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Economic Survey wants public spending to crowd-in investments, restructuring of PPPs

27 February, 2015

The Economic Survey acknowledged the need for investments to pick up if the economic growth has to gather speed in the coming years and stressed on the need for government to kick-off a controlled public spending programme to boost investment climate.

It said banking only on private sector to revive investments when firms are struggling with leveraged balance sheets and a banking system under severe stress itself, would prove challenging. “Against this backdrop, public investment may need to be augmented to recreate an environment to crowd-in private sector investment,” it said.

The Survey, however, cautioned that the call for public investment is not a counsel of despair for private investments going forward, especially the public-private partnership (PPP) model.

PPP

It noted that many infrastructure projects are today financially stressed and new projects do not attract sponsors and it is due to poorly designed frameworks for PPP.

It said existing contracts focus more on fiscal benefits than on efficient service provision; they neglect principles allocating risk to the entity best able to manage it; the default revenue stream of directly collected user charges leaves the government with no leverage in the case of non-performance; there are no ex-ante structures for renegotiation; contracts are over-dependent on market wisdom.

The Survey has recommended that it is better to continue combining construction and maintenance responsibilities to incentivise building quality; risk should only be transferred to those who can manage it; financing structures should be able to attract pension and insurance funds, which are a natural funding source for long-term infrastructure projects.

It said that rather than prescribing model concession agreements, states should be allowed to experiment and one option is the Least Present Value of Revenue (LPVR) contract, where the bid is the lowest present value (discounted at a pre-announced rate) of total gross revenue received by the concessionaire.

The Survey also talks about restructuring of existing contracts to revive private interest and bank lending, with burden sharing among different stakeholders. The guiding principle should be to restructure contracts based on the project’s revenues, differentiating between temporary illiquidity and insolvency, it said.

Crowding-In effect

The Survey suggests that the government needs to step in by providing more funds to ramp up capital formation which has declined more than 6 percentage points in last few years and to recreate an environment to crowd-in the private sector.

It talks of finding sectors with maximum positive spillovers and institutions with a modicum of proven capacity for investing quickly and efficiently and pointed out that two prime candidates are rural roads and railways. It goes on to say how the previous BJP government over a decade ago successfully implemented the roads project and now suggests that the new government can replicate the same with railways.

Railways has suffered from under-investment and the Survey says a boost in the sector can help the manufacturing and services sector dependent on railways through backward and forward linkages.

The Survey suggested that railways should be made commercially viable and public support should be restricted to equity support for investment by the corporatised railways entities and for funding the universal service obligations that it provides.

But it cautioned that public investment support should be clearly linked to serious reform: of the structure of the railways; of its adoption of commercial practices; of rationalising tariff policies; and through an overhaul of technology.

Though the Survey points to a larger role of public investment, one of the major task for the government would be to invest without disturbing the fiscal space. While the recent developments such as drop in crude oil price has supported lower subsidy bill allowing more room for fiscal manoeuvres for such public investments, it is to be seen how the Finance Minister can incorporate such investments over a longer period.


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Economic Survey wants public spending to crowd-in investments, restructuring of PPPs

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