1 Introducing / Development Through Public Private Partnership (PPP) Er. Subhash Malhotra Centre for Management of Engineering Works

Service Provision Options Infrastructure Services Status Quo: Govt. creates assets & provides services PPPs: Contracting of Services - Government creates assets and contracts service provision to private sector PPPs: Government awards concession/ license to private sector for a fixed term under which it creates assets and provides services Privatisation: Government transfers entire sector responsibility to the private sector – which then creates assets and provides services 2

Definition The Department of Economic Affairs, Government of India defines PPPs as: PPP means an arrangement between 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 period of time, 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 ultimate accountability to users for provision of these services vests with the public entity – even if delivery is by the private partner 3

Why do we need PPPs? Fiscal reasons - inadequacy of resources with government (commonest reason) by leveraging on committed government funding it is possible to finance projects of much larger magnitudes Efficiency gains due to appropriate risk transfer, speedy decision making and flexibility of operations (better reason) Examples of private sector involvement in core sectors: airlines, telecom services, oil refining -private sector is able to take on large projects, complex operations and can well handle reasonable commercial risks attached to projects such as Design, Financing, Construction, Operations and Maintenance 4

Why do we need PPPs? Risks that often affect projects implemented by the public sector - time overrun, cost overrun, change of scope, inadequate designs, lower construction quality, leakage of revenues, high maintenance costs – can be assumed by the private player There is also incentive for the private party to use appropriate technology, develop innovative design solutions, improve project management practices, install more efficient revenue collection practices and use life cycle cost approach Expected outcomes - value for money, expeditious implementation and higher quality of assets and services 5

What a PPP is not & what it is PPP is not privatisation or disinvestments PPP is not about borrowing money from the private sector PPP is more about creating a structure in which greater value for money is achieved for services through private sector innovation and management skills delivering significant improvement in service efficiency levels This means that the public sector no longer builds roads, it purchases kilometres of maintained highway no longer builds prisons, it buys custodial services no longer operates ports but provides port services through world class operators no longer builds power plants but purchases power 6

Key Benefits Rigorous project preparation – since the focus shifts to developing bankable projects Delivery of a whole life solution – going beyond asset creation Focus shifts to service delivery – construction responsibility is integrated with O&M obligations and together with appropriate quality monitoring and service delivery- linked payments, this could enhance the levels of service delivery It is possible to roll it into a programme and have a time-bound implementation plan Can lead to better overall management of public services – transparency in prioritization, selection and ongoing implementation 7

Pre-requisites The public entity should have the enabling authority to transfer its responsibility – enabling legislative & policy framework, administrative order – the instrument of transfer is through a contract There is a significant transfer of responsibility to the private entity – and usually includes large financial investment obligations Payment to the private entity for services – directly by users or paid by the public entity These are conditional on achieving pre-specified levels of performance The nature of the relationship is usually long-term to derive maximum benefits 8

Features of PPPs - 1 Genuine risk transfer All risks pertaining to design, building, financing and operation transferred to the private entity as applicable Transfer of demand risk depends on the extent to which the private sector can influence usage or on the monopoly characteristic of the asset Output based Specifications Contracts specify the service outputs required rather than asset configuration/mode of service delivery Emphasis on type of service & performance standards Incentive to deliver outputs using innovation in design, construction, operation and financing 9

Features of PPPs - 2 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 set out in the contract 10

Types of PPPs Financially free standing projects Role of public sector - planning, licensing & statutory approvals No financial support/ payment is made by government Revenues are by levy of user charges by private sector Examples -Toll Roads/ Bridges, Telecom services, Port projects, Solid Waste Management with energy generation Projects where Government procures services Private Sector is paid a fee (tipping fee), tariff (shadow toll) or periodical charge (annuity) by Government for providing services The payment is made against performance There may be demand risk transfer – either in part or whole 11

Types of PPPs Example - Roads - annuity/ shadow tolls, power - under PPAs (Power Purchase Agreements). In UK - prisons, education, health services, defence related services In both cases, the design, financing, construction and O&M risks are fully that of the private partner Hybrid Structures – Combine the financially free standing nature – levy of a user charge – with payment by the public entity Payment could be as a viability gap subsidy or an annuity payment Example – toll road project with either viability gap payment by government or annuity payment based road contract with tolling rights 12

Implementation Structures Commonest form – concession/ licence to a special purpose company/ vehicle (SPV) set up by the private investor for implementing the project SPV is entirely owned by the private investor and other strategic/ financial investors SPV can be set up as a joint venture with the public sector/ government Majority stake with private sector Public partner could expedite the receipt of statutory approvals and clearances Mindful of the conflict of interest for government in its role as an investor in the company and as a statutory authority For certain social infrastructure SPVs can be set up as Not-for- Profit vehicles (Section 25 companies), with the private sector being compensated a fee for services 13

Special Purpose Vehicles A new company is set up to implement each project Usually no balance sheet support is provided by the sponsoring entity – except for the equity commitment Most obligations would be addressed through contractual arrangements – construction, O&M, supply, off take and financing agreements Bankruptcy remote structure – project and sponsor are insulated from each other 14

PPP Options Full Privatizatio n Works & Services Contracts Management & Maintenance Contracts Operation & Maintenance Concessions Build Operate Transfer Concessions Low High Extent of private sector participation Which of these are PPPs? 15

PPP Options Existing Assets, usually with refurbishment obligations Lease of assets Concessions (licenses) Management contracts of whole or significant parts of the undertaking New Assets OMT Concessions of assets newly built by the public sector Sale of a government-owned SPV after project implementation Design, Build, Operate, Transfer Concessions – commonest form used in India 16

Concession Terminologies BOT - Build Operate Transfer BOOT - Build Own Operate Transfer BOO - Build Own Operate BOOST - Build Own Operate Share Transfer BOLT - Build Own Lease Transfer DBFO - Design Build Finance Operate Transfer OMT - Operate Maintain Transfer 17

Value for Money Transfer of risks/ responsibilities under a PPP structure should result in better value for money for the user/ purchaser of service Telecom sector – mobile phone tariffs from Rs. 16/- per minute to Re.1/- or 60 paise per minute for overseas and local calls Tolls paid is offset by savings in direct & indirect costs and value of time Annuity payments – use of a public sector comparator – equivalent annuity Efficiency gain for the project Savings in cost of project versus overrun Savings in operating costs Revenue maximization or leakage reduction 18

Stakeholder Expectations Sponsors/ Strategic Investors Project cash flows are reasonably predictable and sufficiently long term Stable policy/ regulatory framework Return – commensurate with the level of risk Lenders/ Other Financial Investors Adequate/ Secure cash flows to cover debt/ meet return expectations Contractual claim on cash flows for debt servicing Comfort in the event of termination Government/ Public Authority Asset built & operated/ maintained to specified standard – service of desired order – public interest 19

Stakeholder Expectations User Quality of service Affordable/ Reasonable cost Transparent award of project to a suitable partner All intentions are set out in a contract Concession Agreement - bundle of rights & obligations and consequences in case of non-fulfillment Usually the only tangible security available 20

Contractual Framework Contracting parties : Government Agency – Concessing Authority and Private Party – Concessionaire Other parties – State government, lenders, suppliers of services A concession is a license – rights enjoyed for obligations performed 21

Partnership in Practice Partners, not adversaries – this is important given the background of mistrust in conventional procurement Project should be key focus – “win-win” for both parties Independent agencies – Independent Engineer - useful during both implementation and operations Government retains ultimate responsibility but uses the private sector to deliver infrastructure services of specified standard Private Financing – can significantly leverage public funds 22

What Ails Municipal Corporations, Committees Lack of will & skills Lack of Resources Centralization of powers with state govt. Misuse /private use of man power Leakages & corruption Unskilled staff and managers having little/no exposure to technology Devaluation of ethics Poor Revenue Base Lack of will to levy Property Tax and user charges for water and waste services Large debts and poor collections 23

PPP Projects in Local Government Parking Lots including multilevel parking Garbage Collection from homes Maintenance of Public Parks Solid Waste Management (SWM) – Land fills & Energy Gen. Public Conveniences Foot Bridges & Under-passes Bus lay byes, Bus Stands Redevelopment of markets Upgrading water supply system with user charges Complaint cum Suvidha Centers Road side hoardings 24

Investor Comforts & Incentives Fiscal Benefits - Tax holiday of 100% for 10 years in a block of 20 years Viability Gap Funding of up to 40% of the cost of the project – as a grant Foreign Direct Investment –100% of the equity permitted Duty free import of high capacity and modern construction equipment Long Concession periods – up to 30 years 25

26 Thank you, What about mastering PPP and becoming the subject expert? State needs you and beckons you