Understanding Public Private Partnership

PUBLIC PVT PARTNERSHIP

 

Since the formation of new government and the eagerness to resurrect the growth trajectory of India, PUBLIC PRIVATE PARTNERSHIP (PPP) has become a new buzzword for addressing the ills related to stagnation of growth and development in our country.

Let us now embark on a brief journey of understanding PPP as a concept.

WHAT IS MEANT BY PPP? Public-Private-Partnership or PPP is a mode of implementing government programmes/schemes in partnership with the private sector. The term private in PPP encompasses all non-government agencies such as the corporate sector, voluntary organizations, self-help groups, partnership firms, individuals and community based organizations. PPP, moreover, subsumes all the objectives of the service being provided earlier by the government, and is not intended to compromise on them. Essentially, the shift in emphasis is from delivering services directly, to service management and coordination.

WHAT ARE THE SALIENT FEATURES OF A PPP? Not all projects with private sector participation are PPP projects. Essentially, PPPs are those ventures in which the resources required by the project in totality, along with the accompanying risks and rewards/returns, are shared on the basis of a predetermined, agreed formula, which is formalized through a contract. A PPP project is basically based on a significant opportunity for the private sector to innovate in design, construction, service delivery, or use of an asset.

PPPs are different from privatization. While PPPs involve private management of public service through a long-term contract between an operator and a public authority, privatization involves outright sale of a public service or facility to the private sector.

FUNDAMENTAL QUALITIES OF A PPP PROJECT

  • HIGH PRIORITY, GOVERNMENT-PLANNED PROJECT: The project must have emerged from a government-led planning and prioritization process. The project must be such that, regardless of the source of public or private capital, the government would still want the project to be implemented quickly.
  • GENUINE RISK ALLOCATION: Shared risk allocation is a principal feature of a PPP project. The private sector must genuinely assume some risk….
  • MUTUALLY VALUABLE: Value should be for both sides, which means government should also genuinely accept some risks and not transfer the entire risk to the private sector, and vice versa.

POTENTIAL BENEFITS OF PUBLIC PRIVATE PARTNERSHIPS: The financial crisis of 2008-11 has brought about renewed interest in PPP in both developed and developing countries. Facing constraints on public resources and fiscal space, while recognizing the importance of investment in infrastructure to help their economies grow, governments are increasingly turning to the private sector as an alternative additional source of funding to meet the funding gap. While recent attention has been focused on fiscal leveraging of projects, governments look to the private sector to help them deliver infrastructure for a number of other reasons:

  • Exploring PPPs as a way of introducing private sector technology and innovation in providing better public services through improved operational efficiency.
  • Incentivizing the private sector to deliver projects on time and within budgets.
  • Imposing budgetary certainty by setting present and the future costs of infrastructure projects over time.
  • Utilizing, PPPs as a way of developing local private sector capabilities through joint ownership with large international firms, as well as sub-contracting opportunities for local firms in areas such as civil works, electrical works, facilities management, security services, cleaning services, maintenance services, etc.
  • Using PPPs as a way of gradually exposing state owned enterprises and government to increasing level of private sector participation and structuring PPPs in a way so as to ensure transfer of skills leading to capacitated entities that can eventually export their competencies by bidding for projects/ joint ventures.
  • Creating diversification in the economy by making the country more competitive in terms of its facilitating infrastructure base as well as giving a boost to its business and industry associated with infrastructure development.
  • Supplementing limited public sector capacities to meet the growing demand for infrastructure development.
  • Extracting long-term value-for-money through appropriate risk transfer to the private sector over the life of the project – from design/ construction to operations/ maintenance

POTENTIAL RISKS OF PUBLIC PRIVATE PARTNERSHIPS: There are a number of potential risks associated with PPPs such as given hereunder:

  • Development, bidding and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes – the government should therefore determine whether the greater costs involved are justified.
  • There is a cost attached to debt – While private sector can make it easier to get finance, finance will only be available where the operating cash flows of the project company are expected to provide a return on investment (i.e., the cost has to be borne either by the customers or the government through subsidies, etc.)
  • Some projects may be more politically or socially challenging to introduce and implement than others – particularly if there is an existing public sector workforce that fears being transferred to the private sector, if significant tariff increases are required to make the project viable, if there are significant land or resettlement issues, etc.
  • There is no unlimited risk bearing – private firms (and their lenders) will be cautious about accepting major risks beyond their control, such as exchange rate risks/risk of existing assets. If they bear these risks then their price for the service will reflect this. Private sector will also expect a significant level of control over operations if it is to accept significant risks.
  • Private sector will do what it is paid to do and no more than that – therefore incentives and performance requirements need to be clearly set out in the contract. Focus should be on performance requirements that are out-put based and relatively easy to monitor.
  • Government responsibility continues – citizens will continue to hold government accountable for quality of utility services. Government will also need to retain sufficient expertise, whether the implementing agency and/ or via a regulatory body, to be able to understand the PPP arrangements, to carry out its own obligations under the PPP agreement and to monitor performance of the private sector and enforce its obligations.

PPP BRIDGING THE GAP TO FUND INDIA’S GROWTH STORY

Definition of PPP by the Government of India : “Public Private Partnership (PPP) Project means a project based on a 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”.

India had a few notable PPPs as early as the 19th century. The Great Indian Peninsular Railway Company operating between Bombay (now Mumbai) and Thana (now Thane) (1853), the Bombay Tramway Company running tramway services in Bombay (1874), and the power generation and distribution companies in Bombay and Calcutta (now Kolkata) in the early 20th century are some of the earliest examples of PPP in India.

Public-private partnership (PPP) is emerging as the new success route in India’s attempts to build world-class infrastructure and boost social sector development. Over the last decade, policymakers at both central and state levels have been increasingly focusing on infrastructure investments so as to enable fast paced economic growth. PPP, in fact has been identified as the key to policymakers’ attempts to create the requisite infrastructure for enabling double-digit GDP growth and enhancing people’s welfare. In fact, the Planning Commission expects private investments to contribute 50 per cent to total infrastructure investments (worth USD 1 trillion) in India during the 12th Five-Year Plan (FY12–17). It will be no surprise if a large chunk of these investments are directed through the PPP route.

PPP MODELS SUPPORTED BY THE GOVERNMENT IN INDIA

  • USER-FEE BASED BOT MODELS– Medium to large scale PPPs have been awarded mainly in the energy and transport sub-sectors (roads, ports and airports). Although there are variations in approaches, over the years the PPP model has been veering towards competitively bid concessions where costs are recovered mainly through user charges.
  • ANNUITY BASED BOT MODELS-In sectors/projects not amenable for sizeable cost recovery through user charges, owing to socio-political-affordability considerations, such as in rural, urban, health and education sectors, the government harnesses private sector efficiencies through contracts based on availability/performance payments.
  • PERFORMANCE BASED MANAGEMENT/ MAINTENANCE CONTRACTS-In an environment of constrained economic resources, PPP that improves efficiency is more relevant. PPP models such as performance based management/maintenance contracts are encouraged. Sectors amenable for such models include water supply, sanitation, solid waste management, road maintenance etc.
  • MODIFIED DESIGN-BUILD (TURNKEY) CONTRACTS: In traditional Design-Build (DB) contract, private contractor is engaged for a fixed-fee payment on completion. The primary benefits of DB contracts include time and cost savings, efficient risk-sharing and improved quality. A new Turnkey DB approach with the payments linked to achievement of tangible intermediate construction milestones (instead of lump-sum payment on completion) and short period maintenance / repair responsibilities is being considered.

CONCLUSION: If implemented in right earnest, PPPs have the potential to create synergies between public authorities and private sector companies; provide value for money for the taxpayer through optimal risk transfer and risk management; enable speedy, efficient and cost effective delivery of projects; and accountability for the provision and delivery of quality public services. PPP can also help in innovation and diversity in the provision of public services alongwith effective utilisation of state assets for the benefit of all users of public services. In short, PPP has the right ingredients to chart a uniform and holistic course for the growth and development of our country.

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