1. Public Private Partnerships
Jeetendra Singh
Director (PPP & Infrastructure)
Planning Commission

2. What we are going to cover in this session?
Issues with infrastructure, a natural monopoly; how governments across the world have handled these issues in the past; regulatory regimes
What is PPP ? Why PPP ? How PPP?
Lifecycle of a PPP project
Transaction process in PPP project Award - RFQ, RFP & Concession Award
Bankability of infrastructure concessions; credit enhancement measures
Design of Concession Agreement – international best practices
International experiences in PPP
Cross sectoral examples - power generation & transmission, water & sanitation, highway, rail and airport sectors

3. Monopolies & Infrastructure
Monopolies & market power
Governments concerned about Monopolies
Infrastructure – A Natural Monopoly
Economies of scale
Durable & immobile investments
High entry barriers
No close substitutes
Public vs Private provision of infrastructure - changing trends in 19th, 20th & 21st century across countries and sectors
Establishing a credible commitment is an issue

4. Discretionary Regulation
Institutional mechanisms/instruments to handle monopolies
Private contracts
Concession contracts
Public Sector/
Government
Discretionary Regulation
Cost of Service
Competitive
Negotiated
Price Cap
Role of markets in determining prices and quantities
Adapted from Regulating Infrastructure, Jose A. Gomez – Ibanez, Harvard Press

5. Institutional mechanisms/instruments to handle monopolies contd…
Option
Benefits
Issues
Private Contract
Commitment
Risk of incompleteness
Competition: better services & lower costs
High transaction costs
Enforcement: fair legal system
Concession Contract
Trust
Discretionary Regulation
Flexible for future unforeseen changes
Risk of capture; special interests

6. Infrastructure monopolies contd…
Varied solutions over time
Market orientation preferable
Issue of commitment vs flexibility
Discretionary regulation vs regulation by contract

7. Solutions to Infrastructure Monopolies Sources of instability
Discretionary regulation - Capture
Concession contracts – Incompleteness
Options in case of incomplete contracts
Renegotiate
Live in unhappy situation – bankruptcy/poor service quality

8. What is PPP?
Contractual arrangement between government and private sector company
for provision of infrastructure/public service by private sector as per specific performance standards
against pre-determined user charges/grant by the government
Cross sectoral examples of PPPs:
Toll Roads, Water Supply, Power Generation, Power Transmission, Railway Lines, Airports

9. Characteristics of PPPs
Legally enforceable contract
Long term, typically 20 to 30 years or even more; why long term?
Investment of large resources by private sector
User charges for output and not input
Risk transfer from govt to private sector; how much risk to retain and how much to transfer?
Value for Money (VfM)

10. PPP – a network of contracts
SPV
Authority
Lenders
Construction Contractor
O&M Contractor
Escrow Bank
Guarantee Providers
Raw Material Providers
Promoters

11. Why PPP ? Need for economic growth Meet people’s aspirations
Need to build infrastructure
Limited government budget; fiscal constraints 
Bring additionality in investment 
Bring efficiency gains  
With predetermined user charges, incentives to reduce wastages and minimize costs  
Penalties for not meeting specified outputs 
Government benefitted by lower bid price in competitive bidding capturing the efficiency gains

12. How PPP? A PPP project cycle Project Concept Feasibility Study
Approval
Bidding
RFQ&RFP
Concession Agreement
Financial Closure
Construction
Operation
Transfer

13. Bid process & documents are crucial
PPPs
Large investments
Long duration
High risks
Complexities
Sub - optimal bid documents & process puts project at risk
Large effort required in beginning
Push from the top

14. PPP Bidding process Project preparation & structuring
Consultant selection – single stage, 2 envelope process
Technical Consultant
Legal Adviser
Financial Consultant
Concessionaire selection – 2 stage process
Request for Qualification (RFQ)
Request for Proposals (RFP)
Signing of Concession Agreement (CA)

15. Consultant selection is critical
Poorly structured PPP contract can compromise user interests
Technical, financial & legal issues - complexity
In house expertise not adequate/time constraints

16. Consultant procurement
Consultant procurement different from goods procurement
Combined QCBS based selection procedure
Individual experts matter more than firm
Separate consultants reqd; technical, financial, legal
TOR is important

17. Consultant procurement process
Single stage two envelope bidding process
Technical bid
Financial bid
Technical evaluation
Shortlisting
Financial evaluation
Combined score
Selection based on highest Combined score

18. Consultant Procurement
Specify time input of each expert
Discourage substitution of experts -Strong penalty
1st substitution - 20% fee reduction
2nd substitution – 50% fee reduction
team leader not be normally substituted
Link Payment to Deliverables
Final 10% payment on successful execution of Concession Agreement

19. Deciding the Bid Parameter
Option 1 – Tariff based bidding (example power purchase agreement)
Specify minimum quality of service
Award the Concession to the Bidder proposing the lowest tariff
Option 2 – Revenue sharing based bidding (example air ports)
Specify minimum service and maximum tariff
Award the Concession to the Bidder who is ready to share the maximum revenue
Option 3 – Viability Gap based bidding (eample transmission/water supply)
Award the Concession to the Bidder asking the lowest grant or offering the largest concession fee

20. Concession Agreement & Bankability
A project structured through a sound concession agreement attracts investors, leads to competition and reduces user charge or subsidy
Bankability of infrastructure projects is an issue
Non recourse financing of infrastructure projects - off balance sheet
Concession Agreement should provide support to debt financing
Termination payments
Compulsory buyout in case of government default

21. Debt financing support to PPPs in India
Creation of India Infrastructure Finance Corporation Ltd (IIFCL) in 2006
IIFCL borrows against sovereign guarantee and lends 30% to infra projects
Creation of Infrastructure Debt Funds (IDFs) in 2011
Asset Liability mismatch of commercial banks lending to infrastructure projects
Need for credit enhancement
IDFs to raise money through institutional investors, HNIs, insurance and pension funds and refinance commercial bank loans to infrastructure projects after start of commercial operation – roll over the debt

22. Concession Agreement Clauses
Scope of the Project
Grant of Concession
Conditions Precedent
To be fulfilled by Authority
To be fulfilled by Concessionaire
Damages for delay
Obligations
Of Authority
Of Concessionaire
Representation & Warranties
Performance Security
Amount
Duration
Appropriation
Release

23. Concession Agreement Clauses
Right of Way
Construction of the Project
Monitoring of Construction
Completion Date
Entry into Commercial Service (COD)
Change of Scope
Operation & Maintenance
Key Performance Indices
Availability
Reliability
Independent Engineer

24. Concession Agreement Clauses
Financial Close
Grant
Concession Fee
User Fee
Effect of variation on traffic growth 
Payment security
Default Escrow
Letter of Credit
Escrow Account
Revenue shortfall loan

25. Concession Agreement Clauses
Insurance
Force Majeure
Change in Law
Protection of NPV
Termination
Concessionaire default
Authority default
Substitution
Dispute resolution

26. PPP Concessions International experience

27. Research Study The Latin American experience Prof J.Luis Guash, 2004
Period:
Number of Concessions Analysed: 1000
Concession Period : 20 to 30 years
Concessions Renegotiated %
Electricity – 9.7%
Transport – 54.7%
Water & Sanitation – 74.4%

28. Research findings contd…. Prof J.Luis Guash
Average time to renegotiation – 2.2 years (after award)
Renegotiation in direct adjudication contracts – 8%
Renegotiation in competitively bid concessions – 46%
Who initiated renegotiations
Concessionaire – 61%
Government – 26%
Both parties – 13%

29. Research findings contd…. Prof J.Luis Guash
Issues in renegotiations
Tariff adjustments
Investment obligations and schedules
Extension of Concession
Changes in asset base for calculating rate of return
Pass through cost components in tariff

30. Latin America Renegotiation results (Guash)
Tariff increase – 62 %
Tariff decrease – 19%
Reduction in investment obligations – 69%
Acceleration in investment obligations – 18%
Increase in cost pass through in tariff – 59%
Extension of Concession period – 38%
Decrease in annual fee to be paid by Concessionaire - 31%

31. Key drivers of renegotiations (Guash)
Opportunistic behaviour of firms – aggressive bidding
Opportunistic behaviour of governments
Poor Concession design – ambiguities, inadequacy of contract provisions
Political cycles
Lack of understanding of key determinants
Carelessness
Misaligned incentives

32. Latin American Experience with PPPs World Bank Report, 2004
Private participation improved performance & led to efficiency gains in the range of 1 to 9%
63% people in 17 countries in Latin America & Caribbean believe that private participation has not been beneficial
Efficiency gain not transferred in tariff reduction; captured by renegotiation (Argentina: efficiency gain – 1 to 6%, tariff reduction 1% only)
PPP program delayed due to negative perceptions

33. Renegotiation - threat to PPP
Guash regards renegotiation as a problem, not a solution, as it vitiates bidding environment
Undermines competitive award process & public trust; welfare loss
Leads to long drawn court cases & disputes; draws attention of Audit and Investigative Agencies
Well designed Concession Agreements should provide possible responses

34. Questions ?

35. Thank You