Public Private Partnership

Limited Resources makes PPP a necessity

Public Private Partnership
Public Private Partnership

Public Private Partnership or PPP refers to a contract or agreement between the government and private company which is usually for a long period of time. PPP generally includes financing, designing, implementing and operating services or other facilities. The private company finances the project, builds it and operates the public service for a certain period of time and receives payment either by means of charges paid by user or by means of payment from the government or by a mixture of both.

EXCERPT

PPP or Public Private Partnership was adopted in India after the economic reforms of 1991. Post adopting the PPP framework, India has successfully implemented it in various sectors like roads, railways, ports, airports, power, telecom etc. PPP serves as an optimum medium for overcoming the funding gap that governments face while meeting the vast infrastructural needs. Sharing of risks between government and private entity, adding the private efficiency in public services and reforming the traditional procedure so as to bring about effective management of available resources are some of the major benefits of PPP.

Though PPP has no single universal definition, it has been explained by different organisations and countries in different ways. The IMF defines PPP as “the transfer to the private sector of investment projects that traditionally have been executed or financed by the public sector”. As per the OECD public-private-partnerships are “long term contractual arrangements between the government and a private partner whereby the latter delivers and funds public services using a capital asset, sharing the associated risks”. The government of India also has its own definition for PPP which defines it as “an arrangement between a government / statutory entity / government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or public services, through investments being made and/or management being undertaken by the private sector entity, for a specified period of time, where there is well defined allocation of risk between the private sector and the public entity and the private entity receives performance linked payments that conform (or are benchmarked) to specified and pre-determined performance standards, measurable by the public entity or its representative”. The Planning Commission of India defines PPP as “a mode of implementing government programmes/schemes in partnership with the private sector. It provides an opportunity for private sector participation in financing, designing, construction, operation and maintenance of public sector programme and projects.”

PPP projects have spread to various sectors including infrastructure, power sector, telecommunication sector, petroleum sector, road and highways, airport, ports, railways, health, urban development etc. Some of the PPP projects in India include airports of Mumbai, Delhi, Hyderabad, Bangalore and Cochin etc, further, in the current year 6 airports (Amritsar, Varanasi, Bhubaneswar, Indore, Raipur and Trichy) have been approved for PPP model of operation and maintenance. In the roadways and highways, Delhi-Noida bridge project, four laning of Pukhrayan-Ghatampur-Bindaki SH (UP- approved in 2018), 4/6 laning of dewas bypass on NH-3 (MP- approved in 2016), construction of three km long three lane flyover (Elevated Corridor) near Joda town including improvement of road stretch of Joda – Bamberi (Odisha- approved in 2017) etc are some of the ongoing PPP projects. In power sector, Tuivai Hydro Power project (Mizoram- approved in 2013), development of 400 kV Suratgarh-Bikaner Double Circuit of Super Critical Thermal Power Plant at Suratgarh (Rajasthan- approved in 2015) etc are some of the ongoing PPP projects. In ports sector, development of minor sea port at vizhinjam (Kerala- approved in 2014), in metro- Pune metro project (Maharashtra- approved in 2018), in health sector- Setting up of Medical College and Hospital in Bolangir (Odisha- approved in 2013), Arogya Raksha Scheme in Andhra Pradesh, Yeshasvini Health scheme in Karnataka and in education sector – development of Advanced Training Institute (ATI) in Bellary (Karnataka- approved in 2014), development of Advanced Training Institute (ATI) in ITI, Hehal (Jharkhand- approved in 2014), development of Advanced Training Institute(ATI) in Doraha (Punjab- approved in 2014) etc are examples of PPP projects in India that are active at present.

Evolution of PPP in India

India embarked on the journey towards PPP after economic liberalisation in 1991. Before 1991, infrastructure services were solely under the control of the government. The new industrial policy introduced in India after the LPG reforms emphasised on development of industrial and infrastructure sectors with private participation. Corporatisations of existing PUSs like GAIL, ONGC etc, Greenfield investment for completion of new projects and concession agreements as part of PPP with private sector were some of the methods adopted by India in the direction of PPP. Starting gradually, the government took the PPP route in various projects across different sectors like roads, ports, airports, railways, urban development etc. Numbers of PPP projects as well as the financial value of projects in India have been on the rise. Major role of PPP can be noticed in the development of infrastructure in India. India has become one of the world’s largest markets for PPPs in the field of infrastructure. Till 2004, India witnessed limited success in PPP due to absence of efficient PPP network. However, starting from 2004, PPP has evolved in India with the efforts of central as well as different state governments towards development of PPP investment.

In 2004, a Committee on Infrastructure was set up to decide policies, develop structure for PPP and oversee the progress of infrastructure projects. Government also introduced viability gap funding (VGF) scheme for providing funds to large scale infrastructure projects where commercial viability would be difficult to establish. A PPP Approval Committee (PPPAC) was established by government in 2006, which works for appraisal of PPP projects in the central sector. In order to act as the Secretariat for PPPAC, Empowered Committee (EC), and Empowered Institution (EI) for funding PPP projects by means of VGF, government formed the PPP cell in 2006. The PPP cell is responsible for all policy level matters related to PPP projects. In 2006, government also established, India Infrastructure Finance Company Limited (IIFCL) as a government owned company which would help to fill up the finance gaps for long term infrastructure projects. The government also formed the India Infrastructure Project Development Fund (IIPDF) in 2007, to help in funding the development of PPP projects. In 2006, a significant number of PPP projects attained financial closure. Majority of this development was in the transportation sector due to various projects like Golden quadrilateral, North South- East West corridor projects etc. Besides these, India also has a Model Concession Agreement in place that forms the basis of PPP model by laying out policy and regulatory framework for implementation.

 In 2014, the government had announced setting up of 3P India institute which would perform a supporting role in the mainstreaming of PPPs. In 2016, Public Utility (Resolution of Disputes) bill was announced to act as a remedy for pending disputes related to PPP projects. The government also announced that guidelines for renegotiation of PPP projects would be published in order to boost the PPP. Another bill known as the Public Procurement Bill was also being planned by the government. This bill would set out binding fundamental norms for conducting the bidding process of PPP projects as the current norms are scattered in various guidelines, resolutions etc which makes the process complicated.

The evolving PPP network in India is not solely due to the efforts of the central government. Different state governments have initiated their own PPP models and formed laws and policies for streamlining PPPs. As per statistics, about 68% of the PPP projects are implemented by the state governments and the rest by the central government and its agencies. The states of Gujarat, Madhya Pradesh, Rajasthan and Karnataka have been leading in the PPP projects. These steps taken by the central as well as the state governments for encouraging private participation have helped in increasing the base of PPP projects in India and till now PPP projects can be seen in urban development, education sector, health sector, railways, roads and highways, airports, ports, telecom sector and power sector.

Need for PPP in India

The basic infrastructure in India has remained below average considering the geographic and economic size of the country along with its 2nd largest population. Infrastructure like roads, railways, ports, power supply etc in India is not at par with the prevalent standards in other developing nations. As per the requirements of the country, India needs mammoth investment in infrastructure for removing the existing deficiencies. In this backdrop, it can be said that the government would not be able to fund the huge infrastructural requirements due to various fiscal constraints as well as the increasing burden of liabilities on it. This is where the need of private sector is felt most. PPP acting on the border of public and private sector can help to deliver services, aid in infrastructural developments and meet other requirements for development of economy. With the PPP model the limitations of the government to meet the funding gap can be overcome.

Need for PPP in India Info 1
Need for PPP in India

Besides helping in addressing the issue of limited resources and finances, PPP model also incorporates the private efficiency in providing public services. The risks associated with the projects also are shared between the government and the private entity in place of the government carrying the entire burden of risks. The public sector is driven by benefit of public and the private sector by profit motive, a collaboration of both gives a new and efficient way to deal with projects which can fulfil the needs of the public as well increase the profit of the private entity. The Asian Development Bank outlines 3 major needs for opting PPPs in the infrastructure sector: First, ‘to attract capital investment so that public resources can be supplemented or else they may be released for meeting other needs of public’, second, ‘to increase efficiency of work and ensure a better and more effective manner for use of available resources’ and third, ‘to bring about reforms by using reallocation of roles, incentives and accountability’.

Types of PPP Models in India

There are different types of PPP models used across the world. PPP models used for new projects include Design Build (DB) – In this model government enters an agreement with a private entity to design a project and build it. After building, the government assumes responsibility of operating and maintaining the facility. As the facility is transferred after building it is also known as Build- Transfer (BT) model. Design Build Maintain (DBM) – As the names indicates, here the private sector designs, builds as well as maintains the facility. However, the responsibility of operation is on the government or the public sector. Design Build Operate (DBO), in this model the private sector is responsible for designing and building and after completion the facility is transferred to the government but the private entity is allowed to operate the facility for a certain time period. Hence it is also called as Build- Transfer- Operate (BTO) model. Design Build Operate Maintain (DBOM), here the private sector designs, builds, operates and maintains the facility for a specified time period as decided in the agreement. After completion of the time period, the facility is transferred to the government who assumes full responsibility. This model may also be known as Build- Operate- Transfer (BOT). Build Own Operate Transfer (BOOT), in this model besides building and operating the facility, the private sector also owns the facility for certain time period after which the ownership of the facility is shifted to the public sector. Build Own Operate (BOO), in this model, private entity is allowed to build, own and operate the facility as per term and conditions of the agreement. The public sector also buys goods and avails services from the project under the terms of agreement. Design- Build- Finance- Operate/ Maintain (DBFO, DBFM or DBFO/M), in this the private player designs, builds, operates and maintains the facility on the basis of a long-term lease. After completion of lease period, the ownership is transferred to the public sector. Hybrid models from among these may also be used.

For existing projects or facilities also different PPP models are available. Service contracts, the government and private player sign a contract as per which the private player provides services which were initially being provided by the public sector. It is also known as outsourcing. Management contract, here the private entity holds responsibility for operations as well as maintenance of facility. Lease, under this, private player operates a facility as per lease terms and pays a lease fee as per terms to the public partner. Concession, in this model the government grants specific rights to operate and maintain a facility for a long period of time. The public sector has the ultimate ownership of the facility. Divesture, the government transfers a facility or an asset to the private sector along with certain terms and conditions to ensure that improvement of the asset and services continue. The government may transfer a part or the whole of the asset to the private sector.

In case of India certain examples of different PPP models used: the first privately financed water project in India i.e. the Tirupur project of Tamil Nadu was based on BOOT model. The Delhi- Noida bridge project, Greenfield international airports of Bangalore and Hyderabad are also examples of BOOT model. Under the BOT model comes the national highway projects under NHAI, many international port projects etc. In India most of the road sector PPP projects are undertaken with the BOT or BOOT models. The Kutch and Pipavav railway projects of India are examples of BOO model. A project for lying of 6 lane roads over certain distance of National Highways has been undertaken with the DBFO model. Under management contracts food service providers or management companies enter into agreement with the public sector to provide food facilities and services to schools, sports facilities, nursing homes, and public office buildings. The Rajiv Gandhi Container International Transhipment Terminal is an example of lease agreement. Bulk Water Supply Project for IIT Bhubaneswar, NISER, and Infocity-II of Odisha is under concession agreement. India uses 3 other models of PPP. First, the BOT- Toll model, here the private entity after construction of road is allowed to recover his investment by means of toll fee from the users. Example is the project for expansion of road to four lanes between Solapur and Yedeshi in Maharashtra. Second, EPC (Engineering, Procurement and Construction) model, here the government bids in order to procure engineering knowledge from private players and all other costs of the project is borne by government. Example is the EPC project bagged by L&T from Damodar Valley Corporation for setting up Flue Gas Desulphurisation systems. Third, Hybrid Annuity Model, this is a hybrid of EPC and BOT-annuity model where the government pays 40% of project cost to the private body in the first five years and rest amount is transferred variably based on asset creation and performance of the private player. Example in 2017, NHAI awarded about 30 highway projects under HAM.

Problems with PPP Projects

PPP projects have different drawbacks. In India certain sectors like roads have been successful however, sectors like water supply, and sanitation etc have not gained much prominence in the PPP model. PPP models usually are for long time period. Due to long time span expenses as well as hidden debt rises over time which will have adverse effect and overburden the government in the future. PPP projects have long gestation periods due to the lengthy approval procedure involved and clearances that are needed. The delay in obtaining clearances, contractual issues and financing issues demoralises the private entities from indulging in PPP projects as in results in cost overruns and revenue losses. Risks like bankruptcy of the private players also exist posing heavy financial threat for the government. Inconsistent policies, erratic procedures involved and reduced transparency also harm the projects. The PPP projects have not reached the ground level in certain sectors like airport which remains restricted to major airports thereby giving rise to inequality. The cost of capital and the overall cost of the project are increased in case of PPP compared to public sector due to additional cost in terms of cost of tendering, monitoring etc which is incurred by the government.

Problems with PPP Projects Info 2
Problems with PPP Projects

Particularly in the case of India, certain issue encountered are weak policy and regulatory framework, absence of long term instruments like long term debt financing, low capacity to manage the PPP framework, variable procurement procedure, non uniform institutional framework in the form of different regulations developed by different states, inefficiency of public agency in regulating the projects, political interference leading to biased decisions, corruption, existing imbalance between transparency and expediency, lack of proper means to address risks and return concerns of investors, increasing number of non-performing assets of domestic lenders along with financial service crisis has hampered the funding and inadequately formed unsuitable PPP projects have restricted the success of PPP. In case of power sector, delays in finalising of power purchase agreements, matching transmission networks and legally enforceable contracts, inadequate tariff and technical and commercial losses discourage the private entities. In telecom sector issues in relation to spectrum allocation and rationalisation of tariff adversely affect the prospects of more investors. In road sector, land acquisition issues, difficulty in transportation of materials, issues of law and order and collection of high toll fees are some of the major problems. Another important issue is the lack of space for construction of roads, airports and other infrastructure which leads to congestion which prevents the smooth completion of projects.

Kelkar Committee and its Recommendations on PPP

The PPP framework in India suffered from different lacunae. Due to this reason, in 2015, Kelkar committee was set up by the government of India in order to study and evaluate the PPP network in India. The committee consisted of 10 members headed by Vijay Kelkar. The Committee submitted its report in November 2015. In its report the Committee noted that PPPs have the potential to deliver infrastructure projects better and faster. However, it also marked that the PPP framework was focussed on fiscal benefits and hence it recommended that the focus be shifted to service delivery to citizens. It also stated that PPP was adopted to leverage financing and improve the efficiency of operation in comparison to public sector therefore ‘state owned enterprises or public sector undertakings should not be allowed to bid for PPP projects’. The committee noted that one of the major reasons for failure of PPP was due to inefficient risk assessment and it recommended that optimal risk allocation should be ensured and then only the project should be handed over to the private sector that also to the entity which would have best capability to deal with the risks. The committee called for setting up of risk monitoring and evaluating framework. For strengthening policy and governance, the committee recommended formation of a national PPP policy document and also stated that the Prevention of Corruption Act, 1988 be amended to differentiate between genuine errors and corruption.

The committee recommended setting up of national level institution for improving capacity and review committee for infrastructure PPP projects. The committee recommended modifying the terms of PPP contract to allow for renegotiations as the private players may have to face loss due to changing economic conditions over the long term of the projects. A quick and efficient dispute resolution mechanism must also be adopted. A procedure must be adopted to resume the projects that have been stuck due to different reasons. The old model concession agreements should be reviewed and modified. The committee also recommended collection of road toll electronically so as to remove discrepancies.

Conclusion

PPP has vast scope for a country like India. India has been lagging behind other countries in infrastructure, power, telecom and other sectors. In order to improve the existing inefficiencies and in order to utilise the available resources to the maximum capacity, PPP will prove to be beneficial for India. The government would not be able to meet the demands and needs of services and infrastructure by its own due to constraints on funds and increasing fiscal burden on it. PPP would serve as the tool to address the issue of funds. However, India needs to bring about certain changes like developing the PPP framework, modifying the risk allocation procedure, include terms for renegotiations based on changing economic scenario, increasing transparency and lastly the gap existing between formation of policies and it implementation must be filled up. With these changes India can strengthen its PPP framework, thereby utilising the technique for boosting the overall economy of the country.

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