PUBLIC-PRIVATE PARTNERSHIPS IN THE DELIVERY OF URBAN SERVICES: NEED, POTENTIAL, PROCESS AND PRINCIPLES

RAMAKRISHNA NALLATHIGA Centre for Good Governance, Dr MCR HRD IAP Hyderabad 500 033 (AP) INDIA Abstract This paper outlines the potential and importance of Public-private partnerships (PPP) in service delivery. PPPs are assuming importance in the delivery of infrastructure services across all countries; recently, they began to assume importance in the case of urban infrastructure. Given the poor state of finances of urban local bodies in India, PPP is an important route for ensuring service delivery. While touching upon it, this paper presents the major PPP options, the PPP process and principles which urban local bodies could adopt and it discusses the prospects in the light of recent experiences. BACKGROUND India was for long time endowed with high population growth, rapid urbanisation and low levels of economic growth. This has made the country to remain at a low level of development and encouraged the policy makers to tackle the urbanization pressures through policies that aim to reduce population growth, reduce migration of rural people to urban areas and continue with importsubstituting economic policies. However, the break was found on the economic development first through adoption of liberalization policies in early 1990s. India has been experiencing an unprecedented rate of economic growth in the last little over a decade thereafter. Likewise, population growth shows some signs of stabilization to stand itself in the state of demographic transition. However, urbanisation is rapidly engulfing several developing countries and India is no exception to it. But, India has also experienced a relatively lower pace of urbanization when compared to the earlier decades (Kundu 2006) [1]. Yet, the absolute levels of urbanization in terms of growth of urban population are high and it is spreading across the country. Cities are not only centers of population concentration now, but also they are centers of economic activities, investment flows, employment generation, and trade and commerce. Therefore, the pressure on the delivery of urban services from various sections of the society is increasing. While the pressure on the provision of public services is mounting, urban local bodies (ULBs) are increasingly finding it difficult to cope with the pressures, given the poor base of their finances. In absolute terms, the revenues of urban local governments are less than their expenditure most of times as it can be seen in the recent past in the following figure (see Figure 1). Moreover, the spending of municipal expenditure on the provision of capital works like water supply & sewerage, public health and sanitation, solid waste disposal, roads, drainage and street lights is abysmally low enough to provide satisfactory level and quality of services (Mathur 2004) [8]. The total per capita spending on these five core civic services is in the year 1997-98 was just about Rs 747, whereas the expenditure norms of Zakaria Committee and Planning Commission, are Rs 3,390 to Rs 3,724 (lower) or Rs 5022 (higher) on the same (at 1998-99 prices), reflecting the large fiscal gap (Mathur 2004) [8].

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Paper presented at the International Conference on Public Private Partnership in Water Sector held on November 10-11,2006 at Nagpur organized by Indian Water Works Association (IWWA)

Total Revenue 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 1998-99 1999-00

Total Expenditure

2000-01

2001-02

Source: Eleventh Finance Commission, 2000-05

Figure 1 Income and expenditure of urban local bodies in India This position of municipal finances can also be partly attributed to the differences in the distribution of revenue and expenditure powers to the various tiers of government. According to the estimates of Eleventh Finance Commission, own revenue sources contribute to about 60 per cent of total revenues of ULBs but their revenue expenditures constitute 75 per cent of total expenditure. These structural imbalances are further aggravated by assignment of various functions to the list of functions of ULBs under the 74th Indian Constitutional Amendment Act, 1992. By all means, 74th Constitutional Amendment Act is an important intervention which made roads for decentralized urban governance. However, in the process it attached several functions without considering the existing financial constraints to provide these services and without making financial provisions for the new functions attached therewith. Although, inter-governmental transfers in the form of grants-in-aid are designed to offset these fiscal imbalances, the quantum of transfers required is large when compared to the amount of current transfers; further, there exists a risk of fiscal imbalances perpetuating and deepening due to local governments attractiveness to show them in order to get more grants. Given this difficulty in providing matching grants to matching functions within the budgetary system of ULBs, off-budget financing approaches have been proposed to the development of urban infrastructure services. Off-budget strategies, here, refer to the urban development financing strategies which do not directly impact on the budget of the pivotal urban management entity of a city, in the sense that they do not require additional utilization of local government revenue (Wegelin 2006) [11]. In other words, such strategies are budgetarily neutral, but seek to enhance the cost-effectiveness of resource utilization. There are two such strategies in particular: (a) multi-sector investment planning in -- 1 --

Paper presented at the International Conference on Public Private Partnership in Water Sector held on November 10-11,2006 at Nagpur organized by Indian Water Works Association (IWWA)

urban development, and (b) publicprivate partnerships in urban infrastructure delivery. The first one rather refers to pooled investment planning of central and local government funds in the development of cities as is found in some of the countries. The latter is becoming much more relevant in the joint provision of the services, which are hitherto provided by the public body or government, and with which we are concerned here in the context of urban infrastructure services of local governments. The relevance and importance of Public-Private Partnerships (PPP) in infrastructure is well documented e.g., World Bank (2006) [6] provides a good review of the same. Here, the experience of the UK in transforming the provision of services, hitherto provided by the public sector, through private finance initiative is a well known success story. Although the PPP confined to the core / major sectors like power, transport and communications, their applicability is now widely seen in the context of the municipal services and the US, in particular, has paved the way for the same through successful adoption in the light of tight fiscal conditions experienced by local governments (Greene 2002) [3]. We will first discuss the common connotation of PPP and then outline the PPP models and principles. Finally, we will examine the emerging experience of public-private partnerships in the provision of municipal / urban services in the Indian context to throw lights on their potential. PUBLIC-PRIVATE PARTNERSHIPS What are Public-Private Partnerships? Public-private partnerships (PPP) are an important variant of the involvement of the private sector in the provision of services/functions, which were hitherto provided by the public agency. This partnership model ensures the leveraging of public sector strengths (which primarily relate to risk sharing) with those that of private sector (which relate to investment capital, technical and/or managerial efficiency). The partnership can be on a project-to-project basis or on a programmatic basis with involvement of either for-profit organizations e.g., private corporates or business consortia, or non-profit organizations e.g., community based organizations, non-government organizations. However, the extent of private sector participation (PSP) can vary widely in the Public-Private Partnerships (PPP) depending upon the nature of service to be provided, the objectives of the project/programme, the costs and risks involved and the policy framework. The range of partnership options with varying levels of involvement of each is shown in the following block diagram (figure 2).

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Paper presented at the International Conference on Public Private Partnership in Water Sector held on November 10-11,2006 at Nagpur organized by Indian Water Works Association (IWWA)

Public Service Provider

Investment

Private Enabler & Regulator

Government

Service Contracts

Management Contracts

Lease Contract

Concession BOT

BOO /BOOT Divestiture

Figure 2 Spectrum of public-private partnership options Key features of PPPs PPP refers to a spectrum of possible relationships between public and private sectors for a cooperative or joint provision of infrastructure services. The Private sector may include private businesses/firms, non-government organizations (NGOs) and community based organizations (CBOs). Under a spectrum of PPP options, the responsibility of service delivery (or, ensuring it) and ownership may largely exist with the government, except in the case of complete divestiture. Table 1 gives an account of sharing of various characteristics of service generation between public and private sectors in the spectrum of partnership options mentioned above. Table 1 Salient features of key variants of public-private partnerships PPP Option Management Contract Lease Contract Concession/ BOT BOOT/BOO Asset Ownership Public Public Public Public/ Private Operation & Maintenance Private Private Private Private Capital Investment Public Public Private Private Commercial Risk Public Shared Private Private Duration 3-5 years 8-15 years 25-30 years 20-30 years

Source: Kumar and Prasad (2004) [5] Benefits of PPP Private sector participation in service delivery could help to bring technical and managerial expertise, improving operating efficiency, large scale injection of capital, greater efficiency in using the capital, rationalization/ cost based tariffs for services, better responsiveness to consumer needs and satisfaction. It is through this partnership that the advantages of private sector innovation, access to finance, knowledge of technologies, managerial efficiency and entrepreneurial spirit are combined with the strengths of public sector like social responsibility, environmental awareness and local knowledge.

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Paper presented at the International Conference on Public Private Partnership in Water Sector held on November 10-11,2006 at Nagpur organized by Indian Water Works Association (IWWA)

For each urban service i.e., water supply, sanitation, roads, solid waste management, street lights, the PPP option can vary, as some of them, like water supply and solid waste management, have private good characteristics that allow application of cost recovery principles; whereas, some others, like street lights and sanitation, have large public benefits and therefore difficult to subject to cost recovery principles. Moreover, within each sector, it is not necessary to enter partnership for entire range of operations; public sector may retain the core areas of operation or expertise and bring other areas under the PPP. Table 2 provides an account of how these strengths are built into the various models/options of the PPP discussed above. Table 2 Levers of Partnerships under different PPP options PPP Option Service Contract Management Contract Lease Contract Concession/ BOT BOOT/BOO Technical Expertise Yes Yes Yes Yes Yes Managerial Expertise No Yes Yes Some Yes Operating Efficiency No Some Some Some Yes Invest Bulk No No No Yes Yes in Invest in Distribution No No No No Yes

Source: Kumar and Prasad (2004) [5] PPPs Operational Environment While the above levers of various partnership options present their potential, it can be realized when there is conducive environment, which needs to be nurtured through appropriate legal, policy and institutional clarity for the partners. In cities across the world, private firms have demonstrated the ability to improve the operation of infrastructure services, but at the same they alone cannot deliver the goods. Some factors are essential ingredients of the partnerships, which include: clear government commitment, legal and regulatory capacity, stakeholder involvement, intelligent transaction design, cost-recovery tariffs, the right option and a systematic approach. It is, therefore, essential to understand the key ingredients of partnerships under various PPP options, which is provided in table 3. Table 3 PPP options and operational environment PPP Option Service Contract Management Contract Lease Contract Concession/ BOT BOOT/BOO Political Commitment Low Moderate Moderate Moderate High Cost-covering Tariffs Low Moderate High High High -- 4 -Regulatory Framework Low Moderate High High High Good Information Low Low High High High

Paper presented at the International Conference on Public Private Partnership in Water Sector held on November 10-11,2006 at Nagpur organized by Indian Water Works Association (IWWA)

Source: Kumar and Prasad (2004) [5] PROCESS OF PPP The PPP process involves not just bringing the support of the private sector for the development of infrastructure and/or service but a careful planning and design with adequate preparation towards the exercise. A broad policy towards adoption of PPP would be very helpful in setting up the process into motion based on the guidance and support from such document. Ireland, for example, has prepared a local government policy framework document for rolling the PPP projects (Department of Environment, the Heritage and Local Government 2003) [2]. Broadly, the process of PPP in infrastructure development in involves four major phases, namely: Project preparation Selecting am appropriate PPP option Soliciting private sector participation Establishing a durable partnership Project preparation This process begins from conceiving the idea to identifying the potentiality of the project and finding out the financial and economic feasibility of the same. This phase therefore involves preparing a project feasibility report based on the conceptualization of project idea/ problem definition, demand assessment, financial feasibility, economic feasibility and project feasibility. Selecting an appropriate PPP option This phase depend upon the project in hand which needs to be addressed i.e., project importance, economics of project, social and environmental backdrop, political and public interest, private sectors interest in terms of investment attractiveness. This involves choosing an appropriate PPP option by structuring the project for private participation, defining the scope and terms of bidding and preparation of partnership documents for involvement in project. Soliciting private sector participation This phase involves inviting private sector to participate in the project/ venture and the subsequent steps of identifying the most appropriate partner in terms of technical and financial parameters, which include, prequalification, bid process, evaluation and negotiation. Establishing a durable partnership This is essentially the post-bid scenario wherein the relationship over 10-20 years is maintained in good manner in line with the spirit of the contract i.e., award of contract, upkeeping of contractual obligations and considerate views on unforeseen events. While the above process of PPP outlines a phased approach, it is important to understand that the implementation involves a careful assessment of risks attached with PPP projects and address the concerns of all other stakeholders. There are various risks attached to the PPP projects, some of which are outlined in table 4. The issues concerning the stakeholders primarily relate to socio-economic and political effects and those relating to fairness and equity grounds. Table 4 PPP induced risks in the projects

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Paper presented at the International Conference on Public Private Partnership in Water Sector held on November 10-11,2006 at Nagpur organized by Indian Water Works Association (IWWA)

Political risks Economic risks Legal risks Transaction risks

Operation risks

Internal resistance, Labour resistance, Nationalisation, Political influence, Uncertainty of government policy, Instability of government Devaluation risk, Foreign exchange risk, Inflation risk, Small capital market Changes in law and regulation, Inefficient legal process, Legal barrier Delay of privatization programme, Improper privatization programme, Incapable administrative body, Reluctance to proceed, Too small number of interested investors, Unfair selection of state owned enterprises to privatize, Unfavourable investment environment, Valuation of asset Associated infrastructure risk, Demand and supply risk Incapable investor, Improper regulation, Liability risk, Management risk, Price escalation risk, Technical risk

Source: Rwalema et al (2002) [9] PPP PRINCIPLES The implementation of an international competitive process for the selection of an international operator to be engaged under any type of PPP contract is a complex exercise. It demands careful, thought-out, and elaborated methodologies that adhere to the following fundamental principles to ensure a successful outcome (Mandri-Perrott 2005) [7]: The use of project management disciplines to provide a framework for overall control of the process and to monitor progress; A flexible application of these disciplines to match the culture and environment in which they are being used; Broad but systematic methodologies to provide "road maps" in each of the key areas to be covered under the PPP contract; and The effective use of change management techniques. Managing any PPP transaction or contract is a high profile activity vis--vis the general public, the political environment and potential bidders / operators. Thus, managing risk and implementing change will be the key factors that determine the success of the program as a whole. In addition, once an operator has been selected, it is important that the operator is monitored and the benefits achieved through the PPP contract are maintained over time and communicated to stakeholders. The regulatory function plays a critical role in this and therefore the ability to sustain the change following the completion of the transaction will be critical. Major cultural, organizational, legal and institutional change is required to ensure that the potential benefits of PPP are achieved in both short and long term. Box 1 provides a list of guiding principles for the public-private partnerships Box 1: Guiding Principles of Public-Private Partnerships Design the contract to deliver a balanced risk profile between Government & the Private Operator A successful contract will balance the risk between the Government and the operator. When PPP arrangements are designed in a manner that allocates project risks to that party best placed to handle that risk, they provide greater purpose and clarity for everyone involved - from government to potential -- 6 --

Paper presented at the International Conference on Public Private Partnership in Water Sector held on November 10-11,2006 at Nagpur organized by Indian Water Works Association (IWWA)

bidders - regarding the desired outcomes and benefits. However, it is also critical to clearly communicate the outcomes and benefits to the key stakeholders. Rigorous risk management is important throughout the life of the contract, as the costs to Government of not implementing the best strategy or having a failed PPP strategy will be extremely high - not only politically, but also to customers and to the economy as a whole. Risks must be defined and addressed continuously. Win the commitment of critical stakeholders and operators The implementation of the PPP project must be thoroughly and skilfully presented and marketed within Government, to the utility management, staff and labor, to the labor sector generally, and to the public-at-large. The benefits of reform and privatization must be developed and well presented if they are to be understood and accepted by all stakeholders. The success of the reform and PPP exercise will be greatly enhanced by successful marketing of the concepts involved. In addition, the commitment of potential bidders / operators will need to be gained and the design of the structure, its transparency and overall management (during and post transaction) will have a critical bearing in an operator's decision to participate in any PPP arrangement. Develop a strong contract between Operator and Government Sustainability of the transaction is of paramount importance. For Government's objectives to be met and for the operator to perform adequately, the 'rules of the game' need to be set. Clarity of roles and responsibilities between the parties are essential ingredients to achieve long and sustainable results. Drive the Bidding Program Change must be introduced at a pace that the marketplace can accommodate, maximizing buy-in at all levels in order to minimize the risk of failure. The process of developing buy-in will also involve consultations with Bidders at the beginning (when designing the structure of the transaction) and during contract development, and procurement. Demonstrate improved service delivery in terms of customers and infrastructure The key objective of the introduction of the private sector in the infrastructure sectors is generally to meet Government's policy objectives of: Improvement, quality, cost and access to infrastructure, and Ensuring the financial viability of infrastructure at minimum cost to Government Clearly, in meeting the above objectives, Government will have a positive social and economic impact. Sustain change to deliver long term benefits All the levers (processes, fairness, transparency of process, international best practice, stakeholder participation, regulation) must be used to embed the changes into the privatization to ensure that benefits continue to be delivered and the changes sustained after the transaction has been completed. Source: Mandri-Perrott (2005) [7]

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Paper presented at the International Conference on Public Private Partnership in Water Sector held on November 10-11,2006 at Nagpur organized by Indian Water Works Association (IWWA)

Figure 2 shows the guiding principles of PPP that illustrate the inter-related aspects of any given PPP arrangement. In each phase, the main change imperatives in any given PPP transaction are represented. The overall approach to the implementation of a successful and sustainable PPP arrangement should be designed to address these dominant change imperatives.

Figure 2 PPP process implementation guiding principles (Source: Mandri-Perrott 2005) [7] UTILIZING PPP IN LOCAL GOVERNMENT SERVICES AND WAY FORWARD In the post-liberalisation scenario, India has been witnessing rapid economic growth and rapid urbanization and the critical role to be played by infrastructure has become a major issue of debate. The Report of Expert Group on Infrastructure, 1996 (which is also known as Rakeshmohan Committee report) has estimated that the infrastructural investment requirements are very large and critical to the next stage of economic growth. The infrastructural bottlenecks to the economic growth potential were well discussed in the series of India Infrastructure Reports during 2002-2005. With the policy and institutional reforms that took place in the power and telecommunications sector during this period, India has witnessed a boom in the investments in these sectors and the citizens certainly benefited from it. During this period, PPP framework was applied to road development projects, which paved a new way to the management and development of transport infrastructure (Kalidindi and Thomas 2002) [4], and this is strengthened by the recent Electricity act that allowed setting-up captive power projects in the SEZs. However, the urban infrastructure is yet to witness a major change, which can only happen with the private sector involvement in the provision of infrastructure services. In fact, the need for utilizing public-private partnerships in the provision of urban infrastructure has been well emphasized in the Economic Survey (2004) and Tenth Plan Document (2005). The recent Indian Infrastructure -- 8 --

Paper presented at the International Conference on Public Private Partnership in Water Sector held on November 10-11,2006 at Nagpur organized by Indian Water Works Association (IWWA)

Report (3i Network 2006) [1] performed a detailed diagnostic assessment of the urban infrastructure and examined various options for the service provision. Given the poor state of the local body finances and the emerging focus on tapping market potential, it is imperative for the urban local bodies to embark on PPP for the successful provision of services. It is believed that public-private partnership would lead to greater supply of financial resources, pooling together of managerial and technical capabilities and there would be greater consciousness towards cost and customer satisfaction. There are large numbers of instances where public-private model has been successfully used. Rajkot Municipal Corporation, Pali in Rajasthan, CIDCO in Maharashtra are some of the instances of successful public-private partnership (Mathur 2004) [8]. Recently, Municipal Corporation of Delhi (MCD) has entered into public-private partnership for collecting solid waste. Table 5 provides a summary of public-private partnership experiences in various cities to serve as an example. However, more and more municipal governments should explore the possibilities of public private partnership in the provision of municipal services. Table 5 Private Sector Participation in Municipal Services Municipal Services/Activity City/ULB Sanitation/conservancy Thane, Navi Mumbai, Ludhiana, Bangalore, Calcutta, Ulhasnahar, Amravati Solid water management Ahmedabad, Nashik, Thane, Kolhapur. Pune, Pimprichinchwad, Navi Mumbai, Mysore, Bangalore, Ludhiana, Calcutta Rodent and Malaria control Navi Mumbai Street lights Bangalore, Mysore, Hubli-Dharwad, Gulbarga, Belgaum, Ludhiana. Octroi collection Amaravati,Kalyan, Ulhasnahar,Patiala, Jalandhar, Ludhiana. Water supply Tirupur, Vishakapatnam, Ludhiana, Amaravati, Bangalore. Computerization of municipal accounts Bangalore, Ludhiana. Billing-water, property tax, staff salary etc. Ludhiana, Ulhasnahar. Courier system Ludhiana. Park committees Ludhiana. Roads and bridges Kolhapur. Commercial complexes and market Kolhapur, Bangalore. complexes Beautification of city Kolhapur, Bangalore Source: National Institute of Public Finance & Policy, 2003.

ACKNOWLEDGMENTS The author acknowledges the financial support of the Centre for Good Governance to attend the international conference and present the paper in it. The opinions expressed in this paper are that of the author and do not necessarily represent that of the organization he represents.

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Paper presented at the International Conference on Public Private Partnership in Water Sector held on November 10-11,2006 at Nagpur organized by Indian Water Works Association (IWWA)

REFERENCES [1] 3i Network, India Infrastructure Report 2006, Oxford University Press, New Delhi, (2001). [2] Department of Environment, the Heritage and Local Government, Policy Framework for PublicPrivate Partnership in Ireland: Project Implementation in the Local Government Sector, Government of the Republic of Ireland, 2003. [3] Greene, J. D., Cities and Privatisation: Prospects for the New Century, Pearson Education Inc., New Jersey, (2002). [4] Kalidindi, S. N. and Thomas, A. V., Private sector participation road projects in India: assessment and allocation of critical risks, In A. Akintoye, M. Beck and C. Hardcastle (eds), Public-Private Partnerships: Managing risks and opportunities, Blackwell Publishers, Oxford, (2002), pp 317-350. [5] Kumar, S. and Prasad, C. J., Public-private partnerships in urban infrastructure, Kerala Calling, February, (2004), pp 36-37. [6] Kundu, A., Trends and Patterns in Urbansation and Their Economic Implications, India Infrastructure Report 2006, Oxford University Press, New Delhi, (2006), pp 27-41. [7] Mandri-Perrott, C., Six Guiding Principles to Achieve Sustainable PPP Arrangements, Institute of Public Private Partnerships, Washington DC, (2005). [8] Mathur, M. P., Municipal Finance and Municipal Services in India: Present Status and Future Prospectus, Second International Conference on Financing Municipalities & Sub-National Governments, Washington DC, September 29-October 2, (2004). [9] Rwelamala, P. D., Chege, L and Manchidi, T. E., Public-private partnership in South African local authorities: risks and opportunities, In A. Akintoye, M. Beck and C. Hardcastle (eds), Public-Private Partnerships: Managing risks and opportunities, Blackwell Publishers, Oxford, (2002), pp 301-315. [10] Thomas, E., Institutionalization of Public-Private Partnerships (PPP), Institute for PublicPrivate Partnerships, Washington DC, (2002). [11] Wegelin, E., Off-Budget Financing Strategies for Urban Development, Urbanicity, (2005). [12] World Bank, Reforming infrastructure: Privatization, regulation and competition, World Bank, Washington DC, (2006).

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