For PPPs to work, Railways must change mindset

The general and railway budgets have emphasised public private partnerships (PPPs) as an option for achieving the goals set in the Railways’ vision document, including increasing gross revenue from around 1.2% of India’s GDP to 3% by 2020, and adding 2,500 km of new railway lines per year for the next ten years.

There are three options before Railways for undertaking any project:

First, it undertakes the project by itself with internal financing, managerial and technical resources. To the extent the organisation has capabilities to perform such tasks in a cost-efficient manner this method can have many advantages. Indeed, for many activities, this is the method the Railways and other ministries have been using, and will continue to use. Thus, greater competency in pursuing this option is needed.

The second option is contracting out goods activities to other organisations, whether public or private. Contracting out requires skills in contract drawing, supervision, and ensuring that any difference in contract conditions is addressed expeditiously and at low transactions costs. Ensuring that the government officials act as agents of the general public and pursue public interest in awarding and supervising contracts is crucial here.

The third option is PPP. Each of the three terms in the acronym is important. However, the most important is partnership. This requires that the Railways as an organisation, particularly its top officials including the minister, stop assuming that the public sector is the dominant partner in a particular PPP project and can therefore change project specifications and parameters without due consideration to the project viability and costs.

The tendency of the ministers and bureaucrats to regard themselves as rulers rather than as temporary trustees of public responsibilities entrusted to them and personalising the powers entrusted to them is a major constraint to effective PPPs.

Involving a private (or another) party in infrastructure and social projects involves additional transaction costs. There are three generic elements of transaction costs —- search and information about products and the parties with whom to partner; bargaining and decision-making; and policy and enforcement.

The efficiency gains from PPP must be sufficiently large to overcome additional transaction costs. Each PPP project is unique and must be structured appropriately. It would be useful to begin with relatively smaller PPPs and gain learning experience.

Railways will need to pursue all three options simultaneously and become more competent in each of them. Re-examination of the current procurement systems to bring about greater resource efficiencies, an area not emphasisd in the 2010 budget, therefore merits urgent consideration.

Simply setting up a separate structure and a special task force to create what the railway minister called ‘business culture’ for new investment projects involving PPPs is useful but not sufficient. The business culture is needed for other options as well. The rationale and operating requirements for making PPPs successful should permeate throughout Railways and not just be confined to a separate structure as proposed.

Entrusting an existing specialised transport research and training centre, with operationally relevant training in procurement procedures, together with contracting out and the PPPs merit serious consideration.

The Railways’ main function is to provide rail transport related services with the least economic resource costs to the society. Its function is not focus on employment opportunities for their own sake or on non-transport related tasks.

If disproportionate energy of the top policy makers and managers is absorbed by non-transport related tasks, it would distract from the primary function of the Railways. Given the priorities in the railway budget, multi-tasking, retraining and re-skilling of the 1.4 million railway staff should be a priority.

All the three options, particularly the PPPs, require modern budgeting and management information systems. The use of cash budgeting, not taking into account the accrued pension and other liabilities, provides an inadequate picture of government finances including those of the Indian Railways.

The manner in which divestment policy is framed, that profit making public sector units (PSUs) can be divested with the government retaining control is therefore based on inaccurate accounting information.

The appropriate accounting requires inclusion of not just accrual budgeting principles but also recognition of the opportunity cost of equity capital and lower-than-market-price assets such as land provided to the PSU. It is time for India to move to a more sophisticated economic debate on the role of public enterprises in the economy.

The Government Accounting Standards Advisory Board was given responsibilities in July 2008 to develop accrual-based accounting standards for the government. The progress, however, has been very limited. It is unfortunate that neither the finance minister nor the railway minister chose to highlight the need for budgetary and accounting reforms.

The ministry of corporate affairs (MCA) has announced the target of achieving International Financial Reporting Standards by 2011 for the private sector. Listing of PSUs will also require them to move in that direction.

MCA has also developed an early warning system for corporate frauds. The government has reportedly found financial irregularities in 160 companies, 30 of which are PSUs. This underlines the need for better budgeting and management information systems and stronger corporate governance of PSUs including the Railways.

For effective PPPs, Railways needs to urgently initiate a shift to accrual accounting and modern budgeting and management information systems. Sans this, risk sharing of PPP projects cannot be undertaken efficiently. .

Finally, organisational effectiveness requires competition or contestability, appropriate organisational and individual incentive structures and speedy absorption and diffusion of new technologies. Without these, the PPP option will have only limited impact.

The writer is professor, Lee Kuan Yew School of Public Policy, National University of Singapore, and can be reached at sppasher@nus.edu.sg. Views are personal.