Public Private Partnership

Garima Wahi
November 01, 2013 | Garima Wahi Web Exclusives, Garima Wahi, PPP
Introduction
According to the United Kingdom Commission on Public Private Partnerships, „A Public Private
Partnership (PPP) is a risk-sharing relationship between the public and private sectors based upon a
shared aspiration to bring about a desired public policy outcome‟. In the case of infrastructure, PPP
generally refers to the Concession or Build-Operate-Transfer (BOT) contracts, or any variant of them,
i.e., contracts where risks and responsibilities transferred to the private sector are much wider than in
traditional public projects. Concession (BOT) is an exclusive right granted by the Government
Authority, under which private sector builds an infrastructure project, operates it and eventually
transfers the project to the government. Company continues to run the facility, and the government
acts as the regulator, while being the owner of the facility.
As the name suggests, Public Private Partnership does not result in privatization. It aims to implement
risk sharing structures between the public and private partners. A well designed PPP distributes the
risk to the party that is best suited to manage it and does so at least cost. It is a means to achieve
efficiency and quality in provision of public goods such as infrastructure and social services such as
health, Education and other similar services. The private sector provides the required services and
bears the associated risks, while the government provides the land, statutory backup, subsidies and
tax breaks necessary for the successful implementation of the project.
The birth of Public Private Partnerships can be attributed to the mounting public debt in India during
1970s and 1980s due to the first round of oil price rise. Lack of public finance meant reduced
expenditure on infrastructure as well as delays in the completion of indispensable projects. In such a
scenario, the introduction of PPP was seen as a golden key that would allow a rise in capital
expenditure in these projects along with the additional benefits derived from the private sector such
as efficiency, cost reduction and timely completion of projects. Other benefits of PPP include
accelerated and enhanced delivery of projects and wider social impact through efficient provision of
public and quasi-public goods.
Rationale behind Public Private Partnerships
The rationale behind PPP is threefold:

1. Efficiency/Quality: Experience shows that efficiency/quality gains can be obtained through
inclusion of the private sector in the provision of public goods. Private sector is expected to
bring its “rigor” and “expertise” in the design, implementation and operation of a project
driven by the desire for profits. Public sector (Authority) would undertake the responsibilities
relating to statutory and procedural requirements of the projects.

2. Volume: Given the public finance constraints, PPP projects increase the volume of investments
that can be delivered during a given time period. This increase is achieved through reduction
in cost (capital & operational) and improved service delivery. Much of this improvement can be
attributed to the private sector‟s enhanced innovation, experience and flexibility. Thus, PPPs
reduce the government‟s capital cost which in turn helps to bridge the gap between the need
for infrastructure and the government‟s financial capability. Service delivery is improved by
allowing both sectors to do what they do best. Government decides the policies while the
private sector takes the responsibility for non-core functions such as construction,
maintenance and operations.

3. Competition: This is a consequence of liberalization and deregulation policies. An opportunity
for private players to enter in a long term investments in the Public Domain builds a sense of
competitiveness among them as each player tries to capture a greater share of the pie.

typical concessions encourage Judicious Mix of Debt & Equity. Although. This ensures that the actual project development phase experiences as few hurdles as possible. In 2006. build. the private sector brings about greater efficiency and innovation which could potentially increase revenues and reduce both the initial capital expenditure & operational costs. hence is a frequently used option. Since the onset of global financial crisis in the late 2008. A clear distinction should be made between PPP mode and privatization. South Asia has seen a recent surge in investment commitments to infrastructure projects with private participation. privatization means a radical and irreversible change in the way a service is provided and in the ownership pattern. maintain and operate the asset for the contracted period. However. the government loses its control over the privatized enterprise and the private player then aims for profit maximization and is not accountable to the public. Unlike private projects where prices are generally determined competitively and government resources are not involved. Indian PPPs did not suffer much during the financial crisis due to prudent policies pursued by it. the “efficiency/quality” argument is the decisive one for PPP projects. the share rose to 19%.Among the above three arguments. The goal is to combine the best capabilities of the public and private sectors for mutual benefit. Its PPP program has grown rapidly in the past five to six years. are basically motivated by profits and hardly invest in social services such as hospitals. However. This is due to the „Risk Transfer‟ from the public to the private sector which is the most critical element of all PPP projects. PPPs are more exposed to interest rate volatility. red tapism and social (political) interference. if a private company finances and builds a highway. it is normally felt that the public sector suffers from bureaucratic delays. A relatively stable long-term investment opportunity incentivizes the private sector to bear this risk. Under privatization. The long term Institutional financial markets for infrastructure projects is in an evolution stage. These two are completely different terms with distinct implications. Current Scenario India has had more success in attracting private investment in the public domain of infrastructure since 2006 than any other developing country. long-term financing also exposes the banks and financial institutions to the risk of asset-liability mismatch. Typically. Besides this. In India. India has remained impassive to a great extent to such issues. the long term financing to sustain the development of infrastructure has become difficult to obtain in many developing countries. Thus. Private enterprises. raising adequate equity finance tends to be the most challenging aspect. private control of monopolistic services and sharing risks and contingent liabilities by the Government. While a PPP project is funded and operated by virtue of a partnership between the government and one or more private sectors companies. schools. Public Private Partnership projects ensure that a majority of the limitations of the public and private sectors are done away with. However. a private sector consortium forms a separate company called “Special Purpose Vehicle (SPV)” to develop. delegation of governmental authority for recovery of user charges. on the other hand. its share grew to 13% in 2001-06. PPP projects typically involve transfer of public assets. and highways. While infrastructure in South Asia attracted only 5% of the total in 1995-2005. PPP in India . For example. However long-standing policies in most other South Asian countries are beginning to bear fruit as well. PPPs have relied heavily on commercial banks for their debt-financing. Public enterprises are mandated to provide all kinds of public and quasi-public goods and ensure a high degree of public accountability. India has seen a rapid increase in private investment in infrastructure since 2003. it also assumes responsibility for the related risks. An active bond market can increase the flow of long-term funds and reduce reliance on banks.

but subject to a maximum of 20% of the total project cost. Government also recognizes that infrastructure projects may not always be financially viable because of long gestation periods and limited financial returns and thus financial viability of such projects have to be improved through Viability Gap Funding (VGF). PPP projects are being implemented both on VGF Model and also on Annuity Model. the PPP option should be exercised provided it yields a satisfactory rate of return on Equity. the state government projects. VGF is released to the Lead Financial Institution as and when due by Empowered Institution. there are some reservations about the PPP option: First. In case the State Government proposes to provide any assistance over and above the said VGF. The proposal for seeking clearance of the Empowered Institution has to be sent to the PPP cell of the Department of Economic Affairs. PPPAC has been constituted as the APEX approval body with Secretary. Within three months from the date of award. Department of Economic Affairs as chairman and represented by Department of Legal Affairs. the Lead Financial Institution and the private sector company enter into a „Tripartite Agreement‟. But development of infrastructure requires large investments that cannot be undertaken out of public financing alone and hence government is committed to promoting Public Private Partnerships (PPPs) to attract private capital. These guidelines provide for payment of a maximum of 40% of TPC as VGF grant to the concessionaire. Constitutions : Prior to the disbursement of VGF. sponsoring the project. it shall be restricted to a further 20% of the total project cost. The proposal is then submitted by the PPP cell to the Empowered Institution for consideration and „in principle‟ approval. Once cleared by Empowered Institution. Planning Commission. the concessionaire is paid semi-annual annuities for a period of normally 15 years (30 semiannuity payments) to cover the cost of construction. PPPs and public projects are not treated equally as . the project becomes eligible for financial support by VGF. Unlike. the alternative is to postpone investment or cancel it altogether. PPP projects are sometimes handicapped by the requirement of greater and more transparent accountability as compared to public projects. capital related costs and the maintenance cost of the project which the concessionaire is obliged to undertake for the 15 year period. Process : The Private Sector Company is selected through a transparent and open competitive bidding process where competition is on the basis of the amount of VGF required by a Private Sector Company for implementing the project where all other parameters are comparable. VGF is disbursed only after the private sector company subscribes and expends the equity contribution required for the project and will be released in proportion to debt disbursements remaining to be disbursed thereafter. Support of Government of India/States : The amount of VGF is the lowest bid for capital subsidy. However. In case of PPP projects TPC assessed at 1. In case of Annuity Model. particularly for the purposes of disbursing the VGF. the Project Sponsor (State Government) presents the project for final approval of the Empowered Institution. Difficulties with regard to PPP When public finance constraints are real and severe. pre-operative expenditure and Interest During Construction (IDC). In case of VGF projects. The Lead Financial Institution is also responsible for regular monitoring and periodic evaluation of project. the Empowered Institution.25 times of the civil construction cost. PPPAC : Government of India has formulated guidelines for appraisal and approval of PPP Projects of Central Government. Environment and Forests. 25% of civil construction cost is provided towards escalation. subsidy of central government projects (VGF grant) is fully provided by the Ministry.Government of India recognizes that there is a significant lack of infrastructural facilities in different sectors and this is hindering economic growth. government provides upfront capital subsidy to the extent of 40% of the Total Project Cost (TPC). For this purpose. Institutional Structure : Empowered Institution (EI) is an institution authorized by the Government for the purposes of PPP appraisal. In such a case. Expenditure and the Administrative Ministry of the project.

if construction costs and delays are well over expectations. few points should be emphasized while opting for a PPP project. Second. electricity. To gauge the effectiveness of PPP projects. PPP projects empower the concessionaire to use public assets for building infrastructure projects and to levy and collect user charges for the use of public goods but still government remains responsible and accountable for delivery of services to the users. efficiency and competitiveness and are a success in times of financial constraints though accompanied by their own set of difficulties and drawbacks.com/article/economy-policy/what-is-wrong-with-ppp-in-india113070600510_1. a cost-benefit analysis can be conducted to compare a PPP option with a purely public alternative. Second. Planning Commission and wrote this article based her experience there. remedial measures. procurement procedures should be efficient. that could trigger renegotiation. Negotiations should not be long and expansive. taking into account all possible contingencies. implication : PPP projects will become more sustainable and viable in long run . For instance. Third. therefore. Thus. Side note : Finance ministry in not in favour of inserting this clause in already awarded PPP contracts http://www. water supply and irrigation sectors to ensure their development. etc.html .business-standard. These projects.regards performance. private players should be given enough incentives to operate efficiently without abusing their monopolistic position. Renegotiation Clause in PPP     Union Fiance Ministry is planning to have provision of renegotiation clause for future PPP Projects In long time projects things might change and renegotiation may be necessary . PPPs should not impinge on other important issues in terms of efficiency and Public accountability. She has worked as an Intern in the PP & Infrastructure Division. Parameters of monitoring would include assessment of performance. Also. approximately 8% of the GDP is to be invested in infrastructure covering telecommunications. so this seems to be a progressive step If the scope of a project is changed midway. PPPs are immediately liable whereas consequences for public projects are often much less dramatic and hardly visible. Such investments should be made strategically to ensure efficiency. First. transportation. PPP projects are relatively beneficial in terms of volume. water etc. Concluding Remarks According to a Planning Commission document. require close monitoring. sanitation. and mostly the renegotiations benefit the companies. But it might lead to unsustainable PPP projects being brought in by private parties in hope of a future renegotiation Global Scenario : According to Business Standard almost 1/3 of PPP projects around the world are renegotiated esp those relating to infra. levy and collection of user charges on the basis of approved principles. PPP projects can only be successful if they are planned with due care and diligence. The author is a post graduate student of economics from Delhi School of Economics.