Management of PPP

REUIM Assignment

Submitted By:
RP20018- Nishant Pandit
RP20047- Saloni Shah
RP20057- Kshitija Bhoir
RP20060 – Pooja H Panicker
RP20070 – Sitara Chammanam
1. Write short notes on the following:

A. Key Stakeholders

B. Traditional procurement vs. procurement models in PPP

C. Myths and Realities about PPP

 Key Stakeholders: -
The key parties to a PPP arrangement are the public entity (Government) and the private
partner. In addition to the public entity and the private partner, there are several other
stakeholders who are associated with PPP projects, a few of which are described below.
a. Public entity – All Governments Departments & Directorates, Government
sponsored boards, societies, Municipal or Local Bodies, Panchayats,
Government sponsored education, research and knowledge management
institutions, Public Sector Undertakings, Government owned companies,
statutory authority and other entities, which are under the administrative control
of the State Government.
b. Private partner – Any entity other than the Public entity
c. Concessionaire – Refers to the private partner awarded the tender for the
implementation of the PPP project.
d. Special Purpose Vehicle (SPV) - An entity created to act as the legal
manifestation of a project consortium, with no historical financial or operating
record which Government can assess. An SPV is a legal entity with no activity
other than those connected with its borrowing.
e. Transaction Advisors – Consultants hired through a transparent system of
procurement by the sponsoring authorities to assist them in designing the project
and/or providing technical, financial and legal input for the project design, and
providing advice for the management of the process of procuring the private
sector partner for the PPP project
f. Lead Bank/ Lender – The financial institution (FI) that is funding the
infrastructure project by providing debt to an extent not less than 25% of the
total project debt and designated as such by an inter-institutional group or
consortium of financial institution.
g. Lead Financial Institution - The financial institution (FI) that is funding the
PPP project, and in case there is a consortium of financial institutions (FIs), the
financial institution (Fl) designated as such by the consortium.
 h. Independent Engineer – A consultant appointed for supervision and
monitoring quality of the project (different from TA). Independent Consultant
is appointed after the project has been awarded and the Concession Agreement
has been signed. The Independent Consultant ensures that the project work goes
as per schedule and as per the quality criteria specified in the agreement.
i. Users – End users of the infrastructure created or in other terms project
beneficiaries.

 Traditional procurement vs. procurement models in PPP: -

Governments have always procured assets and services from the private sector, even in
the traditional systems of procurement through BOQ contracts, EPC contracts etc. PPPs
are nothing but an alternative method of procurement, which involve substantial risk
sharing with the private partner. The key differences between traditional methods of
public procurement and PPPs are set out below.

a. Risk: - In PPP, there is an allocation of risks between the public entity and the
private partner. PPPs involve the allocation of the risk to the party who is best
suited to handle or mitigate the risks. But in traditional public procurement
methods, the public entity bears almost all the risks associated with the project.

b. Project Management: - In traditional practice, the public entity is solely

responsible for complete project management whereas in PPP, responsibility for
operations and management of the project is primarily with the private partner.

c. Focus: - The focus in a traditional form of public procurement is on building

assets. In PPPs, the focus is in on buying of services or output service delivery.
The output specifications are clearly set out in the bid documents which the
private sector is expected to accomplish as a result of the project.

d. Financing: - Traditional public procurement is financed by the public entity

through its budgetary resources. However, in the PPP form of procurement, the
private sector may bring in finances in the form of debt or equity to develop the
project.

e. Payments: - Traditionally, the public entity will need to make frequent and
short term payments to the contractors who are selected. In the PPP form of
procurement, the association between the public entity and the private partner
is long term and the payments tend to be made on the basis of the outputs. Also,
 in traditional procurement, payments may be linked to construction milestones
and/or testing milestones whereas in PPPs they tend to be linked to service
delivery.

 Myths and Realities about PPP: -

There are several myths and misconceptions regarding PPP projects. Listed below are
a few of the major myths regarding PPP arrangements along with facts that help clarify
such misconceptions.

Myths about PPP: -

a. Private sector is incompatible with the service motive of public entity.

b. PPPs increase user tariffs

c. Money for PPPs comes from private “pockets”

d. Once a private partner is brought in, there is little or no role for the public entity

e. Private operators are not committed to protecting the environment

f. PPPs do not provide value for money

g. The corporate profit motive is incompatible with the provision of essential

public services

Realities about PPP: -

a. The key is to harness the private sector’s profit motive by incentivizing them to
provide better quality service and earn a reasonable return.
b. When appropriate safeguards such as effective regulation and/or adequate
competition are in place prices do not increase arbitrarily.
c. The public entity’s role changes from direct involvement in construction and
service provision to ensuring that the PPP delivers value for the project (also
referred to as Value Proposition of Projects) as far as the Government is
concerned, and better services for users.
d. Value for the project is derived from factors like competitive bidding, improved
designs and service quality.
e. The private sector will make the initial investments from their pockets provided
they can recover them either from users or the Government with a reasonable
return.
f. Significant procedures are in place in order to comply with the environmental
laws.
2. What do you understand by the term “Value for Money” in PPP? Explain the Public
Sector Comparator.

Value proposition plays a key role when making important investment decisions to ascertain
whether the project is feasible and is of value to the public entity. Usually, Value Proposition
of Projects analysis is carried out twice during the project development process:

 Prior to deciding whether to develop the project through a PPP framework

 Before awarding the project to the preferred bidder

If the project is not receiving any fiscal support, but the project cost could be recovered through
user charges in the future. Then the project is still feasible. This is particularly relevant to
annuity based payment schemes where a framework is needed to assess whether the right
procurement route is being used given the alternative of more traditional procurement
approaches.

The analysis is useful to decide whether to pursue the project under a PPP framework. On
receipt of bids from the private partners, the results of value proposition analysis are useful for
examining whether the winning bid delivers value to the public entity.

An analysis is also done on the following:

 Optimizing the PPP framework such that risk sharing is done among the stakeholders
which makes the project bankable, affordable, and provides value to the public.
 Assessing the impact of changes in the risk sharing arrangement
 Establishing an acceptability threshold for bids

Value Proposition analysis/ assessment in sectors like roads and ports that are being developed
through a programmatic approach, where every project is developed under a standard well
established structure like BOT or OMT. The analysis need not be repeatedly carried out for
every project that is developed. It could be carried out judiciously. For instance, NHAI while
undertaking the programme of road development through annuity might not carry out value
proposition of projects analysis for every road.
When is this value proposition carried out?

Initial Assessment:

 An initial assessment is carried out for project feasibility, to determine whether the
public entity can device a procurement strategy before inviting bids from private
players.
 If adequate need and analysis is being done for the general public.
 If adequate risk sharing can be done.
 If the project has market potential.
 If the cost estimate shows that the contracting authorities can be confident about its
affordability and sourcing of funds.

Final Assessment:

 The objective of the final analysis is for the public entity to judge whether there is a
value proposition in the bids submitted by the private entities.
 When judging a bid maid by a private entity a comparison to the PSC should not be
considered as a pass or a fail, because there are various other factors that the private
entity takes care of. A Public Sector Comparator (PSC) is the hypothetical risk-adjusted
cost if a project were to be financed, owned and implemented by a Government Agency.
 The value to the public sector of the risk the private sector accepts through the proposed
PPP arrangement.
 Any differences in service deliverables between the PSC and PPP bid.
 Check whether the PSC is greater than the preferred bid/best bid/final offer.
 If the PSC is greater than the preferred bid/best bid/final offer, then there is value in
awarding the project to the preferred bidder (who submitted the preferred bid/best
bid/final offer).

3. Explain the process of Project Structuring in PPP projects.

PPPs are a plan between the public element and the private collaborator for development of
infrastructure or delivery of administrations. Under traditional development contracts, the
private partner bears just the plan and development risk while under PPPs, they are probably
going to bear other dangers relating to financing, demand, and activities, depending on the
danger dividing system among the public elements and the private partner.
Allocating responsibilities, rights, and dangers to each party to the PPP contract is referred to
as "organizing a PPP project." The agreement indicates this portion exhaustively. Maybe than
building up a full agreement right quickly, project organizing is typically made through an
extensive interaction
The technical analysis, financial analysis, value proposition analysis and the economic analysis
contribute significantly to deriving an optimal project structure for development.
To plan an ideal venture structure under a PPP system, various alternatives should be first
analyzed and valued. This should be done to guarantee that the sharing of dangers between the
two is done in a way that makes a mutually beneficial arrangement not just for the private
partner and the public partner yet in addition offers greatest benefit to the general public at
large.
Stages in the process of Project Structuring in PPP projects:

1. Stage 1: Identification, Prioritization and Selection of the PPP Project.

Its purpose is to identify and test projects so that the quality of the PPP process is
increased. At the completion of this Phase the Sponsoring Agency will have identified
a project that is suitable for further development as a PPP. This project then enters the
PPP process, which starts in next phase, where it undergoes more detailed study and
preparation.
2. Stage 2: Due Diligence and Feasibility Studies.
This process includes activities and studies to ensure the selected project is well
designed and can be successfully tendered and implemented. Carrying out Readiness
Check, to check that the project is ready to proceed to the clearance stage to reassess
the impact of changing parts of the project design and verify the feasibility study model
results
3. Stage 3: Procurement.
This stage includes prequalification of bidders and the bidding and bid evaluation
process and includes a section on Unsolicited Bids. It incudes The qualifying process,
covering the RFQ and shortlisting, Final drafts of key bidding documents are discussed
and finally, contract finalization are covered.
4. Stage 4: Contract Award.
This stage gives advice on dealing with the preferred bidders. It includes financial close
and contract signing.
 5. Stage 5: Contract Management.
This deals with the construction and/or operation periods of a project including transfer
back if relevant. It involves service delivery management, contract compliance,
relationship management, Renegotiation (when needed), Government approval of
renegotiation terms and finally establishment of a process and a dispute resolution team
Government approval (when needed by defined bodies).

4A. In which sector of primary education the private help should be taken?
 Private help should be taken in all or some part of the delivery of education
infrastructure and services. PPPs can help extend the reach and effectiveness of
government funds, encourage innovation in education, increase safety, efficiency, and
capacity of physical educational infrastructure, and given the right public policy
context, extend access to educational services and parity of services received across a
population. They allow the government to maintain strategic, financial and regulatory
control over public education, allowing them to step back from the day-to-day delivery
and management of the infrastructure and/or service in situations where their resources
are limited.

 Public-Private Partnerships can introduce innovation and investment into the primary
education system in India. So, in a rural area of Maharashtra, this can uplift the
education system.

4B. What can be the financial incentive for the private player in such a scenario or how
a private entity can make money from such a venture?

 PPPs can help extend the reach and effectiveness of government funds, encourage
innovation in education, increase safety, efficiency, and capacity of physical
educational infrastructure, and given the right public policy context, extend access to
educational services and parity of services received across a population. They allow
government to maintain strategic, financial, and regulatory control over public
education, allowing them step back from the day-to-day delivery and management of
the infrastructure and/or service in situations where their resources are limited.

 Government should reimburse private operators the full amount of per child costs in a
timely manner to ensure financial viability.
  A robust PPP ecosystem for operators, government, and philanthropies need to be
created to share learning and innovation pathways. This ecosystem is vital to ensure
that PPPs are financially viable, operationally effective and fulfil their promise of
introducing critical quality into the Indian education system.

 Operational funding from government must be adequate. Private management also

receive non-salary grants for expenses such as repair and maintenance costs, purchase
of educational aids and other utility payments.

 Private provider bears capital cost upfront and government provides capital incentives.

 Central government can provide lower capital subsidy and viability gap funding (VGF)
up to 20% of project cost.

 For example: - Rajasthan has two models of PPP implementation in education – the
school adoption model and the Design Build Finance Operate and Transfer (DBFOT)
model. In Rajasthan: DBFOT PPP Project.

4C. What kind of incentives should be provided to the private player for undertaking
such project?

 The government can quickly reimburse private operators for their full per-child costs,
ensuring their financial viability.
 The government has the option to foot the bill for the private company's upkeep.
 Government should encourage the use of private schools in places where public
infrastructure isn't feasible.
 During the project's operational phase, the private sector will receive monthly payments
from the Ministry of Education based on performance.

4D. What kind of measures be used for judging quality of service?

 Infrastructure management and physical functioning of the school.

 Paying teachers and school personnel on time.
 Enhancement of the school's educational foundation.
 The annual increase in the number of students admitted.
 Skills growth and improvement for each individual learner.
 When it comes to closing low-performing schools, authorities should follow well-
defined, well-defined procedures.
  Expansion should be based on the capacity to hold schools responsible for their results.
 Academic approaches and curriculum design are improved.

Based on above, would you recommend PPP in primary education? Explain your
recommendation.

 The PPP in primary education is recommended as it helps in preparing the strong

regulatory framework and sophisticated school infrastructures.
 It also helps in achieving the education policies implemented by the government.
 PPPs will also helping in reaching the people in rural areas and one of the party is public
sector i.e. Government.
 PPPs will succeed more if they are accompanied by quality assurance/monitoring
mechanisms that evaluate provider performance and programme outcomes.
 The government should use 'operational contracts,' which allow private sector managers
to select, hire, and pay employees instead of government officials, to provide the most
scope for successful contracting.