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CHAPTER 2

BASICS OF PUBLIC PRIVATE PARTNERSHIP

2.1 Definition of PPPs in India The Department of Economic Affairs (DEA) defines PPPs as PPP means an arrangement between a government or statutory entity or government owned entity on one side and a private sector entity on the other, for the provision of public assets and/ or related services for public benefit, through investments being made by and/or management undertaken by the private sector entity for a specified time period, where there is a substantial risk sharing with the private sector and the private sector receives performance linked payments that conform (or are benchmarked) to specified, pre-determined and measurable performance standards. The level of private sector participation in infrastructure can cover a spectrum from short-term service contracts at one end all the way through to full privatization (disinvestment) at the other. Service contracts and disinvestments are generally not considered as PPPs in India. An infrastructure PPP in India is therefore more than just a short-term contract for services with the private sector but does not go so far as to include complete private sector ownership and control. A PPP is an arrangement between a public (government) entity & a private (non-government) entity by which services that have traditionally been delivered by the public entity are provided by the private entity under a set of terms and conditions that are defined at the outset. Public Private Partnership (PPP) is a contract between a public sector institution/municipality and a private party, in which the private party assumes substantial financial, technical and operational risk in the design, financing, building and operation of a project. Traditionally, private sector participation has been limited to separate planning, design or construction contracts on a fee for service basis – based on the public agency’s specifications. Expanding the private sector role allows the public agencies to tap private sector technical, management and financial resources in new ways to achieve certain public agency objectives such as greater cost and schedule certainty, supplementing in-house staff, innovative technology applications, specialized expertise or access to private capital. The private partner can expand its business opportunities in return for assuming the new or expanded responsibilities and risks. PPPs provide benefits by allocating the responsibilities to the party – either public or private – that is best positioned to control the activity that will produce the desired result. With PPPs, this is accomplished by specifying the roles, risks and rewards contractually, so as to provide incentives for maximum performance and the flexibility necessary to achieve the desired results

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 investment1 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.

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2.2 What is not a PPP ? The way a PPP is defined in the regulations makes it clear that:

• A PPP is not a simple outsourcing of functions where substantial financial, technical and operational risk is retained by the institution

• A PPP is not a donation by a private party for a public good • A PPP is not the 'commercialisation' of a public function by the creation of a state-owned

enterprise • A PPP does not constitute borrowing by the state.

PPPs can follow a variety of structures and contractual formats. However, all PPPs incorporate three key characteristics: a. A contractual agreement defining the roles and responsibilities of the parties, b. Sensible risk-sharing among the public and the private sector partners, and c. Financial rewards to the private party commensurate with the achievement of pre-specified Outputs. 2.2.1 Essential conditions in the definition 1. Arrangement with Private Sector Entity: The asset and/or service under an arrangement

will be provided by the Private Sector Entity to the public.

2. Public asset or service for public benefit: Has the element of facilities/ services being provided by the Government as a sovereign to its people. To better reflect this intent, two key concepts are elaborated below:

(a) ‘Public Services’ are those services that the State is obligated to provide to its citizens (towards meeting the socio-economic objectives) or where the State has traditionally provided the services to its citizens. For example, provision of security, law and order, electricity, water, etc. to the citizens. (b) ‘Public Asset’ is that asset the use of which is inextricably linked to the delivery of a Public Service. or example, public road which is linked to public transportation. OR, those assets that utilize or integrate sovereign assets to deliver Public Services. For example, right of way on highways, or use of river / water bodies, etc.

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All of these provide strong reasons in favour of using PPPs in India and elsewhere.

2.3 Need for PPP � Economic reasons - Inadequacy of resources – leveraging on lower government funding � Optimal transfer of risks – to the entity best suited to manage the risks

− Design, Financing, Construction, Operations and Maintenance – all are commercially understood and manageable

− Change of scope, defective designs, time overrun, cost overruns, leakage of revenues, high maintenance costs

� Transfer of responsibilities – efficiency gain − Appropriate technology, innovative design solutions, project management,

better collection practices, life cycle costing � Enhanced bankability – more rigorous project preparation � Incentive to deliver whole life solution – not just asset creation � Focus shifts to service delivery – integrated with construction, measurement of

quality & payment linked to service delivery � Acceleration of programme – time-bound implementation � Better overall management of public services – transparency in prioritisation,

selection and ongoing implementation

2.4 Features of PPP � Genuine risk transfer

− All risks pertaining to design, building, financing and operation transferred to the private entity

− Transfer of demand risk depends on the extent to which the private sector can influence usage

� Output based Specifications − Contracts specify the service outputs required rather than asset

configuration/mode of service delivery − Emphasis on type of service & performance standards − Private entity incentivised to deliver outputs using innovation in design,

construction, operation and financing � Whole life asset performance

− Private entity takes responsibility & assumes risk for the performance of the asset and delivery of service over a long term

� Payment for Performance Revenue/ Payment to private entity is subject to performance in relation to specific & quantified criteria enshrined in the contract

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2.5 Implementation Structures Different organizational structures may be used to implement PPP projects. These include:

• Private Sector SPV: The commonest form of implementing PPPs is through a concession or a license granted by the government to a special purpose company / vehicle (SPV) set up by the private investor for implementing the project. The SPV in such a case is entirely owned by the private investor with other strategic / financial investors.

• Joint Venture SPV: An SPV can also be set up as a joint venture with the public sector / government. The majority stake / overall project control rests with the private sector. The public partner could expedite the receipt of statutory approvals and clearances. In such a case, one has to be mindful of the conflict of interest for the government in its roles as an investor in the company and as the statutory authority for the project.

• Section 25 Companies: For certain social infrastructure, SPVs can be set up as not-for-profit entities under Section 25 of the Companies Act. Under this set-up, there are taxation benefits and the private sector may be compensated through a fee for services rendered.

2.6 Contract Uncertainties PPPs often cover a long-term period of service provision (eg. 15-30 years, or life of the asset). Any agreement covering such a long period into the future is naturally subject to uncertainty. If the requirements of the public sponsor or the conditions facing the private sector change during the lifetime of the PPP the contract may need to be modified to reflect the changes. This can entail large costs to the public sector and the benefit of competitive tendering to determine these costs is usually not available. This issue can be mitigated by selecting relatively stable projects as PPPs and by specifying in the original contract terms how future contract variations will be handled and priced. 2.7 Difficulty in Demonstrating Value for Money in Advance Ideally, a project should be procured as a PPP on the basis of a clear demonstration that it provides value for money (VFM) compared with public sector procurement. However, it is difficult to demonstrate VFM in advance due to uncertainties in predicting what will happen over the life of the project and due to a lack of information about comparable previous projects. However, the standard for VFM is different in India to more economically developed countries such as Australia or the UK. In those countries there is a much smaller funding need. In India, many projects procured in the public sector, experience time and cost over runs, and hence it is likely that well-managed private procurements will deliver savings. Furthermore, the funding gap is far greater than the Public Sponsor can meet by itself. In this case, it may sometimes not be a question of public vs. private procurement, but rather the choice between private procurement or none at all. If this is the case then the focus should be on making a careful assessment of alternative project options to be sure that the projects that are selected are the best ones economically and financially.

• The public sector environment is suited to supporting PPPs • The project is suitable to being carried out as a PPP –

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• The potential barriers to successful project implementation have been identified and can be overcome

Given that these conditions are satisfied, the project must be commercially viable for the private sector and offer value for money (VFM) for the public sector 2.7.1 Commercial viability Commercial viability is crucial if the project is to attract a private partner. For a project to be commercially viable does not mean it cannot receive some financial and other support from the public sector. In some cases such support may be necessary, and initiatives such as Viability Gap Funds (VGF) have been established for this purpose. Careful and appropriate risk allocation between the public and private partners is a critical focus of PPP design to achieve value for money. If private partners do not bear the risks that are under their control, their incentives for efficiency will be weakened and PPP benefits may be reduced. The requirements for effective risk transfer and the ability to harness private sector efficiencies means PPPs are best suited to projects for which:

• It is possible to clearly specify the requirements in terms of service outputs – the idea is to capture as much of the private sector efficiencies as possible by allowing scope for bidders to introduce efficiencies through innovations proposed in their bids

• The requirements can be specified so as to enable monitoring of performance against measurable standards and enforcement of penalties where standards are not met

• The requirements of the public sector sponsor are likely to be stable throughout the life of the PPP – the aim is to avoid the need to renegotiate the contract at a later date due to changes to project scope or requirements

2.7.2 Benefits to people o Better quality of service – National Highways, Telecom, Air travel o Decreased user fees – Telecom and Air travel o Happy that Government using taxes not for salaries but for general public – High tax

payers

2.7.3 Benefits to private sector o Return on investment – Paradise Island o Business opportunity – Hotel Metropole, Mysore o Long term involvement and guaranteed income due to lower market risk – BIAL

Airport

2.7.4 Disadvantages of PSP o Only profit – no service – Cable TV, public transport crowded o Private monopoly – Courier services v. Speed Post o Stay till profitable and default o Governments expectations high especially in commercial properties

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2.7.5 Characteristics of PPP • The private sector is responsible for carrying out or operating the project and takes on a

substantial portion of the associated project risks • During the operational life of the project the public sector’s role is to monitor the performance of

the private partner and enforce the terms of the contract • The private sector’s costs may be recovered in whole or in part from charges related to the use of

the services provided by the project, and may be recovered through payments from the public sector

• Public sector payments are based on performance standards set out in the contract • Often the private sector will contribute the majority of the project’s capital costs, although this is

not always the case. It will often be necessary to build or add to existing assets in order to meet the infrastructure needs of the economy and users. However, an important part of the infrastructure PPP concept is that:

• A PPP is focused on outputs, and the outputs of the PPP are infrastructure services, not infrastructure assets.

The reason for the focus on outputs and services rather than assets is to encourage efficient use of public resources and improved infrastructure quality.

A PPP brings the public and private sectors together as partners in a contractual agreement, for a pre-defined period (eg. 30 years) matched to the life of the infrastructure assets used to provide the services. The private partners (investors, contractors and operators) provide specified infrastructure services and, in return, the public sector either pays for those services or grants the private partner the right to generate revenue from the project. For example, the private partner may be allowed to charge user fees or receive revenue from other aspects of the project. The best PPPs will have the public and private partners working together to build and sustain a long-term relationship that is of benefit to all. 2.7.6 Pre-requisites for Implementing PPP projects Certain pre-requisite conditions must be fulfilled in order to use PPPs or derive benefits from their use as a tool for project implementation.

• Enabling authority: The public entity should unambiguously have the enabling authority (that is, legal power) to transfer (to the private party) its responsibility of providing the service in question. This authority may stem from the enabling legislative and policy framework or from an administrative order. The instrument of transfer is through a legally enforceable contract between the authorized public entity and the private party. For example, the Department of Telecom (DoT) could issue Cellular and Basic Services Licences only after appropriate amendments to the Indian Telegraph Act, 1884. The National and State Highways legislation needed appropriate amendments to enable private parties to develop and maintain highways and levy and collect tolls / user fees.

To derive benefits from PPPs projects would need to incorporate the following features:

• Financial obligations: The transfer of responsibility to the private party should be of significant proportions, usually involving large financial investment obligations on part

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of the private party. This would bring in efficiencies in the way projects are financed and could bring down costs for users.

• Performance-based payment: Payment to the private entity for service provided whether paid maximum benefits. Thus, the tenure of the contract would be for periods always in excess of 5 years and may go to 50-60 years as well, depending on the economic life / life cycle of the underlying assets.

2.7.7 Special Purpose Vehicle A Special Purpose Vehicle (SPV), a new company, is set up to implement each project. Usually the sponsoring entity (majority-owing private partner) offers no additional balance sheet support except for the initial equity commitment. The majority of the project obligations are usually addressed through separate contractual arrangements for construction. O&M , supply agreements (for instance, waste supply in a MSW project or fuel supply agreement for a power generation project), off take (purchase of compost for a MSW treatment project or purchase of water / power) and financing – which would mirror the obligations passed on to the SPV under the concession agreement. The benefit of using a SPV structure is that it is a bankruptcy-remove structure. The project and the sponsor are both insulated from each other. The main advantage for the government is that the project is protected from failure of the sponsoring entity. 2.7.8 Investor Comforts and Incentives PPP projects can avail a variety of government incentives.

• Fiscal benefits : PPP projects for sectors that are classified as infrastructure under the Income Tax Act, 1961, can avail a tax holiday of 100% for 10 years in a block of 20 years.

• VGF subsidy: Viability gap funding (VGF) of up 40% of the cost of the project can be availed as a capital grant (for state government sponsored projects, up to 20% would be provided by the central government, with the balance having to come from the state; where another central ministry is the project sponsor it would provide the remaining 20%)

• Foreign direct investment (FDI) : PPP projects are permitted have 74% to 100% of its equity in the form of FDI – depending on the specific sectors.

• Duty free imports : High capacity and modern construction equipment may be imported duty for use in a PPP project.

Long concession periods : PPP projects usually have concession periods of a longer duration. The period can be up to 30 years.

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2.8.1 Typical risks in W&S Infrastructure PPP projects Risk type Description Pre-operative task risks Delays in land acquisition Refers to the risk that the project site (or sites) will be

unavailable or unable to be used within the required time, or in the manner or the cost anticipated or the site will generate unanticipated liabilities due to existing encumbrances and native claims being made on the site. This risk is most relevant to greenfield projects involving treatment and storage facilities

External linkages Refers to the risk that adequate and timely connectivity to the project site is not available, which may impact the commencement of construction and overall pace of development of the project.

Financing risks Refers to the risk that sufficient finance will not be available for the project at reasonable cost (eg, because of changes in market conditions or credit availability) resulting in delays in the financial closure for a project.

Planning risks Refers to the risk that the pre-development studies (technical, legal, financial and others) conducted are inadequate or not robust enough resulting in possible deviations from the outcomes that were planned or expected in the PPP project development.

Construction phase risks Design risk Refers to the risk that the proposed design will be unable to

meet the performance and service requirements in the output specification. It can result in additional costs for modification and redesign.

Construction risk Refers to the risk that the construction of the assets required for the project will not be completed on time, on budget or to specification. It may lead to additional raw materials and labour costs, additional financing costs, increase in the cost of maintaining existing infrastructure or providing a temporary alternative solution due to a delay in the provision of the service.

Approvals risk Refers to the risk that delays in approvals to be obtained during the construction phase will result in a delay in the construction of the assets as per the construction schedule. Such delays in obtaining approvals may lead to cost overruns.

Operation phase risks Operations and maintenance risk

Refers to the risks associated with the need for increased maintenance of assets or machinery over the term of the project in order to meet performance requirements. In a brownfield PPP, where the private partner takes over operation of existing assets, O&M risk is very sensitive to the starting condition of the assets. In this case the private operator's O&M risk is related to the risk of poor or incomplete information about the quality

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of the assets that it will take over. Volume risk Refers to the risk that demand for water or sanitation services

will vary from the initial forecast, such that the total revenue derived from the project over the project life will vary from initial expectations.

Payment risk Refers to the risk that charges for services are not collected in full or are not set at a level that allows recovery of costs. Who bears the payment risk depends on whether the charges for services are paid directly by users, or are paid by the municipality. If charges are paid by the municipality (via taxes) the public sector bears this risk.

Financial risk Refers to the risk that the concessionaire introduces too much financial stress on a project by using an inappropriate financial structure for the privately financed components of the project. It can result in additional funding costs for increased margins or unexpected refinancing costs. Currency risk can also impact on financial risk if the project includes funding denominated in foreign currency.

Performance risk This is a risk that the quality of services delivered will not meet the performance standards agreed in the Concession Agreement. The Concession Agreement should stipulate penalties or compensation terms in this case.

Environmental risk Refers to the risk of environmental damage in excess of what is planned for in the environmental impact mitigation plan. For example, ground water pollution from sewerage release.

Handover risks Handover risk / Terminal value risk

Refers to the risk that the concessionaire will default in the handover of the asset at the end of the project life, or that it will fail to meet the minimum quality standard or value of the asset that needs to be handed back to the public entity. This risk (and terminal value risk) generally relates to concession and BOT type PPPs. However, it may also be relevant to performance based management contracts in which the private partner is responsible for investing in meters.

Other risks Change in law Refers to the risk that the current legal / regulatory regime will

change, having a material adverse impact on the project. Force Majeure Refers to the risk that events beyond the control of either entity

may occur, resulting in a material adverse impact on either party's ability to perform its obligations under the PPP contract. These events are sometimes also called "Acts of God", to indicate that they are beyond the control of either contracted party.

Concessionaire risk Refers to the risk that the concessionaire will prove to be

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inappropriate or unsuitable for delivery of the project, for example due to failure of their company.

Sponsor risk Refers to the risk that the Sponsor will prove to be an unsuitable partner for the project, for example due to poor project management or a failure to fully recognise the agreed terms of the Concession Agreement.

Concessionaire event of default

Refers to the risk that the concessionaire will not fulfil its contractual obligations and that the public Sponsor will be unable to either enforce those obligations against the concessionaire, or recover some form of compensation or remedy from the concessionaire for any loss sustained by it as a result of the breach.

Government event of default

Refers to the risk that the public Sponsor will not fulfil its contractual obligations and that the concessionaire will be unable to either enforce those obligations against the Sponsor, or recover some form of compensation or remedy from the Sponsor for any loss sustained by it as a result of the breach.

2.8.2 Types of PPP

� Financially free standing projects − Role of public sector - planning, licensing & statutory procedures; no financial

support/ payment by government − Revenues through levy of user charges by private sector

� Toll Roads and Bridges, Telecom services, Port projects � Projects where Government procures services

− Private Sector paid a fee (tipping fee), tariff (shadow toll) or periodical charge (annuity) by Government for providing services; payment against performance – no/partial demand risk transfer

− Risks associated with asset creation (including design) and O&M transferred to private sector

− Accountability to users for service - retained by Government − Roads - annuity, power - under PPAs. In the UK -prisons, education, health

services, defence related services

� Other Types - Joint ventures, Not-for-Profit vehicles

2.8.3 PPP Options

2.8.4 Characteristics of typical PPP modes in the W&S sectorMODES / FEATURES

Asset ownership during the contract

Distribution or Operations Concessions

Public

BOT – Bulk Water Supply System

Public

BOT –Water Supply Distribution System

Public

BOT – Water Supply Distribution System & Sanitation Network

Public

Performance Public

Characteristics of typical PPP modes in the W&S sector PPP duration

Capital investment focus & responsibility

Private partner revenue risk and compensation terms

Long (e.g. 15-30 yrs)

Brownfield Private

High User Charges

Long (e.g. 15-30 yrs)

Greenfield (Bulk Water Infrastructure) Private

Med-High (could have a Take or Pay Agreement) Bulk Water Charges from ULB

Medium (e.g. 8-10 yrs)

Greenfield Private

Medium Capex Reimbursement by ULB + User Charges + Operator Fee for O&M from ULB

Long (e.g. 15-30 yrs)

Greenfield Private

Medium Not the focus Low / High

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revenue risk

compensation

Private partner role & involvement

User Charges Design, finance, construct, manage, maintain, transfer

(could have a Take or Pay

Charges from

Design, finance, construct, manage, maintain, transfer

Reimbursement by ULB + User

Operator Fee for O&M from

Design, finance, construct, manage, maintain, transfer

Management of all

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based Management Contracts

(e.g. 5yrs) Public Pre-determined fee / Revenue Share, Performance based

aspects of operation and maintenance

Service Management Contract – Metering, Billing and Collection

Public Short (e.g.3-4 years)

Only towards Metering Private

Low Recovery of Investment in meters from Consumers. Fixed Annuity for O&M from ULB

Minimum Capex, Management, Maintenance of Meters, Billing & Collections

2.8.5 Contractual Framework A PPP project operates under a contractual framework, where the intended outcomes are explicitly set out. This contract is called the Concession Agreement. The concession agreement lays out the rights and obligations of both the private party and the public entity, and the consequences in case of non-fulfillment of any obligation. The importance of the contract lies in the fact that it is usually the only tangible security available to both parties in case of non-performance. The contracting parties are usually the government agency (concessioning authority) which is procuring the service, and the private party (concessionaire) that is providing the service. The other parties may include the state government, lenders, and supplies of services. It is important to remember that a concession is a licence, wherein certain rights are enjoyed by the private party in return for performing certain obligations 2.8.6 Contractual Framework of PPP projects

� All intentions need to be set out in a contract � Concession Agreement - bundle of rights & obligations and consequences in case of non-

fulfillment � Usually the only tangible security available � Contracting parties : Government Agency – Concessioning Authority and Private Party –

Concessionaire � Other parties – state government, Lenders, Suppliers of services � A concession is a license – rights enjoyed for obligations performed

Issues

� Striking a balance between differing concerns & objectives of parties � Legislative Back up � Rights and obligations of parties � Identification and allocation of risks � Penalties and rewards which would ensure performance

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2.8.7 Project characteristics that affect the choice of PPP mode The different modes and variants of them will be appropriate to different projects. This will depend in particular on the nature of the service or output required, which in turn depends on the sector and sub-sector, and the political and economic climate in which the PPP will be carried out. New (“Greenfield”) or existing assets – Greenfield developments, which include major capital expenditure to build new infrastructure, have different requirements to the rehabilitation or management of existing assets in Brownfield developments. The scope of potential private sector roles is broader in greenfield projects. The chosen PPP mode will reflect whether the private sector will be responsible for the design, finance and construction of the project (eg : DBO agreement or a variation) or only some of these roles. Ownership flexibility – There may be legal restrictions on public ownership (as is the case in India for highways or port frontages). Other practical issues need to be taken into account in deciding ownership, such as political acceptability (eg due to resistance to public ownership of certain facilities that are seen as providing strategic or ‘vital’ services, such as may be the case in electricity). Restrictions on ownership rule out PPP modes that specifically contain ownership aspects, such as Build-own-operate (BOO) and its variants (eg. BOOT). In this case other options such as lease management contracts, BOT, BTL, could be considered. Lifetime of the asset and scale of capital costs – infrastructure assets that involve large upfront capital costs, such as roads, require long timeframes for cost recovery. Such assets may be suited to long-term contracts (eg BOT, BLT etc). However, long timeframes also bring greater risk of future unknowns. The public sector may be required to take on some of these risks by providing some guarantee to cost recovery in order to attract private sector project finance. For example, for a road project where future traffic volumes are uncertain the PPP might be structured with annuity payments rather than being toll-based, to reduce the revenue risk to the private operator. Alternatively, if long-tenor finance from the private sector is not available public sector financing may need to step into the gap (eg., IIFCL). The willingness or ability of the public sector partner to meet these risks is a further factor to be considered in determining the length of contract. For example, if facilities to support long-tenor debt are not available shorter term contracts with renewal clauses may be appropriate. The nature of the service to be provided and the supporting infrastructure assets – More broadly, the nature of the end-user service itself will tend to favour a type of contracting structure. This is related to the capital cost structure (scale and timing) and the nature of the assets (physically fixed to their location or transportable). Large capital-intensive network infrastructure assets tend to be natural monopolies and require some form of institutional price and quality regulation, either within the terms of contract or by a dedicated regulatory agency.

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By contrast, some services such as those that are provided on the network (eg municipal buses, electric energy) or solid waste collection, can be subject to market competition. A different contracting structure is possible in this case, including greater opportunity for shorter contracts and periodic competitive re-bidding to maintain pressure on costs. Cost recovery options – Whether the revenue from the PPP will be from a user-charge or a management fee or annuity paid by the public sector has important implications for the nature of the risk sharing. Stability of demand for the services required – long-term PPP contracts are best suited to the provision of infrastructure services which are not expected to change much through time. These projects have lower risk of unforeseeable outcomes compared with projects whose services are subject to change, for example in sectors that are subject to rapid technological change. 2.8.8 Broad Roles & Responsibilities in PPP Projects

� Government Agency � Providing Project Site/ Assets � Environmental Clearances � Specific Obligations (e.g. timely clearances, support infrastructure facilities) � Regulatory Functions

� Concessionaire

� Designing, Engineering, Financing � Construction/ augmentation / upgradation � Operation and Maintenance � Payment and other obligations � Transfer of assets at expiry of concession period � In exchange the concessionaire has the right to receive revenue – tolls or annuity

or any other mechanism

2.8.9 Other Key Elements of PPP � Bankability Issues

− Concessionaire’s ability to assign rights − Lenders’ step-in rights − Charge on project assets and enforceability − Critical Events and consequences

� Force Majeure � Events of Default

− Remedial process in case of default/ events leading to termination − Protection of debt in the event of termination

� Supporting Provisions

− Dispute Resolution Mechanism − Re-negotiation in good faith

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− Termination as a last resort − Preferential treatment in re-bidding

2.8.10 Comparative Table of Highlighting Core Elements that Define PPP

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2.9 .0 Steps in PPP Project Development Process Project Identification

Technical Feasibility Evaluation

Financial Viability Analysis

Evaluation of Project Structuring Options

Resolution of Project Implementation Issues

Bid Documentation

Bidding Process

2.9.1 A Few PPP based projects in Karnataka

• BIAL • HMRDC • MSW Treatment and landfill at Mavallipura • Madivala Market • Bangalore-Maddur State Highway • NICE Road • Hotel Metropole and Hotel KRS • Hotels & Yatri Niwas across State • CSB to Karnataka Border – Elevated Expressway to E City • KUWASIP • Swachha Bangalore • MCC, Devanahalli

KSRTC and BMTC propose to jointly develop the existing Kempegowda Bus Terminal at Subhashnagar into an Intermodal Transit Center through Private Sector Participation on BOT basis

RTO 1. Nodal Department : Transport Department 2. Computerisation of RTOs/Check Posts in Karnataka

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3. Financing, Supply, Installation and Maintenance of Hardware and Application Software at locations all over Karnataka

4. Private developer to issue smart cards for driving licences and vehicle registration certificates 5. Estimated capital investment of Rs.30 crores 6. Bid process underway

BOT Projects 1. Sandur Bypass 2. Tornagallu-Kudligi, Sandur-Hospet & other roads 3. Ring Road in Bellary City 4. Elevated Corridor for IT City – Bangalore

Mysore 24x7 Water Supply Project Job Description : Conversion of intermittent to 24x7 continuous water supply system

through systematic improvements and network rehabilitation Client : Mysore City Corporation & Karnataka Water Supply & Drainage Board (KUWSDB) Salient Features : Hydraulic modeling, Network design, preparation and implementation

of Capital Investment Plan (CIP)

• Rehabilitation of citywide water distribution network – About 1766 km. of pipeline (dia. 65- 350mm), 14 Booster Pump houses, 14 substations & related electrical works

• Providing house service connections – 1,74,936 • Operation & maintenance of citywide water distribution system for 6 years (2

years post rehabilitation & implementation of 24x7, with fixed & performance linked remuneration

• Billing & Collection leading to increased revenue collections • Establishment and Management of 24x7 Customer Complaint centers

Value [Existing Contract] : Rs. 1620 million Completion Time : 72 Months

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2.10.0 Public- Private Partnerships in Municipal Services

Today our urban local bodies /state authorities are finding that their existing water, sanitation, energy and other urban infrastructures are unable to service their rapidly expanding urban population. In addition, governments realize that their limited financial resources are not sufficient to cover the needed expansion of these services. Even where government do find the resources to subsidize public utilities, service is often poor and sectors of the population largely unserved. It is becoming increasingly clear that government connot meet the continually growing demand for water, waste, waste, energy and other urban services acting alone. Local governments are finding that their tax revenues are not providing sufficient resources to meet these needs, and official development assistance has not been able to fill the gap. It is in this backdrop that we are forced to think of alternate sources of finance, technical excellence and support one of the most viable options is to involve the private sector in the state monopolies. This is done through associations with provate sector on a project-to project basis and generally termed as PSP-private sector participation, PPP-Public private partnerships, PFI-Private finance initiatives etc. these usages though done interchangeably have slight differences in their specific definitions and operational frameworks but for the genera understanding it conveys the meaning of involvement of private sector in public services. The term “private partnership” (PPP) describes a spectrum of possible relationships between public and private actors for the cooperative provision of infrastructure services. The only essential ingredient is some degree of private participation in the delivery of traditionally public – domain services. Private actors may include private businesses, as well as non-governmental organizations (NGOs) and community- based organization (CBOs). Through PPPs, the advantages of the private sector- innovation, access to finance, knowledge of technologies, managerial efficiency, and entrepreneurial spirit- are combined with the social responsibility, environmental awareness, and local knowledge of the public sector in an effort to solve problems. In cities throughout the world, private firms have demonstrated their ability to improve the operation of infrastructure services. However, it is important to bear in mind that private involvement does not provide an automatic solution to urban infrastructure problems. The need for private sector involvement in urban infrastructure development is indisputable in the above context and it has been proven beyond doubt that depending on the option of private participation used it could deliver the required benefits in urban infrastructure projects. Private sector participation could help to bring technical and managerial expertise, improve operating efficiency, large scale injection of capital, greater efficiency in using the capital, rationalization/ cost base tariffs for services, better responsiveness to consumer needs and satisfaction. Though we are clear that private sector participation is necessary and it could bring definite advantages into the system, it would be worth while to look into those critical factors which do or undo the partnership or the successful running of it. The key factors that could be highlighted are clear, government commitment, legal and regulatory capacity, stakeholder involvement, intelligent transaction design, cost-recovery tariffs,

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the right option and a systematic approach. If we may compare the options mentioned above on the basis of parameters like ownership, operations accountability, investment, commercial risk bearing and period of contracts, a general matrix like the following could be drawn. Option Asset

Ownership O & M Capital

Investment Commercial Risk

Duration

Management Contract

Public Private Public Public 3-5 years

Lease Public Private Public Shared 8-15 years Concession BOT

Public Private Private Private 25-30 years

BOOT/BOO Private/public Private Private Private 20-30 years These Options could also be compared by mapping the objectives for which private participation is sought as given below Objective Option

Technical Expertise

Managing Expertise

Operating Efficiency

Invest: in Bulk

Invest: in Distri:

Service Contract

Yes No No No No

Management contract

Yes Yes Some No No

Lease Yes Yes Some No No Concession/ BOT

Yes Some Some Yes No

BOOT/BOO Yes Yes Yes Yes Yes The table highlights the necessity of identifying the objectives clearly before venturing into an option. Here are certain prerequisites for a public private partnership to develop and be sustained successfully the importance and priority of the factors as against the various options is as shown.

Requirement option

Political Commitment

Cost-coverring Tariffs

Regulatory Framework

Good Information

Service Contract Low Low Low Low Management Contract

Moderate Moderate Moderate Low

Lease Moderate High High High BOT Concession Moderate High High High BOOT/BOO High High High High

It is not enough that the support of private sector be sought for the development but it should be well thought out and should be ventured into with adequate preparation and homework. There is a definite process to be followed for Private sector participation in infrastructure development this involves many systematic steps, but to put in general it is four phases. They are project preparation, selecting an appropriate PPP option, soliciting private sector participation, establishing a durable partnership.

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Each of the above phases has its own importance and there is a definite sequence to be followed. In general these steps would include detailed steps as given. Step 1 : Project Preparation The process from conceiving the idea to identifying the potentiality of the project and finding out the financial and economical feasibility of the same would come under this phase. They are conceiving the idea or problem definition, demand assessment, financial feasibility, economic feasibility and project feasibility (Generally a project feasibility report) Step 2 : Selecting an appropriate PPP option This phase would depend on the project/problem in hand which is to be addressed ie, importance of the project, economics of the project, social and environmental back-drop, political and public interest, private sectors interest in terns of investment attractiveness. The steps involved would be structuring the project for private participation, setting the necessary changes/framework for the project, defining the terms of bidding (Bid design) and preparation of documents. Step 3 : Soliciting private sector participation This involves the process of inviting private sector to participate in the project/venture and the subsequent steps of identifying the most appropriate partner in terms of technical and financial parameters. The steps would include pre-qualification, bid process, evaluation and negotiations. Step 4 : Establishing a durable partnership The post bid scenario where the relationship of 10-20 years is maintained in good manner keeping in lines with the spirit of the contract- award of the contact, up keeping of the contractual obligations and considerate views on unforeseen events (Mutually) To sum up one would add that the success of the project would depend finally on getting the different stakeholder rallying for it which requires a high level of awareness and a genuine effort for a consensus. The emphasis on this point is because the relationship is for 20 year where in it is possible that governments change, ideologies change and market dynamics may change but the long-term policies should remain and the commitment given to private sector and public should be honoured. 2.10.1 Summary The concept of PPP is new and emerging requiring different skills and Governance. This chapter has discussed the basic aspects of PPP in the Indian context. The definition, advantages and disadvantages, features, need, roles and responsibilities, risk sharing, characteristics, types of PPP, General steps in PPP and a list of PPP projects initiated in Karnataka State have been described. Broadly speaking, a typical PPP allows a private consortium to assume the financing risk and two or more phases of the project’s life-cycle. This may include the design and construction phases of the project and the subsequent maintenance and operation of the government facility under a carefully contrived long-term lease. This is in contrast to the private sector’s traditional role in infrastructure development where its involvement is limited to providing skilled labour under short-term contracts, with the delivery of the services being solely

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provided by the public authority. It is also important not to confuse PPPs with privatization- a situation where responsibility over the delivery of the public service is fully transferred to the private partner with little or no government oversight. Public Private Partnerships combine two or more of the project’s phases in a single bundle for the private consortium to deliver over the long-ter. This created economics of scale by motivating the private sector to organize its activities in a way that drives efficiencies and maximizes returns on investments.

Public private partnerships are designed so that risk is transferred between the public and private sectors, allocating particular project risk to the partner best able to manage that risk cost-effectively. With financing risk routinely transferred to the private consortium, any delays in meeting the agreed upon timelines can lead to additional costs for the private partner as it alone carries the debt for a longer period of time. Therefore, the private sector has a direct financial interest in ensuring that projects and services are delivered on-time, if not sooner. By bringing together the strengths from the public and private sectors. PPPs have the unique ability to share a diverse range of resources, technologies, ideas and skills in a cooperative manner that can work to improve how urban infrastructure assets and services are delivered to the people.

Public private partnerships represent good opportunities to lower overall project costs.

However, when compared with traditional procurement, the complete PPP process invites additional costs that, if not managed properly, can erode some of the potential economic benefits of this model. A key concern with the long-term committal nature of PPP procurement is that it limits the public sector’s ability to make changes to the contract if unexpected economic or situational challenges arise. In the event that a change is required to either the use of an infrastructure asset, or to the type of urban service offered, PPPs have proven to be inflexible-both in terms of the time and administrative burden associated with altering the contract. 2.10.2 Questions :

1. Define PPP as per DEA & planning commission of India & Discuss the essential conditions in the definition?

2. What are the needs and features of PPP ? 3. Discuss the advantages and disadvantages of PPP ? 4. What are the characteristics of PPP? 5. Discuss the different risks in PPP projects in WS & sanitation ? 6. Discuss the types of PPP ? 7. Explain contractual frame work of PPP ? 8. Discuss the broad role and responsibility in PPP projects ? 9. Explain PPP status in municipal services ? 10. Discuss steps in PPP ?