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Introducing / Development

Through

Public Private Partnership (PPP)

Er. Subhash Malhotra

Centre for Management of Engineering Works

Service Provision Options

Infrastructure Services

Status Quo:Govt. creates assets & provides services

PPPs: Contracting of Services - Government

creates assets and contracts service

provision to private sector

PPPs: Government awards concession/

license to private sector for a fixed term under which it creates assets and provides services

Privatisation: Government transfers entire sector responsibility to the

private sector – which then creates assets and

provides services

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Definition

The Department of Economic Affairs, Government of India defines PPPs as:

PPP means an arrangement between 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 period of time, 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.

The ultimate accountability to users for provision of these services vests with the public entity – even if delivery is by the private partner

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Why do we need PPPs?

Fiscal reasons - inadequacy of resources with government (commonest reason)

by leveraging on committed government funding it is possible to finance projects of much larger magnitudes

Efficiency gains due to appropriate risk transfer, speedy decision making and flexibility of operations (better reason)

Examples of private sector involvement in core sectors: airlines, telecom services, oil refining -private sector is able to take on large projects, complex operations and can well handle reasonable commercial risks attached to projects such as Design, Financing, Construction, Operations and Maintenance

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Why do we need PPPs?

Risks that often affect projects implemented by the public sector - time overrun, cost overrun, change of scope, inadequate designs, lower construction quality, leakage of revenues, high maintenance costs – can be assumed by the private player

There is also incentive for the private party to use appropriate technology, develop innovative design solutions, improve project management practices, install more efficient revenue collection practices and use life cycle cost approach

Expected outcomes - value for money, expeditious implementation and higher quality of assets and services

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What a PPP is not & what it is PPP is not privatisation or disinvestments PPP is not about borrowing money from the private sector PPP is more about creating a structure

in which greater value for money is achieved for services through private sector innovation and management skills delivering significant improvement in service efficiency

levels This means that the public sector

no longer builds roads, it purchases kilometres of maintained highway

no longer builds prisons, it buys custodial servicesno longer operates ports but provides port services through

world class operatorsno longer builds power plants but purchases power

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Key Benefits

Rigorous project preparation – since the focus shifts to developing bankable projects

Delivery of a whole life solution – going beyond asset creationFocus shifts to service delivery – construction responsibility is

integrated with O&M obligations and together with appropriate quality monitoring and service delivery- linked payments, this could enhance the levels of service delivery

It is possible to roll it into a programme and have a time-bound implementation plan

Can lead to better overall management of public services – transparency in prioritization, selection and ongoing implementation

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Pre-requisitesThe public entity should have the enabling authority to transfer

its responsibility – enabling legislative & policy framework, administrative order – the instrument of transfer is through a contract

There is a significant transfer of responsibility to the private entity – and usually includes large financial investment obligations

Payment to the private entity for services – directly by users or paid by the public entity These are conditional on achieving pre-specified levels of

performance The nature of the relationship is usually long-term to derive

maximum benefits

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Features of PPPs - 1

Genuine risk transferAll risks pertaining to design, building, financing and

operation transferred to the private entity as applicableTransfer of demand risk depends on the extent to which the

private sector can influence usage or on the monopoly characteristic of the asset

Output based SpecificationsContracts specify the service outputs required rather than

asset configuration/mode of service deliveryEmphasis on type of service & performance standards Incentive to deliver outputs using innovation in design,

construction, operation and financing

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Features of PPPs - 2

Whole life asset performancePrivate entity takes responsibility & assumes risk for the

performance of the asset and delivery of service over a long term

Payment for Performance Revenue/ Payment to private entity is subject to

performance in relation to specific & quantified criteria set out in the contract

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Types of PPPs

Financially free standing projects Role of public sector - planning, licensing & statutory approvals

No financial support/ payment is made by governmentRevenues are by levy of user charges by private sectorExamples -Toll Roads/ Bridges, Telecom services, Port

projects, Solid Waste Management with energy generation Projects where Government procures services

Private Sector is paid a fee (tipping fee), tariff (shadow toll) or periodical charge (annuity) by Government for providing services

The payment is made against performanceThere may be demand risk transfer – either in part or whole

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Types of PPPsExample - Roads - annuity/ shadow tolls, power - under PPAs

(Power Purchase Agreements). In UK - prisons, education, health services, defence related services

In both cases, the design, financing, construction and O&M risks are fully that of the private partner

Hybrid Structures – Combine the financially free standing nature – levy of a user charge – with payment by the public entity Payment could be as a viability gap subsidy or an annuity

paymentExample – toll road project with either viability gap payment

by government or annuity payment based road contract with tolling rights

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Implementation Structures Commonest form – concession/ licence to a special purpose

company/ vehicle (SPV) set up by the private investor for implementing the project SPV is entirely owned by the private investor and other

strategic/ financial investors SPV can be set up as a joint venture with the public sector/

governmentMajority stake with private sectorPublic partner could expedite the receipt of statutory

approvals and clearancesMindful of the conflict of interest for government in its role

as an investor in the company and as a statutory authority For certain social infrastructure SPVs can be set up as Not-for-

Profit vehicles (Section 25 companies), with the private sector being compensated a fee for services

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Special Purpose Vehicles

A new company is set up to implement each projectUsually no balance sheet support is provided by the sponsoring

entity – except for the equity commitmentMost obligations would be addressed through contractual

arrangements – construction, O&M, supply, off take and financing agreements

Bankruptcy remote structure – project and sponsor are insulated from each other

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PPP Options

Full Privatizatio

n

Works & Services

Contracts

Management &

Maintenance Contracts

Operation & Maintenance Concessions

Build Operate Transfer

Concessions

Low High

Extent of private sector participation

Which of these are PPPs?15

PPP OptionsExisting Assets, usually with refurbishment obligations

Lease of assets Concessions (licenses)Management contracts of whole or significant parts of the

undertaking New Assets

OMT Concessions of assets newly built by the public sectorSale of a government-owned SPV after project

implementationDesign, Build, Operate, Transfer Concessions – commonest

form used in India

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Concession Terminologies

BOT - Build Operate Transfer

BOOT - Build Own Operate Transfer

BOO - Build Own Operate

BOOST - Build Own Operate Share Transfer

BOLT - Build Own Lease Transfer

DBFO - Design Build Finance Operate Transfer

OMT - Operate Maintain Transfer

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Value for MoneyTransfer of risks/ responsibilities under a PPP structure should

result in better value for money for the user/ purchaser of serviceTelecom sector – mobile phone tariffs from Rs. 16/- per

minute to Re.1/- or 60 paise per minute for overseas and local calls

Tolls paid is offset by savings in direct & indirect costs and value of time

Annuity payments – use of a public sector comparator – equivalent annuity

Efficiency gain for the project Savings in cost of project versus overrunSavings in operating costsRevenue maximization or leakage reduction

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Stakeholder ExpectationsSponsors/ Strategic Investors

Project cash flows are reasonably predictable and sufficiently long term

Stable policy/ regulatory frameworkReturn – commensurate with the level of risk

Lenders/ Other Financial Investors Adequate/ Secure cash flows to cover debt/ meet return

expectationsContractual claim on cash flows for debt servicingComfort in the event of termination

Government/ Public AuthorityAsset built & operated/ maintained to specified standard –

service of desired order – public interest19

Stakeholder Expectations

UserQuality of serviceAffordable/ Reasonable cost

Transparent award of project to a suitable partner All intentions are set out in a contractConcession Agreement - bundle of rights & obligations and

consequences in case of non-fulfillmentUsually the only tangible security available

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Contractual Framework

Contracting parties : Government Agency – Concessing Authority and Private Party – Concessionaire

Other parties – State government, lenders, suppliers of services A concession is a license – rights enjoyed for obligations

performed

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Partnership in Practice

Partners, not adversaries – this is important given the background of mistrust in conventional procurement

Project should be key focus – “win-win” for both parties Independent agencies – Independent Engineer - useful during both

implementation and operations Government retains ultimate responsibility but uses the private

sector to deliver infrastructure services of specified standard Private Financing – can significantly leverage public funds

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What Ails Municipal Corporations, Committees

Lack of will & skills Lack of ResourcesCentralization of

powers with state govt.Misuse /private use of

man powerLeakages & corruptionUnskilled staff and

managers having little/no exposure to technology

Devaluation of ethics

Poor Revenue BaseLack of will to levy

Property Tax and user charges for water and waste services

Large debts and poor collections

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PPP Projects in Local Government

Parking Lots including multilevel parking

Garbage Collection from homes

Maintenance of Public Parks

Solid Waste Management (SWM) – Land fills & Energy Gen.

Public Conveniences

Foot Bridges & Under-passes

Bus lay byes, Bus StandsRedevelopment of

marketsUpgrading water supply

system with user charges

Complaint cum Suvidha Centers

Road side hoardings

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Investor Comforts & Incentives

Fiscal Benefits - Tax holiday of 100% for 10 years in a block of 20 years

Viability Gap Funding of up to 40% of the cost of the project – as a grant

Foreign Direct Investment –100% of the equity permitted Duty free import of high capacity and modern construction

equipment Long Concession periods – up to 30 years

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Thank you,

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