THERE is still time for free-market types to enjoy the journey in India that will make them feel

the smuggestthat from Delhi to Chennai, the southern city of 9m people once called Madras. You leave a gleaming airport terminal in the capital, built and run by a private firm and opened in 2009. You land at an airport run by the government and are taken by bus to a building that should have been retired along with Leonid Brezhnev. When it comes to creating the infrastructure India needs, the lesson seems clear: private sector good, public sector bad. The contrast will end when Chennais new airport terminal opens, which is due to happen in 2013. Work started in 2008. Yet even if the opening ceremony is delayed forever, the triumphalist view of the private sectors role in infrastructure has begun to look hollow. Nothing illustrates this better than the woes of several trophy public-private partnerships (PPPs)defined here broadly, as deals for private firms to build or run public infrastructure that fall short of outright privatisation. In this section
RIPPP Big is not always beautiful Too big to jail The other mandate To each, not according to his needs National trust Skimming the froth The scam busters
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That smart new airport in Delhi is losing money. Related property deals were criticised by an anti-graft agency in August. The new express-train link connecting it to Delhi has been shut as a result of engineering faults. The services operator, Reliance Group, says it is financially ruinous. In Indias far west a giant new power plant, one of the biggest investments being made in India, is in trouble, due to soaring coal costs. Its owner, Tata, has taken a write-off. As with Americas 19th-century railways boom, some worry that investors are doomed. Even sober voices admit there are problems. Deepak Parekh, the boss of a financial firm and an adviser to the government, says: In some ways weve been successful. In others we have not. The boom was quite something. In the 1990s the political class agreed that PPPs were a panacea. After all, Indias public sector, unlike Chinas, is skint and often seems to struggle to tie its shoelaces. In Latin America in the 1990s existing, or brownfield, assets were privatised. In India it was all about greenfield, or new projects, from roads to power stations.

Between 2007 and 2012, $225 billion was invested by the private sector in infrastructure, equivalent to 12% of GDP in 2012, much of it through PPPs. Official figures suggest 758 PPP projects are under way or complete, worth $70 billion. Roads, ports and electricity projects account for the lions share. These are contracted at both the federal and state level and often involve multiple public bodies. A lot of improvisation took place, with perhaps only 40% of projects using the standard contract framework that the central government recommends. Firms range from big listed outfits to provincial builders on the make. The condition of these projects is murky, partly because most have their finances ringfenced and do not reveal them in public. Gajendra Haldea, an official who helped design Indias PPP framework, says that outside the power sector there is no systemic problem. But even he worries there are signs of strain, particularly at projects with badly designed contracts. The banking system is grappling with dud loans related to PPP projects. Big infrastructure firms have seen their debts soar and share prices fall. Many have subsidiariesoften individual projectsthat are lossmaking. A.M. Naik, the boss of Larsen & Toubro, an engineering conglomerate, fears that a long trail of unlisted small firms are in particularly poor shape.

Fresh activity has stalled. Vinayak Chatterjee of Feedback Infra, a consulting firm, compares the industry to a boa constrictor after a meal. The value of the pipeline of new projects fell by 52% last fiscal year, according to the central bank. The governments hope that investment will rise smoothly to Chinese levels seems wildly unrealistic (see chart). What went wrong? Lots of super roads have been built but during the bubble firms bid too much for the right to build and levy tolls on new projects, says Mahesh Nandurkar of CLSA, a broker. Plenty of contracts won in 2007-10 will not make a profit. In electricity generation many firms wrongly assumed they could get cheap coal from the state-run coal monopoly, or gas from sputtering offshore energy fields (which are themselves largely operated under PPP-style contracts). Delays due to red tape and problems

acquiring land are endemic. Only a quarter of all projects are on or ahead of schedule. High debts mean many lack the flexibility to cope when things veer off plan. Fans of government-run projects are cock-a-hoop. They argue the state can cope better with financially marginal projects and with red tape. Delhis metro, built and run by a state body, is the shining example. It loses money but was built quickly and it works. Chennais metro, due to arrive in 2015, is following the same model. A public body is in charge and subcontracts construction to private firms, including foreign ones. Down a big hole in the city centre, Muscovites in hard hats can be found directing earth-boring machines. Its boss, K. Rajaraman, considered inviting private firms to run the completed project but reckons the state can do it more cheaply. Even some fans of PPP say that India has got things the wrong way round. Shailesh Pathak of Shrei Infrastructure Finance, a financial firm, argues that the state should build things (using private contractors). It should then sell the right to operate completed, and thus lower-risk, projects to the private sector, raising funds to pay for more construction. Kamran Khan of the World Bank agrees. There is an inherent disconnect between what investors want and the wildly unpredictable business of getting a big greenfield project done. Yet Indias rickety public finances, its need for infrastructure and the stately pace with which its policy moves mean that greenfield PPP will remain essential. In the short term the government will try to revive things through some smelly compromises. Contracts for unfinished projects may be tweaked to benefit private firms, even though this will draw accusations of cronyism. State banks will be encouraged to roll over dodgy loans, even though this means taxpayers subsidise business folk. Beyond this there is only one solution: to reduce the risks projects face, from red tape and land-acquisition problems to meddling politicians. Making India predictable is impossible but conditions on the ground can be improved. That should cut the cost of capital and see cash, including from abroad, flood back in to what should be one of the great investment opportunities of the century. a