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

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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