Public-Private Partnership (PPP)- An Understanding


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

The expression public-private partnership is a widely used concept world over but is often not clearly defined. There is no single accepted international definition of what a PPP is (World Bank, 2006). The PPP is defined as “the transfer to the private sector of investment projects that traditionally have been executed or financed by the public sector” (IMF, 2004). Any arrangement made between a state authority and a private partner to perform functions within the mandate of the state authority, and involving different combinations of design, construction, operations and finance is termed as Ireland’s PPP model. In UK’s Private Finance Initiative (PFI), where the public sector purchases services from the private sector under long-term contracts is called as PPP program. However, there are other forms of PPP used in the UK, including where the private sector is introduced as a strategic partner into a state-owned business that provides a public service.
The PPP is sometimes referred to as a joint venture in which a government service or private business venture is funded and operated through a partnership of government and one or more private sector companies. Typically, a private sector consortium forms a special company called a special purpose vehicle (SPV) to build and maintain the asset. The consortium is usually set up with a contractor, a maintenance company and a lender. It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it.
Thus, the PPP combines the development of private sector capital and sometimes, public sector capital to improve public services or the management of public sector assets (Michael, 2001). The PPP may encompass the whole spectrum of approaches from private participation through the contracting out of services and revenue sharing partnership arrangement to pure non-recourse project finance, while sometime it may include only a narrow range of project type. The PPP has two important characteristics. First, there is an emphasis on service provision as well as investment by the private sector. Second, significant risk is transferred from the Government to the private sector. The PPP model is very flexible and discernible in variety of forms. The various models/ schemes and modalities to implement the PPP are set out in Table 1.



























Table 1: Schemes and Modalities of PPP

Schemes

Modalities

Build-own-operate (BOO)
Build-develop-operate (BDO)
Design-construct-manage-finance (DCMF)

The private sector designs, builds, owns, develops, operates and manages an asset with no obligation to transfer ownership to the government. These are variants of design-build-finance-operate (DBFO) schemes.

Buy-build-operate (BBO)
Lease-develop-operate (LDO)
Wrap-around addition (WAA)

The private sector buys or leases an existing asset from the Government, renovates, modernises, and/ or expands it, and then operates the asset, again with no obligation to transfer ownership back to the Government.

Build-operate-transfer (BOT)
Build-own-operate-transfer (BOOT) Build-rent-own-transfer (BROT)
Build-lease-operate-transfer (BLOT) Build-transfer-operate (BTO)

The private sector designs and builds an asset, operates it, and then transfers it to the Government when the operating contract ends, or at some other pre-specified time. The private partner may subsequently rent or lease the asset from the Government.

Source: Public Private Partnership, Fiscal Affairs Department of the IMF.


 

Privatisation and Public-Private Partnership
Typically, the PPP is not a privatisation. At the same time, it cannot be described as partial privatisation also. Privatisation has generally been defined as a process of shifting the ownership or management of a service or activity, in whole or part, from the government to the private sector. The privatisation may be of many forms, which include outsourcing, management contracts, franchise, service shedding, corporatisation, disinvestment, asset sales, long-term lease, etc. The key difference between the PPP and privatisation is that the responsibility for delivery and funding a particular service rests with the private sector in privatisation. The PPP, on the other hand, involves full retention of responsibility by the government for providing the services. In case of ownership, while ownership rights under privatisation are sold to the private sector along with associated benefits and costs, the PPP may continue to retain the legal ownership of assets by the public sector. The nature and scope of the services under privatisation is determined by the private provider, while it is contractually determined between the parties in PPP. Under privatisation, all the risks inherent in the business rest with the private sector while, under the PPP, risks and rewards are shared between the government and the private sector.
Thus, the PPP operates at the boundary of the public and private sectors, being neither nationalised nor privatised. Thus, politically, the PPP represents a third way in which governments deliver some public services in conjunction with private sector. Moreover, in a practical sense, the PPP represents a form of collaboration under a contract by which public and private sectors, acting together, can achieve what each acting alone cannot (Michael 2001).
The Indian Case
In the Indian context, the term PPP is used very loosely while at the international arena, the PPP is adopted for developing public assets in various forms as explained in Table 1. According to Ministry of Finance Government of India the PPP project means a project based on a contract or concession agreement, between Government or statutory entity on the one side and a private sector company on the other side, for delivering infrastructure service on payment of user charges. This is a narrower definition as compared to world best practices where the private sector participation in any form of concession agreement, divestiture of the public sector, greenfield projects and management and lease contract are considered as PPP. The Planning Commission of India has defined the PPP in a generic term as “the PPP is 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”. In addition, greenfield investment in the infrastructure development has also been given more encouragement in India.
Greenfield investment is defined as an investment in a start-up project, usually for a major capital investment and the investment starts with a bare site in a greenfield.
Global Practices
While discussing the infrastructure development, a generic question arises, ‘Why is PPP needed?’ In the face of fiscal and other constraints, governments of most emerging economies have been turning towards the private sector as a means of financing infrastructure development. Many countries have, however, found that it is not always easy to attract the private sector, as the conditions for their participation are, in most cases, different from the traditional method of funding. A closer alliance between various parties involved in the infrastructure development will, however, provide the opportunity to share their views on the risk perspectives, legislative and regulatory environments, which support private investment, project funding packages, project formulation and the means of reducing project preparation and gestation period. It has been empirically proved that “both the public and private sectors have significant effect on each other, the magnitudes of the long-run influence of private production on infrastructure expansion are relatively greater than the reverse for most countries” (Eric C Wang 2002). Review of cross-country experiences while adopting the PPP model in the infrastructure development would provide due solution to the critical question raised at the beginning of this Section.
A number of OECD countries have well established PPP programmes. Other countries with significant PPP programmes include Australia and Ireland while the US has considerable experience with leasing. Many continental EU countries, including Finland, Germany, Greece, Italy, the Netherlands, Portugal and Spain have PPP projects, although their share in public investment remains modest. Reflecting a need for infrastructure investment on a large scale, and weak fiscal positions, a number of countries in Central and Eastern Europe, including the Czech Republic, Hungary and Poland, have embarked on PPP. There are also PPP programmes in Canada and Japan. The PPP in most of these countries are dominated by road projects. Similarly, the EU Growth Initiative envisages the use of PPP type arrangements primarily to develop trans-European road network.
While focusing on country specific practices, the PFI of the UK is perhaps the best developed government’s PPP programme, which also comprises privatisation and other forms of cooperation between the public and private sectors, including the provision of guarantees. The PFI projects are viewed primarily as being about the provision of services, and not about the acquisition of assets. In this endeavour, the private sector makes a long-term commitment to maintain assets and provide services, and the government makes a long-term commitment to procure those services; significant risk is transferred to the private sector; public sector investment projects are considered for PFI where they are likely to represent value for money, and where it meets the UK government’s criteria for efficiency, equity and accountability (IMF, 2004).
In the case of Ireland, the pick up in enthusiasm for PPP can be summarised that there was quick buy-in on the part of all PPP stakeholders, where the government made it clear that its social partners would be consulted on the approach taken to select PPP projects. Second, the government paid more attention to the efficiency benefits of PPP than to just their fiscal advantages. Third, conclusion was reached that the PPP would be a success despite some institutional challenges that had to be overcome. To facilitate the PPP process, the National Development Finance Agency of Ireland was set up to mobilise resources to finance PPP projects and to provide financial advice to government agencies seeking to form PPPs.
Chile’s experience with PPP has been successful and a significant portion of the sizeable infrastructure gap was fulfilled through this model. Chile’s success with PPP has been underpinned by a solid institutional framework, well developed procedures to identify, evaluate the projects, efforts to ensure adequate sharing of risks between the stake holders, and reforms to ensure the availability of financing for projects. In the case of Mexico, most progress has been made with respect to telecommunications, ports and airports, but this mainly takes the form of privatisation. Empirical evidence suggest that public infrastructure in Mexico has negligible effects on private sector costs.
The PPP has been operating in China for over 20 years. Since the introduction of open economic policy in early 1980s, some state-ownedenterprises started their reform by becoming a limited liability company. Since the 1990s, some local governments have initiated to resort to the private sector on the provision of public facilities and services. Since 2000, the PPP has become one principal strategy used by the Chinese Government in the provision of public facilities and services. The main objective of PPP is to make use of market competition in order to ensure the effective use of resources in the provision of public facilities and services. However, some local governments place too much emphasis on attracting private investments by offering even more favorable terms than the normal national status.
Lessons for India
Many developing countries like China, have developed toll roads and a number of private sector greenfield power projects, while Argentina has developed its power sector mostly through divestiture and greenfield investments. The main aim of the Chinese is to attract investors through PPP. Brazil has not only attracted more greenfield projects in power sector but also known for its telecommunication sector development under PPP model. The UK provides guarantees for PFI projects to attract more investment. Chile, on the other hand, has succeeded in the PPP model with institutional development, standardised contract procedures and appropriate risk sharing mechanism. Cross country analysis reveals that the PPP model differs widely across countries and sectors. Overall, many developing countries have developed their power projects, roads, telecom, ports and airports through PPP model, which they considered as the apposite way of developing the public infrastructure through private participation, while these countries have faced fiscal constraints. Judging from the country experiences, the selection of right PPP model is based on the concessions that the PPP is getting, level of development, risk sharing mechanism, government guarantees, stability of the policy environment and commercial consideration of the projects. Therefore, it is rightly accepted that right type of private participation in the infrastructure development with right risk sharing is the only way out to build public infrastructure and thereby bridge the infrastructure gap.
                                                             PPP initiatives in India
The Government of India is promoting PPPs as an effective tool for bringing private-sector efficiencies in creation of economic and social infrastructure assets and for delivery of quality public services. India in recent years has emerged as one of the leading PPP markets in the world, because of several policy and institutional initiatives taken by the central government. By end December 2012 there were over 900 PPP projects in the infrastructure sector with total project cost (TPC) of ` 5,43,045 crore as compared to over 600 projects with TPC of ` 333,083 crore on 31 March 2010. These projects are at different stages of implementation, i.e. bidding, construction, and operational.
Approval of Central-sector PPP projects
Since its constitution in January 2006, the Public Private Partnership Appraisal Committee (PPPAC) has approved 307 central project proposals with TPC of ` 2,97,856.58 crore. These include NHs (242 proposals), ports (29 proposals), airports (2 proposals), tourism infrastructure (1proposal), railways (1 proposal), housing (27 proposals), and sports stadia (5 proposals).
VGF for PPP Projects
Under the Scheme for Financial Support to PPPs in Infrastructure (Viability Gap Funding Scheme), 145 projects have been granted approval with TPC of ` 80,203.28 crore and VGF support of ` 1,56,72.68 crore and ` 902.96 VGF crore has been disbursed.
Thirteen new sub-sectors have been included in the list of sectors eligible for VGF support under the Scheme. These include:
i. Capital investment in the creation of modern storage capacity including cold chains and post-harvest storage.
ii. Education, health, and skill development.
iii. Internal infrastructure in National Investment and Manufacturing Zones.
iv. Oil/gas/liquefied natural gas (LNG) storage facility [includes City Gas distribution (CGD) network]; oil and gas pipelines (includes CGD network); irrigation (dams, channels, embankments, etc); telecommunication (fixed network)  includes optic fibre/ wire/cable networks which provide broadband /internet); telecommunication towers; terminal markets; common infrastructure in agriculture markets; and soil-testing laboratories.
Support for Project Development of PPP Projects
The India Infrastructure Project Development Fund (IIPDF) was launched in December 2007 to facilitate quality project development for PPP projects and ensure transparency in procurement consultants and projects. So far, 51 projects have been approved with IIPDF assistance of ` 64.51 crore of which ` 25.00 crore has been disbursed.
Capacity Building and Strengthening of State and Central Institutions
The National PPP Capacity Building Programme was launched by the Finance Minister in December 2010, and was rolled out last year in 15 States and two central training institutes, viz. the Indian Maritime University and Lal Bahadur Shastri National Academy of Administration. A comprehensive curriculum has been prepared and 11 training programmes conducted to train 154 trainers, who have trained over 1975 public functionaries, who deal with PPPs in their domain.
Online toolkits for PPP projects for five sectors were developed and were launched by the Finance Minister. These are available on this Department's website on PPPs, i.e. www.pppinindia.com. The PPP toolkit is a web-based resource that has been designed to help improve decision-making for infrastructure PPPs in India and to improve the quality of the
infrastructure PPPs that are implemented in India. In the past one year, 720 national and international users have availed of this one-of-a-kind web-based resource to structure better PPP projects.
PPP Rules and PPP Policy:
Following the recommendations of the Committee on Public Procurement, the Prime Minister's announcement regarding transparency and accountability in procurement, and preparation of the Public Procurement Bill, and to ensure that PPP projects are procured and implemented by following laid down processes and observing principles of transparency, competitive bid process, affordability, and value for money, the draft PPP Rules and PPP Policy have been prepared. These have undergone extensive consultation process at central and state government levels for finalization.
Global experience indicates that PPPs work well when they combine the efficiency and risk assessment of the private sector with the public purpose of the government sector. They work poorly when they rely on the efficiency and risk assessment of the government sector and the public purpose of the private sector. India should be careful not to undertake PPPs that
do not apportion risks and responsibilities sensibly. Moreover flexibility needs to be built into arrangements so that the contract can be withdrawn and put up for rebid when the private party underperforms. The government needs to study the PPP experience and build some central capacity to help ministries, authorities, and states structure contracts and renegotiate troubled ones.

Sunday, 16th Mar 2014, 07:28:22 PM

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