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August 2, 2014

ISSUES IN PUBLIC PRIVATE PARTNERSHIP

Hemant Sahai Managing Partner

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PPP projects would ideally entail:

Creation of assets that are primarily public in nature, with private capital and its eventual transfer to the Government

Operation and maintenance of such assets and delivery of public services by Private entity

Payment of user charges

High level of performance at reasonable costs

Allocation of Risk

As per VGF Scheme of Government of India:

“Public-Private Partnership (PPP) Project means a project based on contract or concession agreement between a Government or statutory entity on the one side and a private sector company on the other side, for delivering an infrastructure service on payment of user charges”

Public Private Partnership

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A structure containing the following elements should be preferred

Precision and predictability of costs and obligations

Specified performance and quality parameters

Efficient monitoring mechanism for the Government

Mitigation and unbundling of risks with efficient allocation to various stakeholders

Symmetry of obligations between the parties

Preferred Structure

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Issues in the DBFOT Model

Land - Lease Vs License

intrusive monitoring powers with the Utility

Stringent obligations - no flexibility either in respect of construction milestones or operational and maintenance norms

No encumbrance can be created on the facility – potential bankability issues

excessively rigid framework that is unsuited to the evolving dynamics of the sector

Fuel risk pass through not effective enough

Power Sector - Generation

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Issues in the DBFOT Model

EPC Contract approach micromanages the Developer and is counterproductive

Control over the Project Agreements and the Financing Agreements unnecessary

Real estate development not practical in Transmission Projects

Obtaining VGF clearance time consuming. Main incentive for states adopting DBFOT model is the potential availability of VGF, which incentive gets neutralised due to inordinate delays and uncertainty in obtaining VGF approvals.

Power Sector - Transmission

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Land acquisition – framework uncertain, made more acute by LARR Act

Procurement of permits and clearances

Financial close – over the last few years track record on financial closures has been disappointing

Lenders have been risk averse and the stringent PPP structures appear to have been a disincentive

Cost overruns due to inordinate delays

Inaccurate estimates of traffic/demand

Assessment of Total Project Costs unrealistically low

Generic Issues in Other Sectors

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Thank You.