Business Model Choices for Government IIIT-H

Tools… Goods and Services Direct Loans Income Support… Direct Government Contracting Grants Loan Guarantees Insurance… Indirect Government PPP 2

Public Private Partnership long-term arrangements in which the governments purchases services under a contract either directly or by subsidizing supplies to consumers …the government bears substantial risks - for example, by guaranteeing revenue or returns - on projects that sell directly to consumers World Bank 3

Among other things, PPP is a procurement decision As a procurement decision, PPP attempts to find answer to the question –Should Govt provide service “x” on its own in the traditional format or –should Govt. enter into a partnership with the Private Sector to fulfill its commitment

Decision dimensions Expertise Political – [encourage Pvt Sector] Philosophical – [reducing role of govt] Resources – [Human] Resources – [Time] Resources – [Funds]

Year Costs incurred/ Investments made by Government [a][conventional][Under PPP] [b][e] o1, , , , ,250 51,5001,250

Time Value of Money How to calculate NPV? C t NPV = ∑ (1+i) t –C t = Amount of Cash flow (inflow – outflow) –i = discount rate (or rate of return that could be earned on an investment) –t = time of the cash flow (year 1, year 2…)

Exercise… NPV analysis Year Costs incurred/ Investments made by Government [a][conventional][Under PPP] [b][e] o1, , , , ,250 51,5001,250

Cross-over Rate

Derivation of discount rate / return on capital Required return is the sum of the risk-free rate of interest and a compensation for bearing risk.

A discount rate is therefore a composite…

Value for Money VfM is defined as “the optimum combination of the whole of life cost and quality (or fitness for purpose) of the good or service to meet the user’s requirements”. It is linked in many ways to cost-benefit analysis. VfM may include benefits that are not monetized (as it is not always easy to do so).

123 Prog A [eGov based child and women care right up to village level] Total Cost Lives Saved/value of lives saved Prog B [eGov based child and women care right up to district level] Total Cost Lives Saved Prog C [additional training without any major expansion] Total Cost Lives Saved Discount Rate4812 Exercise… Perform Cost effectiveness analysis

123 Prog A [eGov based child and women care right up to village level] Total Cost Lives Saved/value of lives saved Prog B [eGov based child and women care right up to district level] Total Cost Lives Saved Prog C [additional training without any major expansion] Total Cost Lives Saved Discount Rate4812 Present value of Costs Program A5,7915,3464,953 Program B5,0974,7614,462 Program C1, Discounted Lives/value of lives Saved Program A Program B Program C Cost per 'life' saved Program A8,4918,3428,206 Program B8,3958,3488,305 Program C4,0104,0244,037 Cost effectiveness analysis

Coordinating work effectively often turns out to be much harder than dividing it. Partnerships are one of the coordinating devices The choice of tools is a difficult cultural / political / Legal / economic decision. Decisions should be taken only after DETAILED analysis

Govt. PROCUREMENT

Decisions Make or buy? Two State or Three Stage process? –Request for Information –Request for Proposal –Contract Pre-qualification Selection criteria –L1 –Quality and cost based selection [QCBS] SLA [Service Level Agreement]