Provision of transport infrastructure such as road projects have long been regarded as the domain of the public sector because of massive investment requirement, long gestation period, uncertainty of return and presence of significant externalities. However, with the opening up of the economy and the consequent pressure to contain government expenditure, public sector resources are not be enough to develop an adequate road network for a rapidly growing economy. Therefore, to raise resources and complete the projects at a faster pace, the government of India is encouraging private sector participation in the development, maintenance and operation of national highways.
The origin of PPP can be traced back to Europe in the period of macro economic dislocation of 1970 and 80s. It was argued that models which involved an enhanced role of private sector in infrastructure provision could result in improved efficiency, improved allocation of risk while maintaining public accountability for essential aspects of public provision. The main advantage of PPP was that projects were mostly off public sector balance sheet enabling the government to keep within the restrictions set by economic and stability pact as well as defer payments to future.
In India, several reforms and initiatives have been introduced in India to create an enabling framework for private sector participation in development of National Highways. Constitution of NHAI was the first step in this direction. NHAI is responsible for the development, maintenance, and operation of the National Highways. Several institutional reforms and fiscal incentives have been introduced. The Government of India has undertaken various initiatives to meet the financing needs of infrastructure projects. The key ones are the Viability Gap Funding scheme (VGF) and creation of IIFCL to provide long term capital and capacity building assistance.
PRIVATE SECTOR INVESTMENT IN ROADS IN INDIA
India has attracted most of the investment commitments to infrastructure projects with private participation in the South Asian region due to its sustained efforts to attract investment. Private investment in infrastructure has been steadily increasing since the opening up of the economy in 1991 and reached a record high in 2007.
Given that India is huge country with uneven development it is natural that all parts of the country are not equally favoured by the private sector. Across states and central agencies, the leading users of PPPs by number of projects in the road sector are Rajasthan, Andhra Pradesh, Karnataka and Madhya Pradesh, with 43, 37, 64 and 31 awarded projects respectively.
The states which have received highest number of PPP investments in the road sector are the states which have taken maximum steps to attract the private sector and build an adequate legal and administrative set up to encourage PPP.
Andhra Pradesh is a pioneer in enacting the Infrastructure Authority Act. The legislation aims to facilitate developers in securing the mandatory administrative approvals and lays down provisions for arbitration and fiscal regulation.
In Karnataka the project development studies have been funded entirely by line departments and the Infrastructure Development Department. Project development activities have been funded by the Infrastructure Development Corporation Karnataka Limited (IDeCK), a joint venture of the state Govt., IDFC and HDFC.
The Madhya Pradesh infrastructure Fund Board was constituted in 2000. The Finance Department has been assigned the responsibility of PPP under Rules of Business.
Rajasthan was the first state to formulate a policy for BOT projects in 1994. The Rajasthan road development act, 2002, encourages PSP in the construction of financially viable bridges, bypasses, rail over-bridges, tunnels, etc. New initiatives include creation of nonlapsable State Road Fund (SRF) and the Road Infrastructure Development Company of Rajasthan (RIDCOR).
The under developed states of Bihar, Orissa, Jharkhand and the North Eastern states have failed to attract private investment. Lessons from global experience also prove that the government has a very important role to play in a successful PPP programme.
Mexico
· The government of Mexico announced a Highway Development program in 1989. The selection criteria adopted by the government was the shortest concession period. The result was that the average concession period was 8 – 15 years and unaffordably high level of tolls. The concessioned roads were obligated to have a parallel toll free road, therefore the newly built toll roads were empty while the non toll roads were congested. The tolls had to be lowered due to public outrage and the contractors and financiers had to be bailed out.
Chile
· In the early 1990s, Chile decided to develop 2,000 km of intercity expressway networks in BOT mode. The Chilean government introduced a number of credit enhacement measures such as (i) minimum revenue guarantee (ii) least present value of revenue scheme and (iii) foreign exchange risk guarantee. The prompt action of the government enabled award of all contracts by mid 1990s and construction was completed by 1998 – 2002.
Governments with weaker public finances and limited fiscal space may be especially attracted to PPPs. But PPP schemes are useful even in the absence of such constraints, as a way to achieve greater value for money than the government can achieve in providing goods and services on its own But first the Government will need to close the infrastructure policy deficit, manifested in many sectors in distorted pricing, poor governance and accountability, and weak financial and operational performance.
Thursday, February 18, 2010
Friday, February 5, 2010
Current Global Crisis - The Role of United States and China
The United States and China are locked together in an interdependent relationship. A lot of the blame on the current financial crisis has been put on China. The reason why China is being blamed for the financial imbalance is China’s policy of manipulating the exchange rate to accumulate a gigantic current account surplus. However, the author feels that the source of imbalance is United States which has been spending beyond its means for a very long time. The main question that the current financial crisis has posed to the world is how long the rest of the world can fund the huge current accounts deficit of the United States.
Throughout the whole of 1990s the US current account deficit was increasing. The huge current deficit is sustainable only if asset appreciation keeps pace with interest rates. In the year 2001 there was the stock market bubble and the US adopted expansionary fiscal policy which led to a large US deficit. The external borrowing of the US ballooned and China started purchasing securities. This was largely misinterpreted as Chinese saving but actually US was stoking the increase in Chinese savings.
The total stock of foreign exchange held by all the developing countries in the year 2009 was 45.3 trillion. The foreign exchange reserves held by Africa has also been increasing rapidly (roughly $ 2.8 trillion). The huge current account surplus of China and consequent the global savings glut does not make sense because increase in savings in East Asia must necessarily be balanced by reduced by reduced savings in other parts of the world, say United States. This is easily proved by the fact that global savings as a proportion of global income has remained stable at 22.7%
The source of US deficit lies in the huge expenditure of the US. In the United States private spending was replaced with government deficit. In the year 2000 the US deficit was 12.5 % of GDP according to an estimate by IMF. Such a huge government deficit leads to a large current account deficit. One alternative in this scenario could have been devaluation of the dollar which would have made exports cheaper and reduced the current account deficit. The problem with this strategy is that if the dollar is devalued then the Middle Eastern countries and other countries which hold huge dollar reserves suffer huge losses. The US is thus able to continue borrowing in its own currency by printing dollars while all countries will suffer loss of asset value.
There was a secular decline in the dollar from 2002 to mid 2008. The phenomenon of depreciation of the dollar during 2002 to mid 2008 coincided with the ballooning of the US current account deficit. Therefore, the situation was getting worse when the dollar was depreciating. A curious development in mid 2008 was the appreciation of the dollar before the impending crisis. The dollar depreciated again very recently.
The problem facing the United States and China and the world in general is that the dollar needs to depreciate to reduce the global imbalances. However, the reserve currency status of the dollar impedes this adjustment. If China reduces its holdings of treasury securities and the US dollar depreciated then the situation becomes more dangerous.
China has been a high saving labour surplus economy. Therefore, to increase its productivity it has kept an unduly high investment rate. In the current fiscal China has invested 50% of its GDP and designs to continue with high rates of investment. China is in a comfortable position to increase global demand by increasing its domestic demand. The rate of growth of domestic consumption in China is 9% while the rate of growth of domestic investment is 14.8%. However, it does not make sense for China to strive for a consumption led growth. China will continue to rely on the policy of increasing its exports as an engine for increasing productivity and growth. The problem is that in a more diversified market China needs to shift from pegging the renminbi to a basket of other currencies. Presently 16% of Chinese exports are to the US. China should continue to manage the exchange rate but as the exports to US decline China should peg the value of the renminbi to a basket of currencies. It is more lucrative for China to peg its currency against the dollar because otherwise the book value of the dollar denominated assets will depreciate with the depreciation of the dollar.
The problem with the Chinese export led model is that in the present scenario the US dollar is not a reliable store of value. The impending depreciation of the dollar raises the question of how dollar can remain the prime currency. The large and increasing current account deficit of the United States along with counter cyclical monetary and fiscal policy of the US government only reduce the problem to how gradually the US dollar depreciates. Amidst such an inherently unstable global order any threat of withdrawal of Chinese dollar denominated investments will add to the instability.
Throughout the whole of 1990s the US current account deficit was increasing. The huge current deficit is sustainable only if asset appreciation keeps pace with interest rates. In the year 2001 there was the stock market bubble and the US adopted expansionary fiscal policy which led to a large US deficit. The external borrowing of the US ballooned and China started purchasing securities. This was largely misinterpreted as Chinese saving but actually US was stoking the increase in Chinese savings.
The total stock of foreign exchange held by all the developing countries in the year 2009 was 45.3 trillion. The foreign exchange reserves held by Africa has also been increasing rapidly (roughly $ 2.8 trillion). The huge current account surplus of China and consequent the global savings glut does not make sense because increase in savings in East Asia must necessarily be balanced by reduced by reduced savings in other parts of the world, say United States. This is easily proved by the fact that global savings as a proportion of global income has remained stable at 22.7%
The source of US deficit lies in the huge expenditure of the US. In the United States private spending was replaced with government deficit. In the year 2000 the US deficit was 12.5 % of GDP according to an estimate by IMF. Such a huge government deficit leads to a large current account deficit. One alternative in this scenario could have been devaluation of the dollar which would have made exports cheaper and reduced the current account deficit. The problem with this strategy is that if the dollar is devalued then the Middle Eastern countries and other countries which hold huge dollar reserves suffer huge losses. The US is thus able to continue borrowing in its own currency by printing dollars while all countries will suffer loss of asset value.
There was a secular decline in the dollar from 2002 to mid 2008. The phenomenon of depreciation of the dollar during 2002 to mid 2008 coincided with the ballooning of the US current account deficit. Therefore, the situation was getting worse when the dollar was depreciating. A curious development in mid 2008 was the appreciation of the dollar before the impending crisis. The dollar depreciated again very recently.
The problem facing the United States and China and the world in general is that the dollar needs to depreciate to reduce the global imbalances. However, the reserve currency status of the dollar impedes this adjustment. If China reduces its holdings of treasury securities and the US dollar depreciated then the situation becomes more dangerous.
China has been a high saving labour surplus economy. Therefore, to increase its productivity it has kept an unduly high investment rate. In the current fiscal China has invested 50% of its GDP and designs to continue with high rates of investment. China is in a comfortable position to increase global demand by increasing its domestic demand. The rate of growth of domestic consumption in China is 9% while the rate of growth of domestic investment is 14.8%. However, it does not make sense for China to strive for a consumption led growth. China will continue to rely on the policy of increasing its exports as an engine for increasing productivity and growth. The problem is that in a more diversified market China needs to shift from pegging the renminbi to a basket of other currencies. Presently 16% of Chinese exports are to the US. China should continue to manage the exchange rate but as the exports to US decline China should peg the value of the renminbi to a basket of currencies. It is more lucrative for China to peg its currency against the dollar because otherwise the book value of the dollar denominated assets will depreciate with the depreciation of the dollar.
The problem with the Chinese export led model is that in the present scenario the US dollar is not a reliable store of value. The impending depreciation of the dollar raises the question of how dollar can remain the prime currency. The large and increasing current account deficit of the United States along with counter cyclical monetary and fiscal policy of the US government only reduce the problem to how gradually the US dollar depreciates. Amidst such an inherently unstable global order any threat of withdrawal of Chinese dollar denominated investments will add to the instability.
Subscribe to:
Posts (Atom)