[Burning Issue] Public Private Partnerships- Problems and Solutions

Background

  • public-private partnership is a government service or private business venture that is funded and operated through a partnership of government and one or more private sector companies.
  • PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project
  • Public Private Partnerships (PPPs) in infrastructure refer to the provision of a public asset and service by a private partner who has been conceded the right (the “Concession”) for the purpose, for a specified period of time, on the basis of market determined revenue streams, that allow for commercial return on investment.
  • PPPs in infrastructure represent a valuable instrument to speed up infrastructure development in India. This speeding up is urgently required for India to grow rapidly and generate a demographic dividend for itself and also to tap into the large pool of pension and institutional funds from aging populations in the developed countries.
  • India offers today the world’s largest market for PPPs. It has accumulated a wealth of experience in getting to this premiere position. As the PPP market in infrastructure matures in India, new challenges and opportunities have emerged and will continue to emerge.

Models of PPP

Following are the main models of PPPs.

(a) Build Operate and Transfer (BOT): This is the simple and conventional PPP model where the private partner is responsible to design, build, operate (during the contracted period) and transfer back the facility to the public sector. Role of the private sector partner is to bring the finance for the project and take the responsibility to construct and maintain it. In return, the public sector will allow it to collect revenue from the users. The national highway projects contracted out by NHAI under PPP mode is a major example for the BOT model.

(b) Build-Own-Operate (BOO): This is a variant of the BOT and the difference is that the ownership of the newly built facility will rest with the private party here.The public sector partner agrees to ‘purchase’ the goods and services produced by the project on mutually agreed terms and conditions.

(c) Build-Own-Operate-Transfer (BOOT): This is also on the lines of BOT. After the negotiated period of time, the infrastructure asset is transferred to the government or to the private operator. This approach has been used for the development of highways and ports.

(d) Build-Operate-Lease-Transfer (BOLT): In this approach, the government gives a concession to a private entity to build a facility (and possibly design it as well), own the facility, lease the facility to the public sector and then at the end of the lease period transfer the ownership of the facility to the government.

(e) Lease-Develop-Operate (LDO): Here, the government or the public sector entity retains ownership of the newly created infrastructure facility and receives payments in terms of a lease agreement with the private promoter. This approach is mostly followed in the development of airport facilities.

(f) Rehabilitate-Operate-Transfer (ROT): Under this approach, the governments/local bodies allow private promoters to rehabilitate and operate a facility during a concession period. After the concession period, the project is transferred back to governments/local bodies.

(g) DBFO (Design, Build, Finance and Operate): In this model, the private party assumes the entire responsibility for the design, construction, finance, and operate the project for the period of concession. The private party assumes the entire responsibility for the design, construct, finance, and operate or operate and maintain the project for the period of concession.

(i) Management contract: Here, the private promoter has the responsibility for a full range of investment, operation and maintenance functions. He has the authority to make daily management decisions under a profit-sharing or fixed-fee arrangement.

(j) Service contract: This approach is less focused than the management contract. In this approach, the private promoter performs a particular operational or maintenance function for a fee over a specified period of time.

(h) Swiss Challenge– Under this method the government keeps an unsolicited bid in public domain and invites others to come up with better or improved ones within a given time-frame. The unsolicited bidder is a private player who approaches the government for development of a new infrastructure project.

(k) Joint Venture (PPP): Under this model the infrastructure is co-owned and operated by the public sector and private operators instead of fully privatise the project. The public and private sector partners can either form a new company (SPV) or assume joint ownership of an existing company through a sale of shares to one or several private investors.

Why is PPP needed?

  • The ever-increasing growth in population has imposed tremendous pressure on State resources. In this situation, public-private partnership (PPP) can offer a solution to resource scarcity by taking an associated risk of infrastructure.
  • It intends to bring expertise and efficiency in terms of human resources, technology and innovation.
  • It can provide the room for the government to focus on essential service delivery such as education and health.
  • PPP as long-term investment build the internal competition amongst the private players, thereby promoting the economic growth in long run.

Issues with PPPs

Over the past few years, a number of public private partnership (PPP) projects across various sectors have been in a stalled state (Economic Survey 2015). Further, private investment under the PPP investment model has failed to come by due to various reasons. An examination of various reasons for issues plaguing PPPs is as follows:

  • According to Economic Survey-2015, many companies have been “over-leveraging” i.e. bidding beyond capacity and expecting government to redraw contracts
  • Finance-The long term finance for PPP projects has dried up due to excessive dependance on banks and lack of proper corporate bond market in the country. Banks are further stressed due to high NPAs and governance issues.
  • Clearance issues for projects – land acquisition and environmental clearances for projects have been difficult to come by
  • According to Economic Survey 2015, PPPs have certain inherent flaws in design due to which they have been stalled eventually- no re-negotiation structures; wrongful risk allocation; lack of focus of efficient service provision
    • Focus on fiscal benefits rather than efficient service provision; no measures to penalise the providers for poor service
      • Bidders giving highest revenue share to govt win the contract
    • Neglect the principle of allocating risk to the agency best able to manage it eg traffic risks
    • No ex-ante renegotiation structures; failed projects don’t lead to investigations against bureaucrats while re-negotiated projects might do so.

Vijay Kelkar Committee on PPP

Recommendations of the committee

  • Ministry of Finance should develop and publish a national PPP Policy document and 3PI institution which can function as a centre of excellence, enable research, and review and roll out activities to build capacity.
  • Infrastructure PPP Project Review Committee (“IPRC”) and Infrastructure PPP Adjudication Tribunal (“IPAT”) should be established to ease the bottlenecks in PPP projects.
  • Amend the Prevention of Corruption Act, 1988 to distinguish between genuine errors in decision-making and acts of corruption.
  • Encouraging the banks and financial institution to issue Deep Discount Bonds or Zero Coupon Bonds (ZCB) for PPP.
  • Monetisation of viable projects that have stable revenue flows after EPC delivery should be considered.
  • Concession agreement should stipulate important commercial parameters like return on equity, treatment of land for noncommercial purposes.
  • Open the avenues for long-term investors, including overseas institutional investors as long-term liabilities are best suited for PPP.
  • Protection against ‘Obsolescing Bargain’ – loss of bargaining power by private players in PPP over the long time-frame of the project due to abrupt changes in policy or economic environment

Problems and Solutions- Sector specific problem of PPP, highlighted by CAG and its solution recommended by Kelkar Committee

Sectors Issues highlighted by CAG Kelkar Committee solutions
Port Delays in majority of projects due to time taken in finalization of tenders, security clearances, concession agreement and tender process

Delays in obtaining environmental clearance

Delays in handing over of project sites and back up area.

Urgent need to focus on strengthening the systems to speed up the overall environmental clearance process.

More institutions are required to be given authorization for conducting Coastal Regulation Zone demarcation.

Need to provide support infrastructure such as land, utilities, dredging, rail and road evacuation infrastructure through enforceable obligations

Road Inconsistency in adopting carrying capacity/tollable traffic as yardstick for determining the Concession Period by NHAI resulted in fixing higher concession period and higher toll burden on road users.

Projects were approved despite the known late realization of minimum threshold traffic.

The Total Project Cost (TPC) worked out by the concessionaires was higher as compared to TPC worked out by the NHAI. In 25 projects, TPC worked out by concessionaire was higher by 50 %

In the case of BOT toll projects, focus on projects with longer concession period. NHAI, concessionaire can opt for revenue share on a case to case basis

In case of projects that are not viable on BOT toll basis, options to fund through hybrid models, grant of VGF, part annuity, O&M grants, and debt instruments, maybe explored.

The concessioning authority may undertake detailed project development activities including demand assessment, soliciting stakeholder views on project structure and financial viability analysis to estimate a shadow bid, which could be used to compare actual bids received

Railways Lack of promotion aspect in attracting the PPP for railways projects.

Majority of approved project had been halted due to technical glitch.

Take up simpler projects first to build credibility.

Such projects can be brownfield monetisation of existing stations or, greenfield development of new stations.

Set up regulatory authority to settle technical issues such as track-access charges.

Airports The success of PPP in airport are comparatively good however there is lack of comprehensive policy to deal with negative returns.

Fluctuation cost of aviation turbine fuel had generate the negative trade-off for private entities.

Prepare a policy that addresses the expected growth parameters of the sector and promotes PPPs

Concession agreement should stipulate important commercial parameters like return on equity, treatment of land for noncommercial purposes

Develop brownfield and greenfield airports with defined structure, revenue sharing mechanisms.

Other government interventions

Hybrid annuity model

  • The hybrid model is actually a mix of Engineering, Procurement and Construction(EPC) and BOT models
  • In the annuity type, the concessionaire gets a fixed and assured payment from the government. The assured return balances the risk of insufficient revenues for the developer. Further, the government shoulders the responsibility of revenue collection.
  • Also, the government pays 40% of the project cost to the concessionaire during the construction phase in five equal instalments of 8% each
  • The government will provide 90% of land and the related environmental and forest clearance
  • The operation and maintenance of the toll road rests with the concessionaire.
  • The model goes a long way in shielding the risks for the developer and attracting funding to the infrastructure sector which is facing shortfall of funds in the recent years.
  • The model has achieved considerable success, leading to increase in the average bidders for projects by 3 times.

Way forward

  • The Vijay Kelkar committee on PPP restructuring suggests some forward-looking and viable steps for the regime. Some of the recommendations such as encouraging 3PI to be a centre of excellence, model concession agreements, optimum risk allocation and independent regulators for each sector will go a long way in addressing the problems plaguing the PPP projects.
  • Further, there is dire need for a independent project renegotiation structure for negotiating stalled PPP projects.
  • The Kelkar committee has suggested exploring various mechanisms for finance of PPP projects. Some other measures maybe to simplify corporate debt market regulation and explore other financing alternatives- corporate bonds; pension funds etc
  • Further, there is a need for better exit options- bankruptcy codes, asset reconstruction etc
  • Also, according to economic survey 2015, Highway tolls should have correlation between
    • reasonable profit for the private player
    • users’ capacity to pay
    • measures such as traffic triggers and re-equilibrium discount should be employed to ensure quality service at the same time.

The draft National PPP policy sets several objectives for PPPs

  1. Harnessing private sector efficiencies in asset creation, maintenance, and service delivery
  2. Providing focus on a lifecycle approach for development of a project, involving asset creation.
  3. Creating opportunities to attract innovations and technological improvements.
  4. Availability of affordable and improved services to the users in a responsible and sustainable manner.

CONCLUSION

A mature PPP framework, along with a robust enabling ecosystem shall enable the Government to accomplish, to a considerable extent, what our Prime Minister, Shri. Narendra Modi has said “The Government has no business to do business” and thereby promote private sector investments and participation towards the nation building.

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