PPPs would make a major contribution to closing the investment and service delivery gaps in infrastructure. This would also require more roles for the private sector and appropriate regulatory mechanism.
The most significant criteria for a continued growth rate of an economy rest on the provision of a quality infrastructure. According to the Planning Commission, an approximation of 8 percent of the Gross Domestic Product or GDP needs to be invested. This would help in acquiring a prospective economy as stated in the 11th Five Year Plan. Fund investment of over US $ 494 billion has been conceived of according to the 11th Five Year Plan with effective from 2007 to 2012. The investment sectors under consideration are inclusive of telecommunications, electric power, water transport, road, rail, air, water supply as well as irrigation amounts to about Rs. 20,27,169 crore according to 2006-07 prices.
In order to meet such demands, various Public Private Partnerships or PPPs are being promoted for implementation of infrastructure projects. Several initiatives have been undertaken by Government of India to enable a greater PPP framework.
What is PPP:
Public-private partnership (PPP) describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. These schemes are sometimes referred to as PPP. Thus, PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project.
Definition of PPPs in India:
“PPP means an arrangement between a government or statutory entity or government owned entity on one side and a private sector entity on the other, for the provision of public assets and/ or related services for public benefit, through investments being made by and/or management undertaken by the private sector entity for a specified time period, where there is a substantial risk sharing with the private sector and the private sector receives performance linked payments that conform (or are benchmarked) to specified, pre-determined and measurable performance standards”.
Essential conditions in the definition:
- Arrangement with Private Sector Entity: The asset and/or service under an arrangement will be provided by the Private Sector Entity1 to the public.
- Public asset or service for public benefit: Has the element of facilities/ services being provided by the Government as a sovereign to its people. To better reflect this intent, two key concepts are elaborated below:
‘Public Services’ are those services that the State is obligated to provide to its citizens (towards meeting the socio-economic objectives) or where the State has traditionally provided the services to its citizens. For example, provision of security, law and order, electricity, water, etc. to the citizens.
Why do we need PPPs?
Development of infrastructure and provision of basis civic services has always been considered a very important public sector activity for the following reasons
- Governments have recognised the crucial role of infrastructure in fostering economic growth and reducing poverty.
- Because of its ‘public good’ and ‘essential’ nature, Governments have attempted to ensure availability of basic civic services irrespective of market conditions.
- For a number of economic, social and political reasons, private sector involvement in these important areas was slow to develop and thus uneven.
Provision of public services and infrastructure has traditionally been the exclusive domain of the government. However, with increasing population pressures, urbanisation and other developmental trends, government’s ability to adequately address the public needs through traditional means has been severally constrained. This has led the Government’s across the world to increasingly look at the private sector to supplement public investments and provide public services through Public Private Partnerships.
- PPPs (Public Private Partnership) is very useful for infrastructure sector as Enhanced quality and quantity of infrastructure services
- To release full potential of public sector assets - provide value for the taxpayer and wider benefits for the economy
- Ensure stakeholders receive a fair share of benefits of PPP – as citizen, customers, taxpayers and employees
- Value creation by better management and delivery.
Asian Development Bank
The term “Public–Private Partnership” describes a range of possible relationships among public and private entities in the context of infrastructure and other services. PPPs present a framework that—while engaging the private sector—acknowledge and structure the role for government in ensuring that social obligations are met and successful sector reforms and public investments achieved. A strong PPP allocates the tasks, obligations, and risks among the public and private partners in an optimal way. The public partners in a PPP are government entities, including ministries, departments, municipalities, or state-owned enterprises. The private partners can be local or international and may include businesses or investors with technical or financial expertise relevant to the project.
PPPs can follow a variety of structures and contractual formats. However, all PPPs incorporate three key characteristics:
- A contractual agreement defining the roles and responsibilities of the parties,
- Sensible risk-sharing among the public and the private sector partners, and
- Financial rewards to the private party commensurate with the achievement of pre-specified outputs.
Public-Private Infrastructure Advisory Facility (World Bank Group)
A public-private partnership (PPP) involves the private sector in aspects of the provision of infrastructure assets or of new or existing infrastructure services that have traditionally been provided by the government.
PPP Projects in India
In India the PPP projects include Urban Infrastructure, Airport, Ports, and Railways, Roads, Health, water supply and sanitation and even to schools now. Let us briefly see some of the cases.
“PPPs are best implemented through standardized arrangements that constitute a stable policy and regulatory regime where private capital derives greater comfort and seeks the least possible risk premium. Model Concession Agreements (MCAs) would be used for providing a stable regulatory and policy framework.”
In India, the central as well as a few state governments have successfully harnessed private sector partnership in road development. At the central level, as part of the first and second phases of the National Highways Development Project (NHDP) — a flagship program with an estimated requirement of US$ 50–60 billion investment over the next five years — 66 projects with a total value of about US$ 6 billion were implemented through the BOT route (42 toll projects and 22 annuity projects).The response from the private sector to these initiatives has been very encouraging. In 19 projects, private operators offered to pay upfront for the road concessions.
The Indian railways plan to invest around Rs. 14,00,000 crores (cr), as stated in the Vision 2020, brought out by the Ministry of Railways (MoR) in December 2009. With whatever level of optimistic projections for the internal resources and borrowings for the coming decade, clearly, PPPs would have to be a significant source. This makes it imperative for the IR to create a policy framework that would attract PPPs, especially in the context that the PPPs in IR have not taken off as projected.
The recent Delhi and Mumbai airport deals had created a very high visibility internationally for the Government’s airport reform process.
More recently, GOI has taken several additional measures for facilitating PPPs.
The key ones are the VGF scheme, IIFCL to provide long-term capital, and capacity building and other assistance. These initiatives are aimed at covering PPP projects where the private sector provides infrastructure for a fee under a concession agreement. Concession is granted on the basis of a transparent bidding process.
The multilateral agencies have welcomed the recent steps taken by GOI with respect to VGF and IIFCL. ADB and the World Bank will assist GOI in promoting PPPs across sectors and regions of India, through a range of financing, advisory and technical assistance (TA) measures. Most importantly, these agencies would be able to assist governments in tailoring the PPP solutions to specific demands of the individual states, sectors, and projects
The government has engaged consultants for preparing a policy framework on PPP. The key issues identified by the consultants were:
- Is cross-sectoral law required?
- Is cross-sectoral agency required?
- Provide financial support to PPPs?
- What project development modes?
- How to manage unsolicited bids?
- How to manage contracts?
- How to resolve disputes?
- Role of independent regulation?
“Public–private partnerships should not be seen as public partnerships and private projects. They should rather be viewed as private partnerships and public projects ...”
— Dr. Montek Singh Ahluwalia,
Deputy Chairman, Planning Commission, Government of India
The experience of other countries suggests that it should be possible to increase private investment in infrastructure in India from its current level of 1% of GDP (Gross Domestic Product) to 2% of GDP. Chile has succeeded in increasing its infrastructure investments to a level of 5% of GDP, in good part through encouraging private participation in almost all infrastructure sectors. Today, in Chile, investments and operations in power, gas, telecom, airports, major highways, rail freight services and water and sanitation are mostly in the realm of the private sector, and the presence of the government in service provision is limited to a few areas, such as passenger rail services and small airports. In the United Kingdom a focused effort by the government was required to expand the program, resulting in the signing of over 700 PPP projects in various sectors by 2006. The volume of transactions has meant that a new class of investors has come in to invest in them through the secondary market.
Brazil opted for private participation in roads like many other countries, as a way to overcome its budget constraints, and its experience has been very encouraging. Today, nearly 6% of its paved roads (164,000 km) are under private administration through 36 state and federal toll road concessions, and the share of the private sector is expected to be doubled in the near future. In Korea, PPPs in roads form part of a wider government initiative, called Private Participation in Infrastructure (PPI), which led to an increase in the share of private investment in infrastructure from 0.2% in 1995 to 14.4% in 2005. Of the total 141 Build-Transfer-Operate (BTO) projects under various stages of implementation and review across different sectors, road sector projects account for 27% in terms of number and 57% in terms of volume.
Take the case of affermage (Lease) in Senegal, which has led to substantial improvement in services. Both production capacity and number of connections have been increased by around 50% in Senegal by the private operator. Simultaneously, non-revenue water has been reduced from 32% to 20%, representing annual savings of more than 12 million cubic meters of water. All this has been achieved with the existing Government staff and only a 3% annual tariff increase. Key factors contributing to the success of these PPP projects include a high level of political commitment and focus on improvements related to customer servicing.
A different approach to PPP was adopted in Manila where the city was carved out into two zones and 25-year concessions were awarded to two different operators. Manila Water Company (MWC) successfully bid for the East Zone; its majority shareholding is now with the public, while a local conglomerate, Ayala — is the largest shareholder. A local bank, employees, and multinational corporations are other key shareholders. MWC provides a good example of a private sector utility co-owned by key stakeholders. MWC, within 10 years of operation, has increased the area under 24 x 7 supply from 26% to 98% while reducing water losses.
The usually adopted PPP models are as indicated in the table below:–
Build, Operate and Transfer (BOT)
Under this category, the private partner is responsible to design, build, operate (during the contracted period) and transfer back the facility to the public sector. The private sector partner is expected to bring the finance for the project and take the responsibility to construct and maintain it. The public sector will either pay a rent for using the facility or allow it to collect revenue from the users. The national highway projects contracted out by NHAI under PPP mode is an example.
Lease, Operate and Transfer (LOT)
As the name indicates, under this type of PPPs, a facility which already exists and is under operation, is entrusted to the private sector partner for efficient operation, subject to the terms and conditions decided by mutual agreement. The contract will be for a given but sufficiently long period and the asset will be transferred back to the government at the end of the contract. Leasing a school building or a hospital to the private sector along with the staff and all facilities by entrusting the management and control, subject to pre-determined conditions could come under this category.
Build, Own, Operate(BOO) or Build, Own, Operate and Own, Operate and
This is a variation of the BOT model, except that the ownership of the newly built facility will rest with the private party during the period of contract. This will result in the transfer of most of the risks related to planning, design, construction and operation of the project to the private partner. The public sector partner will however contract to ‘purchase’ the goods and services produced by the project on mutually agreed terms and conditions. In the latter case (BOOT), however, the facility / project built under PPP will be transferred back to the government department or agency at the end of the contract period, generally at the residual value and after the private partner recovers its investment and reasonable return agreed to as per the contract.
Design, Build, Finance and Operate (DBFO) or Design, Build, Finance, Operate and Maintain(DBFOM)
These are other variations of PPP and as the nomenclatures highlight, the private party assumes the entire responsibility for the design, construct, finance, and operate or operate and maintain the project for the period of concession. These are also referred to as “Concessions”11. The private participant to the project will recover its investment and return on investments (ROI) through the concessions granted or through annuity payments etc. It may be noted that most of the project risks related to the design, financing and construction would stand transferred to the private partner. The public sector may provide guarantees to financing agencies, help with the acquisition of land and assist to obtain statutory and environmental clearances and approvals and also assure a reasonable return as per established norms or industry practice etc., throughout the period of concession.
This is a generic term, used to clarify the essential features of PPP arrangements. The PPP agreements which authorize the private partner to recover its investments and expected returns on investments through concessions granted for a certain period, computed on the basis of demand projections and growth, are called operations concession (OC). In these cases, the public sector (department or agency) which is responsible to provide the service to the public and collect revenue by way of user charges, toll, tariff etc., assigns its legal or statutory right to the private partner in return for the latter undertaking the responsibility to implement the project and maintain the required quality. The concession may be by collecting tolls and user charges or by the public sector making periodical payments of annuities or monthly / quarterly/ half-yearly charges on certain assumed basis, like shadow tolls etc.
In a PPP arrangement commonly followed in our country (such as for airport development), the private sector body is encouraged to form a joint venture company (JVC) along with the participating public sector agency with the latter holding only minority shares. The private sector body will be responsible for the design, construction and management of the operations targeted for the PPP and will also bring in most of the investment requirements. The public sector partner’s contribution will be by way of fixed assets at a pre-determined value, whether it is land, buildings or facilities and /or it may contribute to the shareholding capital. It may also provide assurances and guarantees required by the private partner to raise funds and to ensure smooth construction and operation. The public service for which the joint venture is established will be provided by the entity on certain pre-set conditions and subject to the required quality parameters and specifications. Examples are international airports (Hyderabad and Bangalore),