Unless private investments are of good quality, they can become regressive and lead to crony capitalism, as it has happened all along in the PPP model, says EAS Sarma
EAS Sarma, former secretary of the Government of India, has said that public–private partnership (PPPs) are certainly not a substitute for good governance and as suggested by United Nations Office on Drugs and Crime (UNODC) and others, unless there is total transparency, PPPs will tend to hurt the public interest. Consciously, the government should bring them within the purview of the Right to Information (RTI) Act, he said.
The former secretary, in a letter written to Montek Singh Ahluwalia, deputy chairman of Planning Commission, has said, “...the PPP route that the Planning Commission has so aggressively promoted all these years has opened doors to large-scale corruption in the country. The magnitude of the PPP scam is huge as the investments involved are large and the value of the public lands handed over to the private parties is enormous.”
There are around 758 PPP projects worth Rs4 lakh crore already taken up. They are largely in infrastructure sectors such as roads, energy, airports, ports and metros and in development sectors such as education, health and housing. The magnitude of investment in PPPs in India seems to be much higher than the global average. It amounts to 20%-30% of gross domestic product (GDP), whereas the global average is around 15%.
According to the UNODC report, in the absence of laws to govern either PPPs or public procurement procedures, the way these projects have been formulated and implemented has created an enormous scope for rent seeking and deficiencies in their outcomes.
“The General Financial Rules, 2005, are the rules followed for public procurement by government departments and ministries across the country. These rules do not have the status of legislation and violations do not attract much penalty. India currently has no clear rules for regulating PPP projects,” the report says.
In most cases, there was no competitive bidding for selecting the developers. Where there was competitive bidding, the tendering processes were rigged to select pre-determined bidders. The so called ‘independent’ consultants were not so independent, as many of them had a conflict of interest. In many cases, the companies were found to have colluded with the consultants. The bidders often misrepresented the facts to win the orders and misreported revenue to avoid revenue share to the government. The concerned government officials who were expected to ensure fairness in the selection of bidders and monitoring implementation awere either incompetent or outright corrupt.
In many PPP projects, public land is handed over to the private developer at a nominal rate and the suppressed value of the land is considered in computing the equity share of the government. As a result, the government becomes the minority shareholder. Had the market value of the land been considered, the equity share of the government in the PPP would have exceeded 50%, in which case it would have become a government company under the Companies Act.
As a result of undervaluation of the land and the consequent undervaluation of government equity, the PPP project surreptitiously avoids the rule of reservation for SCs/ STs/ OBCs. Since the government in such a case is only a minority shareholder, the private promoter often takes decisions not entirely consistent with the public interest. The government directors who are required to keep a watch over the affairs of the PPP have often become silent spectators or they have connived with the private promoter for personal gains.
“The Emaar MGF scam in AP is an example of this. In AP, there is a law, the AP Infrastructure Development Enabling Act of 2001which requires competitive bidding procedures to be followed in selecting the promoters of ‘mega’ projects but, rarely, has this law been complied with," Mr Sarma added.
There has been undue delay in the Centre enacting the Public Procurement Bill. One is not sure about the intentions of the government towards probity in procurement when ministries/departments such as coal, mines, telecom and atomic energy have openly defied all norms of transparency and competition in procurement by championing subjective procedures in allotment of coal and mineral blocks, sale of spectrum and placement of orders on multi-national companies (MNCs) on a nomination basis for nuclear power projects worth billions of dollars. The central ministries have in fact gone to the extent of swearing before the courts that such opacity and subjectivity are a necessity and a virtue.
Mr Sarma, the former secretary said, “I hope that the earlier IMF study on PPPs in 2006, my own EPW review of that study and the latest UNODC study wake up the government and the Planning Commission to the ground realities and trigger corrective steps before any further damage is caused.”
Here is the UNODC report on India: Probity in Public Procurement...
If the Nifty holds above the day’s low, we may see a sideways move. However, the market trend is still down
A sell-off in oil & gas, power and consumer durables stocks and weak global cues led the market down today. If the Nifty holds above the day’s low, we may see a sideways move. However, the market trend is still down. The National Stock Exchange (NSE) reported a lower volume of 49.74 crore shares and advance-decline ratio of 584:793.
The market opened in the positive on support from Infosys, which continued to rally for the second day after the company’s board on Saturday reappointed NR Narayana Murthy as the executive chairman. On the other hand, the Asian pack was mostly lower on news of a contraction in Chinese HSBC Manufacturing PMI.
The Nifty opened 11 points higher at 5,997 and the Sensex started the day at 19,859, a gain of 99 points over its previous close. The gains in the IT sector helped the benchmarks hit their intraday highs in initial trade itself. The Nifty touched 6,011 and the Sensex inched up to 19,860 at their respective highs.
The benchmarks remained near their previous closing levels in the first hour of trade and trended lower on selling pressure from the auto and power sectors. The HSBC Manufacturing PMI coming in at a 50- month low of 50.1 for May also weighed on investors.
Barring IT and technology, all other sectoral gauges were in the red in late morning trade. Global cues remained weak in the noon session as markets in Asia were in the negative and the key European markets opened with sharp cuts on Chinese concerns and fears that the US Federal Reserve will taper its bond buying programme.
The market continued its southbound journey in the second session of trade on concerns about the pace of domestic economic growth. The Sensex fell to its lows shortly after 2.00pm with the index at 19,542 while the Nifty’s low came in at around 2.15pm as the index touched 5,916.
The benchmarks settled off the lows, but down for the second consecutive day. The Nifty closed 47 points (0.78%) down at 5,939 and the Sensex finished trade at 19,610, a decline of 150 points (0.76%).
The broader indices finished mixed as the BSE Mid-cap index gained 0.26% and the BSE Small-cap index fell 0.12%.
The sectoral gainers were BSE TECk (up 1.11%); BSE IT (up 1.01%); BSE Metal (up 0.38%) and BSE Realty (up 0.33%). The main losers were BSE Oil & Gas (down 1.84%); BSE Power (down 1.02%); BSE Consumer Durables, BSE Capital Goods (down 0.99% each) and BSE Auto (down 0.84%).
Out of the 30 stocks on the Sensex, 10 settled higher. The top gainers were Infosys (up 4.42%); Jindal Steel & Power (up 1.64%); GAIL India (up 1.42%) and State Bank of India (up 1.07%). The major losers were Hero MotoCorp (down 3.65%); Bajaj Auto (down 3.32%); ONGC (down 2.85%); Sun Pharmaceutical Industries (down 2.68%) and HDFC (down 2.40%).
The top two A Group gainers on the BSE were—CRISIL (up 20%) and GlaxoSmithKline Pharmaceuticals (up 6.15%).
The top two A Group losers on the BSE were—Suzlon Energy (down 9.96%) and Jaypee Infratech (down 6.99%).
The top two B Group gainers on the BSE were—Anjani Portland (down 19.89%) and Tirupati Inks (down 19.97%).
The top two B Group losers on the BSE were—Williamson Financial Services (down 19.50%) and Eskay Knit India (down 19.05%).
Of the 50 stocks on the Nifty, 17 ended in the in the green. The main gainers were Infosys (up 4%); Lupin (up 2.35%); Reliance Infrastructure (up 2.26%); JSPL (up 2.13%) and Tata Steel (up 1.97%). The key losers were ONGC (down 3.51%); Asian Paints (down Bajaj Auto (down 3.32%); Hero MotoCorp (down 3.30%) and Ranbaxy (down 3.29%).
Markets across Asia settled lower as China's HSBC’s Purchasing Manager's Index (PMI) fell to 49.2 for the month of May, below the 50-mark that separates expansion from contraction. An improvement in the growth outlook in the US re-ignited concerns of the Federal Reserve tapering its bond-buying programme, which also weighed on investors’ sentiments.
The Shanghai Composite shed 0.06%; the Hang Seng declined 0.49%; the Jakarta Composite tanked 1.92%); the KLSE Composite fell 0.16%; the Nikkei 225 tumbled 3.72%; the Straits Times dropped 0.61%; the Seoul Composite lost 0.57% and the Taiwan Weighted settled 0.65% down.
At the time of writing, two of the three the key European indices were in the red while the US stock futures were in the green, indicating a firm opening for US stocks later in the day.
Back home, foreign institutional investors were net sellers of equities totalling Rs504.02 crore on Friday whereas domestic institutional investors were net buyers of stocks worth Rs203.11 crore.
Pharmaceutical major Dr Reddy’s Laboratories and Fujifilm Corporation today said they have decided to terminate the memorandum of understanding (MoU) to enter into an exclusive partnership in the generic drugs business for the Japanese market and to establish a joint venture in Japan. Though the MoU for generic drugs has been cancelled, both the companies will explore partnerships in other related areas, said a statement issued by DRL. The stock gained 1.10% to close at Rs2,115 on the NSE.
Speciality steel and wire rope maker Usha Martin has signed a technical assistance agreement with Aichi Steel Corporation (ASC), a leading speciality steel and forging company of Japan. The deal aims to improve Usha Martin’s production efficiencies and utilise its facilities to produce higher value steel products. The stock surged 2.16% to close at Rs23.60 on the NSE.
Mumbai-based Welspun Corp today said it has demerged Welspun Infra Enterprises from Welspun Corp and renamed it as Welspun Enterprises. The demerged firm will focus on steel, infrastructure, oil and gas exploration and energy. The existing company Welspun Corp will solely focus on pipes and plates business in India and globally, it said in a release. Welspun Corp advanced 4.07% to close at Rs47.30 on the NSE.
Investors' faith in several richly valued stocks in the banking, consumer staples and pharmaceutical sectors will be tested, says Kotak Securities in a research note, since it foresees weak economic growth, weak investment cycle and anaemic job creation
Notwithstanding decent results in the March quarter, valuations of good-quality companies have become quite expensive, propelled by the market's view of low cost of capital in perpetuity. While potential withdrawal of monetary stimulus programs by global banks may coincide with potentially higher political uncertainty closer to India's general elections in early 2014, the market may react earlier as global currency and bond markets are flashing some warning signs, says Kotak Institutional Equities Research.
According the report, 4Q FY13 adjusted net profits of the BSE-30 Index grew 8.2% year-on-year (y-o-y) with automobiles, metals and mining stocks surprising positively. Coal India, Hero MotoCorp, ITC, Maruti Suzuki India, Mahindra and Mahindra (M&M), ONGC, Tata Motors and Tata Steel surprised while cement, consumer and telecom sectors disappointed significantly at the net income level during the March quarter.
However, according to Kotak research, the market's view on cost of equity over the next few months will determine whether valuations of fancied stocks sustain at elevated levels or not. The biggest issue for global equity markets and in turn, for Indian equity market is the potential exit of central banks from their quantitative easing (QE) programs. Low yields and the quest for yields everywhere have resulted in a compression of the required rate of return for investors, resulting in a decline in the acceptable cost of capital or equity, the research report said.
India has benefitted from the large global liquidity and the ensuing global yield compression, which has resulted in the equity market and all types of investors rationalizing much higher multiples for favoured sectors and stocks compared with normal level. “We note that valuations in the Indian market are largely determined by global investors like foreign institutional investors (FIIs) and foreign direct investment (FDI) given large inflows from FIIs and aggressive open offers by multi-national companies (MNCs) to increase their stake in their Indian unit. Even FDI investors have participated in the process with cheap money perhaps fuelling their decisions to increase their shareholding in their Indian subsidiaries at inflated valuations of borrow low and buy moderately higher earnings yield,” the research note added.
Kotak said,”"We do not see the on-going improvement in macro-economic parameters translating into strong economic growth; a weak investment cycle and anaemic job creation will pose challenges for consumption and GDP growth over the next 12-18 months. At 15.5X FY2014E and 13.8X FY2015E ‘EPS’ (free-float basis), the Indian market looks fully valued.”
According to the brokerage, the quality of earnings in Q4 was not very good, once again. This has been the case over the past few quarters and the market seems to be ignoring some of the issues that can be no longer be treated as one-off items. Here are the areas of concern...
Low underlying growth in consumer staples
Volume growth moderated to low-to-high single digits over the past few quarters from mid-to-high- teens growth previously.
High share of other income in the profits of several companies
This is particularly true in the case of consumer staples companies. This raises a rather uncomfortable fact that consumer staples stocks on core earnings are trading at even higher multiples compared with their overall optical multiple.
“We think financial other income should get a multiple of around 15x (inverse of post-tax return on cash) and operating other income a similar 12-15x multiple,” Kotak said.