiled case studies were shared for review with key informants and their concurrence was taken. The cases were then coded using open coding techniques (Strauss and Corbin, 1998). Dominant constructs that contributed to the governance issues due to institutional environments from each of these projects were then identified using axial coding techniques (Strauss and Corbin, 1998). The following section will describe the key findings of our research efforts. EMPIRICAL FINDINGS Institutional environment in the state of Tamil Nadu The key capabilities of the institutional environment as emerged from the interviews with various experts in PPPs in India are as given in the figure 1. We discuss each of these capabilities briefly now. Clear Rationale Capacity to develop and monitor projects Legitimacy Institutional Environment Predictability and Commitment Political Willingness Advocacy Figure 1 Key capabilities of institutional environment for PPPs in India. Clear Rationale The environment should have a clearly articulated rationale for PPPs, including a statement of the benefits that they are expected to bring and the circumstances in which they may be preferred to traditional public sector provision of infrastructure or services. Such a rationale, when provided in clear, credible terms to all stakeholders clarifies the expectations and avoids misunderstandings. It will provide public officials with a clear set of guidelines for their actions and a clear signal of support for particular efforts to improve service quality through PPPs.

5 1485 Legitimacy Legitimization is key capability to be developed in the environment to bring on board the key constituencies in the public and private sectors in order to achieve the benefits of a PPP project. In many cases, legitimization centers on creating a belief and recognition of the potential benefits from private sector involvement to offset a history of suspicion of profit-motivated providers. Political Willingness Political willingness is a key capability which needs to be developed beyond legitimacy. Broad acceptance of PPPs is a necessary condition but not a sufficient condition. Given the costs of any deviation from the status quo, a pro-active impetus to initiate PPPs is required to ensure that these projects deliver the intended benefits. Predictability and commitment in decision making Transparent, well documented, consistent decision making process of the public sector is essential to attract private sector partners to the PPP projects. This capability ensures creation of credible boundaries of the decisions. Both the public sector and private sector commitment to the projects is important. This will increase the credibility of the project players and also increases the confidence of various stakeholders to the project. Capacity to develop and monitor projects The public sector needs to have the capability to bring projects to the table and successfully award them. The fact that PPPs are long-run incomplete contracts makes such monitoring complex, since it must balance oversight with credible noninterference and the overseer often must assess blame and assign damages in case of unexpected circumstances. Limitations to private sector capacity also cause bottlenecks to PPPs. In times of economic turbulence, the private sector might be unable to mobilize finances. Advocacy PPPs are often perceived as delivery mechanisms that will result in downsizing of the public sector and cost-increases to the general public. Both these fears must be combated. In addition, an enabling environment must be created where all the relevant stakeholders are convinced and well-informed, and an effective communication strategy must be evolved to achieve this objective The capabilities discussed above can be developed using a variety of institutional forms. Sometimes, an institutional form can affect two or more capabilities of the environment. A law can enhance the legitimacy as well as clearly state the rationale for the use of PPPs and the predictability in decision making. However, having just the institutional forms in place does not guarantee the development of capabilities. Having a dedicated PPP cell to encourage PPPs is not enough to develop the capacity to develop projects. Staffing the cell with qualified personnel and empowering the cell to take key decisions with regards to PPPs is equally important.

6 1486 Tamil Nadu has yet to create several of the institutional capabilities and forms that are required for a dynamic PPP environment and a programmatic, cross-sectoral approach towards undertaking PPP projects. The state has a number of ambiguities in the functioning of its institutional mechanisms that are responsible for project selection, approval and monitoring. For example, the PPP Cell in the state falls short on its mandates, with poor staffing and technical expertise and limited executing powers. Most of the projects in the state have evolved organically as well as promoted by individual project champions. A statewide emphasis on PPP projects is missing in Tamil Nadu. There has been no significant thrust from the policymakers in the state to mainstream PPPs. The state needs to create a strong sectoral legislation addressing all aspects of project delivery via the PPP mode and should also create institutions that will minimize project risks and deliver project oversight and monitoring. Case studies from state of Tamil Nadu In this section, we look at 6 case studies in the state of Tami Nadu in the light of above framework. In each case study, we look at the capabilities of the institutional environment surrounding the project and look for the affects of this environment on the project. The East Coast Road Project The Government of Tamil Nadu (GoTN) wished to repair and widen the ECR in order to stimulate economic growth in the region. The rationale for the project was primarily lack of funds. The success of the PPP concepts in roads at the national level was also put out as a rationale for experimenting with PPP concept on this project. GoTN was enthusiastic in pursuing this project on PPP basis in the initial phases giving the necessary political will to the push the project through. The road was canvassed as a tourist attraction for Tamil Nadu and gained popularity with the public at large. But the institutional environment surrounding the project clearly lacked in terms of predictability and commitment in decision making and public sector capacity for managing such kinds of projects. The public sector capacity to develop this project was augmented by the presence of a hand holding agency TNRDC. But the agency is itself new to such kinds of projects. GoTN also reneged on the commitment to increase the toll rates by 8% which led to severe financial distress in the project. Thus we see the lack of these capabilities in the institutional environments contributed to governance issues during project operation phase. The Rajiv Gandhi Salai Road Project GoTN decided to develop a 6-lane road from the city through the southern suburbs. The lack of finance was presented as the rationale for doing this project on a PPP basis. The project company coerced GoTN to pass a Government Order to raise tolls on the project on a need basis. This was done to fill the gap in the institutional capabilities of legitimacy and commitment by public sectors, which were exposed during the ECR road project. On the terms of political will and public sector predictability in decision making, we still see the institutional environment has huge gaps which were exhibited by public sector in reducing the time frame for the project,

7 1487 frequent changes in the road alignments. With the usual prevalent adversarial nature towards the private sector in the state and the ceremonial advocacy measures adopted for the project, the project did not gain popularity with the public. There were huge public protests against the project where users refused to pay tolls. This severely affected the viability of the project. Alandur Sewerage Project The municipality of Alandur turned its attention towards building world-class sewerage infrastructure. A Government order was enacted to get the legal basis for the project to be done on PPP basis. But, Alandur s residents lacked confidence in their municipality s ability to implement infrastructure projects and were therefore reluctant to pay for the sewerage network. The mayor personally spent a considerable amount of time in canvassing the project to the residents and made the financial details of the project transparent. This effort yielded fruit and the value of the user deposits collected exceeded expectations. The capability to handle PPP projects was augmented by Tamil Nadu Urban Development Fund (TNUDF) a public sector organization focused on helping municipalities finance and develop urban infrastructure. However, a change in government then led to the replacement of project officials from the government s side. TNUDF then withdrew from the project, even as the municipality questioned the readiness of the STP. Without TNUDF s presence, the municipality was unsure as to how to deal with the operator. When the STP was finally commissioned, the sewage inflow was much lower than expected. The municipality refused to pay for the minimum guaranteed amount of sewage. Arbitration proceedings are currently underway as the operator seeks compensation for the delayed inflow of sewage into the system. Tirupur Solid Waste Management Project Tirupur is located in the South of India and is home to a thriving textile industry. The amount of solid waste generated in Tirupur was increasing in the 1990s and the municipality was finding it difficult to manage this growing quantity of municipal solid waste. The rationale for the project to go on a PPP basis was stated as the lack of finances and the lack of the know-how to build and operate such a plant. But the usual mistrust against the private sector and the lack of political willingness from the leadership led to protests from the local villagers. The local NGOs came to the rescue and canvassed for the project and educated the villagers which yielded fruits. But a year was lost in these issues. The Tirupur Water Supply Project Tirupur s textile industry is water intensive. Urged by the Tirupur Exporter s Association (TEA), GoTN partnered with Infrastructure Leasing and Financial Services (IL&FS) a leading infrastructure consulting firm to provide a water supply solution to Tirupur. A PPP approach was proposed due the lack of funds with Tirupur municipality. GoTN gave the necessary thrust for the project to be executed. But the project still suffered from the lack of commitment and predictability from the public sector. GoTN later asked the private operator to build a sewage treatment plant and

8 1488 also supply water free of cost to wayside villages after the concession was awarded. The projects financial viability suffered as a result of this. Chennai Solid Waste Management Project A government order was enacted to get the legal basis for the project on PPP basis. There was a good advocacy campaign conducted surrounding the project which was needed to moderate the apprehensions of the municipal workers and the public at large. This led to the smooth functioning of the project. However the lack of capacity came to the fore, when the project has to be re-bid after the completion of the lease period. The capacity till award was augmented by Tamil Nadu Industrial Development Company (TIDCO) a state run agency mandated with encouraging industrial development. Later after TIDCO left the project, the lack of PPP experience had led the CoC to underestimate the time needed to select a new operator and for the operator to mobilize resources. This led to garbage piling up on the street that had serious health complications. DISCUSSION A summary of the case studies and the institutional environment surrounding these projects is given in Table 1 below. Table 1. Institutional environment surrounding the projects in Tamil Nadu, India S NO PROJECT NAME RATION ALE LEGITIMAC Y POLITICA L WILL ADVOCAC Y COMMI TMENT CAPACITY 1 The ECR Project Finance The Rajiv Gandhi Salai Road Project The Tirupur Water Supply Project Tirupur SWM Project Chennai SWM Project Alandur Sewerage Project Finance Finance Finance and technolo gy Finance Finance No explicit instruments Government Order Government Order Government Order Government Order Government Order Present till award No real political will Present from GoTN No real political will CoC Mayor as project champion Consultatio n No real advocacy Consultatio ns were performed No real advocacy Consultatio ns Personal campaignin g by mayor GoTN opportuni sm Frequent design changes Commit ment present Private sector opportuni sm Commit ment present Present Augmented by TNRDC Augmented by TNRDC Augmented by IL&FS Augment by TNUDF Augmented by TIDCO Augmented by TNUDF The projects discussed briefly above highlight the impact of the capabilities or the lack of them in the smooth execution of PPP projects. In the case studies we find that seemingly successful projects at the time of award suffer from governance issues later during the project implementation due to gaps in capacities in the institutional environment. The rationale for the projects was predominantly financial constraints which falls in line with the usual rationale stated at the state government level. This

9 1489 led to the questioning of the projects once the finance was not a constraint anymore. The political will for these projects was normally present till the award of the projects in many cases, but fizzled out in the light of popular protests during project operations. A programmatic advocacy building program was not present in the state. The commitment from the public sector was of major concern in many of the projects and led to serious problems in the projects. In all the cases, the capacity was augmented using a hand holding agency. But, problems seem to arise once the agency left the project. Based on the empirical evidence and the above discussion, we present the following testable propositions. Proposition 1: In institutional environments surrounding PPP projects, which lack the capabilities significant efforts would be expended on the project level to supplement these capabilities For example, in Alandur sewerage project, the mayor of the town had to canvass for the project personally to build the legitimacy and advocacy around the project. Similar efforts were done in most of the projects as these capabilities were not present in the institutional environment. Proposition 2: When the capabilities lacking in the institutional environment surrounding PPP projects are not developed at the project level, it leads to governance issues on PPP projects leading to huge cost and time implications. The absence of credible commitment by the GoTN in the case of ECR road led to significant financial challenges on the project. The absence of capacity with the Alandur municipality to manage the project in sewerage project once TNUDF left the project led to arbitration proceedings on the otherwise successful project. Similar instances can be found on the other projects where an unmitigated gap in the institutional environment caused significant governance challenges on the projects. CONCLUSIONS AND FURTHER WORK This article highlighted the key capabilities in the institutional environments surrounding the PPP projects - clear rationale, legitimacy, political willingness, advocacy, predictability and commitment in decision making and capacity to develop and monitor projects - which can affect the implementation of PPP infrastructure projects. Where these capabilities are absent in the wider institutional environment surrounding the PPPs, it would take significant effort on the project proponents to plug these gaps for the smooth functioning of PPPs. Accounting for the institutional environments and their impacts of projects constitutes a key process in governing these projects. The particular case of Tamil Nadu was taken as a case study to look at the research. But the implications of the research can be extended and generalized to other institutional environments. This work consists just a starting step in the development of a comprehensive governance framework for the PPP infrastructure projects contingent on contextual institutional conditions. Future works can focus on investigating the institutional environments in different states of India and different countries. Such an effort could crystallize into the development of a prescriptive model for governance of PPP infrastructure projects which would take into account the institutional environment surrounding these projects.

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