Public-Private Partnership Model (PPP)

Topics covered

  • Why in News? 
  • What is PPP? 
  • Background 
  • Features of PPP 
  • Advantages of PPP 
  • Types of Investment Models 
  • Modes of PPP 
  • Government incentives for PPPs 
  • Problems with PPP Projects 
  • Vijay Kelkar Committee Report on Revisiting and Revitalising PPP Model
  • Recommendations Of Kelkar Committee 
  • Way Forward 

Why in News?

  • In recent years, Indian government has given a greater impetus to metro rail expansion. In 2018 itself, 6 new metro rail projects have been sanctioned.
  • In recent policy regime change there is a greater involvement of private sector in financing and developing these projects.
  • In this context, concerns have been raised due to public–private partnerships in financing and developing metro projects, and the possible implications of these on patterns of urban land use.

What is PPP?

  • Public Private Partnership means an arrangement between a government/statutory entity/government owned entity on one side and a private sector entity on the other.
  • It is often done for the provision of public assets or public services, through investments being made and/or management being undertaken by the private sector entity, for a specified period of time.
  • There is well defined allocation of risk between the private sector and the public entity.
  • The private entity who is chosen on the basis of open competitive bidding, receives performance linked payments that conform (or are benchmarked) to specified and pre-determined performance standards, measurable by the public entity or its representative.

Background

  • Metro rail projects in India, until 2017, were broadly guided by a consolidated framework decided by the Ministry of Urban Development.
  • The consolidated framework had set its preference for executing metro rail projects primarily through government funding.
  • This framework duly recognised the limitations of PPP models due to risks associated with the metro rail systems and the limited experience of India in executing metro rail systems on a PPP basis.
  • On 16 August 2017, the Union Cabinet approved a new Metro Rail Policy which opens a big window for private investments in metro operations by making PPP component mandatory for availing central assistance on metro projects.
  • Private participation has its own cost because projects are undertaken only if they are able to generate profits in return for their investments.
  • Therefore, in the current policy framework it appears that expansion of metro rail projects across the country will only accelerate the process of conversion of land in urban and semi-urban areas for consumer-oriented use.

Features of PPP

  • The private entity is responsible for completing the project within the specified time period. Hence the private entity assumes a certain portion of the risk associated with the project.
  • The public entity assumes the important role of monitoring the performance of the private entity, either directly or through an agency, and enforcing the terms of the PPP contract.
  • The private entity may be allowed to recover, partly or fully, the cost of the project through user charges and other avenues, or it may be paid by the public entity.

Advantages of PPP

  • Access to private sector finance
  • Efficiency advantages from using private sector skills and from transferring risk to the private sector
  • Potentially increased transparency
  • Enlargement of focus from only creating an asset to delivery of a service, including maintenance of the infrastructure asset during its operating lifetime
  • This broadened focus creates incentives to reduce the full life-cycle costs (ie, construction costs and operating costs)

Types of Investment Models

  • Public Investment Model: In this model Government requires revenue for investment that mainly comes through taxes.
    • As the world is facing the prospect of an extended period of weak economic growth, by enhancing public-sector investment large pools of savings can be channelized into productivity.
    • Properly targeted public investment can do much to boost economic performance, generating aggregate demand quickly, fueling productivity growth by improving human capital, encouraging technological innovation, and spurring private-sector investment by increasing returns.
    • Though public investment cannot fix a large demand shortfall overnight, it can accelerate the recovery and establish more sustainable growth patterns.
  • Private Investment Model: For a country to grow and increase its production investment is required. Presently tax revenue of India is not adequate to meet this demand so government requires private investment.
    • Private investment can be source from domestic or international market.
    • From abroad private investment comes in the form of FDI or FPI.
    • Private investment can generate more efficiency by creating more competition, realization of economies of scale and greater flexibility than is available to the public sector.
  • Public-Private Partnership Model:PPP is an arrangement between government and private sector for the provision of public assets and/or public services. Public-private partnerships allow large-scale government projects, such as roads, bridges, or hospitals, to be completed with private funding.
    • In this type of partnership, investments are undertaken by the private sector entity, for a specified period of time.
    • These partnerships work well when private sector technology and innovation combine with public sector incentives to complete work on time and within budget.
    • As PPP involves full retention of responsibility by the government for providing the services, it doesn’t amount to privatization.
    • There is a well defined allocation of risk between the private sector and the public entity.
    • Private entity is chosen on the basis of open competitive bidding and receives performance linked payments.
    • PPP route can be alternative in developing countries where governments face various constraints on borrowing money for important projects.
    • It can also give required expertise in planning or executing large projects.

Modes of PPP

  • The four major “families” of PPP modes are:
  • Management contracts – Contractual arrangement for the management of a part or whole of a public facility or service by the private sector. Capital investment is typically not the primary focus in such arrangements.
  • Lease contracts
  • Concessions and
  • Build-operate-transfer (BOT) and its variants.
  • PPPs have given rise to an array of acronyms for the names that describe the variations in each modal family.

Government incentives for PPPs

  • The Government has facilitated the PPP sector by offering:
  • Viability Gap Funding (VGF) subsidy – Viability Gap Funding of upto 40% of the cost of the project can be accessed in the form of a capital grant.
  • India Infrastructure Project Development Fund (IIPDF) – Scheme supports the Central and the State Governments and local bodies through financial support for project development activities (, feasibility reports, project structuring etc) for PPP projects
  • IIFCL – long-term debt for financing infrastructure projects that typically involve long gestation periods since debt finance for such projects should be of a sufficient.
  • Foreign Direct Investment (FDI) – upto 100% FDI in equity of SPVs in the PPP sector is allowed on the automatic route for most sectors.

Problems with PPP Projects

  • PPP projects have been stuck in issues such as disputes in existing contracts, non-availability of capital and regulatory hurdles related to the acquisition of land.
  • Indian government has a poor record in regulating PPPs in practice.
  • Metro projects become sites of crony capitalism and a means for accumulating land by private companies.
  • Across the world PPPs are facing problems, performance of PPPs has been very mixed according to study conducted by various research bodies.
  • It is also argued that PPP is mere a ‘’language game” by governments who find it difficult to push privatization, or when politically it is difficult to contracting out.
  • Loans for infrastructure projects are believed to comprise a large share of the non-performing asset portfolio of public sector banks in India.
  • In many sectors, PPP projects have turned into conduits of crony capitalism.
  • Many PPP projects in infrastructure sector are run by “politically connected firms” which have used political connections to win contracts.
  • PPP firms use every opportunity for renegotiating contracts by citing reasons like lower revenue or rise in costs which becomes a norm in India.
  • Frequent renegotiations also resulted into drain of larger share of public resources.
  • These firms create a moral hazard by their opportunistic behavior.

Vijay Kelkar Committee Report on Revisiting and Revitalising PPP Model

  • Finance Minister in the Union Budget 2015-16 announced that the PPP mode of infrastructure development has to be revisited and revitalised.
  • In pursuance of this announcement, a Committee on Revisiting & Revitalising the PPP model of Infrastructure Development was set-up which was chaired by Dr. Vijay Kelkar.

Recommendations Of Kelkar Committee

  • Periodic reviews – Such reviews should ideally therefore be done frequently, perhaps once every three years.
  • Change in attitude and in the mind-set – The Committee urges all parties concerned to foster trust between private and public sector partners when they implement PPPs.
  • The Government may take early action to amend the Prevention of Corruption Act, 1988 which does not distinguish between genuine errors in decision-making and acts of corruption.
  • Structured capacity building programmes for different stakeholders including implementing agencies and customized programmes for banks and financial institutions and private sector need to be evolved. The need for a national level institution to support institutional capacity building activities must be explored.
  • Optimal allocation of risks across PPP stakeholders – Project specific risks are rarely addressed by project implementation authorities in this “One-size-fits-all” approach.
  • A rational allocation of risks can only be undertaken in sector and project-specific contexts. Committee also emphasizes that a generic risk monitoring and evaluation framework should be developed encompassing all aspects across project development and implementation lifecycle.
  • The Committee recognizes the need for a quick, equitable, efficient and enforceable dispute resolution mechanism for PPP projects.
  • The authorities may be advised against adopting PPP structures for very small projects, since the benefits of delivering small PPP projects may not be commensurate with the resulting costs and the complexity of managing such partnerships over a long period.
  • Unsolicited Proposals (“Swiss Challenge”) may be actively discouraged as they bring information asymmetries into the procurement process and result in lack of transparency and fair and equal treatment of potential bidders in the procurement process.
  • The Committee is of the view that since state owned entities SoEs/PSUs are essentially government entities and work within the government framework, they should not be allowed to bid for PPP projects.
  • PPP should not be used as the first delivery mechanism without checking its suitability for a particular project.
  • Monetisation of viable projects that have stable revenue flows after EPC delivery may be considered.
  • Equity in completed, successful infrastructure projects may be divested by offering to long-term investors, including overseas institutional investors as domestic and foreign institutional investors with long-term liabilities are best suited for providing such long-term financing, but have a limited appetite for risk.
  • Improving a PPP project’s risk profile so that it is more suitable for overseas and domestic long-term investors can be accomplished through partial recourse to credible third-party institutions. This could be implemented through a partial credit guarantee or cash flow support mechanisms.
  • It is necessary to explore options for sourcing long term capital at low cost. Towards this, the Committee recommends, encouraging the banks and financial institution to issue Deep Discount Bonds or Zero Coupon Bonds (ZCB). These will not only lower debt servicing costs in an initial phase of project but also enable the authorities to charge lower user charges in initial years.

Way Forward

  • New projects especially large-scale transit projects are significant for increasing mobility and for the series of changes in land use patterns. PPPs have the potential to deliver infrastructure projects better and faster. Currently, PPP contracts focus more on fiscal benefits.
  • There is need for a serious assessment of the efficacy and the likely benefits of increasing private sector participation in metro rail projects before the adoption of this model.
  • NITI Aayog in its document ‘Strategy for New India @75’, targeted investment rates to 36 per cent by 2022-23 from 28 percent of 2017-2018.
  • To raise the rate of investment (gross fixed capital formation as a share of GDP) slew of measures will be required to boost both private and public investment.
  • Private investment needs be encouraged in infrastructure through a renewed public-private partnership (PPP) mechanism on the lines suggested by the Kelkar Committee.
  • A mature PPP framework, along with a robust enabling ecosystem shall enable the Government to accomplish, to a considerable extent, what our Prime Minister, has said “The Government has no business to do business” and thereby promote private sector investments and participation towards the nation building.