In a panel discussion presided over by chief minister Omar Abdullah on J&K’s Economic Reconstruction through Public Private Partnership (PPP) last week, economist and J&K Bank chairman Dr Haseeb A Drabu delivered a brief speech. Excerpts are reproduced here.
Prior to discussing my understanding of PPP, based on my limited experience of working in J&K, a quick word about Economic Reconstruction seems to be in order. I do not think Economic Reconstruction is only reconstruction of physical assets like roads, bridges and buildings. In my view, the critical challenge in Economic Reconstruction is how to restore the institutional capacity of the government and the private sector to deliver. The institutional capacity to deliver public services has been decimated over the last twenty years.
If that is the broad tenet of economic reconstruction then PPP gets defined not in a project specific sense but in terms of capacity and knowledge building. It is here that the whole issue of delivery of public goods and public services comes in.
So in the specific context of J&K, the first thing is that we are looking at public private participation for the purpose of economic reconstruction not so much as assets but of the institutional capability of the government and the private sector to deliver.
Second, in terms of PPP as a model or as an abstraction, I don’t think anybody needs to spend much time to convince that it is a viable model. Its efficacy and success is also not to be debated. Having said this, let us also not see PPP as an end in itself. It is only a means to an end.
As a point in fact, it is not entirely new either to J&K or to the system as it is made out to be. We have been essentially talking of the same thing in different forms since the 1960’s. It took different forms then because the historical context was different and the private sector hadn’t evolved then as much as it has now
Nevertheless, I can’t resist the temptation of saying that one of the best models of public private participation is the institution that I happen to head now which is the J&K Bank; even though the state government holds a majority stake in the bank, it is being run as a private sector bank. Therein lies the secret of its success. In fact one of the things that I keep telling investors is that the J&K Bank is public sector bank in its cost structure and a private sector bank in its earnings growth! It is to the great credit of government that this institution has survived in the model of public private participation. It is this success story that needs to be replicated and multiplied over and over again in the state by the State.
The only issue at hand in the discussion on PPP which needs to be discussed today is that even as we accept the model of public private participation in whatever form it is, the real challenge is to understand the context in which it will operate in J&K. In other words, what is required is the context specific detailing.
I would suggest that we spend most of the time on the outlining the specificity of J&K and try and adapt the generic PPP model to the extant conditions that we have on the ground here in the state. Towards this end, I want to make five basic points.
First, is the logic, why are we doing it? What is the need for going in for PPP. I think it is very obvious but I still want to highlight this. Are we doing it for public economic purposes, i.e because the delivery of public service is poor? Or are we doing it for public finance purpose, i.e the state doesn’t have the money to provide these services? Wherever I have discussed this issue, the answer has been the latter; we need to get private sector to do funding. If that is indeed the raison d’ ?tre for PPP then I think the intent is misplaced. The way finance has evolved today it is not required that the private sector has to be the leader in this case.
Take the example of the Power sector. Till five years ago power sector was not being financed by banks or institutions largely because the way it was structured. After power trading companies have come in, power has become a tradable commodity. Financial institutions and banks are bending backward to finance power projects not on basis of assets, not on basis of land but on the basis of receivables. So there is a whole new model of finance that has emerged.
The implication of this is that when we look at PPP in J&K’s context let it not emerge from the fact that we have a bankrupt government therefore we need to do it. I think that is a wrong premise to start. We must have tangible reasons of improving delivery of public goods through participation of private sector for us to get into public private participation.
The second issue is the underlying assumption which I think is very critical to understand in the context of J&K. What are we talking of when we talk of “private sector”? Invariably the assumption is a large well developed private sector in the system. In J&K, are we talking of local private sector, are we talking of national private sector, or are we talking of international private sector. I think that issue needs to be debated.
When I look at it from this perspective I find that there is hardly a private sector worth the name in J&K. The private sector is small, it is very fragmented and it doesn’t have the size and scale to actually deliver what you want to deliver. Whatever the reason for the stunted growth of the private sector, and there are many, the fact is that our local private sector is not well developed to be able to engage in PPP at this point of time.
The national private sector, let me tell you from experience, has very little appetite for participation in J&K, whatever be the reasons. There may be the reason of Article 370, or the reason of inefficiency of state government, or the reason of civil strife in the society. The fact is that the national private sector has shown very limited appetite for investing in J&K. In addition to all this, there is of course the issue of what I would call “mission integrity”.
This leaves us with the only possibility of international private sector. There are only two variants of international private sector. One is international private sector companies; these are not allowed. The other variant is the institutional private sector like the multilateral agencies like IFC or ADB and all. I think that is the best route for Kashmir to take at this point of time. There is some kind of limited engagement already with ADB. We did create a structure called Economic Reconstruction Agency (ERA) which again lost its way somewhere down the line because it was part of the larger system, so it couldn’t work the way it ought to have.
The bottom line is that when you look at the private sector please try and define what private sector we are talking of. It’s not a uniform homogenous entity. There are fragments of it and each has its own interest.
The third issue which I am going to raise is on the local context of the PPP, which has to be designed with reference to three things:
(1) First, is the factor of “public acceptance risk”. It is important to take account of how the engagement with national and international private sector is going to be taken by the people. It may need a lot of well informed debate and education to precede the actual engagement.
(2) Second is the governance risk. We have had experiences in the last twenty years where a government has reneged on many a contract. So there is a governance risk which the private sector is very worried about.
(3) Third is the regulatory risk that we don’t have an independent regulator. And of course then there are all kinds of other risks but those are generic, not specific.
My fourth point of enabling environment. We have a contentious legal environment which I think becomes the stumbling block in everything we do. So we need to look at the legal environment very specific to J&K which starts and ends at Article 370. But I think there is far more than Article 370 that is involved in economic legislations than elsewhere. We don’t even have a record of the economic legislations of the state as to what applies where. So we need to do some ground work before we start getting into the larger issues of PPP.
The second part of enabling environment is market development, which is the final point I want to make. We have very low levels of financial intermediation and market development. We have labour market issues and of course we have the well known land market issues. So this needs to be factored in when you are looking at J&K as a model.
All these five issues will determine the form and type of PPP that can be had in J&K.
The other thought that I want to leave with you is that if the idea is that private sector should come in for participation in the state, there are three variants of their participation: first is of course the private funding of a project. Second is the private ownership and third is private management. I find it very curious that wherever we talk of public private partnership we are only talking of private ownership, we never talk of private funding, or of private management. And if that is not enough, the first thing that comes up in any PPP model/project or otherwise is the issue of land. There are many ways to start an engagement and establish a few success stories and then move forward. But for some strange reason it always get struck on the emotive land issue and invariably gets the Article 370! I suspect, it is more out of lack of intent than anything else that the national private sector behaves in this fashion.
Finally, even as we must proceed with PPP in whatever form it is workable here, there is no denying the fact that the development strategy of J&K in the medium term has to be one led by government solely as in the South East Asian model for the next 5-7 years to build a certain system, and create structures and on top of which then we can then layer at PPP for sustainable development and delivery of public services.