PUBLIC-PRIVATE PARTNERSHIPS USED TO DEVELOP TAMIL NADU'S

UNCLAS SECTION 01 OF 02 CHENNAI 000244 SIPDIS SENSITIVE SIPDIS USDOC FOR MAC/ANESA/OSA USDOC FOR USFCS/OIO USDOC FOR ITA/TD E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV IN SUBJECT: PUBLIC-PRIVATE PARTNERSHIPS USED TO DEVELOP TAMIL NADU'S FLAGGING INFRASTRUCTURE REF: (A) KOLKATA 00041, (B) 05 CHENNAI 01866, ¶1. (U) SUMMARY: Deficit budgets and demands for more projects in Tamil Nadu have resulted in a tight funding climate for infrastructure projects. The state government has used public-private partnerships, in the form of dedicated companies known as Special Purpose Vehicles (SPVs),to finance much-needed infrastructure improvements. These Special Purpose Vehicles not only obtain project finance, they also write contracts and identify contractors to ensure projects are completed within budget and on time. Tamil Nadu officials expect greater private participation in project management after the anticipated passage of proposed legislation that will provide for alternative dispute resolution for infrastructure projects. Outside observers, however, are skeptical as to whether the contemplated reforms will be enough to draw greater international investment, including from U.S. companies. END SUMMARY. ¶2. (SBU) Budget deficits have hamstrung the Government of Tamil Nadu's ability to make investments in infrastructure (ref B). Brajendra Navnit, Deputy Secretary for Budget in Tamil Nadu's Finance Department, told Post that the state government sees public-private partnerships as a way to finance infrastructure development. According to Navnit, Tamil Nadu increasingly resorts to establishing dedicated companies or Special Purpose Vehicles (SPV) to execute infrastructure projects. These companies are financed through debt subscribed to by major financial institutions both international and domestic. Mr. L. Ravikumar, Head of the National Urban Infrastructure Fund - Southern Region, Infrastructure Leasing and Finance Services Limited, told Post that his quasi-governmental institution (a consortium including Indian and international lenders) was one of the biggest subscribers to SPV debt. Ravikumar said that his company is comfortable with its exposure in the state, given Tamil Nadu's relatively healthy fiscal situation. ¶3. (SBU) Special Purpose Vehicles provide a number of benefits in addition to serving as a method for raising private investment in public infrastructure. First, SPVs provide some insulation for the government from the thorny political problems (ref A) that often accompany land acquisition in India. In addition, they provide the flexibility needed to hire and fire employees and thus to ensure timely and cost effective project completion. For example, the New Tirupur Area Development Corporation SPV is able to employ consultants on contracts of varying tenures. The corporation, established to build and operate a water supply, sewerage treatment, and disposal network for the city of Tirupur, has been able to keep labor costs down by using contractors rather than permanent hires. Sameer Vyas, New Tirupur Area Development Corporation's Managing Director, proudly told Post that his team had completed the first phase of its program six months ahead of schedule and within budget. ¶4. (SBU) Faced with rapid economic growth, Tamil Nadu needs across the board improvements to its infrastructure. The SPV route is most often taken for urban infrastructure projects, where the demand for quality infrastructure is the highest. Niranjan Mardi, Commissioner of Tamil Nadu's Municipal Administration Department, which oversees urban infrastructure development, told Post that as more and more of the state's residents travel to the West, they return demanding first world facilities at home. He said that rapidly expanding incomes have boosted the willingness of Tamil Nadu's urbanites to pay for better infrastructure. These urban dwellers demand results, creating space for the government to treat urban infrastructure projects as commercial ventures. ¶5. (SBU) The state commonly has used SPVs for projects relating to water supply, waste water treatment, and solid waste management. Vikram Kapur, Managing Director of Tamil Nadu's Urban Infrastructure Development Fund (a government advisory body on project finance), told Post that confidence in the SPV framework among all stakeholders makes establishing such vehicles quite easy, with some SPVs raising funds from the bond market. He said that Tamil Nadu's municipal governments increasingly turn to SPVs to build, expand, and manage infrastructure facilities, leaving municipal governments to concentrate on revenue collection and the regulation of growth. ¶6. (SBU) Despite the effectiveness of the SPV approach, private investment in Tamil Nadu infrastructure improvement has been dampened by the ineffective administration of justice in the state. Litigation over contract disputes in Tamil Nadu, as in most of India, moves at a glacial pace. Tamil Nadu is seeking to remedy CHENNAI 00000244 002 OF 002 these gaps by changing the existing law to permit alternative dispute resolution in cases of disputes over infrastructure investments. The state expects interest from private investors in infrastructure projects to increase once this new law is passed. Nonetheless, the legislation has remained in the drafting stage for over a year. Outside experts, however, are skeptical about the ultimate impact of the proposed legislation. Latha Ramnathan, Executive Director for Infrastructure at PricewaterhouseCoopers, told Post that the proposed dispute resolution methods would not necessarily attract greater investment, as they will only strengthen the control of the state government. ¶7. (U) COMMENT: Tamil Nadu's infrastructure needs are great; investing in infrastructure development SPVs could be a business opportunity for international concerns. While the technology is locally available, Indian companies lack the necessary project management expertise to cost effectively and quickly complete large infrastructure projects. Tamil Nadu's proposed reforms represent an effort by the state to draw greater international investment. But it is unclear whether the introduction of alternative dispute resolution will be enough to draw the quantum of investment Tamil Nadu requires to keep pace with the growing demands it faces. END COMMENT. HOPPER