Report PPPLessonsFromExperiences270812

|A n a l y s i s o f P P P s i n I n d i a : L e s s o n s f o r S o c i a l S e c t o r s
Public Private Partnerships in India

Lessons from Experiences
I|P u b l i c P r i v a t e P a r t n e r s h i p s : L e s s o n s f r o m E x p e r i e n c e s
April 2012
All Rights Reserved, Athena Infonomics The information contained in this report prepared by Athena Infonomics India Pvt. Ltd. is furnished for information purposes only. While every effort has been made to ensure the accuracy of information presented in the report, Athena Infonomics India Pvt. Ltd. makes no representations or warranties regarding the accuracy or completeness of such information and expressly disclaims any liabilities based on such information or on omissions there from. The material presented in the report can be used in academic or professional work with appropriate citation.
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This report has been prepared with support from the British High Commission, through its Prosperity Fund India Programme
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Public Policy Team, Athena Infonomics
April 2012
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Contents
Abbreviations ................................................................................................. VII List of Exhibits ............................................................................................ IX List of Figures .............................................................................................. IX Preface ............................................................................................................ XIII Executive Summary ................................................................................ XV
Section I Need for Private Sector Participation in Creation of Public Assets and Provision of Public Services ............................................ 3 Section II Public Private Partnerships as an Important Mechanism to Facilitate Private Sector Investment ............................................................. 9 Section III Seven Key Success Factors for Effective PPPs ......................................... 14 Section IV Conclusion and Measures for the Future ................................................ 44
Appendix .......................................................................................................... 45 References ........................................................................................................ 59
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Abbreviations
AAI ALM AP BHC BOT BOO BOOT BWSL CA CO2 CSR DBFOT DFC DIPP DPR DEA EAC EIA EIRR EMP EPC EGoM FAO FIRR GDP GOI ICICI IDBI ICT IFC IIFCL JICA MCA MoEF NGO NO2 NH NHAI NOIDA NSICT O&M PPP PRIs PURA R&R RFP SO2 RFQ SPV SSA TAMP ToR UK ULB Airport Authority of India Asset-Liability Mismatch Andhra Pradesh British High Commission Build Operate Transfer Build Own Operate Build Own Operate Transfer Bandra Worli Sea Link Concession Agreement Carbon Dioxide Corporate Social Responsibility Design, Build, Finance, Operate & Transfer Dedicated Freight Corridor Department of Industrial Policy & Promotion Detailed Project Report Department of Economic Affairs Environment Appraisal Committee Environmental Impact Assessment Economic Internal Rate of Return Environment Management Plan Engineering & Procurement Contract Empowered Group of Ministers Food and Agricultural Organisation Financial Internal Rate of Return Gross Domestic Product Government of India Industrial Credit and Investment Corporation of India Industrial Development Bank of India Information & Communication Technology International Finance Corporation India Infrastructure Finance Corporation Limited Japanese International Cooperation Agency Model Concession Agreement Ministry of Environment & Forest Non-Governmental Organization Nitrogen Dioxide National Highway National Highway Authority of India New Okhla Industrial Development Authority Nhava Sheva International Container Terminal Operations & Management/Maintenance Public Private Partnerships Panchayati Raj Institutions Provision of Urban Amenities in Rural Areas Relief & Rehabilitation Request for Proposal Sulphur Dioxide Request for Qualification Special Purpose Vehicle State Support Agreement Tariff Authority for Major Ports Terms of Reference United Kingdom Urban Local Bodies
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UMPP UNEP USA USD VGF WUA WFSL
Ultra Mega Power Projects United Nations Environment Programme United States of America United States Dollar Viability Gap Funding Water Users Association Western Freeway Sea Link
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List of Exhibits
Page Exhibit 1.1: Exhibit 2.1: Exhibit 2.2: Exhibit 2.3: Exhibit.2.4: Exhibit 3.1: Exhibit 3.2: Exhibit 3.3: Exhibit 3.4: Exhibit 3.5: Exhibit 3.6: Exhibit 3.7: Growth Drivers and Bottlenecks of the Indian Economy Types of Private Sector Participation Comparative Analysis of Features of Different PPP Definitions Comparison of Costs, Risks, Returns and Incentives of Different Stakeholders State-Wise PPP Intensity Seven Success Factors for PPP Projects Foreign Participation in PPP Projects in India Allocation of Risk and Mitigation Measures in PPP Projects Status of Provision of Basic Amenities to Public in India Taxonomy of Provision of Public Services Environmental Acts by MoEF Impact of Development of Different Infrastructure Projects on Environment 4 9 11 12 13 15 23 33 37 38 40 41
List of Figures
Fig. 1.1: Fig. 1.2: Fig. 1.3: Fig. 1.4: Fig. 1.5: Fig. 1.6: Fig. 2.1: Fig. 3.1: Fig. 3.2: Trend GDP Growth Rates of Select Developing Countries and the World Projected Trend Growth Rates in Key Economies Human Development Index (Trends from 1980 to Present) Annual Number of Mobile Subscriptions (In thousands) Annual Air Passenger Traffic in India (In thousands) Infrastructure Spending during the 11 and 12 Plan Period Sector-wise PPP Maturity Number of Projects Debt Requirement for the 11th Plan Period Regionwise CO2 Emissions by Power Sector in India (In million tonnes)
th th
3 4 5 6 7 8 12 29 43
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List of Boxes Page

Box 3.1 Box 3.2 Box 3.3 Box 3.4 Box 3.5 Box 3.6 Box 3.7 Mumbai & Delhi International Airport Nhava Sheva International Container Terminal Vizhinjam International Container Terminal Mundra Ultra Mega Power Project Delhi Noida Toll Bridge (DND Flyway) Byrraju 4P Model of Drinking Water Supply Navi Mumbai Airport 17 21 24 26 28 39 42
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Foreword
The approach paper to the Twelfth Five Year plan clearly spells out the enlargement in the role of Public Private Partnerships (PPP) in development. Until the end of the Eleventh Plan, these initiatives had been focused on building infrastructure, on the argument that private sector management, expertise and project development skills could be leveraged through Government concessions to achieve a more rapid development of infrastructure. The results have been mixed, yet the experience gained has given sufficient confidence to move the concept to the social sectors as well. This is being attempted in the Twelfth Plan. There are two reasons for this. First, there is genuine apprehension that public expenditure for capital works will be constrained by the state of finances at the centre as well as the states. Second, in areas like water supply, education and health, the private sector is already playing an important role, although entirely for commercial benefits. It therefore appears relevant to merge the twin reasons of need and availability into a national programme of using PPPs for enlarging the pace of development in the social sectors. However, the social sectors are not easily amenable to standardisation in terms of financing, execution and revenue recovery. The current paper is part of a project to develop some guidelines for implementing PPPs in three selected sectorswater, waste management and skill development. This paper is an analysis of the experience in infrastructure sectors, to draw lessons and to develop suggestions for the social sectors. The outputs would feed into further work on development of feasible models for the selected sectors. This is the output of painstaking and diligent research work, interviews and analysis, by the team consisting of Arslan, Deepa, Ankit and Saloni of the Public Policy team at Athena.
Dr. S. Narayan, IAS (retd.)

President, Athena Infonomics Former Finance Secretary, Govt. of India
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Preface
This report is the outcome of a six-month-long research activity undertaken by the Public Policy Team at Athena Infonomics, supported by the British High Commission. This represents the first phase of a larger research plan with the objective of identifying bottlenecks in the Public Private Partnerships (PPP) implemented across social sectors and arriving at policy recommendations to catalyze activities that can create social impact. India now stands at a major crossroad in its journey towards economic and social development. The last two decades of economic liberalization has resulted in improved infrastructure, standard of living and social indicators. However, these gains are heavily distorted. PPPs have now become the preferred mode of investment especially in infrastructure, which is one of the primary requirements of our economy. This report analyzes the public private partnerships undertaken in four commercial infrastructure sectors, i.e., roads, airports, ports and power, to draw out 7 key factors for a successful PPP project.
Methodology
We began with an extensive review of existing literature on issues and experiences of PPPs at both national and international level. We also collected data on several national PPP projects in the commercial infrastructure sectors. From this, our team identified 40 projects for further analysis. In order to conduct an in-depth investigation, key features of the PPP were identified Next, the different stakeholders and their respective roles and responsibilities, incentives, costs, risks and returns were mapped out. Brief case studies were created for eight PPP projects, two each in road, airport, ports and power sectors. A Round Table discussion on issues and challenges faced by PPPs was conducted on 10th November, 2011 at Chennai, Tamil Nadu which was attended by twenty-five experienced stakeholders and experts. The meeting included financiers, developers, consultants, bureaucrats and academicians. Issues that occur while executing PPP projects were discussed and possible solutions were identified. Our team handed out questionnaires to the Round Table participants and other experts and we received 25 detailed responses. In order to get a detailed perspective on the issues involved in PPP projects, several expert interviews were conducted. This report documents the outcome of the above mentioned activities that we have used to create a framework for identifying the formulae for a successful PPP project.
Public Policy Team Arslan Aziz Deepa Karthykeyan Ankit Kumar Chatri Saloni Ketan Shah
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Acknowledgements This report would not have been possible without the cooperation of the experts and practitioners of the various Public Private Partnerships in India. Their willingness to share their experiences and opinions has helped us ground this report in practical insights. In particular we would like to thank Mr. V. Ravichandar, Chairman, Feedback Consulting; Mr. B.S. Sudhanvan, Vice President -Technical Services, GVK Power & Infrastructure Ltd.; Mr. R. Raghuttama Rao, Managing Director, ICRA Management Consulting Services Ltd.; Mr. Karthikeyan T.V., Vice President-Development Projects, Larsen & Toubro Ltd.; Dr. G. Raghuram, Indian Railways Chair Professor, IIM Ahmedabad; Mr. B.S. Chakravarthy, Executive Director, Capital Fortunes Private Ltd.; Mr. Prashant Gupta, Associate Vice President Transaction Advisory Services, E&Y; Mr. Harsh Agarwal, Executive Director, Morgan Stanley; Mr. Anumolu Rajasekhar, Executive Director, International Infrastructure Consultants Ltd.; Mr. Madhu Krishnamoorthy, General Manager, Water Health India; Mr., Arvind Sagar, President- Corporate Initiatives and Planning, Marg Ltd.; Mr. R. Narayan, Regional Head Investment Banking, HDFC Bank; Ms. Thangam S., Chairperson, NTADCL; Mr. Selvaraj, Former Chairperson, Madras Port Trust; Mr. K. Rajivan, Former Chairperson TNUDF; and Commodore R. S. Vasan, Head - Strategy & Security Studies, Centre for Asia Studies. We thank our Director, Dr. S. Narayan for his constant advice and support in our work. We would also like to thank our advisors, Mr. S. Parthasarathy, former Director ICRISAT, Ms. Revathy Ashok, CEO and Founder, Iris Consulting, and Dr. A. Mahalingam, Assistant Professor, Department of Civil Engineering, IIT Madras for their guidance. We would also like to thank the British High Commission for their financial support for carrying out this study. In particular we thank Ms. Aarti Kapoor, Programme Manager, BHC, New Delhi for her constant encouragement and guidance during the project.
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Executive Summary
Section I: Need for Private Sector Participation in creation of public assets and provision of public services. Rapid economic growth High and sustained pace of economic growth is estimated for the foreseeable future. Key drivers of economic growth would be strong demand fuelled by a young demography with rising incomes. Supply side constraints like inadequate infrastructure, governance and slow pace of economic reforms are critical bottlenecks. Inclusion Poverty alleviation and provision of basic services to the poor remain high on the governments agenda. India has a dismal position in most human development and quality of life indicators. Progress on social indicators has been poor. Private sector participation to address the issues of access, efficiency and quality are essential. To meet the dual objectives of fast and inclusive growth, investments of USD 1 trillion in infrastructure are envisaged in the 12th five year plan.
performance linked returns, (iv) asset transfer back to government, (v) public nature of service, (vi) partnership tenure and (vii) outcome specifications. Analyzing Public Private Partnerships Comparison of costs, risks and returns of different stakeholders in a PPP reveals a complex web of interactions and incentives that must be carefully managed to ensure smooth coordination and functioning of the project. Risks must be allocated to the stakeholder who is best able to manage that particular risk and returns must be commensurate with the investment and risk undertaken by the stakeholder.
Section III: Seven key success factors for effective Public Private Partnerships. Seven key success factors have emerged for the effective functioning of a PPP project. 1. Strong public sector capacity to identify, structure and monitor PPP projects. This would include - a mature rationale that focuses on private sector bringing in efficiency rather than implementing a project through PPP simply because of a lack of public funds; sustained and strong political and bureaucratic commitment; clarity of role and coordination between different government authorities; technical competence for project identification, enlisting appropriate consultants and experts to conduct techno-economic feasibility studies and manage the bidding process efficiently, monitor progress and settle disputes; and consensus building across users, affected communities and civil society.
Section II: Public Private Partnerships are an important mechanism to facilitate private sector investment. Different models of Private Sector Participation Several different models of private sector participation are possible for the provision of public infrastructure. It is important to understand the specifics of PPP arrangements in the Indian context in comparison with global practices. Features of PPP that distinguish it from other forms of private sector participation are (i) private sector investment, (ii) risk sharing, (iii)
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2. Private sector capacity For private sector developers, technical competence and financial ability to design, construct and operate projects is essential. Efficiency of operations, commitment to take the project to its completion and ensuring adequate service delivery, focus on innovation and consensus building to partner with government and NGOs to enable buy-in from different stakeholders are other requirements. For technical consultants, technical competence to structure PPP projects efficiently is the most important requirement. Objectivity of the evaluation committees and alignment of incentives to include consultants as partners in the eventual success of the projects are also essential. 3. Community participation Panchayats and Urban Local Bodies (ULBs) must be involved in the planning and budgeting of the projects, while public opinion must be sought for identifying models and appropriate service standards.1 Adequate compensation must be provided to project affected people and end-users must be consulted before setting user tariffs. 4. Financing & Commercial viability Availability of adequate equity and long term debt to finance infrastructure projects is an essential requirement. Commercial viability of different sectors varies, and the governments budgetary support must be commensurate to the commercial viability of the sector.
5. Risk sharing The long gestation period of infrastructure projects makes management of risks especially challenging. Exhaustive identification of risks throughout the project lifecycle, allocation to appropriate entity, pricing of risks and mitigation mechanisms are necessary. 6. Social inclusion Universal access to drinking water, sanitation, primary education & public health that is affordable to people of all economic strata is necessary. While this is less of a concern for commercial infrastructure projects, past experiences have emphasized the importance of incorporating social inclusion in a projects planning and implementation especially for projects in the social sector. 7. Sustainability While provision of adequate infrastructure is essential, it is also important that this provision is done in a sustainable manner, without compromising the environment for the current population or future generations.
Section IV: Conclusion and Next Steps. While evidence of the success of PPPs is mixed, they still have the potential to play an important role in delivering much needed public infrastructure and services. Realised results vary from potential due to structural and institutional inefficiencies that need to be addressed. Potential of PPP in addressing the issues of access, quality and equity for social services needs to be evaluated.
Panchayats refer to a system of governance prevalent in rural India since ancient times. The 73rd Constitutional Amendment Act, 1992 conferred constitutional status to Panchayats. It is the third tier of government below the state government.
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Section I
Need for Private Sector Participation in the Creation of Public Assets and Provision of Public Services
India embarked upon major economic reforms in 1991 following the balance-of-payments crisis that was the result of decades of Protectionism, License Raj, Import Substitution, State intervention and Central Planning. The solution adopted for the balance-of-payment crisis was to start a long-term process of fundamentally restructuring the economy, i.e. opening sectors for international trade and investment, deregulation, initiating privatization, tax reforms and inflation-controlling measures.
Rapid Economic Growth

As a consequence of the economic reforms, India witnessed a period of sustained economic growth. Since the turn of the century, Indias GDP growth rate has been varying between 6.5 to 8.5 %, consistently outpacing the world average, and thus elevating itself to the 9th position in terms of absolute GDP and 4th position in Purchasing Power Parity terms. Fig. 1.1: Trend GDP Growth Rates of Select Developing Countries and the World
16 14 12 10 8 6 4 2 0 -2 -4
2000
2001
2002
2003 India
2004 Brazil
2005
2006 China
2007
2008
2009
2010
World
Source: GDP growth (annual %) from 2000 to 2010, World Bank national Accounts data, and OECD National Accounts data files, World Development Indicators, World Bank Data, World Bank.
The targeted GDP growth for the Eleventh Plan (2007-08 to 2010-11) was 9 %, but in the first four years of the Eleventh Plan, the GDP growth averaged 8.2 %. This drop in the expected growth has been explained as the impact of the global recession in 2009. However, compared to other countries, the impact of the recession was much lower in India. This suggests that Indias GDP growth is fuelled by the domestic consumption of a large and growing workforce and one of lowest dependency rates in the world.2 This growth is expected to continue for the next couple of decades if backed by strong macroeconomic fundamentals. Continued economic reforms, development of a dynamic private sector and development of skills for the young and growing population are other factors
2
The Government of India aims to reduce dependency ratio to 0.59 by 2011, from 0.73 in 2001. Please refer to http://www.financialexpress.com/news/lower-dependency-ratio-more-jobs-for-one-andall/278352/ for further details.
that would ensure this trend growth. According to studies conducted by experts, India is stated to be the worlds 3rd largest economy by 2025.3 Fig. 1.2: Projected Trend Growth Rates in Key Economies
% Real GDP Growth
India China Brazil Russia US UK Japan
2021
2033
2007
2009
2011
2013
2015
2017
2019
2023
2025
2027
2029
2031
2035
2037
2039
2041
2043
2045
2047
Source: Hawksworth, John &Gordon Cookson, Fig. 3- Projected Trend Growth Rates in Key Economies, P. 10, The World in 2050 Beyond the BRICs: a broader look at emerging market growth prospects
Exhibit 1.1: Growth Drivers and Bottlenecks of the Indian Economy Growth Drivers - Strong Macroeconomic Fundamentals
- Impact of economic reforms - Growth of a vibrant private sector - Development of human resources
Bottlenecks
- Availability of energy - Slow improvement of farm output - Lack of sufficient infrastructure for industry and public - Land acquisiton difficulties for infrastructure and industry - Lack of governance, transparency and political will
Inclusive Growth
While performance in terms of the pace of growth has been satisfactory in the last decade, it has been weak at best in terms of inclusiveness. The difficulty begins with defining inclusiveness itself. Inclusiveness has many components and it is hard to have a single number
Please see, http://articles.economictimes.indiatimes.com/2011-08-22/news/29915163_1_gdp-largesteconomy-growth-target.
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that measures it. At the very least, it consists of the alleviation of poverty, access to adequate healthcare and education, employment opportunities and access to basic amenities like electricity, water, sanitation and housing. Other dimensions of inclusiveness would include socio-economic integration of historically deprived castes and communities with the mainstream, gender equality for women and respect for rights of children, senior citizens and the differently-abled. Comparing Indias performance on the Human Development Index4 (HDI) demonstrates two features the size of the gap between Indias score and the world average, and the persistence of this gap. India has made little progress in catching up with the rest of the world in terms of human development. Fig.1.3: Human Development Index (Trends from 1980 to Present)
0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 India Source: HDI Report, UNDP (2011) Medium human development World
There are several factors responsible for the continued poor performance of India in the human development indicators. One of the main reasons would be the inherent beliefs, customs and cultural traditions of the people that have evolved and survived through centuries and hence are usually resistant to modernity or else take a long time to change. It is sometimes uncertain whether the amount of money spent by the government on creating social programmes, schemes and initiatives for levelling the playing field for all citizens, irrespective of caste, gender and socio-economic status really brings about the expected changes in the society. Yet there are other aspects of inclusiveness that are more easily addressable and amenable to change, such as creation of social infrastructure to provide access to electricity, water, sanitation, healthcare and education. However, even these services have seen a great level of disparity - with the economically well-off sections of the society having more access to such amenities while people at the base of the economic pyramid struggle to survive without these basic necessities. For example, while private schools and hospitals provide excellent services to
4
HDI is a composite index that measures average achievement by an individual in three basic dimensions of human development a long and healthy life, knowledge, and a decent standard of living. See, HDI Report 2011, UNDP, for further details.
those who are able to pay for them, the government-run schools and hospitals, upon which a very large section of the population depend, are characterized by rampant absenteeism and lack of accountability.
Role for Private Sector

The argument against the participation of private sector in providing basic services such as water, sanitation, healthcare and education is that they would charge high prices for such services because they are profit-driven. This would make them unaffordable to a large segment of the population. Experience, however, has been different in some cases, e.g., opening up the aviation and telecom sector to the private sector. Earlier, both airlines and telecom were state monopolies and were characterized by limited capacity, poor services and high prices. But with the entry of private sector operators, there has been an unprecedented growth in mobile coverage and penetration across economic and geographic strata. Competition within private sector operators for price sensitive customers has resulted in cost efficiencies being created and passed on to customers with the result that India has one of the lowest call rates in the world.
Fig. 1.4: Annual Number of Mobile Subscriptions (In thousands)

6,00,000 5,00,000 4,00,000 3,00,000 2,00,000 1,00,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Number of Mobile Subscriptions from 2000 to 2009, International Telecommunication Union, World Telecommunication/ICT Development Report and database, World Development Indicators, World Bank Data, The World Bank.
The aviation sector has seen a similar growth in reach and increase in affordability. Domestic carriers have multiplied and witnessed competition for attracting customers by offering better services and cheaper fares. Fig. 1.5: Annual Air Passenger Traffic in India (in Thousands)5
60,000 50,000 40,000 30,000 20,000 10,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Air Transport (Passengers Carried) from 2000 to 2009, Civil Aviation Statistics of the world and ICAO staff estimates, World Development Indicators, World Bank Data, The World Bank.
The cases of the telecom and aviation sector clearly illustrate that contrary to popular perception, the private sector can deliver substantial improvement in reach, affordability and quality of service if they are properly organized. Yet there are caveats to expecting such performance in the delivery of public services. Both telecom and aviation are characterized by a high degree of competition and low switching costs for the consumers. Also, the nature of competition for providing public services is substantially different. Competition can occur amongst various private developers for winning different projects by offering services at the lowest cost, but once a project is won, the private developer has a monopoly over the public asset for the duration of the concession period. Need for Private Sector Investment The government has recognized the importance of private sector investment in infrastructure and social sectors. This is reflected in two significant changes in the 12th Five Year Plan from the 11th Five Year Plan (i) the total outlay for infrastructure in the 12th Five Year Plan is twice that of the outlay in the 11th Five Year Plan, and (ii) the percentage share of private sector investment is expected to grow to 50 % in the 12th Plan compared to 30 % in the 11th Plan.
Air Passengers carried include both domestic and international aircraft passengers of air carriers registered in the country.
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Fig. 1.6: Infrastructure Spending during 11th and 12th Plan Period
11th plan
INR Lakh Crore 20.6 7.7 6.7 6.2
Sector-wise breakup
Gas
Telecommunications
Airport 956,510 Ports
Water, Sanitation & Irrigation
Power
666,525 Roads Railways
Total
Central
State
Private .
12th plan
INR Lakh Crore
Sector-wise breakup
Gas
42.7 12 9.7 21
2,265,307 Airport
Ports Water, Sanitation & Irrigation
Telecommunication
Power
1,289,946 Roads Railways
Total
Central
State
Private
Source: 11th Five Year Plan and Draft 12th Five Year Plan documents, Planning Commission, GOI.
There is, thus, a growing acceptance of the need for private sector participation in infrastructure and social sectors. In the next section of the report, we will discuss the features and advantages of PPP that makes them an attractive mode for private sector participation.
Section II Public Private Partnerships : A Crucial Mechanism to Aid Private Sector investment
Different models of PPP
Private sector participation in public services can take many forms. Each form differs in the degree of responsibilities shared by the private and the public sector. They vary from service contracts where the private operator is assured of a fixed payment on providing a service, to full-fledged divestitures where erstwhile public sector companies have been privatized. Some of the many parameters on which such modes of participation vary are design, build, finance, own, operate and tenure. In Exhibit 2.1, we plot the different models of private sector participation on two parameters ownership and operation between public and private sector.
Exhibit 2.1: Types of Private Sector Participation
Public Private Partnerships Features: Comparison with Global Practices

A survey of different definitions and policies regarding PPP shows that although there are several common features in most of the definitions, some of them are customized to fit certain constraints and objectives of the entity formulating the definition. In this section, we have listed seven features of the Indian definition of PPP drawing attention to the particular nuances that are distinct or receive special attention in policy documents. At the end of the section, we have compared the emphasis on these seven features in other international definitions of PPP.
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Private Sector Investment

The most compelling feature of PPP is its potential to mobilize private capital to overcome the shortage of public funds and meet the investment needs in commercial infrastructure and social sectors. The Indian definition, however, does not require that the private sector investment be necessarily financial. Non-financial investments, through management expertise or intellectual property are also viewed as investments, and hence fall within the ambit of PPPs. This opens up a range of PPP modes, with varying degrees of private sector participation, and this flexibility makes PPPs applicable and viable for a variety of sectors. For example, providing drinking water supply to the poor, either urban or rural, is not a commercially viable scheme, if the cost of sourcing, treating and distributing water, are to be recovered from the public. Instead, in such cases, a PPP annuity model can be implemented, where the government selects and transfers this responsibility of providing drinking water to a private operator at a free or subsidized rate. The government then provides the operator a fixed annual payment for this service. The private operator uses his own resources financial, managerial, technical and human - which can be viewed as investments, to provide water.
Risk Sharing
Transfer of risk to the private sector is another important feature of PPPs that makes it attractive for public sector entities. Yet, the focus should be on risk sharing instead of transferring risk, with risks being allocated to the entity best able to manage or mitigate that risk. While policies and definitions emphasize the importance of efficient and effective risk sharing, the gap between these policies and its implementation remains particularly large. Effective risk sharing is one of the factors for the success of a PPP project. This aspect is covered in detail in the next chapter.
Performance-Linked Returns
The difference between a service being contracted out to a private contractor and a PPP is the aspect of performance-linked returns in PPPs. A fixed service contract prevents the private contractor from exceeding the minimum performance benchmarks specified in the contract. On the other hand, a contract that links returns to performance incentivizes the private contractor to exceed minimum benchmarks and get rewarded for additional value generated.
Transfer of Asset Back to the Government

A PPP project is characterized by a fixed tenure for which the rights to develop a particular public asset and provide public services are assigned to a private developer. At the end of this tenure, known as the concession period, the private developer must necessarily transfer the ownership of the asset back to the public sector entity. The length of the concession period is a parameter that is usually prescribed by the project sponsoring authority, and is usually range-bound for a particular sector. For example, longer concession periods are typical of assets that have a long life e.g., roads, so that the recovery of the project costs can be spread over a longer period.
Public Nature of Service

PPPs are typically limited to sectors and services that are defined as public goods. In the Indian context, goods and services that have traditionally been supplied by the government, or are expected to be supplied by the government, are included within the ambit of PPPs. However, there have been experiences of public sector support in the creation of assets and provision for
services that are primarily for private use examples include captive power plants, IT parks and tourism projects that are owned and operated by private companies.
Exhibit 2.2: Comparative Analysis of Features of Different PPP Definitions
Source: Compiled from Approach Paper on Defining Public Private Partnerships- Discussion Note, MoF, DEA, GOI, (2010), Promoting Infrastructure Development through PPPs: A Compendium of State Initiatives, MoF, DEA, GOI.
Analyzing Public Private Partnerships

An important issue in PPPs is the multitude of stakeholders with often differing incentives that need to collaborate and coordinate their actions to ensure the success of the project. A lack of commitment, absence of clarity of role or a lack of technical competence of any one of the stakeholders can jeopardize the project, and adversely affect all the other stakeholders. The government, while being a partner in the project, must play a more central role than the other stakeholders. This additional burden of duty falls on the government due to the fact that the responsibility of providing public goods resides traditionally with the government. It is the governments duty to ensure that if this responsibility is shared with other agents then the outcomes achieved should be beneficial for the public. The government also has the ability to regulate and govern the other stakeholders by its law-making authority.
12 | A n a l y s i s o f P P P s i n I n d i a : L e s s o n s f o r S o c i a l S e c t o r s Exhibit 2.3: Comparison of Costs, Risks, Returns and Incentives of Different Stakeholders
Public Sector
Cost Incurred Return/Benefit
Lenders
Cost Incurred Return/Benefit
Project Identif ication Monitoring
Fulf ilment of mandate to provide public inf rastructure

VGF Debt Protection
Cost of capital Opportunity Cost
Return on investment
Risk Borne
Risk
Political Risk? Regulatory Risk? Residual Asset value risk
Financial viability risk Currency Risk? Asset liability tenure mismatch
Tax Public/User
Debt Private developer
Repayments
Cost Incurred
Return/Benefit
Cost Incurred Opportunity cost of investment Debt repayments Technical & human resources Risk Borne
Financial risk Development risk Operation risk Technology risk Non-political force majeure risk
Return/Benefit
Tax User charges Displacement
Risk Borne
Environmental/ social impact Exclusion
Usage of quality inf rastructure Time and cost savings Employment opportunities Improved living standard
Access
Return on investment Increased technical competence Enhanced brand equity
User charges
Current Status of Public Private Partnerships India has seen varied traction in developing projects through PPP modes. In some sectors, such as roads, PPPs have been established as the preferred mode of development, and several projects are in the pipeline. Fig. 2.1: Sector-Wise PPP Maturity Number of Projects
Source: Compiled from data available in Status of implementation of PPP projects in India as of July 2011.
Geographically too, there has been a wide disparity between PPP investments. Mapping the PPP Investment Per Capita (which measures the PPP intensity), shows that the southern and western regions have greater investments in PPPs. North eastern states of India have low PPP intensity, although Sikkim is an exception due to the existence of a large number of micro-hydel power projects. Low-income states have a PPP investment per capita of ` 3,907 which is almost half of the average for the rest of India. Exhibit 2.4: State-Wise PPP Intensity
Source: Compiled from data available in Status of implementation of P PP projects in India as of July 2011.
This disparity among PPP investments is due to several factors that are required for successful development of projects in the PPP mode. In the next section, we have listed seven key success factors of successful PPP projects.
Section III Seven Success Factors For Effective PPPs
Even though we have established that the private sector participation in commercial and social infrastructure is necessary and that the PPPs are an important mechanism of structuring such participation, it is essential to recognize that PPPs are not the only solution for Indias infrastructure woes. The responsibility of providing infrastructure lies primarily with the government and PPPs must not be viewed as a mechanism for transferring that responsibility to the private sector. PPPs, by their very nature, involve cooperation and coordination among several entities whose interests and objectives often diverge. PPP projects themselves are highly challenging as they include long gestation period and project life with numerous risks involved that keep changing over the projects lifecycle. PPPs also involve multiple dependencies across stakeholders and uncertainty in forecasting demand, which makes the management and execution of a successful PPP project very demanding. A committed government, an informed and active community and a competent private sector with financial and managerial capability are the primary ingredients for a successful partnership program. Availability of long-term funds, exhaustive identification and optimal allocation of risks and appropriate pricing are essential for smooth coordination amongst stakeholders. Finally, the social and environmental impact of the project must be carefully managed. The key success factors identified and presented in this section are categorized into three types: 1. Stakeholders Roles responsibilities, competencies and commitment of the public sector, private sector, financiers, consultants, end-users, community and civil society. 2. Interaction financing, revenue generation and risk-sharing among stakeholders. 3. Project Impact social inclusion and environmental sustainability.
Exhibit 3.1: Seven Success Factors for PPP Projects
1. Strong Public Sector Capacity and Commitment to Identifying, Structuring and Governing of PPP Projects
The responsibility of providing public infrastructure and services is entrusted primarily to the government. With the emergence of a strong and vibrant private sector over the past two decades, there is a need for a strategic shift in the role of the government in implementing PPP projects. Instead of being driven by financial constraints, the government should position itself as a partner as well as an overseer of the activities being undertaken. For such a role, the government needs to strengthen its governance capabilities which include accurate identification, proper structuring and vigilant monitoring of the projects. We have listed out five features that characterize strong public sector capacity: (i) Mature Rationale The initial need for implementing PPPs was due to the lack of public funds for investment in infrastructure. PPPs presented an attractive, and in many cases, the only route for raising money for public infrastructure. External support was given by funds received from multilateral agencies that were conditional on the involvement of private sector through a partnership model. Since then, commercial infrastructure sectors have matured considerably. Though the main reason for implementing PPPs is still the shortage of public funds, there is now an additional motive, which is to enhance the quality being delivered through implementing a project through the PPP mode. This is also to gain a footing among policy makers and bureaucrats. A focus on efficiency, quality of service and appropriate allocation of risk can deliver value for money. Private sector participation, however, is more expensive compared to the governments as government can raise funds from markets at a lower cost compared to private sector due to the absence of any associated risk with governments borrowings. This means that the higher cost of private sector participation must be compensated by harnessing the operational and managerial efficiency of the private sector in order to improve the quality of the product or service created for the public. The inclusive growth objective of the government calls for providing quality services to the most economically and socially deprived sections of the country. Social sectors, like water supply and sanitation, public health, solid waste management, and education are plagued by poor infrastructure facilities and services.6 PPPs can be harnessed to improve access and quality of basic amenities and other services. It must nevertheless be noted that the involvement of PPPs in the social sector is still at a nascent stage.7 Implementing projects in the PPP mode for social sectors must be done for two reasons first to provide widespread access and second, to improving the quality of services. Given the essential nature of these services and the vast discrepancies in the purchasing power of different
The country faces a shortage of around 2,433 doctors of 23,673 required for total; 6148 positions were lying vacant as on 31st March, 2010. Please see State-wise Number of Allopathic Doctors at Primary Health Centres (PHCs) in India, Ministry of Health & Family Welfare, GOI, (2010). The teacher -student ratio in lower primary schools and middle schools was 42 and 34 respectively in 2005. Please see Access to Elementary Education in India: Country analytical Review, R. Govinda et al. NUEPA, (2008). 7 As on 31st July, 2011, only 17 and 8 projects were awarded on PPP mode in education and health care, respectively with a combined total project cost of ` 3,683 crore. See PPP Projects Status Report, on PPPs in India, DEA, Ministry of Finance, GoI, 2011.
6
socio-economic segments, it is essential that the government play a more prominent role in financing these projects through budgetary support8. The current expenditure of these services is expected to increase significantly in the forthcoming period of the 12th plan. As discussed before, PPPs should be seen as a mechanism to increase the efficiency and effectiveness of this expenditure by leveraging private sectors technical and managerial expertise.9 Box 3.1 Mumbai & Delhi International Airport
July - AAI Amendment Bill for modernisation of Airports was passed Dec Appointment of ABN Amro as a Financial Consultant June 4th as the last submission date for EoI
On 15th, the new Govt made policy changes (FDI of 49% within 74%) Appointment of Global Transaction Advisor, Legal Consultant and Accounts & Tax Advisor
June Final Bids to be submitted
Sept Bid Date extended
Dec. Revised Evaluation Constitution of Committee of Secretaries and Group of Eminent Technical Experts (GETE)
Feb Allegations against AAI and Union of India by Reliance Airport Developers Pvt Ltd.
2003
Sep .Approval by GoI for a Joint Venture to be formed Feb Invitation to register for Expression of Interest (EoI)
2004
Jul yExtended dates of submission April Request for Proposal and Transaction Documents issued to Pre-Qualified Bidders
2005
Aug Transaction Documents finalised Nov - Evaluation Committee reported the Planning Commission
2006
Jan Submission of reports by GETE
Privatisation and modernization of the Mumbai and Delhi International Airports was being discussed by the government since 1996. In 2003, Airport Authority of India finally agreed to modernize them, following which the bidding process was initiated. This project is one of the initial steps undertaken by the government towards the privatisation of the airport sector. Earlier the Cochin International Airport was developed in 1991. However, in the case of Delhi and Mumbai, the lack of experience in this sector resulted in issues during the bidding phase. A greater emphasis was laid on the financial parameters of the bidders instead of the technical expertise. Moreover, the RFP and other bid documents were not clear on several aspects. This resulted in multiple pre-bid meetings, though carrying out several meetings with bidder is helpful as it reduces occurrence of disputes in future like the different interpretation of legal terms by contracting parties. Further, bias of the Evaluation Committee towards some private sector companies was also reported in the media. However, some curative measures were taken later, and a model RFP was provided and procedures for selection of Evaluation Committee were undertaken.
(ii) Sustained Political and Bureaucratic Commitment Infrastructure projects are complex owing to the long project life and different kinds of risks involved in the different phases of a project. Even the period from the announcement of a project to its approval can take several months. It has been observed that any political regime change can cause severe delays or even termination of projects. Hence, a sustained commitment from the government is necessary to ensure that the projects are not put at risk due to the difference in political ideologies of different ruling parties. The Airport Authority of India (AAI) board approved the modernization of Delhi International Airport in 2003, but change in the Central government delayed the implementation of this project as the Empowered Group of Ministers (EGoM) was reconstituted in 2004. The project was finally approved only in 2006. See Box 3.1.
The draft National PPP Policy, 2011 states that annuity models would be undertaken in social sectors. Please see p.6 of the Draft National PPP Policy, 2011, DEA, Ministry of Finance, GoI. 9 Please see, http://www.thehindu.com/opinion/Readers-Editor/article2311139.ece
8
Infrastructure should be built based on a robust and well-planned vision document. This will help to adopt a coherent and comprehensive action plan for the integrated development of infrastructure across all sectors. Gujarat has a vision documents titled Big 2020 which attempts to put together a comprehensive view of programmes and projects which are aimed to raise the state to a new level of development. The document goes beyond the five year planning process and links individual projects of each department into an integrated program for the state. It also schedules projects in line with the states priorities.10 If such vision documents could be prepared for each state and for the centre, it could help in creating an infrastructure agenda for the entire country that is to some extent predictable by the stakeholders. Several state governments and the central government have been putting appropriate institutional and regulatory framework towards this end. The draft National PPP Policy aims to create a comprehensive framework for formalizing PPPs as the preferred form in sectors like roads, airports, power, etc. where such partnerships have earlier been successful. At the state level, varying degrees of commitment towards PPPs can be observed. The disparity in the presence of PPP policy/guidelines, financial support to PPP projects by governments and in the presence of operational PPP projects in different states show the different levels of commitment that the different state governments have towards PPPs. Some states, like Gujarat, Maharashtra and Andhra Pradesh have both PPP acts/policies and several PPP projects that are either in the implementation or in the operational stage. A few states like Uttar Pradesh do not have a PPP Act or Policy but still have PPP projects. Other states like Mizoram have neither a PPP law nor a state PPP project. Some of the delays faced while executing PPP projects include, land acquisition delays, delay in obtaining environmental and other clearances and delays in the release of funds.11 These issues can be solved if there is a consistent, sustained, political and bureaucratic commitment from the government. There has been a trend of increasing commitment from the central government towards PPPs. This can be determined from the fact that the central government has set a progressively increasing target of financing total infrastructure needs through private participation including PPPs during each subsequent Five Year Plan. The 10th Plan had targeted 20 % of the investment in infrastructure projects to be mobilized by the private sector which grew to 30 % in the 11th Plan and 50 % in the 12th Plan.
(iii) Capability It is necessary that the strong commitment of the government is supported by its strong implementation capability. This should be duly reflected in its ability to identify the project, its technical expertise to rightly structure the project, and put in place suitable governance and monitoring mechanisms.
Please refer to Review of Blueprint for Infrastructure in Gujarat (BIG 2020) Final Report, GIDB, (2009). 11 For example, Sasan Ultra Mega Power Project was delayed as the captive mines allotted to it were under the MoEF No-Go zone. Similarly, progress on Navi Mumbai International Airport was delayed as construction of an airport in Navi Mumbai was not a permissible activity under Coastal Regulation Zone notification of 1991. Further, the construction of the airport would have resulted in a loss of 98 hectares of mangroves.
10
The projects identified should fit the countrys overall sectoral strategy and policy framework. It is also important to identify the need for a particular project rather than identify the project itself, especially when it involves the social sector. A large number of projects, mostly in the commercial infrastructure sectors are identified through a top-down approach where the state identifies projects and implements them with limited consideration of the needs and aspirations of the people. In order to prevent this, a bottom-up approach could be adopted, where the demand for projects comes from the people and government executes them with the involvement of the people. For example, the people can decide if a metro rail or a fleet of highcapacity buses would be more helpful in addressing their transportation problem. A holistic plan would be a combination of both the top-down and the bottom-up approach which could be connected to the national/state level master plan. In order to prevent and eliminate unplanned and impractical plans, the project identification process should be properly structured. This could also prevent the haste in awarding projects for political gains. A list of identified projects should be made public so that people themselves can agree upon the kind of approach required to undertake the project. Moreover, it would also enable the private sector to assess the potential market. The PPP arena in the country has witnessed a mix of successful and failed projects which has raised concerns about the usefulness of such projects. There are successful projects that could be emulated like the Bhiwandi Electricity Distribution Franchise, Alandur Sewerage Project, Amritsar Inter-City Bus Terminal etc. However, projects like Delhi-Noida Tollway, DelhiGurgaon Expressway, Vadodara-Halol Toll Road Yamuna Expressway, Nhava-Sheva International Container Terminal, Gangavaram Port, Vizhinjam Port etc., encountered problems during project preparation and development phases.12 This is primarily because the government adopted a project-based approach towards PPPs. The lack of planning and integration of the project plan with the regional plan and other plans have resulted in a mixture of both successful and failed projects. It is always good to look at the big picture and formulate projects using a programmatic approach. For instance, power generation projects often face operational delays because of delays in supplying the required transmission and distribution mechanisms or establishment of appropriate fuel linkages. Another example would be the Bangalore International Airport where the road connecting Bangalore city to the airport was not ready even though the airport was ready for operations. Poor structuring of a project is one of the primary reasons for its failure. The current method of structuring projects is based on the preparation of a Detailed Project Reports (DPRs) by consultants selected and appointed by the government. It is therefore, crucial that the government maintains objectivity and transparency in selecting consultants who have the required sectoral expertise. While selecting consultants it is important to see if the consultants have a track record of successfully structuring projects. The financial bid should be of secondary importance. In India, the project development cost is much lower compared to global standards. In India, only 2 % of the project cost is spent on the Detailed Project Report whereas it is around 5 % and between 6-9 % in UK and USA respectively.13 This cost should be increased to ensure that the project does not suffer due to cost-cutting in the project structuring phase.
See, toolkit.pppinindia.com/highways/module3-roiewp-intro.php?links=roiewp1&links1=roiewp2. Please refer to Building India: Accelerating Infrastructure Projects, McKinsey & Company, 2009, for further details.
12 13
Government should also be capable enough to evaluate the inputs provided by the appointed consultants. It should have adequate technical expertise in appropriately structuring the legal documents pertaining to the project. This would ensure that the government officials successfully negotiate the terms of the concession agreement with their counterparts in the private sector. Standardization of contracts at the national and state level based on international standards would allow interpretations of the contracts in a consistent way thereby leading to lesser occurrences of disputes. Rigorous training of government officials at all levels who are associated with PPP projects is important. Monitoring & Governance For effective governance, the regulators should be empowered sufficiently. If the regulatory authorities only have the power to determine tariff rates and no power to set and enforce performance standards or other measures in order to protect the users interest, then their role is limited and of little help to the society. Please refer to Box 3.2 for an illustration. Thus the government also has the responsibility of establishing strong regulatory bodies. Though there are regulators in the commercial infrastructure sectors, their independence is often questioned, as the government is both the stakeholder and the regulator. There have been suggestions that the government should not be part of the governance mechanism to prevent a conflict of interests. In social sector projects, there is no regulatory body at the apex level. If PPPs are to be adopted at an increasing rate in these sectors, there is a need to establish independent regulatory bodies at the apex level to standardize the development of projects. Proper monitoring mechanisms ensure accountability of both the private and public sector. At present, the monitoring of projects, in many cases is entrusted to different agencies and it is not clear what aspect of the monitoring is done by which agency. For example, in a state sponsored project, where some component of the Viability Gap Funding (VGF) is also supported by the central government, the monitoring is done by the PPP cell at both the central and state level. However, the division of monitoring responsibility is not very clear to the stakeholders. Normally, an Independent Engineer (a consultancy firm) is the monitoring authority entrusted with the responsibility of a fair, amicable and quick settlement of disputes. The selection of an independent engineer should also be based on a transparent and competitive process. The responsiveness of the monitoring authority in the social sector projects is even more critical than that in the commercial sectors. Also, wherever possible, community or civil society representatives like the Resident Welfare Organizations or Aanchal Samities, should be encouraged to be a part of the monitoring process.14
Aanchal Samiti also called as Intermediate Panchayat is the second tier of Panchayati Raj System in India. Its members are elected members of the public. For further details see, http://arunachalpradesh.nic.in/panchayat/html/pachayat.htm
14
Box 3.2 Nhava Sheva International Container Terminal
The Nhava Sheva International Container Terminal, a major container handling facility on the western coast of India is the first private container terminal of the country. The events that unfolded during the development of the landmark project highlighted the need for a strong regulator. The Tariff Authority for Major Ports (TAMP) the apex body for major ports failed to review port tariff and was not able to monitor the private consortiums revenue flow that resulted in accrual of monopoly rents to the latter. The private player enjoyed benefits by passing the burden to the users. TAMP was seen to be a weak regulator as its role was restricted to setting tariffs and revising them. It was not entrusted with the task of assessing performance of the private player and securing interests of the users.
(iv) Clarity of Role Very often, different bodies from different levels of the government are involved in the various stages of a project. This necessitates exact specification of the roles of the involved bodies, especially their roles in legislative and other powers. Delays in getting regulatory approvals are often caused due to the lack of adequate information among the departments. The construction of the Yamuna Expressway faced substantial delays in obtaining regulatory clearances as the three government bodies, the government of Delhi, the government of Uttar Pradesh and New Okhla Industrial Development Authority (NOIDA), a local authority, involved in this project lacked proper co-ordination. The Provision of Urban Amenities in Rural Areas (PURA) program for rural development that has been re-launched during the 11th Plan also requires effective coordination among the government bodies involved.15 This program is a converging point for the schemes proposed by the Ministry of Rural Development, and other ministries like the Ministry of Renewable Energy, Ministry of Panchayati Raj etc. For successful operation of PURA, it is essential that each ministry and department is aware of its role and responsibility. (v) Consensus Building While there is a broad consensus on the need for PPPs in commercial infrastructure sectors, the appropriateness of PPPs in social sectors, like water supply, solid waste management, and public health are still a point of debate in public perception. Even if a PPP project is implemented, it is the responsibility of the government to bring the issues involved with the project in a public forum. Most of the projects are identified by the ministries concerned at
The PURA program was initially launched by Central Government in 2003 in 7 villages as pilot projects.
15
both central and state level and are evaluated by an apex body constituted for the purpose. Currently, the government starts interaction with the public only at the onset of land acquisition process by way of issuing notices to the landowners. It would be more appropriate if the government first interact with the users about the projects, and dispel the doubts of the people regarding the potential loss of land and livelihood. It is important to share the plan with the public, seek suggestions and incorporate changes if necessary. ICT has greatly enhanced the scope of interaction between the government and the public. Apart from reducing the time and cost of interaction, it is also user friendly. Now the government can make increasing use of this medium to seek suggestions, feedback and grievances from different stakeholders and take the required decisions based on this information. A very contemporary example is of the NHAI using Facebook as a platform to address the concerns of users by giving an opportunity for developer-user interaction. The Planning Commission has also initiated an online forum to invite suggestions and opinions from common people on planning priorities.
2. Private Sector Capacity

Infrastructure development in India has demonstrated the competence of the private sector over the last two decades. Though capacity building is a continuous process, the private sector has displayed its ability in sectors like road, airports, power and ports. Despite this, there have been instances of failure and the underlying causes need to be addressed to prevent such cases. The government has initiated several steps to provide a conducive environment to the private sector in these areas. For instance, the government has adopted the competitive bidding process to give equal opportunity to all companies in the private sector. It has also attempted to standardize the PPP procurement framework by issuing Model Concession Agreements (MCAs) for the commercial infrastructure sectors that serves as guidelines for sharing of responsibilities between the government and the private sector. India Infrastructure Finance Corporation Limited (IIFCL) has been set up to look after the financial needs of the PPP projects. Private sectors must convert these opportunities to benefit themselves and the users. Moreover, their involvement in infrastructure development should not just be for the bottom-line but should also focus on the socio-economic development of the country in a sustainable and inclusive manner.
a) i.
Private Developers Technical Competence:
The scale of investment is usually very large in infrastructure projects, with returns spread over a long horizon. The private sector should have the ability to manage the financial risks arising out of the long gestation period of projects. At present, the competence of the private developers varies across sectors. In the roads sector, domestic competence has been established to an extent, but airports and ports also involve participation of foreign companies for either technical or financial reasons. Some such examples are the Hyderabad Airport, Ganagavaram Port and Jegurupadu Phase I Power Project. Exhibit 3.2: Foreign Participation in PPP Projects in India S/N 1. 2. 3. 4. Project Delhi International Airport (P) Ltd. NSICT Gangavaram Port DND Flyway Foreign Partner Frankfurt Airport Services Worldwide Malaysia Airport Holdings Behrad P&O Australia Ports Konsotium Perlapalan Behrad DBC Group of Companies Warburg Pincus (30%) Asian Infrastructure Mezzanine Capital Fund Primary Reason Technical Technical Financial Financial
Source: Compiled from various reports, case studies, and newspaper articles.
ii.
Engineering Efficiency
An increasing number of complex projects are being undertaken in the PPP mode. Apart from the enormous budget required to execute these projects, there is also a need for sophisticated and state-of-the-art technology. Some of the complex projects undertaken by PPP include the Metro Rail projects, International Airports, Ultra Mega Power Projects (UMPP), etc. Compared to the international standards, Indian private developers have weak skill set in risk management, engineering, procurement and construction. Also, the application of value engineering and lean construction principles is very low in India.16 iii. Social Commitment
Commitment of the private sector towards the project is vital for establishing a reliable longterm partnership. The commitment of the developer needs to be an all-inclusive one from efficient delivery of the project within stipulated cost and time to adequate R&R measures for both natural and human resources. In the case of Vizhinjam Port Development project, the private developer backed out of the project at a very late stage which led to re-starting of the entire bidding process resulting in loss of both time and money. See Box 3.3.
16
Building India Accelerating Infrastructure Projects McKinsey & Company, 2009.
Box 3.3 Vizhinjam International Container Terminal

Aug An Indo-Chinese firm which won the bid was denied security clearance by Central Govt. July- Strategic Advisor and Technical Consultant appointed. June Consortium led by Lanco won the bid. Lanco backs out of the project.
Bidding process extended to carry out Environmental Impact Study . Central Govt refused to aid the State owned Major Port.
2006
April Pre bid meeting with 40 Private sector developers.
Oct 18th was the last day to submit bids. Extended to 15th Dec. Further extended to 31st Jan.
2007
2008
June / July Consortium led by Zoom Developers challenged Govts decision
2009
2010
2011
Govt considered various options : MoU with Spanish Govt SCI Expressed Interest SBT to fund the project .
Vizhinjam International Seaport was a major project initiated by the Government of Kerala. The project was important because of its strategic location and its capacity to boost India's trade and commercial activities. The government made several efforts since 2006 to select a suitable private developer. Despite the potential of the project, it attracted interest from only a few bidders although bidding was undertaken three times. It was finally in 2008, that Lanco was selected to undertake this project. However, the company later backed out of the project claiming that the project was facing legal issues although some sources state that the developer backed out due to the lack of financial capability to implement the project. This further delayed the project. Even the government had difficulty in arranging funds for the project, which was an additional problem that caused further delay. The government later explored various options to fund the project. It also considered various MoUs, but has been unsuccessful till now. iv. Consensus Building Private players have an important role to play in building a favorable opinion of the project . among the users and the project affected people. Especially in social sector projects, the support of the community is critical to the success of a project. It is therefore important for the developers to engage in a comprehensive dialogue process with the various segments of the public and inform them of the positive as well negative aspects of the project and about the measures that would be undertaken to mitigate the negative aspects. So far the project developers, especially in the port and power sector, have made very little efforts to engage the public in their plans. On many occasions exhaustive mapping of the people affected by the project or a detailed environment assessment was not undertaken. For instance, in the Coastal Gujarat Power Ltd. UMPP, the fishing community was excluded from the list of project-affected people. See Box 3.4 for an illustration. This was a violation of the Performance Standard Social and Environmental Assessment and Management System. Landowners are often informed about a particular project by way of notices or advertisements only after the project has been decided. In the Krishnapatnam Port project, the livelihood of the Yandis, (a local community in the Krishnapatnam area) was severely impacted due to the project and they did not even receive any compensation or rehabilitation for this. (b) Consultants Consultants are responsible in guiding the government in identifying the right project as well as the right bidder. The objectivity of the consultants is essential during the entire life of a project. The selection of a right consultant that has sound knowledge and experience in the sector concerned paves the way for the selection of the right projects. Here adequate emphasis should be placed on the technical expertise of the consultant in a particular sector. Compromising on the quality of consultants can result in poor structuring of the project. For
example, in the Delhi-Gurgaon Expressway, the original scope of the project was changed substantially and the final scope was issued to the concessionaire just days before the original scheduled completion date of the project. In the case of the Vadodara-Halol Toll road, the actual level of traffic did not match the expected traffic levels as per the traffic study because the traffic estimates were based on the assumption that incentives for industrial development in Halol area would continue over the long term. However, the incentives were withdrawn by the government in later years. A high-level committee on National Highway Development Program (NHDP), set up by government, stated that several road projects resulted in disputes, as the DPRs were not carefully prepared.17 These examples show that engaging consultants with sound knowledge and experience is essential in preparing DPRs. Low investment in planning and engineering aspects often results in higher implementation costs in the form of transaction costs and settlement of financial claims arising due to disputes. Such disputes involve a lot of time and money jeopardizing the benefits of PPPs. There are instances where commercially unviable projects were tendered initially and later terminated. Significant differences in the total project costs estimates by National Highways Authority of India (NHAI) and the private developers have also been reported.18 There is also a need to increase the number of Transaction Advisors (TA) empanelled by the Central government for PPP projects. At present, there are only 11 TAs available for central government projects. Now that an increasing number of projects are being planned, it is important to expand the list of empanelled consultants.
3. Community Participation
The end-users of any public infrastructure are the common public, who also ultimately bear the cost of developing that infrastructure, either directly, through user charges, or indirectly, through taxes. There is hence a need for involving representatives of the local community. This could be done either through Non-Governmental Organizations (NGOs), civil societies, or through members of Gram Panchayat/Zilla Parishad etc.19 A forum should be created for the community to communicate their needs to the government through channels like small group meetings, Round Tables, Kisan Mahapanchayats, online public forums, etc.20 Such a forum shall address the concerns, apprehensions and acceptability of the various categories of stakeholders and the government on its part should endeavor to consider these issues while preparing the project. However, current efforts in this direction have been less than satisfactory. There have been cases where projects have created an adverse impact on the local community. Apart from environmental issues, there has been insufficient rehabilitation of people during the land acquisition phase in many cases. The Sasan Ultra Mega Power Project in Madhya Pradesh has displaced 6000 people in the region and has reduced them to extreme poverty. As a consequence of such incidents, projects such as Girye Ultra Mega Power Project have
Please refer to Second Report on Faster Implementation of NHDP, B. K. Chaturvedi, Member , Planning Commission, (2010) for further details. 18 Please refer to the Times of India, 28.11.2011. 19 Gram Panchayat, Intermediate Panchayat and Zilla Parishad are lowest, intermediate and highest tiers of the Panchayat system in India, respectively. 20 Kisan is the Hindi word for a farmer.
17
prompted mango farmers and others to conduct marches and hunger strikes to prevent the Government from acquiring their agricultural lands and setting up a power plant.21 Box 3.4 Mundra Ultra Mega Power Project
Ministry of Power proposes UMPPs
Successful bidder identified Letter of Intent issued
Revised date for Commercial Operation of Unit I as per CA
Scheduled date for Commercial Operation of Unit I as per CA
Jan. 2006
Feb. 2006 Dec. 2006
Apr. 2008
Financial Closure achieved
Sep. 2011
June 2012
Invitation for EOI
Mundra Ultra Mega Power Project is one of the 16 UMPPs envisaged by the Government of India to address the growing need for power in the country. The project has demonstrated some positive aspects of PPPs as it had been scheduled to commission ahead of its time and the bidding process was completed within 10 months. However, violation of Ministry of Environment & Forests (MoEF) regulations e.g., use of potable water for construction activities was reported in the media. The developer did not undertake a comprehensive assessment of all the project-affected people. The fishing community, an important group that was severely affected by the power project, was excluded from the list of directly affected people.
For projects in commercial infrastructure sectors, the government can initiate projects, distribute information, and then seek public opinion especially on matters like alternative site locations, R&R packages, etc. Here, the role of the community is limited to the project identification phase as it may be difficult to involve them during the governance or monitoring of the projects. Lately, some regulators like the Tariff Authority for Major Ports (TAMP) have initiated involvement of users in determination of port tariff. This is a healthy development as it would help protect the users interests. In social sector projects, the involvement of the users/community is even more crucial. The public must be a part of the entire project governance instead of just being involved during the identification stage. For instance, municipal schools adopted by NGOs under the PPP mode have representatives of the Parents-Teacher Association (PTA) as members of the School Management Committee. Similarly, members of the Intermediate Panchayat represent the community who are also members of the management committee of Primary Health Centres in Arunachal Pradesh. Such an inclusive approach, centered on mobilizing communities as active agents of their own development, is essential to the larger development process.
4. Financing and Commercial Viability

(i) Commercial Viability It is crucial to ensure that projects offer returns that are attractive enough to the private sector. Robust and reliable traffic estimates, appropriate and acceptable user fee, commercialization of supplementary assets like the development and usage rights of real estate and government
Please refer to http://www.grist.org/coal/2011-05-27-down-with-coal-the-grassroots-anti-coalmovement-goes-global. See also http://www.powermin.nic.in/whats_new/pdf/ultra%20mega%20project.pdf / http://pacificenvironment.org/downloads/Sasan%20Power%20Project%20FactsheetFinal.pdf
21
grants in the form of VGF, are important in ensuring commercial viability of the projects. There have been instances where projects offered for bidding were not found economically viable. For example, a bypass road proposed around Coimbatore through Build-OperateTransfer (BOT) arrangement did not attract any private sector developer to bid for the project. Similarly, in Chennai a solid waste management project did not attract bidders during the initial round of bidding as the waste generated from the associated zones was not enough to generate profit from the project.22 Many projects, especially those in the transportation sector, have dedicated traffic and a uniform fee structure regime, which leave little leeway for adjustments. Further, the concession period cannot be extended indefinitely to allow recoupment of investments made. Under such circumstances, awarding projects on a competitive basis reduces the quantum of VGF sought by the developers. Instilling competition, in turn, compels the private sector players to be efficient and innovative so that the project margins do not fall below their desired level. The shift towards output specification of the projects instead of the traditional input specification approach has been aimed at inducing the private developers to use the best management practices e.g., applying lean construction principles, etc. to reduce project cost and improve margin. [Traffic * User Fee]* Concession Period VGF = Total Cost + Return
In recent times, a large number of projects in the road sector have been awarded on negative grant basis, where the private developer offers to pay the sponsoring authority in return for the right to develop and operate the project for the concession period. Providing other assets for commercial exploitation to the concessionaire, in the form of development rights for real estate near the project site, has been one approach to ensure the commercial viability of projects that do not break-even based on traffic estimates. Appropriate bundling of project features is therefore important to such projects. Integrating an upcoming project with an existing project to increase traffic can be yet another way to improve attractiveness of the project for the developer. For example, integrating Bandra-Worli Sea Link (BWSL) with the Western Freeway Sea Link (WFSL) was recommended as one of the measures to make the project commercially viable. In the Hyderabad Metro Rail project, a plan was set up to have feeder buses along the metro route apart from integrating bus routes of state road transport. At present, the emphasis is typically on the FIRR (Financial Internal Rate of Return) rather than on the Economic Internal Rate of Return (EIRR). Some international lending agencies like the Japan International Cooperation Agency (JICA) require establishment of EIRR as a necessary pre-condition for going ahead with projects. There is a need to make EIRR mandatory for large scale projects if not for all projects.
Please refer to PPP Experience in Indian States: Bottlenecks, Enablers and Key Issues, by Mahalingam, A., Indian Institute of Technology Madras, 2008.
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Box 3.5 Delhi-Noida Toll Bridge (DND Flyway)

Memorandum of Understanding signed
Financial Closure Achieved
Company undergoes debt-restructuring
Toll hike uncertainty (10 % vs. 25 %)
1992
1998
1997
Concession Agreement Executed
2001
Project Commissioned (construction time: 25 months 4 months ahead)
2005
2006
2011
Losses incurred due to revenue shortfall during initial years (2001-2005)
The Delhi NOIDA Toll Bridge was awarded through direct negotiation. Being one of the early PPP projects, the Concession Agreement was poorly structured. The concession agreement provided for extending the concession period on a recurrent basis till the project cost and a pre-determined return on investment made by the concessionaire was recovered completely. Further, revenue projects were not undertaken robustly as during the operational phase, proportion of heavy commercial vehicles was very low. This affected the commercial viability of the project. To compensate for the loss, the concession period is now slated to be for around 70 years. Such poor structuring of contracts, results in inadequate sharing of risks. With poor realized demand and an indefinite concession period, the burden has been ultimately passed on to the road users with the concessionaire bearing no risk at all. The project is also affected due to disputes between the government and concessionaire over determination of toll. The concession agreement provided the concessionaire with the right to determine toll which can potentially jeopardize the interest of users.
(ii) Availability of Finance Budgetary Support Well-structured and important projects should not be delayed due to the lack of availability of adequate finance. The support of the government in the form of VGF can make a large number of commercially unviable projects feasible. The government should be capable of generating adequate resources through both budgetary and extra-budgetary measures for meeting the requirements of the infrastructure sector. In the Krishna Water Supply project in Andhra Pradesh, the government failed to meet the funding gap, which caused the project to experience several glitches. Further, within the infrastructure sector, there should be efficient allocation and utilization of funds based on certain pre-specified priorities. The Finance Ministry should provide project-wise, ministry-wise and sector-wise information on PPPs in supplementary documents to the annual budget. Currently, there is no consolidated information on financial support to the PPPs by the government made available to the public. At present the maximum support from the government in terms of VGF is 40 % of the total project cost. Such threshold limits may work for projects in commercial infrastructure sector where the commercial viability can be established by assigning other rights to the developer, like development rights of real estate near the project site23, conferring advertisement rights
In the Hyderabad Metro Rail project, the concessionaire was allowed to develop real estate around the metro rail facilities at three depots and above the parking areas at about 33 stations.
23
along the highways to the developer etc.24 However, in social sectors, where establishing commercial viability is difficult, bulk of the financial support would have to come from the government. In the early years of the development of PPPs in these sectors, BOT annuity would be preferred model as stated in the draft National PPP Policy. Equity The government has allowed 100 % Foreign Direct Investment (FDI) in several infrastructure sectors like roads to attract foreign capital. Despite this, the level of FDI received has been low; around 11 % of the total investments in 2008. Promoters equity is the main source of equity for projects in the country. However, given the enormity of finance required to fund infrastructure projects in the coming years, promoters equity is going to be limited. Hence, there is a need to ensure availability of institutional equity or development capital for infrastructure projects. Debt Commercial banks in India, especially those in the public sector have been the main source of debt for PPP projects.25 The conversion of erstwhile long-term lending financial institutions like Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), into commercial banks has led to the problem of availability of long-tenure debt for the infrastructure projects. At present, two-third of the total debt requirement of the PPP infrastructure projects is financed by the public sector banks. These banks are faced with the problem of Asset-Liability Mismatch (ALM) and most of them are already operating at their exposure ceilings for the infrastructure sector. The absence of a developed corporate bond market in the country has made it difficult for the developers to raise the required debt. We require a deep, liquid bond market with a wide array of sophisticated investors and products to provide long-term finance and distribution of risks at a much wider level. Further, pre-emption of funds by the infrastructure sector may limit the availability of banking funds to other important sectors. Fig. 3.1: Debt Requirement for the 11th Plan Period
Source: Projections for Investment in Infrastructure during the 11 th Plan, Planning Commission, 2008 IL&FS, the developer of the DND Flyway was conferred th e advertisement rights along the toll road as a part of the concession agreement. 25 Commercial Banks fund around 80 % of the debt requirement of the PPP projects in India. See, Discussion Paper On Financing Requirements Of Infrastructure and Industry, DIPP, GOI, 2011.
24
Fig. 3.2 points to the inadequate availability of debt requirement during the 11th plan period. A total of ` 8,25,539 crore would be available as debt against the total requirement of ` 9,88,035 crore implying a gap of ` 1,62,496 crore (20 %). As can be observed, domestic bank credit is the major source of debt followed by Non-Banking Financial Companies (NBFCs) and pension funds. Further, debt constitutes around 50 % of the total investment required in infrastructure. However, the normal capital structure of a project is 30 % equity and 70 % debt. This aggravates the shortage of finance for infrastructure projects in the coming years.
5. Risk Management
(A) Risk Identification and Allocation It is important that all risks associated with the projects are thoroughly identified. Several projects have faced disruptions at later stages because the possible occurrences of many glitches that were not taken into consideration while framing the concession agreements. In order to minimize any uncertainty involved in the long gestation of PPP projects, a whole-life cycle approach needs to be pursued. This will help to identify the entire gamut of financial and other risks that may jeopardize the viability of the project. Further, strong measures for risk alleviation should be inbuilt into concession agreements so that even disputes during the course of the projects are resolved amicably. This will also reduce the number of litigations. Risks are critical to PPP projects as they indicate the probable occurrence of events that may cause changes in socio-economic, political and natural environment faced by the projects.26 Allocation of risks is important to increase efficiency, reduce project-related costs and achieve improved value for money. The parties involved in a project can affect the amount of risk by: The level of information they have about the present and future which will help them avoid or tackle unforeseen events The level of influence they have over events which will enable them to take actions and determine outcomes The MCAs (Model Concession Agreements) for different sectors, attempt to address the unbundling and allocation of risks and propose associated risk mitigation measures based on the above mentioned parameters. MCAs mention that as an underlying principle, risks have been allocated to the parties best suited to manage them.27 Technical risks such as construction, operation and maintenance are allocated to private sector developers as transfer of such risks is likely to increase the scope of adoption of the best available technology and spur innovative practices, which in turn would bring in cost efficiency and better service delivery. Commercial risks such as the demand risks are also allocated to the concessionaire under BOT Toll projects whereas direct and indirect political risks are allocated to the government agency or the contracting authority implementing the project. A detailed table of the different types of risks that have been identified in a PPP project development phase, as provided in MCA is given in Exhibit 3.2. However, the following features of risk allocation are observed in practice:
Please see, Risk A critical focus of PPP Design, PPP Toolkit for Improving PPP Decision Making Processes, Public Private Partnerships in India, Ministry of Finance, Government of India as retrieved from http://toolkit.pppinindia.com/ 27 Model Concession Agreement for National Highways, Secretariat for Infrastructure, Indian Planning Commission, Government of India as retrieved from http://infrastructure.gov.in/pdf/OverviewMCA.pdf
26
(i) Risks are often allocated to stakeholders not best suited to manage them In many cases, the social and environmental risks and those associated with land acquisition are directly or indirectly borne by the concessionaire. Such responsibilities, if given to the private sector either cause delays in the project implementation and / or create negative impact on the biodiversity. The Hyderabad Outer Ring Road Project had faced delays because the private developer had difficulties in acquiring land due to objections by the surrounding community, especially farmers. In the Gangavaram Port project, the risk of social impact was allocated to the private sector developer. The port authorities had promised the fishing community in the village nearby that they would provide the fishermen with jobs since the construction of the port would affect their livelihood. However, the fishing community alleged that the port authorities gave them only 292 jobs out of the 600 jobs promised. Several people were denied jobs. Allocating the responsibility of providing employment to the private developer might leave the community vulnerable to risk. The Dhamra Port Project is located to the north of Gahirmatha Marine Sanctuary, where around 2 to 5 lakh female Olive Ridley turtles nest every year. Although the port site is not a nesting area, environmentalists are worried that the regular dredging activities and industrial pollution could ruin the habitat of these turtles. Greenpeace activists are also demanding the private developer to stop construction of the port. These examples prove that the risks involved in land acquisition and other social and environmental risks should be assessed and solved by the government. (ii) Stakeholders fail to handle risks that are appropriately allocated to them. Although concession agreements outline the allocation of risks to a specific partner, there are cases where the partner fails to handle the allocated risk. In Vizhinjam Port, the private developer (a foreign company) was responsible to get statutory clearance from the Central Government for developing the project. However, when it failed to get approval, the State Government attempted to get the necessary statutory clearance for the private developer but was not successful. The Concession Agreement for the Yamuna Expressway was executed in February 2003, but there was a 5-year delay in land acquisition. There was also failure on the part of the state government to provide the private developer with project land on time. In several Greenfield ports, traffic growth is often over-estimated. Private developers face a high-demand risk due to lack of hinterland port connectivity. In some instances, demand shortfall had to be compensated by further undertaking last mile connectivity through feeder links in form of road and rail connectivity projects.28
(iii) Lack of uniformity among state governments in allocation of risks. Initiatives taken by the state governments to build capacities for PPP, in the form of an act, policy or a set of guidelines should also include identification of various project risks. The
Please see, Background Paper on Port Connectivity in Gujarat, Deloitte Touche Tohmatsu India Pvt. Ltd., (2009)
28
details of the risks undertaken by state governments or the local authorities of various states are given in Appendix I. Some inferences are based on these are given below: (a) Some of the major risks are identified and borne directly by the state governments. These include: Facilitating the developer to obtain the clearances (statutory and environmental) from state and central government as per the requirement of the project. Provisions for rehabilitation and resettlement of the affected families. Facilitating water and power requirements at the project site. Facilitating land acquisition (wherever required).
(b) Though there is lack of uniformity among state governments in the allocation of risks, the Karnataka Infrastructure Policy 2007 is an exception. It provides a detailed identification of risks involved during project life cycle (of a BOT model), its allocation to parties best able to handle them and the respective mitigation measures. It specifically emphasizes that the government would acquire the land required for the project in case the private investors could not obtain it. There is a clear distinction in the role of the Karnataka Government, compared to the other state governments where the risk of land acquisition is initially transferred to private developers. It is only when a private developer is not able to acquire the required land that the government steps in to undertake the responsibility of land acquisitions and hence bear the associated risks. (c) A provision has been made by the Andhra Pradesh and Bihar government to assist the developer to securitize the project asset and project receipts/revenue in favor of lenders to safeguard the completion of the projects. Such a provision to identify debt risk is not included in the policies, act or guidelines formulated by the other state governments.
Exhibit 3.3: Allocation of Risk and Mitigation Measures in PPP Projects

S/N
Risks
Examples Selection of right bidder Statutory Clearance Land Acquisition Right of Way (Associated delay) Risk of Inadequacy [Error in the Request For Quotation (RFQ)]
Risk Assigned/Risk Bearer
Risk Mitigation Measures Selection of developer and transaction advisors through international/domestic competitive bidding Consulting Professional Experts for preparing bid documents. Encumbrance free land and Right of Way provided by government
1.
Project Development Risk
Government/ Concessionaire
2.
Construction Period Risk
Project Design Risk Risk of Innovation Contractor Default Damages to 3rd Party Cost & Time Overrun Scope Change Demandin Risk Revenue Risk
Engineering Procurement Construction (EPC) Contractor/ Concessionaire
Output specification instead of input specification Sub-contracting individual components of project
Concessionaire Revision of user charges Extension of concession period Moratorium on construction/operation of competing projects by government or implementing agency. Developer provided with the right to first refusal
Maintenance Standards 3. Operation Risk Injuries to Users Environmental Risks
Operation & Maintenance (O&M) Contractor/Contractor/ Insurance Company Government/Public Concession Agreement (CA)/Concessionaire/ Lead Financial Institution Sponsoring Authority/Investors Lead Financial Institution Concessionaire Concessionaire, Lead Financial Institution, Government
Termination Risks Equity Debt 4. Financial Risk Interest Rate/ Currency Risk/ Inflation VGF Disbursement Direct Political Force Majeure Termination of Concession by the Government.
Project monitoring by lenders. Lenders provided with the right to substitute the developer Termination payment by the government/implementing agency
5.
Regulatory Risk
Government/CA
State Support Agreement signed between implementing agency, concerned state government and private developer.
Source: Compiled from Modal Contract Agreements, Manuals and Guidelines on different sectors, DEA, Planning Commission, (GOI); various issues Note: EPC: Engineering, Procurement & Construction; O&M: Operations & Management; CA: Concession Agreement
(B) Risk Mitigation As discussed above, identification of risks and allocation of risk alleviation in an appropriate manner is the first step to mitigate project risks. A robust concession agreement is required to provide measures that will manage and lessen risks involved at each stage of a project. For instance, upward or downward revision of user charges and/or extension of concession period by a certain number of years if actual traffic growth happens to be less than the expected growth in traffic. Such steps assure either party some degree of certainty in recovery of costs incurred and initiation of steps to rectify shortfalls, if any. Thus, the private sector is protected, as the extension of concession period would allow it to recover its investments along with returns. Also, the government need not explore alternative measures to bail out the failed projects. It is therefore important that adequate measures are inbuilt into the concession agreements that balance risks to all stakeholders. However, it is equally necessary that the riskmitigating measures do not conflict with the basic features of a project and concession agreement. For example, in a road project, if a concession agreement provides for an indefinite extension of concession period and if the total project cost and returns is not recovered, then the entire financial burden of the project is shifted to the users. It also defers the transfer of project asset back to government at the end of concession period. More importantly, it disincentivizes efficiency and cost management, which should be the primary benefits to accrue due to a PPP. Exhibit 3.3 classifies overall project risks into five broad categories, namely project development, construction, operations, financial and regulatory risks and associated risk mitigation measures. Project development risks are normally shared between government, developers and the consultants. Government bears the risk of identifying an appropriate project and selecting the right bidder. Competitive bidding and consulting professional experts while preparing the bid documents will minimize risks associated with poor structuring. Developers must bear the risks of designing projects in line with the projected demand and other user requirements like service quality and change in the scope of the project during later stages. Consultants will assist government in preparing the project, the feasibility reports and also in scrutinizing detailed project reports (DPRs) submitted by developers. They should also highlight the merits and demerits of each proposal. Consultants face risk of penalty if they do not exercise adequate diligence while preparing DPRs. By assigning construction risks to private developers, the risks associated with time and cost overruns are moved away from the government. The developers in turn lessen the construction risks by sub-contracting part of the construction work to other private contractors. It is the governments duty to transfer the encumbrance-free land including right of way to developers before the construction due date. The risk of construction delay due to delay in transfer of land by government is mitigated by providing monetary compensation to the developers. Further, the SSA (State Support Agreement) between an implementing agency like NHAI, the state government and the developer addresses the regulatory risks associated with the projects. Government or the implementing agency also assists developers in obtaining all the necessary infrastructure facilities and utilities, including water, electricity and telecommunication facilities. The operational phase of a project covers the maximum length of the concession period and hence involves a lot of uncertainty. A shortfall in demand is often a primary concern for developers and there have been instances where actual demand fell short of the projected levels. Two popular examples for this are the Tirupur Water Supply Project and the VadodaraHalol Expressway. If government decides to build a competing project, the concession
agreement stipulates compensation to the concessionaire of the existing project in case of revenue loss. For example, the Concession Agreement of National Highway (NH) 45 Padalpur Road Project, states that any additional toll way that is envisaged by government in future shall not be opened for traffic before expiry of 8 years from the appointment date of current project. It further specifies that, if additional toll way is commissioned after 8 years from the appointment date, then the concession period shall be increased by half the number of years by which such commissioning precedes the expiry of the concession period.29 Successful operation of a project by developer is crucial for safeguarding the interest of the lending institutions. In order to protect lenders against the failure of developers to successfully operate projects, concession agreements provide lenders with a right to substitute the developer. Further, monitoring rights assigned to lenders enable smooth functioning of projects. There are provisions for the termination of payment to lenders in the event of default by government or due to force majeure like a non-political event or an indirect political event. However no termination payment is made by government to the lenders in the event of default by concessionaire.30 From studying the experiences in risk identification, allocation and mitigation in the PPPs of commercial sectors, the following lessons can be drawn: In the early stages of PPP projects in these sectors, government should be willing to undertake major responsibilities in terms of budgetary support and other assistance. The identification of risks should be made by taking into consideration the impact of the project on all the stakeholders involved. The allocation of the risks to the party best suited to manage them should be made explicit in the DPR. This will allow the private and public sector to recognize their roles and responsibilities before entering into a concession agreement. They will further be able to decide upon their ability to influence the events of the project and make provisions for alleviate unforeseen events. The risk of land acquisition and statutory clearances should be taken by the government. It should also take care of the risks of social and environment impact and its clearance. This will lower the time delays and cost overruns. User charges should be determined in a manner that balances the issue of access to weaker sections of the society and the profit motives of the private developer. Further, revision of user charges should be undertaken in a manner that protects the most vulnerable sections of the society. In case of the inability of the respective party to mitigate the risk, alternative measures should be identified in consultation with the other involved stakeholders.
Please refer to Concession Agreement for Design, Engineering, Construction, Development, Finance, Operation and Maintenance of 4 Laning of Existing 2 Lane Section from KM. 285 (Near Padalpur) to KM 325 (Near Trichy) on NH-45 in the State of Tamil Nadu on Build Operate Transfer Basis, NHAI, Government of India, (2006).
29
6. Social Inclusion
True development must be inclusive of all vulnerable groups. The state has to keep in mind the principles of justice - social, economic and political that is enshrined in the Constitution, if it is to deliver the peoples rights and entitlements. The Planning Commission, in the 11th Five Year Plan stated that a persons individual endowment in the form of capital, labour and skill, along with the access to public resources has a direct bearing on his/her current welfare in the short run while determining his/her economic opportunities in the long run. In India, 25.7 % and 41.8 % of the population live below the poverty line in the urban and rural areas, respectively.31 The incidence of poverty is high among certain marginalized groups, e.g. scheduled castes and tribes. With a significant proportion of people surviving at below subsistence level, there is an urgent need to provide minimum needs to the poorest of the people. Exhibit 3.4 describes the condition of the people, especially those who are socially and economically marginalized in terms of access to basic amenities. There is an urgent need to accelerate efforts to create an all-inclusive development strategy. As mentioned earlier, the Planning Commission explicitly emphasized the need for inclusiveness in the countrys growth strategy in its 11th Five Year Plan document. Inclusiveness was meant to mobilize the marginalized and make them active agents of their own development. They could play a key role in the very design of the development process and can assist in bringing people in the mainstream of development strategy. Expenditure by the government in areas like public health, water supply and sanitation, and education has been increasing over the years but it is still not sufficient compared to actual requirements.32 Even in these sectors the governments current resources may not be adequate to finance the overall requirement; hence additional resources may have to be obtained from private participation through PPPs. Water and health within the social sectors are sensitive issues as they are associated with an individuals survival and hence r equire a differential approach. Water being essentially a public and social good; every human being has a right to water. Treating water as a commodity and pricing it based on market principles can potentially jeopardize the basic human right to life especially of the most vulnerable sections of the society. In order to ensure full realization of these human rights and guarantee welfare of all citizens, the state obligation in necessary in delivering services in water and other social sectors. Dwindling water resources in the country also call for the efficient use of water that may require effective management of water resources through private initiatives. Hence, there is a need to balance the cost recovery principle and profit motives with human rights. PPPs when undertaken based on holistic perspective can possibly play an important role in addressing issues concerning access, equity and quality of services. PPPs in social sectors can enhance access to basic public amenities. Such partnerships should be aimed primarily at efficient delivery of services from the existing government infrastructure facilities. In order to make a long-term impact on the lives of the people, PPPs should be undertaken through models that are sustainable as well as scalable. At present a large number of NGOs are working in social sectors to enhance access to basic services by the people. However, most of them are charity/donor based models and hence have limited scope for mass implementation.
Please refer to Report of the Expert Group to Review the Methodology for Estimation of Poverty, Planning Commission, GOI, 2009, for further details. 32 Government Expenditure on Higher Education has been projected to increase from 1.12 % during the 11th Plan period to around 1.5 % of GDP during the 12 th Plan period. Similarly, govt. expenditure on Public Health is expected to increase from around 1.2 % during 11th Plan period to around 2.5 % of GDP during the 12th Plan period. Government expenditure on Water Supply & Sanitation has been targeted to increase from ` 1,43,730 Crore to ` 1,73,730 Crore during the same period. Please see 11th & 12th Five Year Plan document, GoI.
31
Exhibit 3.4: Status of Provision of Basic Amenities to Public in India Sector Water Supply & Sanitation Status Only 14.44 % of the rural habitations have pipe water supply facility.33 Only 30 % of the total sewage generated in the country is actually treated before being dumped into available water bodies.34 55 % of households have no access to toilet facilities (74 % in rural areas and 17 % in urban areas).35
Public Health
The Central and State governments together spend just 1.2 % of the GDP on public health with a target to increase it to around 2.5 % of the GDP during the 12th Five Year Plan period and gradually increase it to 3 % of the GDP by 2022.36 The availability of allopathic doctors, nurses and midwives is a mere 1.29 per 1,000 persons.37 There is a shortage of 19,590 sub centres, 4,252 PHCs and 2,115 CHCs.38 Infant mortality rate is as high as 50 per 1,000 live births.39 Combined expenditure of the centre and state governments on education is only around 3.6 % of the GDP.40
Education
Exhibit 3.5 attempts to classify provisioning of infrastructural services to the people on three broad categories. The first category refers to the non-subsidized services that are priced to cover the total cost of providing such services. Examples include telecom services, toll roads, etc. End users are the source of revenue for such services. The second category includes partially subsidized services with funds sourced from government, users and private sector. Such cross-subsidized services are largely provided in sectors like health and education. Private hospitals, where services to those who can afford it are provided at full-cost recovery pricing whereas services to poor are provided at a subsidized rate with government compensating private hospital for its loss of revenue. Lastly, completely subsidized services fall in the third category wherein public health, primary education, waste collection services, etc. are provided free of cost to people. Services in the third category are financed chiefly by government, philanthropic and Corporate Social Responsibility (CSR) activities of private sector.
See, Results Framework Document, Department of Drinking water and Sanitation, Ministry of Rural Development, 2011-12. 34 Please see, Draft 12th Five Year Plan Document, Planning Commission, GOI. 35 Please refer to State Environment Report, MoEF, GoI, 2009. 36 See, p.14, of High Level Expert Group Report on Universal Health Coverage for India, Planning Commission, GOI, 2011. 37 See, High Level Expert Group Report on Universal Health Coverage for India, Plann ing Commission, GOI, 2011. 38 Please refer to Draft 12th Five Year Plan Document, Planning Commission, GOI. 39 See, http://planningcommission.nic.in/data/datatable/0211/data%20112.pdf 40 See, 11th Five Year Plan Document, Planning Commission, GOI.
33
Exhibit 3.5: Taxonomy of Provision of Public Services
I
I, II
II, III
Type I
Description Nonsubsidized Partially subsidized
Source of funds Paid by the end user Other users Government Private sector
Sectors Transport, Utilities Health, Education Primary Health, Primary Education, Waste collection
II
III
Fully subsidized
Government Private sector philanthropists, donor foundations, CSR etc
With reference to Exhibit 3.5, the challenge is to identify existing as well as conceptual models of PPP that can help the government to focus on the most deprived sections of society and provide them basic services that are of good quality, within their reach and also affordable. One model that can be potentially scalable is the Byrraju Foundations 4P (Panchayat PublicPrivate Partnership) model of drinking water supply. With the 73rd and 74th amendments, drinking water and sanitation are included in the list of subjects to be devolved to Panchayats. Box 3.6 makes an attempt to map the stakeholders, their responsibilities and participation and the functioning of the model. The 4P model is a step ahead of the normal PPP model as Gram Panchayats (local village selfgovernments) are involved in this partnership. The contribution from government is in the form of provisions for free land, permission to draw raw water, subsidized power connection and other regulatory approvals. The Byrraju Foundation bears around 50 % (sometimes 100 %) of the cost for the equipments used for water treatment. It also trains the local people to operate the plant. Technological aspects of the equipment are modified to allow the community to operate the plant. Gram Vikas Samiti (Village Development Committee), comprising of 9 volunteers representing different sections of the society, monitors the activities of the project on behalf of the community at the village level. (Purified water is provided to people at around 20-30 paise per liter.41 Hence, sustainability is ensured by collection of user charges for operations and maintenance of the project.
41
One paise is the hundredth part of Indian Rupee.
Box 3.6: The 4P Byrraju Model of Drinking Water Supply The 4P model is a step ahead of the normal PPP model as Gram Panchayats (local village selfgovernments) are involved in this partnership. The contribution from government is in form of provision of free land, permission to draw raw water, subsidized power connection and other regulatory approvals. The Byrraju Foundation bears around 50 % (sometimes 100 %) of the cost of equipment for water treatment and also trains the local people to operate the plant. Technological aspects of the equipment are modified to allow the community to operate the plant. Gram Vikas Samiti (Village Development Committee), comprising of 9 volunteers representing different sections of the society monitors activities of the project on behalf of community at the village level. (Purified water is provided to people at around 20-30 paise per liter. Hence, sustainability is ensured by collection of user charges for operations and maintenance of the project. With limited financial powers with local bodies to raise resources through taxation or other means, such models can be useful in addressing the basic needs of the public like drinking water. There is a need to provide enabling support and environment for Panchayati Raj Institutions (PRIs)/ local communities to manage their own drinking water sources and systems, and sanitation in their villages.
With limited financial powers and with local bodies to raise resources through taxation or other means, such models can be useful in addressing the basic needs of the public like drinking water. There is a need to provide support and environment for PRIs or local communities to manage their own drinking water sources and systems, and sanitation in their villages.
7. Sustainability
The Eleventh Plan followed a strategy to meet the infrastructure needs by supplementing the public sector resources with that of the private sector in the form of PPPs. The Twelfth Plan continues to implement the strategy and also emphasises the need to further explore the scope of PPPs in the development of the social sectors. While infrastructure has its benefits of rapid and inclusive growth, it also has another facet of creating pressures on environment. Exhibit 3.6 lists the Acts that govern the environmental impact of projects. Exhibit 3.6: Environmental Acts by MoEF
The Air (Prevention and Control of Pollution) Act 1981,amended 1987 Forest (Conservation) Act 1980, amended 1988 The Environment (Protection) Act 1986, amended 1991 The Public Liability Insurance Act 1991, amended 1992 The National Environment Tribunal Act, 1995 The National Environment Appellate Authority Act, 1997 The Wild Life (Protection) Amendment Act, 2002 Biological Diversity Act, 2002
(i) Details of EIA and the Process of Environmental Clearance In 1994, Environment Impact Assessment (EIA) notification imposed restrictions and prohibitions on the expansion and modernization of any activity or new projects being undertaken in any part of India unless environmental clearance has been accorded by the Central Government or the State Government in accordance with the procedure specified in that notification.42 EIA is an important tool to ensure the optimal use of natural resources for infrastructure projects. Its purpose is to identify, examine, evaluate and lessen the adverse impacts of a proposed project on the environment and carry out remedial activities. The general format of an EIA in the infrastructure sector is as follows: 1) Scoping of the Project: Where the Environment Assessment Committee (EAC) addresses a detailed Terms of Reference (ToR) providing all the relevant environmental concerns that a project may face based on its scope, which is categorized as modernization, expansion or Greenfield. All these concerns are broadly realized, sectorwise, by the EIA Guide. A brief of these have been detailed in Exhibit 3.7. 2) Public Consultation: It refers to the process by which the concerns of the people affected by the project and others who have a plausible stake in the environmental impact of the project are consulted to understand their existing and future concerns. 3) Appraisal: It includes detailed scrutiny by the EAC of the application of the project and other related documents submitted for the grant of environmental clearance. Appendix III gives further details regarding the contents of an EIA report.
Environment Impact Assessment Notification, Ministry of Environment and Forest, the 27 th January 1994, New Delhi - http://moef.nic.in/divisions/iass/notif/notif.htm
42
Exhibit 3.7: Impact of Development of Different Infrastructure Projects on Environment
Sector
Airports
Air
Growing aircraft traffic associated with growing emissions of CO2. Emissions from construction equipment, work vessels, trucks and other vehicles used cause air pollution.
Water
Not Available (NA)
Land
NA
Biodiversity
Growing air traffic, growing amount of noise pollution
Ports43
Ships are a possible source of airborne emissions such as gases, smoke, soot and fumes. NO2 and SO2 are typical pollutants generated by ships while both maneuvering and berthing and may affect air in the hinterland. GHG emissions across sectors (comparison between road and rail). Hence, use of low carbon transport. Shift from passenger vehicles to public transport. CO2 emissions by the power sector. Its percentage compared to the total CO2 emissions.
Deposition of construction work causes an increase in the level of suspended solids and reduces the sunlight penetration for the organisms. Discharges and spills from Ships such as oils, lubricants, fuels, sewage and garbage.
Discharges from the ships cause damage to the marine and coastal ecology. Dust dispersion on land due to construction may change the terrestrial habitat, affect the health of the port workers and the local people engaged.
Sand erosion
Roads44
NA
NA
NA
Power
Water Supply
NA
Use of potable water for power projects (Mundra and Barmar) Availability of water in India Use of water for different purposes Domestic, Industrial, Irrigation and Others. Growing population and growing demands for drinking water supply.
NA
NA
NA
NA
SWM45
Different categories of wastes dumped on land. Percent of total GHG emissions by waste p. 24 of IPC CC Report Waste water generation. Solid waste generated in major cities of India associated with growing population. NA
Please refer to (http://www.unescap.org/ttdw/Publications/TFS_pubs/Pub_1234/pub_1234_ch2.pdf). Please refer to (http://planningcommission.nic.in/reports/genrep/Inter_Exp.pdf). 45 Please refer to (http://moef.nic.in/soer/2009/SoE%20Report_2009.pdf).

43 44
Even though, a comprehensive framework has been laid down by the state and central government as per the outline provided by the MoEF to provide environmental clearances, there have been some projects which cannot be considered to be environmentally sustainable. For instance, the Tirupur Water Supply and Sewerage Project did not pay adequate attention towards environmental concerns. The project did not integrate the effluent treatment of industrial discharge that is fundamental to prevent further damage to water bodies and environment. Used water from textile units with high salt content was discharged directly into River Noyyal, which adversely impacted the agricultural lands in the surrounding areas. Effluents were also discharged into River Nallar that stagnated in the riverbeds and percolated into the groundwater. Moreover, Orthupalayam Dam that used to irrigate around 500 acres of agricultural land has now been reduced to storing industrial waste from textile units.46 Box 3.7 Navi Mumbai Airport
Technical Economic Feasibility Study carried out MoCA examined the locations CIDCO submitted the report Asked to carry out the simulation study to establish conflict free operation of the two airports The Union Cabinet granted in principal for development of Greenfield airport at Navi Mumbai on PPP Made application to Ministry of environment and forest (MoEF) for environmental clearance
Fresh application of ToR to carry out EIA was done
1997
2000
Committee recommended for international airport with two runways Sept. - CIDCO revised its proposal
2001
2006
Simulation Study carried out by Technical Cooperation Bureau (TCB)
2007
2008
GoM approved CIDCO as the nodal agency
2009
2010
Nov. EAC and CRZ clearance granted
The Navi Mumbai Airport suffered primarily due to environmental issues and lack of clarity in the scope of the project. The airport took more than three years to get environment clearance. The project was stalled as potential environmental losses were substantial. Destruction of mangroves, threat to the recourse of the Ulwe River and noise pollution affecting avian population of the Karnala and Matheran Hills, were the prominent concerns. Amendments were made in the Coastal Regulation Zones notifications to accommodate the implementation of the airport accompanied by the mitigation of environmental risks faced by the surrounding ecosystems. Amending existing environmental laws are certainly not the best way to mitigate threats to environment. Several visits were made by the MoEF and the Expert Appraisal Committee to get detailed insights into the impact of noise pollution on the aviation habitat of the Karnala and Matheran hills, on the recourse of the Ulwe River, mangrove forests and the revised quality of water and ecology. However, attempts were made to incorporate the needs of the public addressed in a public hearing conducted on the development of the port. Since their livelihood was going to be affected, attempts were made to resettle them. (ii) Water There have been instances where potable water is used for construction purposes. This has caused ground water to deplete by 4 cm/year between 2002 and 2008 in the Northern States of India. There is lack of coordination between the competing uses of water and there is no regulation on ground water use. Absence of rational pricing of water has increased its misuse. Also, the Water Users Associations (WUA) members are not adequately involved in solving matters relating to the use of water.
Please see, Tirupur Water Supply and Sanitation Project: An Impediment to Sustainable water Management? R. Madhav, IELRC Working Paper 2008-01. One international acre is equal to 4046.85 square metres.
46
(iii) Air The State of Environment Report, 2009 issued by the MoEF has emphasized the further rise of Carbon Dioxide emissions in India which would continue over the next few decades. The major cause of these emissions is the power sector and its large dependence on coal (about 78 % of countrys total production). Nearly 70 % of the electricity produced in India is via thermal units and coal continues to be the main fuel source. In 2006-07 India emitted 492.53 million tonnes of Carbon Dioxide compared to 382.32 million tonnes in 2000-01. Although, Indias share in global CO2 emissions was 5 % in 2007, which is minimal as per her population size, there is still a need to explore alternative sources of energy generation. Fig. 3.2: Regionwise CO2 Emissions by Power Sector in India (in million tonnes
180 160 140 120 100 80 60 40 20 0 2000-01 2001-02 2002-03 East 2003-04 South 2004-05 West 2005-06 2006-07 North North-East
Source: Table 2.2.3: Total Absolute Emissions of Co2 (Million Tonnes/ Year) From the Power Sector by Region for 200-01 to 2006-07, State of Environment Report - India, 2009, MoEF
(iv) Forest According to The Food & Agricultural Organization (FAO), the annual rate of deforestation in India in the past decade (2001-10) has fallen to 5.2 million hectares, compared to 8.3 million hectares in 1991-2000. Some countries like China, Norway and India and have increased the area under forest cover at an annual rate of 1.6 %, 0.8 % and 0.5 %, respectively.47 Mangroves are important for the countrys ecology as they form not only a habitat for diverse marine and terrestrial flora and fauna, but also in a socio economic context that is by provisioning timber wood, fodder, medicines and honey to people. However, the area under mangroves cover reduced from 4737 sq. km in 1997 to 4581 sq. km in 2005.
Other Initiatives
The National Urban Transport Policy, 2006 emphasizes on the different modes of transport, mainly public transport (and the use of electrical transport) developed through cleaner technologies to reduce the vehicular pollution. The policy has also been stressed on in the State of Environment Report 2009 by the MoEF. United Nations Environment Program (UNEP) has named India as the second largest contributor of CO2 emissions from the transport system. An initiative is being made by UNEP, keeping into account the countrys goals on Climate Change to promote low carbon transport in India.
The Economist Online, The State of the Worlds Forests, February 11th 2011, GMT 11:01 http://www.economist.com/blogs/dailychart/2011/02/worlds_forests
47
Section IV Conclusion and Future Measures
India has come a long way from its earliest attempts at bringing in private participation in infrastructure and public services. As discussed in this report, the first PPPs were instituted primarily to bring in funds from the private sector to finance much needed infrastructure. This experience has enabled a gradual maturing of the rationale of PPPs as a mode to leverage private sector capacity to innovate and deliver higher quality of service, especially in social sectors like health and education that desperately need an injection of quality in delivery. Evidence of success of PPP projects is mixed at best both within India and at an international level. Yet it is important to realize that PPPs still have the potential to play an important role in delivering much needed public infrastructure and services. Results vary in potential due to the structural and institutional inefficiencies that needs to be addressed. This report attempts to capture the lessons that can be drawn from existing experiences in commercial infrastructure sectors. This is the first phase of our larger research projects that attempts to build guidelines for enhancing the quality and efficiency of the next wave of PPPs one that is likely to address more complex sectors, involve greater stakeholder participation, more scrutiny and greater impact. The next phase of our research project by Athena Infonomics involves identifying the potential for PPP in select social sectors skill development, water and solid waste management. Through a mix of detailed case studies mapping different models, interviews, conferences, workshops and secondary research, a set of issues and challenges faced by these sectors would be identified. Next, we intend to use the principles and success factors developed in this report and apply them to solve the challenges that have been identified for each sector. We are cognizant that some of the problems facing these sectors pricing for water, for example are entrenched in the sector specific context that is perhaps not amenable to a solution through only a PPP approach. The key point is that PPPs are not a panacea for all ills facing a variety of sectors, but instead, simply a tool, albeit a powerful one, to unlock critical bottlenecks that have caused a chronic deficit in the quality of service delivery in these sectors.
Appendix I
Issues and Challenges faced by Public Private Partnerships
Public Private Partnerships have increasingly emerged as a preferred and viable mode for building much needed infrastructure in the country. As part of our study on understanding the issues and challenges faced by Public Private Partnerships and identifying lessons that can be drawn from existing experiences, we would appreciate if you could fill in the following brief questionnaire Respondents Profile Name Designation Company/Organization Email Mobile Section A: Common Questions 1) Please score the stages of a PPP Project based on the criticality of the issues faced. (From 1 to 5, 1 being the most critical and 5 being the least critical) 1 Project Identification Bidding Financial Closure Construction Operations & Management/ Maintenance 2) Please tick the top five critical issues faced by you during a PPP Project lifecycle Obtaining clarification on bidding parameters Output specification of the project Coordinating with the Government Poor coordination among the central and state agencies Securing finance for the projects Availability of foreign currency denomination funds Determination of user free/ tariff Poor project governance Land acquisition and other obtaining mandatory clearances Dispute settlement mechanism Lack of independent regulatory authorities in some sectors Slow progress of ancillary set ups Others : __________ 2 3 4 5
3) Please rate the sectors on a scale of 1 to 5 based on their commercial viability. (A score of 1 implying least viability and 5 being highly viable) S/N i. ii. iii. iv. v. vi. Sector Roads Ports Airports Power Railways Telecom Score S/N vii. viii. ix. x. xi. Sector Tourism Water Supply & Sanitation Waste Management Education Health Care Score
4) Please assign a score to the following states based on their investment attractiveness for PPPs (A score of 1 implying least attractive and 5 being most attractive) States Andhra Pradesh Gujarat Karnataka Kerala Madhya Pradesh Score States Maharashtra Rajasthan Sikkim Uttar Pradesh Tamil Nadu Score
5) Please identify the different roles/ initiatives of carried out by the government during a PPP project that needs improvement to make the PPP environment more private-sector friendly: Draft National Public Private Partnership Policy Broader shelf of projects across sectors/ states Provision of Model Concession Agreements for all sectors Provision of Guidelines to select Consultants Provision of Bid Documents Request for Qualification / Proposal Enhanced Role of PPP Appraisal Committee Access/ Timely Disbursement of VGF Monitoring & Evaluation 6) How useful do you find the MCA in drafting the actual terms of contract? Very Useful Useful Neutral Not Useful No Opinion 7) Is fast track approval accorded to projects that adhere to the MCA as promised by the Government? Yes No Dont Know
8) Should the Swiss Challenge Approach (SCA) restriction be relaxed by the Central Government for certain sectors? Yes No No Opinion
9) Have output based specifications enabled better delivery of service? Yes No Dont Know 10) How satisfied are you with the handling of disputes by the government? Very Satisfied Satisfied Neutral Dissatisfied Strongly Dissatisfied 11) In the Water Sector, which areas are most likely to attract private sector investments? Bulk water supply in industrial and city areas Water supply in rural areas Water supply on user charge basis Water supply on annuity basis Others
12) In the Education sector, which areas are most likely to attract private sector investments? Primary Education Higher Education Research and Development Skill Development Others
13) In the Health Sector, which areas are most likely to attract private sector investment? Primary Health Centres Managed Hospitals Diagnostic Services Others
14) Do you consider that the Draft National PPP Policy recognizes the different nature of PPP Projects in the social sectors? Yes No No Opinion 15) Is the VGF criterion of 40 % sufficient to attract private sector in Social Sectors? Yes No No Opinion
Section B: For Financial Institutions 1) Which is the most severe constraint faced by the banks when it comes to lending for infrastructure projects under the PPP mode? Information Asymmetry Collateral requirement Exposure ceilings stipulated by the RBI Repayment risk Asset Liability Mismatch Lack of developed bond market Other : _____________ 2) How timely is the disbursement of VGF from the government? On time Usually on time Sometimes delayed Delayed No opinion 3) In the event of a default by the concessionaire, is it easy to revoke the right of substitution? Yes No Dont know 4) In the event of a default by the concessionaire, is it easy to revoke the right of substitution Yes No Dont know 5) Do you prefer projects with VGF funding? Yes No No opinion
Fig 1: Criticality of Issues Faced during different Stages of a PPP Project
Not critical Less Critical Neutral Critical Most Critical Project Identification Bidding Financial Closure Construction Operations & Maintenance / Management)
Fig 2: Attractiveness of Private Investments towards various areas of Health Sector
Managed Hospitals
Diagnostic Services
Primary Health Centres
Others 0% 10% 20% 30% 40% 50% 60% 70% 80%
Fig 3: Attractiveness of Private Investments towards Various Areas of Water Sector
Bulk Water Supply in Industrial & City Areas Treatment of Water Distribution of Water Water supply in Rural Areas Others 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Fig 4: Attractiveness of Private Investments towards Various Areas of Education Sector
Higher Education
Skill Development & Training
Primary Education
Research & development
Others 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Fig 5: Investment Attractiveness towards Various States
Gujarat Tamil Nadu Karnataka Maharashtra Rajasthan Andhra Pradesh Madhya Pradesh Uttar Pradesh Sikkim Kerala 0 1 2 3 4 5
Fig 6: Usefulness of the MCAs
Fig 7: Impact of Output based Specifications on Better Delivery of Services
Fig 8: Fast Track Approval to Projects
Fig 9: Relaxation of Swiss Challenge Approach
Fig 10: Experiences of Private Sector in Handling Disputes with Government
Fig. 11: Recognition of the Social Sectors in Draft PPP Policy
Fig. 12: Sufficiency of 40 % as VGF to Attract Private Investments in Social Sectors
Fig. 13: Commercial Viability of various Sectors

Roads Telecom Ports Power Tourism Airports Railways Health Care Education Water Supply & Sanitation Waste Management 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
Fig. 14: Most Critical Issues Faced by PPP Projects

Land acquisition and other obtaining Poor coordination among the central and Obtaining clarification on bidding parameters Determination of user fee/ tariff Poor project governance Others Availability of foreign currency denomination 0% 50% 100%
Fig. 15: Initiatives Taken by the Government that Needs Improvement

Greater clarification of bid documents - Draft National Public Private Provision of Model Concession Broader shelf of projects across sectors/ Enchanced Monitoring & Evaluation Access/ timely disbursement of VGF Enhanced role of PPP Appraisel Others Provision of Guidelines to select 0% 10% 20% 30% 40% 50% 60% 70% 80%
Fig. 16: Difficulties in Financing Social Sector Projects
Availability of appropriate financial instruments Lack of prior exposure/ experience
Sustainability issues
Sensitivity of the sectors
Commercial Viability 0% 10% 20% 30% 40% 50% 60% 70% 80%
Appendix II
Risk Sharing Mechanism A Review of Select States
State Governments Act/ Policy/ Guideline
Identification of Risk, Allocation & Mitigation

(Clause 28-31) The State Government Agency or the local authority would provide all facilities to the developer in obtaining statutory clearances, water and power required; and provides best effort support to obtain central government clearances and assistance in rehabilitation and resettlement activities. Disclosure of Generic risks and allocation will be provided in the concession agreement. The State Government may facilitate the developer to securitize project revenues and assets in favor of lenders to safeguard successful completion of the project The lenders will be given the right to cover dues from the developer in the form of user charges and upon default by the developer, can substitute the developer upon consent from the government. (Clause 8 State Support Agreement) Political Support/ commitment from the government that the project and its assets will not be nationalized during the concession period. Facilitate acquiring of the land necessary for project. Assistance in R&R of affected families. Facilitate in obtaining state and central government clearances. Facilitate provision of supply of power and water at project site. Same as that of Andhra Pradesh (Schedule I & II) The policy very comprehensively identifies the risks for each of these stages of a PPP Project, to whom this risk is allocated and ways to mitigate the following: Project Development Period, Construction Period, Operations Period, Financing Risks &Other Risks.
Andhra Pradesh Infrastructure Development Enabling Act, 2001
Assam Policy on Public Private Partnership in Infrastructure Development Bihar Infrastructure Development Enabling Act,2006
Karnataka Infrastructure Policy, 2007
The role and responsibilities of each institution has been outlaid very specifically, namely Government of Karnataka (GoK) Infrastructure Development Department, GoK High Level Committee Single Window Agency PPP Cell & District PPP Cell Infrastructure Development Corporation (Karnataka) Limited (Clause 9) Implementing Agency will meet the cost of the following items Feasibility Study and preparation of Project Report Land for Right of Way and enroute facilities Clearance of the Right of Way: Relocation of utility services, R&R and affected establishments Environmental Clearances (Clause 7.2) State Government shall offer necessary administrative support Facilitate obtaining state and central government clearances Facilitate R&R Provision of supply of power and water at projects Facilitate acquiring land
Guidelines for Public Private Partnership Projects in the State of Madhya Pradesh
Orissa Public Private Partnership Policy 2007
Appendix III
Generic Structure of the Environmental Impact Assessment Document Category Features Location of the project with various geographical aspects (latitudes, district, natural resources, etc ) Activities to be undertaken for development of the project Existing traffic and future predictions Details of the SPV, project cost &PPP type Status of land Acquisition Facilities or services to be provided Rehabilitation and resettlement of the existing community and wildlife Evaluation of the alternative use of natural resources, technology and site Existing quality of land, water and air He used to have a beautiful biological environment (Eco system and the respective habitat) Socio-economic environment Waste management Prediction of the impact during construction and operational phase and risk analysis Avoid/ mitigate/ control adverse environmental impact Provide remedies and disaster management plans Technical aspects of monitoring the mitigation measures Parameters of monitoring Frequency of measurement Analysis of environmental impact Submission of the environmental statement semi-annually Provision for additional employment and revenue generation Triggering growth in the region and improvement in the quality of life Development of ancillary industries and trade centers Safety awareness A separate environmental cell to oversee implementation of the EMP Monitor the effectiveness of mitigation measures Ensure efficient operation of mitigation measures Establish systems and procedures for this purpose Take any necessary action when unforeseen impact occurs
Project Description
Analysis of Alternatives Description of Environment
Impact Analysis and Mitigation Measures Environmental Monitoring Program
Socio Economic Project Benefits
Environmental Management Plan
References
Asian Development Bank, Methodology for Estimating Carbon Footprint of Road ProjectsCase Study: India, (2010). Deloitte Touche Tohmatsu India Private Limited, Background Paper on Port Connectivity in Gujarat, (2009). Department of Drinking Water and Sanitation, Results Framework Document, Ministry of Rural Development, Government of India, (2011). Department of Economic Affairs, Ministry of Finance, Government of India PPP Projects Status Report on PPPs in India, (2011). Draft National PPP Policy, (2011). Risk A critical focus of PPP Design, PPP Toolkit for Improving PPP Decision Making Processes, Public Private Partnerships in India, retrieved at http://toolkit.pppinindia.com/highways/module1-racfopd.php?links=risk1 Department of Industrial Policy and Promotion, Discussion Paper on Financing Requirements of Infrastructure and Industry, Government of India, (2011). Gujarat Infrastructure Development Board, Review of Blueprint for Infrastructure in Gujarat (BIG 2020) Final Report, Government of Gujarat, (2009). Mahalingam, A., PPP Experience in Indian States: Bottlenecks, Enablers and Key Issues, IIT Madras, (2008). Mahadev, R., Tirupur Water Supply and Sanitation Project: An Impediment to Sustainable Water Management? IELRC, Working Paper No.1, (2008). McKinsey & Company, Building India: Accelerating Infrastructure Projects, (2009). National Highway Authority of India, Concession Agreement for Design, Engineering, Construction, Development, Finance, Operation and Maintenance of 4 Laning of Existing 2 Lane Section from KM. 285 (Near Padalpur) to KM 325 (Near Trichy) on NH-45 in the State of Tamil Nadu on Build Operate Transfer Basis, Government of India, (2006). Planning Commission, Government of India Chaturvedi, B.K., Second Report on Faster Implementation of NHDP, (2010) Draft 12th Five Year Plan Document, (2011) Eleventh Five Year Plan Document, (2008) High Level Expert Group Report on Universal Health Coverage for India' (2011). Model Concession Agreement for National Highways, Secretariat for Infrastructure, Indian (2009). Pargal S., Concession for Delhi Noida Bridge, (2007). Report of the Expert Group to Review the Methodology for Estimation of Poverty (2009)
P. Pangotra, Case Study of Delhi Mumbai Freight Corridor (IIMA), National Strategy for Promoting Low Carbon Transport in India, (2011). R. Govinda et al., Access to Elementary Education in India: Country Analytical Review, NUEPA, (2008) State of Environment Report India 2009, Ministry of Environment & Forests, Government of India, (2009) The State of Environment India 2001, Ministry of Environment and Forests, Government of India, (2001) World Bank, The Nexus between Infrastructure and Environment, (2007)
Athena Infonomics India Pvt. Ltd. 6th Floor, B Block, Mena Kampala Arcade Sir Theagaraya Road, T. Nagar, Chennai 600017 Ph: +91 44 42327112/13, 28152778 Fax: +91 44 28152778 www.athenainfonomics.in

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|A n a l y s i s o f P P P s i n I n d i a : L e s s o n s f o r S o c i a l S e c t o r s

Public Private Partnerships in India

Public Private Partnerships in India

Public Policy Team, Athena Infonomics

Appendix .......................................................................................................... 45 References ........................................................................................................ 59

UMPP UNEP USA USD VGF WUA WFSL

List of Boxes Page

Dr. S. Narayan, IAS (retd.)

Public Private Partnerships in India

Rapid Economic Growth

% Real GDP Growth

India China Brazil Russia US UK Japan

Role for Private Sector

Fig. 1.4: Annual Number of Mobile Subscriptions (In thousands)

INR Lakh Crore 20.6 7.7 6.7 6.2

666,525 Roads Railways

1,289,946 Roads Railways

Exhibit 2.1: Types of Private Sector Participation

Public Private Partnerships Features: Comparison with Global Practices

Private Sector Investment

Transfer of Asset Back to the Government

Public Nature of Service

Exhibit 2.2: Comparative Analysis of Features of Different PPP Definitions

Analyzing Public Private Partnerships

Project Identif ication Monitoring

Fulf ilment of mandate to provide public inf rastructure

Cost of capital Opportunity Cost

Political Risk? Regulatory Risk? Residual Asset value risk

Financial viability risk Currency Risk? Asset liability tenure mismatch

Debt Private developer

Tax User charges Displacement

Environmental/ social impact Exclusion

Return on investment Increased technical competence Enhanced brand equity

Section III Seven Success Factors For Effective PPPs

Exhibit 3.1: Seven Success Factors for PPP Projects

June Final Bids to be submitted

Sept Bid Date extended

Box 3.2 Nhava Sheva International Container Terminal

2. Private Sector Capacity

Private Developers Technical Competence:

Building India Accelerating Infrastructure Projects McKinsey & Company, 2009.

Box 3.3 Vizhinjam International Container Terminal

Successful bidder identified Letter of Intent issued

Revised date for Commercial Operation of Unit I as per CA

Scheduled date for Commercial Operation of Unit I as per CA

Feb. 2006 Dec. 2006

Invitation for EOI

4. Financing and Commercial Viability

Box 3.5 Delhi-Noida Toll Bridge (DND Flyway)

Company undergoes debt-restructuring

Toll hike uncertainty (10 % vs. 25 %)

Losses incurred due to revenue shortfall during initial years (2001-2005)

Exhibit 3.3: Allocation of Risk and Mitigation Measures in PPP Projects

Risk Assigned/Risk Bearer

Project Development Risk

Construction Period Risk

Engineering Procurement Construction (EPC) Contractor/ Concessionaire

Output specification instead of input specification Sub-contracting individual components of project

Maintenance Standards 3. Operation Risk Injuries to Users Environmental Risks

Exhibit 3.5: Taxonomy of Provision of Public Services

Description Nonsubsidized Partially subsidized

Government Private sector philanthropists, donor foundations, CSR etc

One paise is the hundredth part of Indian Rupee.