Public - Private partnership - what happened to private risk taking?

The US Senate refused to bail out the US car manufacturers. Closer home, as if on cue, the demand for government guarantees for infrastructure projects seems to be rising. On a show on a business channel last evening, I was asked to comment on whether the government should provide such support, in the context of the increasing difficulty in reaching financial closure for long gestation, and low return infrastructure projects. A similar demand was voiced by the Chairman of one of India's largest construction companies a few days ago on a rival channel.

Lets look at the merit of case - long gestation infrastructure projects are currently difficult to finance because lenders - predominantly bankers - see them as risky. The risk for road projects for example - arises either out of estimation of "tollable" traffic, or the duration of loan - typically in excess of 20 years. Government guarantees will doubtless make these projects bankable. The question then is "what is the role of the private sector?"

To me, it appears that once again, the private sector wants to pass on legitimate commercial risk to the public while keeping the profits involved in the construction of the project in private hands! The moot point is, why should the public sector not do it all itself? Which brings us back to a government controlled "planned" economy - a model which was supposedly given up for dead just a few months back.

The logical work-around would be to look at measure to develop a vibrant and functioning debt market, which India sorely lacks. Simultaneously, we need to develop a long term bond market to allow intermediaries to match tenure risk. There are several studies which point to the steps that need to be taken in this regard - which I will discuss in another post. What we definitely do not need is another form of crony capitalism!