Management Of PPP Projects

Prasad K V

Assistant Professor, NICMAR

About Self
 A construction management graduate and an alumnus of NICMAR.

 Started career at Hindustan Construction Company (HCC) in 2008 till late 2020 ~ 13 years.

 Initial two years at water sector projects – Planner and project coordinator.

 Sector Head (AGM) for Planning of Metro & Industrial Projects – 300 Cr to 3000 Cr

 Underground Metro Projects – Delhi Metro Packages & Mumbai Metro

 Nuclear Reactors & Fuel Complexes – BARC, RAPP, FRFCF, DAE

 Dry Docks & Ports

 Thermal Power & Industrial Complexes

 Joined NICMAR in 2020 as Faculty & pursuing PhD from VIT, Chennai in Lean Construction
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Course Outline
 PPP Contracts and agreements

 Role of various parties in PPP projects

 Feasibility and appraisal of PPP projects

 Identification, screening and selection of PPP projects

 Financial Structuring of PPP projects

 Legal framework of PPP projects

 Case studies
Session Outline
 Overview and background of PPPs

 Understanding PPPs- what they are; key structures; perspectives

 Compulsions for privatization

 Advantages and Limitations of PPPs

PPP: What is it?

 Medium to long term relationship between the public sector and the partners

(including voluntary organisations)

 Involves sharing and transferring of risks and rewards between public sector

and the partners

 Attempts to utilise multi-sectoral and multi-disciplinary expertise to structure,

finance and deliver desired policy outcomes that are in public interest

 Clear governance structures established to manage the partnerships

PPP: What is it?

 It is about creating, nurturing and sustaining an effective relationship between the

Government and the private sector

 Achieving improved value for money by utilising the innovative capabilities and

skills to deliver performance improvements and efficiency savings.

 It aims to leverage private sector expertise and capital to obtain efficiency gains

in service delivery and asset creation

 The key contrast between PPPs and traditional procurement is that with

PPPs the private sector returns are linked to service outcomes and
performance of the asset over the contract life.
Defining Public Private Partnerships
 Describes a range of possible relationships among public and private entities in the

context of infrastructure and other services

 PPPs are a contractual means to deliver public assets and public services

 Agreement between the government and one or more private partners (which may

include the operators and the financers). Within the agreement, the private partners

deliver the service so that the service delivery objectives of the government are aligned

with the profit objectives of the private partners.

Defining Public Private
Partnerships
 A long-term contract between a private party and a government entity, for providing a public asset or service,

in which the private party bears significant risk and management responsibility and remuneration is linked to

performance

 Encompasses PPPs that provide for both new and existing assets and related services

 Includes PPPs in which the private party is paid entirely by service users, and those in which a

government agency makes some or all payments

 Encompasses contracts in many sectors and for many services, provided there is a public interest in the

provision of these services and the project involves long-life assets linked to the long term nature of the

PPP contract
Defining Public Private
Partnerships
 The project functions transferred to the private party - such as design, construction,

financing, operations, and maintenance - may vary from contract to contract, but in all
cases the private party is accountable for project performance and bears significant
risk and management responsibility.

 PPP contracts typically allocate each risk to the party that can best manage and handle

it - risk transfer to the private party is not a goal, but is instrumental for full transfer of
management responsibility and for the alignment of private interests with the public
interest.

 The effectiveness of the alignment depends on a sufficient balanced transfer of risk to

the private partners.

Development of PPPs
Almost 90 countries around the world are working
on at some form and some stage of PPP-with
varying degrees of success

Core functions
UK

New Zealand

Area of Partnership
Australia
South Africa

Spain
Germany Ireland
Italy
France
India

Japan
Jamaica
Mauritius
Non-core functions Sri Lanka

High
Low
Sophistication of partnership structure
Key structures
• Designed to maximize the use of Private Sector Skills

• Risk placed where it can be managed best

• Activities performed by those most capable

• Public and Private Sector each retain their own identity

• They collaborate on the basis of a clear division of tasks and risks

• PPP offers to the Public Sector greater Value for Money:

– PPP transaction facilitates technology transfer

– Private Sector shares its experience with Public Sector

• PPP delivers high quality infrastructure in the shortest possible time

Key structures
Differential procurement
process

Capital and operating costs are paid for by the public sector, who The public sector only pays over the long term as services are
take the risk of cost overruns and late delivery.. delivered. The private sector funds itself using a large portion
of debt plus shareholder equity. The returns on their equity
will depend on the quality of services.
Swiss Challenge
Approach
Perspectives
• PPPs cannot be a solution for every challenge that public sector faces with

regard to service delivery & infrastructure development

• Countries have kept some sectors out; while others have put a floor price

• PPPs play a small but important role in the overall objective of delivering

modernised public services, and asset creation

• Even in a mature market for PPP like UK, it represents 10-15% of total

investment in public services

Infrastructure Challenges
 Infrastructure is critical for economic development and growth

 Reducing poverty and inequality

 Creating employment

 Ensuring environmental sustainability

 Generating high social returns and welfare enhancing

 Governments are ultimately responsible for the provision of public services and

the infrastructure required for their delivery

 Infrastructure investment is often part of the social compact between a

government and its citizens

Infrastructure Challenges
 Inadequate infrastructure is a constraint on growth and impacts quality of life, particularly in

developing countries

 Situations of demand for infrastructure services outstripping supply

 Congestion / Service rationing

 Quality of service delivery is impacted & is low, unreliable

 Some areas not covered at all

 Some stats -

 Over 2.4 billion people lacked access to improved sanitation

 At least 663 Million people lacked access to safe drinking water

 Over one billion people lacked access to electricity

 At least one third of world’s population was not served by an all weather road
Infrastructure Challenges
 Degradation of infrastructure - implies that actual economic growth will be lower than

forecasts

 Infrastructure investment poses pervasive challenges to governments

 Agency problems involving different actors and taking different forms throughout the project cycle

require complex governance arrangements

 Infrastructure projects involve large sums of money – susceptible to corruption and bribery

 Flaws in the incentive framework &

 Rules governing agency problems through out the project lifecycle

Reason for failure of infrastructure projects to meet timeline, budget, & service delivery.
Infrastructure Challenges
 Countries constrained to spend enough to provide infrastructure

needed to reach universal access

 Other issues

 Quality of infrastructure delivery is often less than satisfactory

 Construction of new assets costs more and takes longer than expected

 Infrastructure assets are often poorly maintained, increasing costs and

reducing benefits
Principle of PPPs
• Contracting Authority defines the service required
Output based specification • Design of the works to deliver that service lies with the private sector

Long-term contractual arrangements • The contract can be for 25/30 years plus

• Cost measured against conventional procurement.

Value for money • Whole life costs and quality are combined to gauge VFM

Transfer of risk • Transfer of design and construction risk

• Risk of ownership transferred to the private sector
• Competition will drive best value
Market competition • Gives public sector access to innovation

Whole life costing • Long term responsibility for building operation and maintenance
• Focus on reducing cost
PPP Value Drivers
 Whole-of-life costing

 Risk transfer

 Upfront commitment of private party

 Focus on service delivery

 Innovation

 Asset utilization

 Mobilization of additional funding

 Accountability
How PPPs Can Help
 Estimated investment in infrastructure required by 2030 globally ~ $50 Tn; more

than the estimated value of today’s worldwide infrastructure stock

 Insufficient funds – many economically beneficial projects are not being

implemented.
 Increased revenue from better implementation of user fees

 New revenue streams from greater asset utilization

 Customizing projects to maximize user utility and increase cost recovery

 Financing vs. Funding

Funding vs Financing
How Ppps Can Help
Poor Planning and Project Selection

 Harnessing the analysis and ideas of private sector investors, whose financial returns depend on

getting cost and revenue forecasts right

 Private investors and lenders undertake their own project analysis based on their experience –

 Strong, profit-driven incentive to assess benefits and costs

 Lenders to project finance transactions, in particular, carry out extensive project due diligence

 The PPP tender process can act as a filter for non-viable projects

 E.g. : National Highways Authority of India (NHAI)’s toll road projects did not attract bidders (Gupta et al. 2009); in

some cases demand forecasts were too high; in others, bidders found NHAI’s cost estimates to be low, and the
project not viable on more conservative cost assumptions.
Poor Planning – A Case Of Mumbai Water
Supply
Poor Planning and Project Selection

 The experience of the Municipal Corporation of Greater Mumbai provides an example of weak planning

in the water sector. The Corporation was looking for ways to improve the efficiency of its operations.
Mumbai is short of water, with supply rationed to around four to six hours a day in most parts of the city.
Corporation planners were working on new schemes to transport water from hundreds of kilometers
outside the city. Consultants engaged through the World Bank analyzed the cost of achieving a 24-hour
water supply in one ward (K-East) entirely with new supply, and compared this with the cost of
achieving 24-hour water supply through improving the distribution system to reduce leakage and theft.
The consultants estimated that the cost of distribution improvements would be one sixth or less of the
cost of bulk supply increments, for the same level of service improvements. The size of the discrepancy
suggests that the Municipal Corporations’ planning had been biased toward large projects
How PPPs Can Help
Weak Management

 Efficient and effective at managing infrastructure construction projects, and at managing service

delivery once the assets are in place

 Quality of infrastructure service delivery by Government entities is often constrained by limited

capacity and weak management incentives

 Training, retaining, and leading qualified professionals is often harder in the public sector

 Private sector participation can improve service delivery and management efficiency, compared to

government-run infrastructure services

How PPPs Can Help
Inadequate Maintenance
 Infrastructure assets are often under-maintained, either because maintenance is poorly planned or

because planned maintenance is deferred

 Political consideration or pursuit of personal gain often biases infrastructure expenditure towards

new assets over maintenance

 Inadequate maintenance increases lifetime costs while also decreasing benefits

 PPPs bundle construction or rehabilitation and ongoing maintenance into a single contract; strong

incentive to carry out adequate maintenance; PPPs bundle construction or rehabilitation and
ongoing maintenance into a single contract
How PPPs Can Help
Climate change and natural disasters

 Risk of natural disasters affects infrastructure projects

 Climate change introduces additional challenges by increasing uncertainty and the

probability of extreme weather events

 PPP contracts are long-term and generally inflexible arrangements with lock-in

effects, failure to address climate risks exposes stakeholders to long-term

vulnerabilities over the life of the asset

 Embedding the systematic adoption of some type of insurance in the national

infrastructure or PPP policy will increase the cost of infrastructure but reduce the
fiscal hardships caused by extreme climate events and natural disasters
Challenges And How PPPs Can Help
Significance Of PPP Projects
Advantages
Principles for Success of PPPs
Pros vs Cons
Essential Condition Of PPPs
 Arrangement with private sector entity

 Provision of public asset or service for public benefit

 Investments being made by and / or managed by the private partner

 Time period

 Risks sharing

 Performance linked payments

 Conformance to performance standards

Essential Condition Of PPPs