20 Oct

Public Private Partnership

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Content

• Introduction
• Significance of Public Private Partnerships
• Several types of PPP Models
• Challenges of PPP Model
• Recommendations of Vijay Kelkar Committee

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Introduction:

 In 1997, the report of the Rakesh Mohan Committee (RMC) concluded that India’s problem was that of poor infrastructure holding back development.

It also highlighted the importance of bringing in the private sector into most areas of infrastructure in the country.

This private investment in infrastructure has mainly come in the form of PPPs in India.

Public Private Partnership (PPP) is a collaborative arrangement between government and private sector to jointly plan, mobilize resources, develop, and/or operate infrastructure projects.

According to the Canadian Council for Public Private Partnership PPP is defined as “Co-operative venture between the public and private sectors, built on the expertise of each partner that best meets clearly defined public needs through appropriate allocation of resources, risks and rewards”.

Significance of Public Private Partnerships:

Mobilization of Resources: PPP helps government in mobilization of enough resources for infrastructure development and thus address infra gaps. (For e.g., in the BOT (Toll/ Annuity) model of road construction, private player invests the entire initial money for the construction of the road project).

Getting Private Sector expertise and Innovation: E.g., in the EPC model, private sector engineers and construct the entire road.

Risk Sharing: Long gestation period of infra projects bring along its own risks due to uncertain revenue stream in long run. PPP projects allows government to share these risks with private players.

Increased Efficiency and Reduced cost of the project: Private sector comes along with efficiency and reduced scope for corruption – this leads to timely and economic completion of various infra projects.

Increased Transparency and Accountability: PPP projects are subject to public scrutiny and the private players are also accountable to their shareholders.

Better Infrastructure: All the above advantages eventually contribute to better quality and quantity of infrastructure for general public.

But, the success of PPPs lies in the robustness of institutional structure, financial support, and use and availability of standardized documents, such as Model Requests for Qualifications (RFQ), Model Request for Proposal (RFP) and Model Concession Agreement (MCAs).

Government of India has taken several measures:

• Government of India has streamlined the appraisal and approval mechanism for Central Sector PPP projects to ensure speedy appraisal of projects, eliminate delays, and have uniformity in appraisal mechanisms.
  • Procedure for approval of PPP projects was finalized in 2005 and in 2006, the Public Private Partnership Appraisal Committee (PPPAC) for the appraisal of was notified in 2006. It has cleared 79 projects with a total cost of Rs 2,27,268 crore from FY15 to FY23.
• Viability Gap Funding (VGF) Scheme, 2006
  • It provides financial assistance to financially unviable but socially/economically desirable PPP projects.
    • Economic Sector Projects may get upto 40% of Capex as VGF grant.
    • Social Sector Projects include higher provisions of VGF grant. It may get upto 80% of CAPEX and upto 50% of the Operating Expenditure (OPEX).
• India Infrastructure Project Development Fund (IIPDF) Scheme notified in Nov 2022)
  • The scheme aims to develop quality PPP projects by providing necessary funding support to project sponsoring authorities, both in the central and the state governments, for creating a shelf of bankable and viable PPP projects by on-boarding transaction advisors.
  •  It has an outlay of Rs 150 crores for a period of 3 years from FY23 to FY25.
  • Under the scheme a maximum amount of Rs 5 crores for a single proposal, inclusive of any tax implications, can be funded which can include cost of consultants/transaction advisors of a PPP project.

Several types of PPP Models are used in India in different sectors:

• EPC Model (Engineering, Procurement, and Construction): In this model, the cost of project is completely borne by government. Private sector with its expertise is responsible for engineering, procuring raw material and constructing the project. Ownership remains with government.
• Built Operate and Transfer (BOT) model involves private player entity designing, financing, constructing, operating, and maintaining an infra projects for a specific period. After the specified period, the ownership is transferred back to government. This model has been used in sectors like Roadways, Ports, Airports and Power Generation. It can be of two types – BOT (Toll) & BOT (Annuity).
• Hybrid Annuity Model (HAM): It is a mix of EPC and BOT (Annuity) model.
• Build Own Operate (BOO): The private sector entity builds and owns the asset, and then operates it for a specified period of time.
  • Government has agreed to “buy” the goods and services delivered by the project on mutually acceptable terms and circumstances.
• Build Own Operate Transfer (BOOT):
  • It is a model of PPP in which a private company is granted a concession to finance, build, own, and operate a project for a specified period of time. At the end of the concession period, the project is transferred back to government.
    •  E.g., of project under BOOT model, Delhi Mumbai Expressway, The Mumbai Metro, the Bangalore International airport etc.
  • It involves a private sector entity being responsible for the complete lifecycle of the project, including design, financing, construction, operation, and maintenance. However, here private sector entity retains ownership of the project even after the concession period.
• Build Own Lease Transfer (BOLT): It is a PPP model in which a private company is granted a concession to finance, build, own and lease a project to the government for the specified period of time. At the end of the concession period, the project is transferred back to government.
  Some notable BLT projects in India are, the Delhi-Gurgaon Expressway and the Mumbai-Pune Expressway.
• Design Build Finance and Operate (DBFO): It allows a private sector to design, build, finance, and operate a project for a specified period of time. This public sector client retains the ownership of the project, but the private sector contractor is responsible for all aspects of its delivery.
  • E.g. Delhi Metro: Project was awarded to a consortium of private companies, which designed, built, financed, and operated the metro for a period of 30 years. At the end of the concession period, the metro will be transferred back to government.
• Lease Developed Operate (LDO) Model: Private company is granted a concession to finance, develop, and operate a project for a specified period of time. The government sector retains the ownership, but the private sector is responsible for all aspects of its delivery. At the end of the concession period, government may choose to operate the project itself, or it may contract with another private company to operate the project.
• Rehabilitate-Operate-Transfer (ROT) Model: Under this model, government allows private promoters to rehabilitate and operate a facility during a concession period. After the concession period, the project is transferred back to government / local bodies.

 Challenges of PPP Model:

• Institutional Inadequacies:
  • An overly regulated institutional and legal framework with issues such as complexity, fragmentation, and lack of accountability results in inefficient implementation of PPP Projects.
• Lack of expertise in identifying projects, forming contract, choosing the right PPP models etc.
  • This leads to difficulty in assessing the investment needs and the duration required to improve service and operational efficiencies, which is crucial to the success of PPP.
  • It leads to projects being stuck due to disputes in existing contracts.
• Lack of Transparency and Accountability:
  • There is inadequate information on PPPs in public domain. Private companies often don’t share data in the name of business secrecy.
• Profit Motive as opposed to Public Service:
  • Service efficiency in the delivery of PPP models is lacking due to profit motive.
  • Crony capitalism has also emerged as a major challenge in several sectors.
• Communication and Stakeholder engagement is generally weak and lacking in the projects.
• Lack of balanced assessment and treatment of Risk Sharing in the PPP projects.
• Issues such as non-availability of capital and land acquisition challenges also hinder PPP projects.
• Long Gestation period and delays in the implementation has led to a lot of loans becoming Non Performing Assets (NPAs).
•  Uncertainty: The regulatory and legal framework of PPP models in India are still evolving. This can lead to uncertainty for investors.

 Recommendations of Vijay Kelkar Committee:

• Vijay Kelkar Committee on “Revisiting & Revitalizing the PPP model of infrastructure Development” was set up in the Union Budget of FY15-16. It recommended:
  • The Need of PPP contract to be more focused on service delivery.
  • The need to identify, balance and allocate risks amongst the different stakeholders.
  • Viability Gap Funding for unviable social and economic projects
  • Careful monitoring of performance as well as managing the risk.

Other suggestions:

• Strengthening Contracts: PPP model contracts should allow flexibility in resetting the targets or renegotiating funding allocations
• Strengthening Institutional Capacities: Bringing experts from the area of contract formation, risk assessment etc. Setting up a PPP adjudication tribunal for better dispute redressal.

Conclusion:
The success of PPP model in India will depend on the ability of the government to address these factors and to create an environment that is conducive to private investment in infrastructure.

Practice Questions:
1. Why is Public Private Partnership (PPP) required in infrastructure projects? Examine the role of PPP model in the redevelopment of Railway Stations in India [Mains 2022, 10 marks, 150 words]
2. Explain how PPP arrangements, in long gestation infrastructure projects, can transfer
sustainable liabilities to the future. What arrangements need to be put in place to ensure that successive generations’ capacities are not compromised? [2014, 12.5 marks, 250 words]
3. Adoption of PPP model for infrastructure development of the country has not been free of criticism. Critically discuss pros and cons of the model [2013, 12.5 marks, 200 words]