Guidelines

For
Public Private Partnership
(PPP)
In
Haryana

PPP Cell

Finance Department
Government of Haryana

GUIDELINES ON PPP IN HARYANA

1. BACKGROUND
1.1 Haryana is amongst the richest States in India and one of the preferred investment
destinations in the country. It is a leading centre for the manufacture of automobiles
and its components, the preferred investment destination in IT and IT enabled. It has
been attracting handsome investments mainly in construction sectors, electricity,
manufacturing and services. Haryana aspires to be the number one State in the
country in terms of investments and in the quality of life of its people. To achieve this,
the State would need to bring about substantial improvement in its physical and social
infrastructure so as to bring about further improvements.
1.2 State would require huge financial resources, managerial capabilities and
manpower in bringing about the substantial improvement in delivery system of
physical and social infrastructure. Private Sector can play a significant role in
augmenting the efforts of the Government. Government of India has been seeking,
increased private sector investments in infrastructure to cover the deficit in
infrastructure services. It has taken a number of steps to create enabling and
conducive environment to attract private investment through a mutually beneficial
arrangement under Public Private Partnership (PPP) approach (Appendix I).
1.3 State Governments have also recognized the benefits of PPP and have adopted this
as preferred mode of delivery of pubic services. There are around 300 projects on PPP
in various sectors in different States. Road sector accounts for major share at 64%,
followed by Ports at 13%, Urban Development at 10%, Energy at 10%, Airports at
2% and Railways at 1%.
1.4 Government of Haryana (GoH) recognizes that a partnership approach under
Public Private Partnership (PPP) should be one of the tools to deliver public services
to improve the assets and services. The stated policy of Haryana Government (official
website: haryana.gov.in), implicitly and explicitly, recognizes the role of private
sectors in physical and social infrastructure sectors such as IT, Education, Industries
and Tourism etc. Government has also brought out the Policy for Public Private
Partnership (PPP) in Haryana as enabling measure.
2. DEFINITIONS OF PUBLIC-PRIVATE PARTNERSHIP (PPP)
2.1 A Public-Private Partnership (PPP) is a long term contractual agreement between
a public agency (federal, state or local) and a private sector entity for providing a
public asset or service in which the private party bears significant risk and
management responsibility.
2.2 PPP has been defined by various institutions as given below: Government of India:
PPP means an arrangement between a government or statutory entity or
government owned entity on one side and a private sector entity on the other,
for the provision of public assets and/ or related services for public benefit,
through investments being made by and/or management undertaken by the

private sector entity for a specified time period, where there is a substantial
risk sharing with the private sector and the private sector receives
performance linked payments that conform (or are benchmarked) to specified,
pre-determined and measurable performance standards.
(Department of Economic Affairs, Ministry of Finance, Government of India,
2010).
The earlier definition was A partnership between a public sector entity
(sponsoring authority) and a private sector entity (a legal entity in which 51%
or more of equity is with the private partner/s) for the creation and/or
management of infrastructure for public purpose for a specified period of time
(concession period) on commercial terms and in which the private partner has
been procured through a transport and open procurement system.
The International Monetary Fund (IMF):
Public-private partnerships (PPPs) refer to arrangements where the private
sector supplies infrastructure assets and services that traditionally have been
provided by the government. (IMF 2004,)
The World Bank:
PPP programs are projects that are for services traditionally provided by the
public sector, combine investment and service provision, see significant risks
being borne by the private sector, and also see a major role for the public
sector in either purchasing services or bearing substantial risks under the
project. (World Bank 2006, p13)
The Asian Development Bank (ADB):
PPPs broadly refer to long-term, contractual partnerships between the public
and private sector agencies, specifically targeted towards financing, designing,
implementing, and operating infrastructure facilities and services that were
traditionally provided by the public sector (ADB 2006, p15)
The European Union:
A PPP is the transfer to the private sector of investment projects that
traditionally have been executed or financed by the public sector (European
Commission 2003, p96)

3. MAIN FEATURES OF PPPS

3.1
Cooperative and Complementary Relationship:
PPPs represent the
cooperation between government and private sector. Most successful partnership
arrangements draw on the strengths of both the public and private sector in order to
establish complementary relationships between them. PPP arrangements are long term
in nature, typically extending over a 15 to 30 year period. This factor helps to
establish productive and lasting relations built around the expertise and capacity of
both the partners based on contractual agreement which ensures appropriate and
mutually agreed allocation of resources, risks and returns.
3.2
Shared Responsibilities: The responsibilities in a PPP project are shared
between the public body and private enterprise. However the Government still
remains accountable and responsible for the provision of high quality services that
meet the public needs.
3.3
Risk Transfer: A key element of PPPs is their potential to deliver public
services in more economically efficient manner. At the beginning of the relationship,

potential risks associated with the project are identified and each party adopts those
which it is best equipped to manage. The public sector can therefore transfer
appropriate risks to the private partner, who has the necessary skills and experience to
manage them. The delegation of risks depends on the type of mode adopted for PPP
as depicted in Fig. 1.
Fig. 1: Delegation of Risk in PPP
Enabler/
100% private

regulator
Divestitures
BuildOperateOwn
Concessions
Build-Operate-Transfer
Role of Government

(back to Government)

Ownership

Leases

Management
Contracts
Provider
Service contracts
100% public
5

10

15

20

30
years

Delegation of risk to private sector, level of commitment required

3.4
Flexible ownership: PPPs enable flexible arrangements between public and
private bodies, where the public body may or may not retain ownership of the project
or facility that is produced. In some cases, the private organisation may be contracted
only to construct facilities or supply equipment, leaving the public body as owners,
operators and maintainers of the service. Alternatively, the public sector may decide it
is more cost-effective not to own directly and operate assets, but to purchase these
instead from the private entity. Services may be purchased for use by the government
itself, as an input to provide another service, or on behalf of the end user.
3.5
The information given on historical background to PPP in Appendix II, on
lessons learnt from PPP programmes in Appendix III, on some facts about PPP in
Appendix IV, on strength and weakness on PPP in Appendix V, on common
misconceptions on PPP in Appendix VI, on PPP and conventional procurement in
Appendix VII, on enabling environment for PPP in Appendix VIIII, on project
financing in Appendix IX may be referred for further details. Various models of PPP,
generally in practice, are given in Appendix X which may provide guidance in
selection of appropriate model.

3.6

The main players in a PPP project are :

public sector
private sector
financial players
insurance and export credit agencies
international institutions
Users

4. PPP IS NOT
Simple outsourcing where substantial financial, technical and operational
risks retained by the Institutions
Donation by Private Party for Public good
Privatisation or Divesture of State assets and/or liabilities
Commercialistion of a public function by creation of a state owned enterprise
Constitute borrowing by the state
5. DEVELOPMENT OF PPP PROGRAMME
Follow specific guidelines should be considered before launching PPP program:
5.1 When starting from a low base of PPP development, the aim should be to
incorporate key principles of good governance but not necessarily to have a complete
PPP framework in place. A complete PPP framework can be worked towards while
some projects are being developed and experience gained.
5.2 Develop a proper PPP policy and consult widely on it. Take into account views
where they do not ultimately endanger the key concepts of transparency/ competition
and benefits.
5.3 Build capacity in the public sector institutions and help develop capacity in the
private sector. Convince the private sector that doing PPPs well means more and
better business for them.
5.4 The policy should encompass a flexible approach that fits the political, financial,
economic social situation/conditions in each country. A comprehensive and rigid
approach from day one is neither desirable nor essential.
5.5 If, in the initial stages, a pipeline of PPP projects is difficult to prepare, ring fence
several good projects and develop as PPPs, flexibly, but incorporating key minimum
conditions for PPP.
5.6 Work towards a pipeline of good i.e. bankable PPP projects.
5.7 Develop good projects, with help of multilaterals/good advisors, with the basic
PPP principles of;
Good project preparation including sound draft tender documents
incorporating the principles of competition and transparency.
Consider a range of highway projects; bridges, tunnels, new motorways,
Brown field upgrading, maintenance, rural roads, port and airport accesses.
Consider a range of PPP modalities PBC, Concessions, BOT, Annuities etc.

 Select projects that are reasonably large but not too complex or risky and if
possible those that need little or no government financial support.
Understand and integrate risk management (identification, allocation and
mitigation) principles in the selected projects.
5.8 Obtain commitment at all levels, starting at the most senior across the board and
within the line Departments/ Local Bodies/ Public Undertakings.
5.9 Prepare projects on a realistic schedule-keep up pressure but not cutting corners to
fast track.
5.10 Work towards, have a view to the development of, in the medium-term a more
comprehensive framework of laws, regulations and regulatory bodies. Regulate by
contract initially.
5.11 Appropriately and effectively address the major concerns of concessionaires and
investors, which are:
Cost, time, and quality of the PPP bid process.
Availability of required land and environmental clearances
Clarity and stability of the legal and regulatory framework
Criteria for evaluating bids
Quality of the public sector project team, its advisers and decision making
Security of the projects income stream (demand, bankability of public
sector obligations)
Deliverables and assessment of performance: What are they expected to
deliver, and how will their performance be measured?
Status and availability of connecting infrastructure and availability of
inputs and terms of supply
Effectiveness and enforceability of the PPP contract and related
agreements
Wider operating environment for private capital
Returns commensurate with the risks they are asked to assume
Effectiveness with which the public sector will manage the contract and
make decisions
Opportunities to refinance the debt or sell the investment.

6. PPP PROJECT IMPLEMENTATION PROCEDURE

6.1 Figure 2 gives main steps to be followed for the implementation of PPP projects in
the State
Fig. 2: Main Steps in PPP Project Implementation

Public Sector
Committee under FCF
in consultation with
concerned
Departments and
assisted by PPP Cell
FD may engage
consultant for above
exercise
Sector Focused Units
Action on LA etc
Standardization of
documents
Consultation with
client and marketing
Approval of CoSI for
PQ documents
Approval of CoSI for
RFP document
Constitution of
Evaluation Committee
Approval of CoSI or
CCI, depending Upon
the size of project
Appointment of
Independent
Consultant if required

Private Sector
Identification of Sector for Focus and
Preparation of Long List of Possible Projects

Project Identification and Prioritization

based on Pre-feasibility Study

Possible
Investors
Conference

Engagement of Transition Advisor

Feasibility Study and Bid Documents
PQ of Bidders
Issue RFP
Pre Bid Meeting

Bidders
Apply for PQ

Bidders
attend and
seek
clarification

Final RFP for Bidders

Bid Evaluation

Bidders
Submit
Proposal

Agreement Signing

6.2 Procedure for Approval of PPP projects

Following procedure shall be followed for implementation and approval of PPP
projects:
A Committee under Financial Commissioner & Principal Secretary, Finance shall
identify the infrastructural (physical and social) Sector(s)/ areas of focus. This
Committee shall be assisted by the PPP Cell in Finance Department. Finance
Department may engage consultant (either on retainer basis or sector specific) to
assist in identification of projects and their prioritisation based on pre-feasibility
study. The concerned Administrative Departments or State Public Sector
Undertaking(s) or Municipalities or Urban Local Bodies or other Government
statutory authorities or other entities under their administrative control (Authority)
shall be consulted in this exercise. The prioritised list for sectors shall be brought

before CoSI for approval, to be taken up on PPP. A meeting of the CoSI will be
convened within one month to consider the proposal(s) for 'in principle' approval.
Prioritised list of possible PPP projects shall then be sent to the concerned
Administrative Departments or State Public Sector Undertaking(s) or
Municipalities or Urban Local Bodies or other Government statutory authorities or
other entities under their administrative control (Authority) for taking forward the
process of implementation of project(s) on PPP in accordance with the Policy.
Authority shall identify an officer or team for implementing the identified
project(s).
Authority would engage a Transaction Advisor (TA) through competitive
selection process and with the approval of the concerned Administrative
Secretary. The Template of the RFP for engagement of TA as available on the
web site: pppinharyana.gov.in should be used with modifications done to meet the
sector specific requirements.
The TA shall prepare Feasibility Study (also including project structuring,
financial analysis, bid process), RFQ, RFP and Concession Agreement, and assist
the Authority in procurement of private partner. For initiating the procurement,
RFQ document shall be submitted by the sponsoring Authority, to the PPP Cell,
for seeking approval of CoSI. The meeting of CoSI would be fixed within a month
time, on submission of the document to PPP Cell. The Authority would then
circulate the agenda and memoranda (giving brief of the project particulars) to the
members of CoSI. CoSI will either approve or request the Authority to make
necessary changes for further consideration of CoSI.
After the requisite approval, the Authority would invite applications for
Qualification (RFQ) for two stage bid process. Prequalification would involve
pre-proposal conference for any clarification etc, issue of response to them,
receipt of RFQ application, and their evaluation and due intimation to prequalified
applicants. TA shall assist the Authority in these exercises. The Authority shall
constitute an Evaluation Committee with members, keeping in view the
requirements of the project. It would be advisable to have at least one sector
expert as one of the members.
The TA shall also prepare RFP with draft Agreement. The Authority shall submit
these bid documents to the PPP Cell for seeking approval of CoSI. The meeting of
CoSI shall be convened within one month. On approval, these documents,
Authority shall issue them to the qualified applicants for bid submission. For
single stage bid process, RFP with draft Agreement shall be submitted to CoSI,
through PPP Cell, and got approved as above and bids invited through open
invitation
After evaluation and selection of bidders the final proposals with finalized bid
shall be submitted to PPP Cell for seeking approval of CoSI/ CCI ( as the case
may be, depending upon the project cost and period of concession, according to
the provisions of PPP Policy).
The Authority shall take further action to award the work, shall sign the
Agreement and implement the project.

6.3 Project Identification

The starting point in originating PPP project ideas should be the broader infrastructure
or sector planning process, or a strategic assessment of where PPPs may add most
value. The Committee under FCF would first identify sectors requiring attention; and
reference may be useful to the study Report on Haryana Infrastructure Vision 2030
8

for sectors of water supply, sanitation, solid waste management, urban transport, rural
infrastructure got done by the State with assistance from Department of Economic
Affairs (DEA) Ministry of Finance, Government of India and Asian Development
Bank (ADB). The PPP Toolkit for Improving Decision Making Process developed by
the PPP Cell in DEA, (pppinindia) provides guidance for project identification and
can be utilised. The project identification would also depend on the priority that the
specific sector requires and possible candidate PPP projects based on an assessment of
viability, affordability and provision of value for money compared to other options. It
may be advisable to have a pre-feasibility study/ assessment got done, for the
availability of some of the necessary requirements such as land, shifting of utilities if
any, possibility of getting environmental clearances etc. It would be desirable that
shelf of projects are created which could be offered on PPP. A committee under FCF
shall identify sectors for focus and possible projects on PPP. These shall be brought
before CoSI for approval and for taking further actions. The list of such projects then
shall be passed on to the Administrative Departments or State Public Sector
Undertaking(s) or Municipalities or Urban Local Bodies or other Government
statutory authorities or other entities under their administrative control (Authority) for
taking forward the process of implementation of project(s) on PPP in accordance with
the Policy.
6.4 Setting up the project team
PPP projects generally need complex skills and therefore it is advisable to have a team
base management approach. The team may not necessarily be a large one. The
Authority should identify an officer at middle level for project handling and
implementation. This action should also be accompanied by capacity building efforts
in the Authority. System should be developed whereby officers regularly participate
in trainings, seminars and workshops etc so that nuances of the PPP project are well
appreciated in the Authority for smooth and speedy project implementation
6.5 Mistakes to be Avoided
While developing a project on PPP, following common mistakes should be avoided

Lack of clarity by the Authority regarding what it wants from the project

Lack of project ownership and leadership

Poorly resourced project (and programme) teams

Selection of advisers on the basis of cost rather than quality and experience

Lack of effective engagement with stakeholders

Lack of understanding of and contact with the private sector at senior levels
and poorly conducted market sounding

Expectations that the private sector will deal with issues, such as the
acquisition of land, that are better handled by the public sector

Lack of clarity about the public authoritys legal powers to enter into the
public-private partnership contract

Conflict between the procurement process and procurement regulations

Overly ambitious project preparation timetables

Release of incomplete project information.

6.6 Engagement of Transaction Advisor (TA)
Having identified the project to be taken up on PPP and setting up the project
implementation team or officer, the next steps are the project structuring (type of PPP
mode) and preparation of bid documents for inviting proposals and selection of

private partner. This can be done either in-house or outsourced. PPP projects require
inputs and expertise in the disciplines of finance, legal and sector specific technical.
Since such skills may not necessarily be available within the Authority, it would be
advisable to engage a consultancy firm as Transaction Advisor (TA). The Authority
would undertake the procurement of services of TA in a transparent manner through
competitive bidding process with the approval of the Administrative Head. The
advertisement for this should be published in at least one National and one Regional
newspaper. A Template of the RFP for engagement of TA is available on the website;
pppinharyana.gov.in, which should be used after doing the project specific
modifications. The composition of core team or key personnel from TA would depend
upon project specific requirements (The Key Personnel and their respective maximum
marks may be suitably modified to address project-specific requirements). Since the
composition of the team and its key members is crucial for successful implementation
of the project, the quality-cum-cost base selection (QCBS) should be adopted where
by a weight age of 70/30 or 80/20 (where the intellectual and design content is
comparatively higher). should be given. The TA is expected to perform/ assist the
client in, main activities in project implementation as discussed in succeeding
paragraphs.
6.7 Preparation of Feasibility Report
TA would produce a comprehensive Feasibility Study Report, in close liaison with the
Authority. For most of the PPP projects, Feasibility Report should meet the
requirements (it also provides window for innovation and application of new concepts
and technologies); however, depending upon the project requirement, venturing into
altogether new area and its complexity, Authority may choose to have a Detailed
Project Report (DPR) to fine tune the spelling out of the core requirements of the
project. The Feasibility Report should provide answer to following key questions:
Is the project affordable?
What of the key risks and their managements strategy.
Would the project offer value for money.
What would be financing sources?
Is the project viable on PPP. The viability of a PPP project depends on
revenue generation along with expected growth, user fee rates and on
estimated project cost which normally includes cost of civil works, interest
during construction, financing charges, contingencies, expenses on operation,
maintenance and management etc. (excluding cost of land, as, cost of land
and other pre-construction activities are to be borne by the Implementing
Agency), operation & maintenance cost and VGF.
The Feasible Report would essentially indicate project structuring, mode of PPP to
be adopted, cost estimation, risk allocations, commercial and financial analyses,
optimal procurement methodology. Value for Money (VfM) assessment, and
identification of the issues to be addressed by the Authority. The feasible study
prepared by TA would be appropriately considered by the Authority and accepted for
taking further procurement steps. It may be helpful to have power point presentation
of the main features of the Report and issues for consideration of Authority in order to
facilitate process. The Feasibility Report should either be provided along with the RFP
or at least 45 days prior to the Bid Due Date.

10

6.8 Stake Holders Consultation

The TA would be required to maintain close liaison with the Authority. Various stake
holders shall be formally and informally consulted, in the process of preparing
feasibility report and project structuring so that their concerns get adequately
addressed and project runs without objections. TA would also undertake market
survey to identify potential partners and to sell the project.
6.9 Preparation of Request for Qualification (RFQ).
The TA shall prepare the Request for Qualification (RFQ) and assist the Authority in:
Conduct of pre-application meeting,
Evaluation of qualification applications and
Short-listing eligible applicants.
Bidding documents shall be issued, against the prescribed fee, to all those firms who
request for the same. The cost of RFQ may be determined at the rate of Rs. 10,000 for
every Rs. 100 crore or part thereof comprising the estimated Project Cost. Thus the
cost of an RFQ document for a project of Rs. 500 crore shall be Rs. 50,000 .
The technical qualification threshold to be prescribed should be that the bidder has
done in the last 5 years, relevant Project(s) and other core sector (physical or social, as
the case may be) of sum total of more than equivalent to twice the Estimated Cost of
the Project for which bids are being invited. Where deemed necessary, for example
sector is new for PPP and participation could be low, the Authority may
increase/decrease this amount by one half of the Estimated Project Cost.
The Financial capability threshold should be:
Parameter
Value
Net Worth in the preceding year
Minimum 25% of project cost
Average Turnover for last 5 years
Minimum 100% of project cost
The document would also give the time schedule as below:
Stage
Date
1. Last date for receiving queries
[25 days from date of RFQ]
2. Pre-Application Conference
[30 days from date of RFQ]
3. Authority response to queries
latest by [35 days from date of RFQ]
4. Application Due Date
[45 days from date of RFQ]
5. Announcement of short-list
Within 30 days of Application Due Date
A
model
document
of
RFQ
is
available
on
the
website;
http://infrastructure.gov.in/pdf/PreQualif_bidders.pdf, which may need modifications
to meet the project specific requirements. The pre application meeting would be held
where prospective applicant can seek clarifications. Based on the discussions in this
meeting, the Request for Proposal can be modified, if considered necessary. The
Authority shall constitute a Bid Evaluation Committee for evaluation of qualification
applications and the bids. The Authority would seek CoSI approval for RFQ
document through PPP Cell.
6.10 Preparation of Request for Proposal (RFP)
TA shall prepare the RFP document including the Concession Agreement which shall
be issued to the qualified applicants for two stage bid process and to all for single
stage bid process. The model document for RFP document for bidders is available on
the website: http://infrastructure.gov.in/pdf/Model_REQ.pdf which may need
modifications to meet the project specific requirements. The RFP document mainly

11

comprises:
Instruction to Bidders
Draft Concession Agreement (DCA)
Schedules to DCA
In deciding on the bid parameter in the RFP, it needs to appreciate that three factors
are important; one is the period of Concession (Agreement, based on financial
analysis of the project), the other is return on investment through user fee through
directly or through user based payment (shadow fee); the third factor is the financial
support that the project requires to make it finically viable and implementable. The
bidding parameter for financial bid should be one of these factors for simplicity of
evaluation. Normally it is either financial support (grant from the Government; there
could be a premium also offered by bidder to the Government in case revenue returns
are very healthy) or period of Concession. In case of Annuity projects, the bid
parameter is the Annuity amount quoted by bidders.
The RFP document would invariably make provision for pre-bid conference which
would provide an opportunity to the client to make assessment of the market response
and to the prospective bidders any clarification or possible suggestive modification.
The out come of this bidders conference would be the necessary written
clarifications. It would also specify the date of submission and bidding schedule; as
suggested below:
Event Description
1. Last date for receiving queries
2. Pre-Bid meeting-1
3. Client response to queries latest by
4. Bid Due Date
6. Opening of Bids
7. Letter of Award (LOA)
8. Validity of Bids
9. Signing of Concession Agreement

Date
[25 days from the date of RFP]
[To be specified]
[35 days from the date of RFP]
[To be specified]
On Bid Due Date [at least 45
days from the date of RFP]
Within 30 days of Bid Due Date
120 days of Bid Due Date
Within 30 days of award of LOA

The Concession Agreement has to be carefully drafted so that all financial, legal and
project specific technical requirements are addressed in the manner that disputes
could be eliminated.
The Draft Agreement should cover the following topics at the minimum:
scope of the project
rights and obligations of the parties;
risk allocation, right to some compensation, breaches, events of defaults and
penalties;
grant of concession
Operation & Maintenance (O&M) requirements
Standards and Specifications
service performance standards and targets, which need to be objective and
measurable;
procedure for permitted modifications, as well as their scope and nature;

12

payment mechanisms (e.g. tariffs, subsidies, grants/ premium ) and

adjustments to payments in response to various contingencies;
penalties (and possibly bonuses) which have financial consequences or give
rise to warning notifications (eventually leading to termination of the PPP
contract);
security and performance bonds;
project insurances;
terms of the PPP contract;
provision of escrow account and agreement, as per project requirement
the conditions for termination (categorised by party and type of event) and
compensation upon termination (for each type);
step-in rights (both for lenders and, in emergency situations, the Authority);
the definition and impact of force majeure and changes in law; and
the dispute resolution procedure.
schedules describing in detail some of these requirements

The RFP document shall be taken to CoSI, through PPP Cell, for its approval before
the same is duly issued. Any modification in the RFP either consequent to pre- bid
conference or otherwise shall also be got approved by CoSI.
6.11 Pre-bid conference
In PPP projects, pre- bid conference is desirable as it play a very useful role in
providing opportunity for clarifying the queries that prospective bidders may like to
seek in regard to the provisions of bidding documents and other details. It should
normally be held one month prior to deadline for submission of Bids. Queries raised
by various firms/ bidders shall be discussed in the Pre-Bid Conference/Clarification.
Based on those discussions, the Authority shall issue clarifications and or modify the
RFP if considered necessary. If modified RFP is issued then Authority may consider
revising the bid due date. The concerned Authority would keep on consulting PPP
Cell in the process.
6.12 Authority web site
The Authority should also host all its project advertisements, documents for RFQ,
RFP, clarifications, modifications and any project related information on bid process
on the Authoritys web site for wide dissemination and transparency. For realising the
document/ bid processing fee etc. guidance can be provided that the same shall be
payable while submitting the document, if downloaded from the website.
6.13 Award of Concession
On receipt of bids (single stage or two stage bid process), they would be evaluated by
an Evaluation Committee, constituted by the Authority, duly assisted by the TA, if
appointed. One or combination of one or more of the following criteria should be
considered for selection through competitive bidding depending upon the bid
parameter
Lowest bid in terms of the present value of user fees;
Highest revenue share to the Government
Highest up front fee offered by bidder
Shortest concession period
Lowest present value of the subsidy

13

Lowest capital cost and Operation & Management cost for Projects having a
definite scope;
Highest equity premium
Quantum of State Support solicited in present value
Such other suitable selection criteria as the CoSI/ CCI may allow or
determine.

Based on the evaluation done and got approved by Administrative Secretary/

Competent Authority, the proposal shall be put up to CoSI (through PPP Cell, the
Secretariat for CoSI) for approval which shall consider the same to be placed before
CCI, depending upon project cost and period of concession as per the Policy.
After the final approval, Authority shall issue the Letter of Acceptance (LAO) to the
successful bidder. The LAO should include the requirements to be fulfilled including
any securities/ performance guarantees etc to be furnished before signing of the
Agreement.
6.14 Signing of Concession/ Contract Agreement
The Concession/ Contract Agreement shall then be signed by the authorised
signatories of the bidder (depending upon their legal status, ie. consortium, SPC, JV
etc.) and the Authority. The role of TA should normally end at this stage unless the
Authority wants their services till financial closure for the project.
6.15 Treatment of Sole Bid
In case of the competitive bidding process resulting into a Sole Bid, the Authority
shall decide the matter only with the approval of CoSI.
6.16 Treatment of Limited Response
In case the competitive bidding process does not generate sufficient of response and if
even a sole bid is not received, then the Authority shall, with the approval of CoSI,
either modify the pre-qualification criteria and / or the risk sharing provisions and
restart the bid process; or may cancel the competitive bid process.
6.17 Monitoring of the Projects
CoSI will monitor the progress of PPP projects. All the Departments/Agencies
(Authority) carrying out PPP projects will keep the PPP Cell informed regarding the
latest development. The Nodal of the Authority shall update the status of the
project(s) every month on the window of www.pppinharyana.gov.in. The Nodal
officer shall periodically review the progress/ status of PPP project under
implementation, in pipeline.
6.18 Unsolicited Proposals
Unsolicited proposals for infrastructure projects from private investors can introduce
innovative ideas but is fraught with risks. It can introduce the element of lack of
transparency and the loss of cost benifits of competitve bidding process. There is also
risk that the fairness of the contract award could be challanged at a later stage by
dissappointed potantial bidder. In many cases, unsolicited proposals may require
Government gaurenties and land grants. Two ways have been generally tried to
address transparency and competitiveness issues; one is to buy the project concept and
adopt competitive bidding (known as Swiss Challange) and the other is to give
advantage (eg. Bonus) to the origianl project proponent in bidding. But it is not easy

14

to find the right balance between incentives to propose benificial projects and
incentives for third parties to submit counter proposals. One way to reduce public
sector corruption and opportunistic behaviour by private proponents of projects is to
forbid all unsolicited proposals.
Considering the risks involved in considering unsolicited proposals and doubtful
benefits as brought out above and the possibility of more time taken (resulting in
avoidable delays), to address the issues of transparency and competitiveness, it would
not be prudent to entertain unsolicited proposals till the situation gets matured.
7. MAIN FEATURES OF PPP PROJECT REQUIRING ATTENTION
7.1 Main Features of a PPP Project
PPP Project is a project based on a contract or Concession Agreement between a
Government or statutory entity and a private sector company, with the following
essential elements:
Fixed Concession period
Pre-determined user charges/tariff
Pre-determined scope of work for the Concessionaire
Pre-determined bidding parameters, i.e., VGF/ Premium/Revenue Sharing/ Lease
Rent
All conditions, specifications, and project agreements frozen prior to inviting final
bids
Key Performance Indicators and measurable parameters
Mechanism for return on investment
Dispute resolution mechanism
Independent agency for ensuring of project implementation in accordance with
agreed terms and conditions
Land required for the project available with the Implementing Agency
7.2 Implementing Agency (Authority) Support
7.2.1
Implementing Agency (Authority) will meet the cost of following items : Feasibility Study and preparation of Project Report, either in-house or through
TA.
Land for the project requirement (Right of Way) and en-route facilities.
Environmental Clearances.
Clearance of the Right of Way (land):
relocation of utility services
cutting of trees
resettlement/rehabilitation of affected establishments
Authority may, however, involve the private sector in these activities to minimize
delay in their completion.
7.2.2 Authority may provide Grant/Subsidy to the Concessionaire, depending on the
financial viability of a project, the amount of which will be determined solely on the
basis of competitive bidding. Depending on viability of the project, there may be a
negative grant /premium to be paid by the Concessionaire to the Implementing
Agency, which shall be decided on the basis of competitive bidding.

15

7.3 Concession Period

The Concession Period is the duration for which the agreement has been signed and
comprises the construction period which will be project specific, and the period
during which the private partner is permitted to levy fee and is liable for operating,
maintaining and managing the facility, which will be determined on the basis of
viability of a project and may be up to a maximum of 30 years as prescribed by
Government of India. However, in cases where the returns might take a long time, a
longer concession period may be considered to make the project viable subject to
approval by CCI. On expiry of the concession period, the Concessionaire has to hand
over the property created under the project to the Agency/Government in its original
condition/shape as when it was constructed. The concession period may be extended
suitably, to cover any Force Majeure Conditions. If the Concessionaire completes
construction of project before expiry of the period specified in the contract, it will be
entitled to collect user fee for the period saved in construction, in addition to the
normal operation period. In case of delay in construction beyond the specified timelimit, the fee collection period will get reduced correspondingly, along with damages
payable by the Concessionaire. This may be seen as the returns on investments to be
made by the Concessionaire. For this calculation, estimated project cost and future
revenue will be taken into consideration.
Concession Period is decided based on reasonable profit expected, IRR (should be
more than 13% depending upon bank interest rates on debt) and on the return on
equity investment made which should be in the range of 15-20%.
Based on the above, Profitability Statement, Cash Flow, Return on Equity, IRR,
Payback period etc. are to be calculated with different concession periods and
different percentage amounts of VGF.
7.4 Viability Gap Funding (VGF)
Some projects may need financial support to make them finically viable. To offer
proper financial support to such projects, GoI has devised a scheme known as VGF
(Viability Gap Funding). Under this, a grant of 20% of the total project cost is made
available by GoI and the balance grant up to 20% grant (of the total 40% grant limit
prescribed by GoI) shall be given by Government of Haryana as prescribed in PPP
Policy for Haryana. Thus, through VGF, a seemingly unviable project can become
financially viable and attractive to the private sector. The procedure for seeking VGF
from GoI is given in paragraph 3.2 of Appendix I.
VGF is normally in the form of a capital grant at the stage of project construction. For
projects involving VGF, the Concessionaire needs to be selected through a transparent
and open competitive bidding process. The criteria for bidding will be the amount of
VGF required by the bidder, when all of the other parameters are comparable.
7.5 Financial Closure
For PPP projects, Financial Closure is an important milestone which refers to the tieup and fulfilment of all condition precedent to the initial availability of the funds for
the Project from Lenders, Banks, Fls, etc. under the financing arrangements.

16

7.6 Bidding Process

The bid process for PPP projects should be fair, efficient, effective, competitive and
transparent. Though, there are various processes for procurement of goods and
works, but for PPP projects, either of the two process are generally adopted. These are
Single Stage two cover system and Two Stage- two cover system.
7.6.1 Single Stage Two Cover System
In cases where the project size is small (less than Rs. 50 crores), project requirements/
configuration is simple, practices/ technologies for the sector have matured and/ or
there is some urgency for procurement, single stage bid process can be adopted,
where Qualification Proposal (Technical and Financial capability of the bidder) and
Financial Proposal are invited simultaneously but in two separate covers through open
invitation by advertisement, in at least one National and one Regional news paper and
by hosting on the related web site. Request for Proposal (RFP) need to clearly
prescribe the criteria for Technical and Financial capability of bidders and the bidding
parameters for Financial Proposal. Firstly the Technical and Financial capability of
the bidder is evaluated as the prescribed criteria. The Financial Proposals of only
those bidders are opened who possess Technical and Financial capability as per the
Bid Document. Generally, the Technical capability reflects the project experience in
last five years, equal to twice of the estimated project cost. Financial capability is
assessed in terms of :
Parameter
Net Worth in preceding year
Average Turnover for last 5 years

Value
Minimum 25% of project cost
Minimum 100% of project cost

These are indicative threshold conditions and may be decided on project specific case.
The Financial proposal is then evaluated on least cost basis as mentioned in the bid
documents.
7.6.2 Two Stage Two Cover System
In the case of contracts for large complex facilities or works of a special nature or
turnkey contracts or complex information and communication technology, it may be
undesirable or impractical to prepare complete technical specifications in advance. In
such cases, a two-stage bidding procedure may be used, under which first un priced
technical proposals on the basis of a conceptual design or performance specifications
are invited, subject to technical as well as commercial clarifications and adjustments,
to be followed by amended bidding documents and the submission of final technical
proposals and priced bids in the second stage.
A two stage bidding process shall broadly comprise of the following two stages:
(i) 1st Stage Bidding (Technical and financial capability assessment, without prices)
(ii) 2nd Stage Bidding (Price Bids)
In the first Stage, proposals would be invited for prequalification of bidders. Proposals
shall generally be invited through publication of the Invitation of Bids in newspaper,
at least in one National and one Regional and by hosting on relevant web site. The
Request for Qualification (RFQ) document prepared either in-house or by engaging
Transaction Advisor shall give the background of the project, bid process, criteria for
evaluation and general instructions. In the second stage, the RFP document including
the draft Concession Agreement shall be issued to those who had qualified in the first
stage.

17

7.7 Bid Security/Performance Security

Bids for the project shall be accompanied by a Bid Security/Earnest Money in the
form of Demand Draft or Bank Guarantee of amount specified in the RFQ/Bid
Documents. Normally, Bid Security shall be an amount equivalent to 1% of the
Estimated Project Cost. However, the Authority may, in its discretion, prescribe a
higher Bid Security not exceeding 2% of the Estimated Project Cost. In case of a
project having an Estimated Project Cost of Rs. 2,000 cr. or above, the Bid Security,
amount could be reduced but not less than 0.5% of the Estimated Project Cost in any
case.
The selected bidder (Concessionaire) will furnish Performance Security in the form of
Bank Guarantee. Performance Security shall be for an amount equal to 5% of the
Estimated Project Cost.
7.8 Procurement of projects through PPP mode involves some changed steps and
some additional steps from those for procurement through traditional method as
indicated in flow chart shown in Fig. 3.
Fig. 3: Flow Chart Showing change in some steps in PPP Project Procurement

18

Key

Project Identification

No Change to
Existing process

Assessment of PPP
Suitability

Changes to
Existing process
New Stage for
PPP projects

Project Appraisal

PPP Assessment

Statutory Process
Assessment

Procurement
Procedure Selection

Project Management

Stakeholders
Consultation
Statutory process risk with
contracting authority

Statutory Process

Preparation of Contract
Documentation

Statutory process risk with

private sector

Elements of Statutory
Process Retained by
Public Sector
Preparation of Contract
Documentation

Tendering Process

Tendering Process
Contract and Performance
Management of
Construction and Operation

Contract Management of
Planning Phase

Elements of Statutory
Process Transferred to

Private Sector
Contract and Performance
Management of Construction
and Operation

19

8. ENABLING PROVISIONS BY GOVERNMENT OF HARYANA

8.1 The Government of Haryana has been taking up projects on PPP in various sectors
such as roads, industry, education, power, agri- business, solid waste management,
tourism etc. The stated policies of sectors such industry, IT, Tourism, education and
special economic zones include PPP as mode of delivery of infrastructure and
services.
8.2 The Government of Haryana has notified the Policy for PPP in Haryana to
facilitate more and more projects to be taken up on PPP. Full policy document can be
seen on the web site: www.pppinharyana.gov.in. Main features are given in
succeeding paragraphs.
One of the main provisions of the Policy is the constitution of institutional mechanism
with two levels of approvals for implementation of PPP projects.
8.2.1 Cabinet Committee on Infrastructure (CCI):
The projects under PPP mode having concession period of more than 10 years and / or
involving investment of more than Rs. 25 crore, shall be considered by the Cabinet
Committee on Infrastructure (CCI) and approved on the basis of recommendations of
the Committee of Secretaries on Infrastructure (CoSI).
8.2.2 A Committee of Secretaries on Infrastructure (CoSI), consisting of a group of
Secretaries under the Chairmanship of the Chief Secretary, Government of Haryana
for facilitating infrastructure development in the State under PPP. The other members
of CoSI are the Principal Secretary to Chief Minister (CM), Administrative
Secretaries of Finance & Planning, Revenue, Law & Justice, Town & Country
Planning, Industries, Building & Roads, Forest and the concerned Department.
Principal Secretary, Finance is the convener of this Committee. The Chairman of
CoSI may co-opt / invite any other officer / expert to be a member of CoSl and/ or to
participate in its meeting.
The powers and functions of CoSI are to:
consider and formulate policy directives for facilitation and acceleration of PPP
mode of delivery of public services in the State.
consider and provide in principle approval for project to be taken up on PPP.P
determine most preferred and optimal method, based on the detailed analysis
presented on alternatives for procuring the public services / utilities. Wherever,
Govt. of India has prescribed specific procedures for sector / scheme or projects,
the same would be followed and in case of any gap, the provisions of this Policy
would be adopted. The key issue would be as to which method of procurement
would provide the best Value for Money (VfM), while determining the most
appropriate method of delivery,
consider and approve projects under PPP mode having concession period up to 10
years and/or involving investment up to Rs. 25 crore.
consider and recommend PPP projects (including those requiring VGF), to the
Cabinet Committee on Infrastructure.
approve sectoral policies and model contract principles, bid documents, risk
sharing principles, dispute resolution mechanism and bid processes.
resolve issues relating to project approval process.

20

 approve to prepare road map for project development.

identify inter-sectoral linkages and provide enablers for projects.
exercise authority for accepting or rejecting sole bid if received and/ or limited

bids, for any project

prescribe time limits for clearances for any project.
decide issues pertaining to user levies including but not limiting to prescribing
mechanism and procedure for setting, revising, collecting and/or regulating user
levies and to decide and settle disputes relating to user levies.
recommend en-actment of special legislation for formation of appropriate
regulatory mechanism / robust grievance redressal mechanism as may be required.
inspect, review and monitor implementation, execution, operation and
management of PPP Projects.

8.2.3 PPP Cell

The Finance Department, Haryana shall be the Nodal Department dealing with all
policy matters relating to PPP, in the State. Financial Commissioner and Principal
Secretary Finance would act as the State PPP Nodal Officer. Haryana Bureau of
Public Enterprises (HBPE) in the Finance Department shall act as the PPP Cell under
the State Nodal Officer. The PPP Cell shall act as the Secretariat of CoSI and has
following functions: Serve as the repository of knowledge and information relating to PPP including
best practices, guidelines, schemes etc.
Identify and prioritize sectors and sub sectors for PPP projects and seek in
principle approvals if required.
Assist various Government Departments in preparation of feasibility / project
report by themselves or through consultant.
Standardise procedures and bid documents.
Advise, if required, Departments in their recommendations of final bids of the
projects for approval of the CoSI, keeping in view the considerations of Public
Sector Comparator (PSC) and Value for Money (VfM).
Coordinate with GoI and line Departments of the State on all issues related to
private investment in the infrastructure sectors, including PPP. Relevant
Departments/Ministries in the State will coordinate with PPP Cell at all stages of
project and the PPP Cell would keep itself informed of the status of the PPP
proposals.
Assess fund requirements for the development of projects, Viability Gap Funding
(VGF) and any other related purpose for furthering the objectives of this policy.
Organize trainings, workshops, seminar and conduct / recommend exposure visits
for capacity building.
8.2.4 A PPP Nodal Officer shall be designated in each infrastructure-centric Ministry/
Department/ Govt. Entity of the State (Authority), to interact / coordinate with PPP
Cell and to act as the contact point for PPP projects.
8.3 A web site on PPP in the State has been hosted on the internet, having the address
as: pppinharyana.gov.in.

21

It has web based Management Information System (MIS) software which allows the
user Department (Authority) to capture various aspects of data at each step of project
lifecycle and generates reports which help in decision making.
The overall goal of this comprehensive Management Information System is to enable
decision support system through complete management of information. The key
features of the computerized system, being covered by this software are mentioned
below.

Online and Real Time: All transactions are updated instantly in all pertinent
data files as soon as the data is entered by the end user. This integrated software
eliminates the need for error prone and times consuming clerical work, as all
necessary reports are available online.

Total Integration: This software utilizes a single consolidated database serving

as a core of the system. As a result, the management is provided with an updated view
of information related with PPP projects under various sectors facilitating in
managements analytical and planning functions.

Data Security: This software has been developed using MS-SQL Database.
The entire application and database resides on the server placed in NIC Data Center
with complete security features and ensures that right person has access to right
information.

Flexibility in implementation: This software has a total of eight entry modules.

The end user is not required to feed information in all eight modules at a single
instance. The end user can feed information module by module as is convenient to
him. This helps in planned and smooth implementation.

Openness: These software enables various query handling reports as desired

by the user. It also allows user to take the reports in word or excel software.
This website provides information on policies and acts, PPP projects in Haryana. PPP
Toolkit etc.
The web site also provides guidance on the use of MIS. For that, the user should click
on core user group option given on the top right corner of the home page. The
opened window would ask for User ID and Password. User ID to be given as admin
and password is minda123. The opened window shall give an option of help at its
top right corner. Clicking on help shall give User Manual, which can be used to
obtain the guidance on MIS.
9. KEYS TO SUCCESSFUL PPPS
There are some critical components of any successful Public-Private Partnership:
9.1 Statutory and Political Environment
A successful partnership can result only if there is commitment from "the top".
The most senior public officials must be willing to be actively involved and taking a
leadership role in supporting the concept of PPPs. A well-informed political leader
can play a critical role
9.2 Public Sectors Organized Structure
Once a partnership has been established, the public-sector must remain
actively involved in the project or program. On-going monitoring (on daily, weekly,
monthly or quarterly basis) of the performance of the partnership is important in
assuring its success.

22

9.3 Detailed Contract

A carefully developed plan (often done with the assistance of an outside expert in
this field) will substantially increase the probability of success of the partnership. This
plan most often will take the form of an extensive, detailed contract, clearly
describing the responsibilities of both the public and private partners. In addition to
attempting to foresee areas of respective responsibilities, a good plan or contract will
include a clearly defined method of dispute resolution (because not all contingencies
can be foreseen).
9.4 Guaranteed Revenue Stream
While the private partner may provide the initial funding for capital
improvements, there must be a means of repayment of this investment over the long
term of the partnership. The income stream can be generated by a variety and
combination of sources (fees, tolls, shadow tolls, tax increment financing, or a wide
range of additional options), but must be assured for the length of the partnership.
9.5 Stakeholder Support
More people will be affected by a partnership than just the public officials and
the private-sector partner. These would be affected employees, the portions of the
public receiving the service, the press, appropriate labour unions and relevant interest
groups. It is important to communicate openly and candidly with these stakeholders to
minimize potential resistance to establishing a partnership.
9.6 Careful Partner Selection
The "lowest bid" is not always the best choice for selecting a partner.
The "best value" in a partner is critical in a long-term relationship that is central to a
successful partnership. The experience in the specific area of partnerships being
considered is an important factor in identifying the right partner. (PPP). While there is
not a set formula or an absolute foolproof technique in crafting a successful PPP, each
of these keys is involved in varying degrees
9.7 Optimal Risk Allocation
Infrastructure projects have inherent risk and management of risks is the key to
the success of PPP project. There must be a well thought & thorough definition of
risks and structure for risk allocation. Risks should be allocated to the party best able
to manage them. Fig. 4 shows the process of risk management.

23

Fig. 4: Risk Management in PPP

Risk Identification

Risk Assessment

Risk Allocation

Risk Mitigation

Review & Monitoring

Identify all relevant risks to the project

Assess consequences and financial

impact
Undertake Quantitative and Qualitative
analysis

Share risks between parties

Focus on Optimal risk transfer

Actions to reduce risk occurrences

Monitor and manage risks during the

project life cycle

24

Appendix I
PUBLIC PRIVATE PARTNERSHIP (PPP) IN INDIA
1 Government in India embarked upon the route of economic progress in early
Nineties and infrastructural deficiencies were recognised as major constraint.
Development and improvement of infrastructure therefore became a priority. The
level of efforts and investment required was quite huge and it was not possible to be
met from the normally available resources of the Government. Estimate by various
agencies had indicated the investment requirement of the order of US$ 500 (Rs.
25,00,000 cr) in XI Plan period which is expected to increase to the requirement of
US$ 1 trillion (Rs 50,00,000 cr) during XII Plan period, in order to sustain the
targeted growth rate of 9% to 10%. It was and is, therefore, necessary to involve
private sector to supplement the efforts of the Government in provision of improved
infrastructure.
2 The PPP mode of delivery public utilities and services has matured to a great extent
in India. A recent study commissioned by ADB has given fourth rank to India (Fig. 5)
after Australia,UK and Korea in South Pacific Region, in readiness and capacity to
implement and sustain PPP projects for infrastructure improvements.
Fig. 5: PPP Projects in Countries

3 Government of India (GOI) has launched several institutional initiatives for

facilitating private sector participation in infrastructure improvement through PPPs.
These include:
3.1 Setting up a Committee on Infrastructure (CoI), chaired by the Prime Minister
in August 2004. Its functions were to initiate policies, develop structures for PPPs,

25

and oversee the progress of key infrastructure projects. This has now been substituted,
in July 2009, by the Cabinet Committee on Infrastructure (CCI), under the
Chairmanship of the Prime Minister. The CCI approves and reviews policies and
monitors implementation of programmes and projects across infrastructure sectors.
Besides various innovative schemes have been initiated to promote PPP mode of
delivery of public services/ utilities.
3.2 Financial support to PPP in infrastructure under the Viability Gap Funding
Scheme (VGF) Scheme
3.2.1 In order to make infrastructure projects commercially viable, Government of
India has the Viability Gap Funding Scheme for providing financial support in the
form of grants, one time or deferred. The Scheme is administered by the Ministry of
Finance.
3.2.2. Government has constituted an Empowered Committee and Empowered
Institution for approving financial assistance to such projects which satisfies all the
eligibility criteria indicated in the Scheme.
The composition of Empowered Committee will be as follows:
i.
ii.
iii.
iv.

Secretary {Economic Affairs)

Secretary (Planning Commission)
Secretary (Expenditure)
Secretary of the line Ministry dealing with the subject

The Empowered Committee will:

Sanction Viability Gap Funding up to Rs. 200 crore (Rs. Two hundred crore)
for each project subject to the budgetary ceilings indicated by the Finance
Ministry. Amounts exceeding Rs. 200 crore may be sanctioned by the
Empowered Committee with the approval of Finance Minister;
Determine the appropriate formula that balances needs across sectors in a
manner that broad bases the sect oral coverage and avoids pre empting, of
funds by a few large projects;
Determine the inter-se allocation between any on-going Plan Scheme
providing viability gap funding and this Scheme; and,
Provide clarifications or instructions relating to eligibility of a project for such
support as and when requested by Empowered Institution.

The Composition of the Empowered Institution is as follows:

i.
ii.
iii.
iv.

Additional Secretary (Economic Affairs)

Additional Secretary (Expenditure)
Representative of Planning Commission not below the rank of Joint Secretary
Joint Secretary in the line Ministry dealing with the subject (v) Joint Secretary
(FT), DEA -- Member Secretary

The Empowered Institution will sanction projects for Viability Gap Funding
upto Rs. 100 crore (Rs. One hundred crore) for each eligible project subject to
26

the budgetary ceiling indicated by the Finance Ministry. Empowered

Institution will also consider other proposals and place them before the
Empowered Committee.
3.2.3 The total VGF under the Scheme shall not exceed 20% of the total project cost.
The (State) Government or statuary entity owning the project may, if it so decides,
provide additional grants out of its budget up to further 20% of the total project cost.
VGF under the Scheme is normally in the form of a capital grant at the stage of
project construction. Proposals for any other form of assistance can be considered by
Empowered Committee along with approval of Finance Minister on a case to case
basis.
3.2.4 In order to be eligible for funding under this scheme, a PPP project shall meet
following criteria:
(a) The project shall be implemented ie. Developed, financed, constructed, maintained
and operated for the Project Term by a Private Sector Company to be selected by the
Government or a statutory entity through a open competitive bidding.
(b) The PPP Project should be from one of the following sectors:
(i) Roads and bridges, railways, seaports, airports, inland waterways;
(ii) Power;
(iii) Urban transport, water supply, sewerage, solid waste management and
other physical infrastructure in urban areas;
(iv) Infrastructure projects in Special Economic Zones; and
(v) International convention centres and other tourism infrastructure projects;
(vi) Modern storage capacity including cold chains and post harvest sorage
Provided that the Empowered Committee may, with approval of the Finance Minister,
add or delete sectors/sub-sectors from the aforesaid list.
(c) The project should provide a service against payment of a predetermined tariff or
user charge.
(d) The concerned Government/statutory entity should certify, with reasons that;
(i) the tariff/user charge cannot be increased to eliminate \ or reduce the
viability gap of the PPP;
(ii) the Project Term cannot be increased for reducing the viability gap; and
(iii) the capital costs are reasonable and based on the standards and
specifications normally applicable to such projects and that the capital
costs cannot be further restricted for reducing the viability gap.

27

3.3
India Infrastructure Finance Company Limited (IIFCL) is the company
floated by Ministry of Finance to provide long-term capital to help finance PPPs, as
well capacity building and other forms of assistance. IIFCL renders financial
assistance through:

Direct lending to eligible projects

Refinance to banks and Financial Institutions for loans with tenor of five years
or more
Any other method approved by GOI

Some other salient features of financing and development include:

Loans assistance from SPV ordinarily shall not exceed 20 percent of the
project cost; the Company shall also syndicate loans, in addition to its
assistance
A project awarded to a private sector company for development, financing and
construction through PPP shall have overriding priority.

3.4
India Infrastructure Project Development Fund (IIPDF) within the
Department of Economic Affairs (DEA) is to provide financial support for quality
project development activities. Its role is to promote the development of credible and
bankable PPP projects. The proposals for assistance under the scheme would be
sponsored by Central Government Ministries/ Departments, State Governments,
Municipal or Local Bodies or any other statuary authority. IIPDF will ordinarily fund
up to 75% of the project development expenses as an interest free loan. Balance 25%
will be co-funded by the Sponsoring Authority. On successful completion of the
bidding process, the project development expenditure would be recovered from the
successful bidder. The IIPDF will be administered by the Empowered Institution. The
composition of the Empowered Institution will be as under:
a. Additional Secretary, DEA- Chairperson
b. Additional Secretary (Expenditure)
c. Representative of Planning Commission not below the rank of Joint Secretary
d. Joint Secretary in the line Ministry dealing with the subject
e. Joint Secretary, DEA Member Secretary
The Public Private Partnership (PPP) Cell of the Department of Economic Affairs
(DEA), Government of India will provide support functions to the Empowered
Institution to examine the applications received for assistance under IIPDF.
To seek financial assistance from the IIPDF it would be necessary for the Sponsoring
Authority to create and empower a PPP Cell to undertake PPP project development
activities and to address policy and regulatory issues. Assistance under IIPDF funding
will require co-funding by the Sponsoring Authority generally to the extent of 25
percent of the total project development cost, which would include the cost of prefeasibility study to determine whether a project is amenable to PPP. The assistance
from the IIPDF would ordinarily be released after the share of the Sponsoring
Authority has been released. Only in exceptional circumstances, the Empowered
Institution (EI) may relax this condition of co-funding by the Sponsoring Authority.

28

The web site: www.pppinindia.com should be referred for detailed guidelines, in

order to avail this facility. Annexes I,II and III give the guidelines, application form
contents of the preliminary report to be furnished for availing this facility.
3.5 Pilot Projects Initiative and IIPDF
The Pilot Projects Initiative Under the Initiative, an innovative project development
funding scheme has been jointly established between the GOI's IIPDF scheme and
ADB TA funds. This is aimed at developing projects in especially challenging sectors
and providing hand-holding from the central DEA and ADB PPP units to project
sponsors from concept development to bid award. Project sponsors are thus able to
access funds for engagement of transaction advisors for developing projects and
undertaking bid processes. The facility has had a significant impact on the
development of the challenging sectors' project pipeline at the states and uptake for
especially challenging projects has been growing over the last year since its
establishment.
3.6 PPP Cell within the Department of Economic Affairs (DEA) in the Ministry of
Finance, whose tasks are to organise activities promoting the use of PPPs, and
administer proposals; and to act an inter-ministerial secretarial assistance for Public
Private Partnership Appraisal Committee (PPPAC).
3.6.1 Panel of Transaction Advisors for PPP Projects
Government had prequalified a Panel of firms through International Competitive
Bidding (ICB) as Transaction Advisors (TAs), so as to meet the needs of State
Governments and its agencies for the assistance in creation of shelf of projects and to
prevent hiring of TAs on nomination basis. The Panel was intended to

Streamline the tendering process for the engagement of Transaction Advisors

for PPPs
Enable fast access to the firms that have pre qualified against relevant criteria
Ensure transparency and accountability through clear definition of the process
and the role and responsibilities of the agencies and the private sector.
Following steps were to be taken for using the Panel of TAs
Confirm proposed project is eligible
Develop specific terms of reference (TOR) and request for proposal (RFP)
for the assignment
Seek proposals from panel members in accordance with RFP
Evaluate proposals from Panel members
Sign contract for provision of transaction services with selected Panel
members
Service commences
Evaluate and report to DEA on performance of selected Panel member
This panel is no longer valid.
3.6.2 PPP Toolkit
The Government of India in the Department of Economic Affairs, Ministry of Finance
has designed the PPP Toolkit, a web-based resource, to help improve decision making
for infrastructure PPPs in India. Toolkit covers five infrastructure sectors, namely,
State highways, Water and Sanitation, Ports, Solid Waste Management, and Urban

29

Transport (Bus Rapid Transport Systems). The Toolkit may be accessed at

http://toolkit. pppinindia.com. The web site also provides guidance to use the toolkit.

Annex I
Memorandum for Consideration
Under Guidelines for IIPDF
1. Introduction
The MFC is an application to be made by the Sponsoring Authority to seek project
development funding from the India Infrastructure Project Development Fund set up
by the Department of Economic Affairs, Ministry of Finance. The information sought
in the MFC and the rationale is given below. Annexure II includes an Application
Form to be completed for the MFC and Annexure III provides a typical Table of
Contents for the Preliminary Report to accompany the MFC.
2. Project Proposal
The Sponsoring Authority, with the aid of the PPP Cell or otherwise, will highlight
the broad contours of the project and issues related to its implementation framework
in the proposed PPP option. The proposed project development\ activities, budget and
time lines will form a part of the report.
a. Technical Information: The technical information will include the need for the
project, the components, their preliminary capacity/sizing and block cost estimates
for investment sought through PPP options. In case of PPP options like Service,
Management or Lease Contracts, the investment required for rehabilitation or
efficiency improvement measures need to be stated, the absence of which will
hinder structuring performance based contracts.
b. Environmental and Social Aspects: On one hand, the information must list the
applicable steps required to obtain environmental clearance under the
Environmental Rules and Regulations issued by competent authority from time to
time. On other hand, the information should also bring out if there are any
environmental or social risks that can impact/delay/ hinder the project deliverables
from considerations of efficient use of assets created under a PPP framework. This
should be addressed from an investment risk perspective.
c. Financial Analysis: Financial analysis of the investment proposed for the landed
cost of the project (see definitions given in the guidelines, the project cost to
include cost of project development funding and returns thereon) must highlight
the sources of investment, drawdown period, the revenues over the project
contract period (due to tariffs for services and/or due to savings arising out of
efficiency gains) and Internal Rate of Return (IRR) on Economic/Project/Equity
IRR considerations. In case of non-revenue generating projects, the Economic
IRR must be mentioned.

30

d. Legal Aspects: This must bring out the provisions under the relevant Acts/Rules
that grant authority to the Sponsoring Agency for developing and implementing
the project under the proposed PPP option and the proposed decision-making
steps to award the PPP contract. The objective is to ensure that the Sponsoring
Authority by itself or through an identified Competent Authority has the necessary
authority to approve the proposed project development and implementation
framework. In case of any need to amend the legal framework, the same must be
mentioned.
e. Risk Identification: A preliminary assessment of the project risks during different
phases of the project-development, construction and implementation-must be
summarized. This will form the basis for structuring possible mitigation
measures/structures in detail during project development, hence an indicative
summary is considered adequate at the preliminary stage. This is to ensure that the
cost of capital/investment sought from the private sector investor is minimal and
based on informed risk mitigation structures rather than perceived risks with
mitigation measures not mentioned.
f. Proposed PPP Implementation Structure: Typically, the intent of systematic project
development with funding support is to seek private sector investment and
management skills so that the Sponsoring Authority can structure performance
based service delivery, while allowing the private sector to recover the investment
with appropriate returns. In case of Greenfield projects, options such as Build, Own,
Operate & Transfer (BOOT), BOT and its variants or Concession or Lease
Contracts are possible. However, in case of existing projects, where significant
rehabilitation or replacement of assets is necessary for asset performance
improvement, management or service contracts (that bring in private sector
efficiency and management skills with investment mostly by the public sector) may
be the first step toward establishing efficient asset base and operational systems for
the project assets for subsequently enabling larger investments through BOOT type
contracts. Hence, the financiability of the proposed PPP option must be highlighted.
g. Regulatory Aspects: The preliminary report accompanying the MFC must mention
the existing regulatory mechanism, as applicable, in case tariffs are to be
structured in the PPP options. In the absence of regulatory mechanism, proposed
steps for regulation by contract must be indicated.
h. Project Development Cycle: The information will include the proposed project
development activities and time lines starting from the appointment of consultants
and advisors culminating in the selection of the private sector partner through a
transparent and competitive procurement process. The role of different
government agencies, role of consultants and advisors should be briefly included.
3. Budget for Project Development
The budget for project development should include an estimate of:

Surveys and investigation expenses.

Consultant fees covering technical, environmental & social, legal,

financial studies and project documentation, as may be needed.

Fee for grading of projects, if any.

Transaction Advisor fees.

Consultant fees covering risk assessment/identification.

31

Out of pocket expenses for procurement process documentation,

advertising, marketing road shows/investor meetings, etc.
It would not include expenses incurred by the Sponsoring Authority on its
own staff, etc.

4. Duration of Funding and Drawdown Requirements

An indicative quarterly budget with milestone-linked payments for each project
activity should be indicated.
5. Plan for Recovery
Plan for Recovery of Project Development funding with Returns should be indicated.

Annex II
Memorandum For Consideration (MFC) Application Form
Nature of Assistance

Project Name
Sector
Sponsoring Authority
Location/
(State/District/Town)

: Project Development funding for Rs. ______

Is Viability Gap Fund (VGF) also sought separately?
Yes/No
:
:
:
:

Implementing agency (if

different from above as in
case of SPV))
:
Need for the Project

Brief Project Description :

PPP structure for Project :

Implementation
Project Implementation
Milestones

Likely impact(s) of the

Project

BOOT/BOT (its variants)/Concession/Lease

Management/Service/EPC along with Performance
based O&M Contract
List key milestones

Project Financial Structure : A) Details of Project Cost

32

Item
Land
Building
Equipments
Any other (Specify)

Rs. Lakhs

Total Project Cost

B) Proposed means of financing
Source
Private Sector
State Government
Sponsoring Authority
Govt. of India (VGF)
Any Other (Specify)

Rs. lakhs

Total
IRR Estimations (as
applicable)

Estimated Project
Development Expenses

Enclosures

Economic IRR
Project IRR
Equity IRR
Item
Surveys and Investigations
Consultancy fees:
Technical
Environmental & Social
Legal
Financial
Any other
Total Consultancy Fees
Transaction Advisory Fees
Marketing and Procurement
Related Expenses
Any other
Total Estimated Project
Development Expenses
IIPDF contribution @75%

Rs. lakhs

Signatures and Name

of the Authorised Signatory of the
Sponsoring Authority

33

Annex III
Table of Contents of the Preliminary
Report accompanying the MFC
1. Introduction
2. Existing Project Scenario
(including need for rehabilitation, up gradation, improvement and/or
incremental investments-to bring out the need of the project)
3. Project Proposal
(covering broad project concept and components, block cost estimates,
revenue structures, etc.-See Annexure I)
4. Preliminary Project Assessment
4.1 Technical feasibility
4.2 Environment and social acceptability
4.3 Financial & commercial viability
4.4 Legal framework
4.5 Risks (during development, construction and operation implementation)
4.6 Contractual & implementation structures1 5
5. Project Development Activities
5.1 Project development cycle
5.2 Timelines
5.3 Surveys and investigations
5.4 Technical/Environmental & Social/Financial/Legal consultants, their scope of
work
5.5 Transaction Advisors, their scope of work
5.6 Marketing
5.7 Procurement process
5.8 Others (Please specify)
6. Funding Requirements for Project Development
6.1 Budget for Project Development expenses
6.2 Drawdown (indicative quarterly budget and estimated milestone linked payment
for each activity)
7. Plan for Recovery
Plan for Recovery of the Project Development funding with Returns
8. Recommendations
BOT= build-operate-transfer, O&M= Operation and maintenance
Source: ADB, Public-Private-Partnership Handbook; Heather Skilling and Kathleen
Booth 2007.

34

Appendix II
HISTORICAL BACKGROUND
The beginnings of partnership between private and public sectors can be traced as far
back as the Roman Empire two thousand years ago in Europe. A network of postal
stations was developed to accompany the vast expansion of the highway system under
the Roman legions. During the 16th and 17th centuries, European sovereigns,
particularly France, began much more expansive public works concession programs
in canal construction, road paving, waste collection, public lighting, mail distribution
and public transportation. In early 20th. prior to 1982 there was very limited private
financing of transport infrastructure in developing or transition countries. Throughout
the industrialized and developing world, there has been a renewed move to
liberalization and privatization of infrastructure activities which increased
dramatically into the 1990s forging a systematic Public Private Partnership (PPP).
The United Kingdom's Private Finance Initiative (PFI), which began in 1992, had
projects in most key infrastructure areas. Other countries with significant PPP
programs include Australia, Ireland, United States, France, Italy, Spain, Finland,
Germany, Greece, the Netherlands and Portugal. Reflecting a need for infrastructure
investment on a large scale, but weak fiscal positions, a number of countries in
Central and Eastern Europe, including the Czech Republic, Hungary, and Poland,
have embarked on PPPs. There are also fledgling PPP programs in Canada and Japan.
PPPs in most of these countries are dominated by road projects. In Latin America,
Chile, Colombia, and Mexico have used PPPs to promote private sector participation
in public investment projects. In Africa, South Africa has embarked upon developing
PPPs in a number of sectors. In Asia, the use of PPPs is continuing to develop with a
well established program in South Korea, an extensive investment program in China,
although with varying degrees of implementation and success, in Indonesia, the
Philippines and Singapore. In India, PPP is now being used widely in improvement of
physical and social infrastructure.

35

Appendix III
LESSONS LEARNT FROM PPP PROGRAMS
The establishment and implementation of PPP programs worldwide has provided
several lessons, particularly from the poor performing PPP programs.
Such lessons include:
1 Countries without a proper policy and full commitment across the Ministries/
Departments involved, (Finance and Development, Planning), fail to instil confidence
in the private sector. The result is that either the private sector is not interested or
prefers to use unsolicited tenders to avoid a competitive and transparent framework.
2 Projects are often insufficiently prepared, sometimes for financial reasons,
sometimes for time reasons. Ultimately, poorly prepared projects either fail or take
much longer, sometimes years longer than the advocated PPP process or result in
financial (and political) liabilities for governments in later years.
3 Inconsistent laws and regulations can be worse than limited or no laws, where
regulation by contract can operate at least initially.
4 Even where projects are well developed and frameworks are in place, relatively
minor defects in concession contracts can lead to weak and uncompetitive tenders.
5 Without clear policy regarding unsolicited bids, the private sector may prefer this
approach, which could result in poorer deals for the government and longer time taken
to implement than the standard PPP route.
6 Ad hoc projects, rather than a properly developed pipeline of projects, may result in
difficult projects which either fail to be implemented or take years to be developed.
Difficult projects are generally those that require large subsidies, are risky, often not
ready and have too many negative impacts.
7 Consultation and explanation of PPPs is often insufficient to convince/inform public
sector officials, senior staff and general public of their advantages and how they work,
generating a lot of misunderstanding and opposition to PPPs. Many of these lessons
provide the basis for the policy and strategy development in the present section.
8 PPP is not the only method to deliver project financing and realisation. It does not
provide a miracle solution nor a quick fix and should only be used where
appropriate and where it is able to deliver clear advantages and benefits.
9 Each type of PPP has inherent strengths and weaknesses which need to be
recognized and integrated into project design.
10 One of the fundamental causes of project failure, for both traditional public sector
procurement and PPPs, is often a lack of clarity on the part of the public authority
regarding the exact scope and requirements of the project. The other reasons are
revenue or market forecasts being wrong, failure of technology, insolvency of
subcontractors, or excessive exchange rate fluctuations.

36

11 PPP seems likely to be appropriate if:

Service outcomes can be clearly specified and measured
There exists the potential, and the incentives to introduce, design innovations and
operational changes that can raise efficiency
Payment mechanisms are devised that give the operators the motivation to maintain
service quality
Value for money is able to be demonstrated, after allowing for costs of project
development and costs of monitoring the contract
An integrated service can be provided with close working relationships and
good
communication between service providers
There are transparent accountability procedures and a due regard for the public
12 The review of international best practice in PPPs suggests a number of core issues
that public authorities must address when considering the use of PPPs for producing
public infrastructure projects. These include:
Whether PPP arrangements will result in better value for money than
conventional procurement methods;
Whether the project is affordable in the long term, given overall budgetary
constraints.
How willing the private sector is to be involved in public service provision;
What type of PPP arrangement is most appropriate to the particular project.
12.1 Value for money
Public bodies should utilize PPPs if they have the potential to offer better value for
money in comparison with traditional ways of procuring infrastructural development
PPPs should be used if they provide the best value-for-money outcome, taking into
account all of the benefits, costs and risks over the whole life of the project. This
value for money may take the form of the delivery of the service at a lower cost; less
exposure to risk and hence a more certain financial outcome; or increased benefits to
12.2 Affordability
Before engaging in PPPs, the public sector must ensure that the capital costs of the
project are affordable within its budgetary constraints. This is determined by public
expenditure commitments as well as the potential for the private sector partner to
make a return on its investment. It is important that the public agency closely
examines the budgets of proposed projects and makes certain that these are
compatible with its capital investment allocation and targets over the given time
period.
12.3 Stability
It is vital that the projects future demand is sustainable over the long term. Due to the
15-30 year nature of most PPP contracts, the private sector partner needs to formulate
an integrated, long-term approach to addressing the needs of the public sector.
However, there are risks inherent in this long term arrangement.
12.4 Risk transfer
All projects contain an element of risk which has the potential to significantly affect
the financial position of the public authority. A primary reason for major projects
overrunning their budgets and/or schedules is the inadequate identification and
management of risk. A key benefit in the use of PPPs is the possibility for the public

37

sector to transfer a portion of the risks associated with the project to a private sector
company, which will, it is assumed, have the skills and experience needed to manage
these more effectively and at a lower cost.
12.5 Legal and regulatory environment
Increasingly many countries have amended ( or are currently amending) their existing
legislation in order to clearly specify the powers of public bodies to contract out
services under PPPs. Legislation addressing PPP arrangements should identify which
sectors may make use of PPPs, how PPP tariffs are set and adjusted, the role played
by different institutions in making PPPs happen, how PPPs should be procured, and
methods for the resolution of any disputes that may arise between contracting
partners.
13 Another element of international best practice suggests that public authorities
engaged in broad based PPP programmes are increasingly making use of crosssectoral pools of expertise in dedicated PPP units. These units play a wide variety of
roles including:
Developing PPP policies and legislation;
Providing guidance about best practice and disseminating information on
PPPs;
Clearing and approving PPPs;
Providing expertise in one or more areas of PPP procurement and
management;
Assessing the direct and contingent financial costs of PPPs, and approving
PPPs developed by other government agencies.
14 Creating the Dedicated PPP Units
There are four general approaches to establishing PPP units and identifying their
core functions:
14.1 Create a unit within a ministry / department. For example PPP unit in
Department of Economic Affairs, Government of India, PPP unit in Treasury in South
Africa
14.2 Set up the unit as an autonomous entity attached to but not fully part of
government bureaucracy. For example Philippines BOT Centre
14.3 Establish a government owned company to collaborate with departments and
other agencies to indentify and procure PPPs. For example Partnerships British
Columbia in Canada.
14.4 Create a joint venture company owned in part by private sector shareholders
and acting as bridge between the public and private sectors. For example Partnership
UK
14.5 The authorities engaged in PPP programmes have established dedicated PPP
units for using cross sectoral pools of expertise. These units perform following main
functions
Developing PPP policies and legislation

38

 Providing guidance on best practices and dissemination information on PPPs

Providing expertise in one or more areas of PPP procurement and management
Assessing the direct and contingent financial cost of PPPs and reviewing /
approving PPPs developed by other government agencies
15 Using Advisors
As with any commercial contract, there are several stages involved in the negotiation
of a successful PPP arrangement. As the full range of required experience is often not
found within an individual public authority, it can be necessary to make use of inputs
from technical, financial and legal experts. In addition, external advisors are often
brought in to assist public authorities with the PPP process.
15.1 Financial expertise
The experience of financial experts can assist public agencies in finding potential
investors for a PPP project, as well as identifying their particular attitudes towards
risk and structuring the contract in a way that is acceptable to private financiers. Input
from those with a good understanding of financial markets and project financing will
enable the public body to locate appropriate sources of capital which can meet the
public sectors needs at the lowest possible cost. Broadly speaking, financial experts
on project teams are used to:
Develop a strong business case for the PPP project;
Clarify the risks and responsibilities assumed by both public and private
sectors, and identify the financial implications of these;
Produce payment mechanisms which offer the optimum balance of risk,
responsibility and reward to both partners;
Prepare and review tender proposals, evaluating the accuracy of the
financial models proposed by the private entity, and the impact of this for
the public body;
Identify the financial implications of all clauses of the contract, such as
step-in rights and termination clauses;
15.2 Legal Expertise
Legal experts have a vital role to play in drawing up the PPP contract. They help
public agency negotiators to identify the implications of the terms of the contract,
especially potential deal-breakers such as payment mechanism, termination clauses
and step-in rights. Their specific functions are to:
Structure and draft the tender documents, PPP contract and land lease
agreements;
Provide advice on the best procurement or bidding;
Offer general legal information on taxation, property, planning,
environmental considerations, banking, competition and intellectual
property laws.
15.3
Technical Expertise
Public agencies require knowledge of the technical requirements for the services
under PPP arrangements. Depending on the specific project, a wide range of
technical advisors may be required, including surveyors, engineers, architects,

39

contractors, project managers, actuaries and other technical professionals. They carry
out the following functions:
Define output and outcome specifications and service standards to be
provided under the PPP contract;
Evaluate proposals and bids, including the capability of the private sector
tenderers;
Conduct quality assurance during construction, ensuring contractor
compliance and assessing technical risk;
Value assets that may be sold or transferred from the public sector to the
private entity;
Develop systems for monitoring and measuring performance.

40

Appendix IV
TOP TEN FACTS ABOUT PPPS
1
Public-private
partnerships
are
just
what
the
name
implies.
Public-private partnerships are a contractual arrangement whereby the resources, risks
and rewards of both the public agency and private company are combined to provide
greater efficiency, better access to capital, and improved improved service delivery
with a range of government regulations. The public's interests are fully assured
through provisions in the contracts that provide for on-going monitoring and oversight
of the operation of a service or development of a facility. In this way, everyone wins - the government entity, the private company and the general public.
2 Public-private partnerships are more common than one may think
and have been in use in many countries. These contractual arrangements between
government entities and private companies for the delivery of services or facilities is
used for infrastructure such as roads, water/ wastewater, transportation, urban
development, and delivery of social services, to name only a few areas of application.
The use of partnerships is increasing because they provide an effective tool in meeting
public needs, maintaining a high level of public control, improving the quality of
services, and are more cost effective than traditional delivery methods.
3
They
are
essential
tools
in
challenging
economic
times.
Even in the best of times, governments at all levels are challenged to keep pace with
the demands of their constituencies. During periods of slow growth, government
revenues are frequently not sufficient to meet spending demands, necessitating painful
spending cuts or tax increases. Partnerships can provide a continued or improved level
of service, at reduced costs. And equally important, partnerships can also provide the
capital needed for construction of major facilities. By developing partnerships with
private-sector entities, governments can maintain quality services despite budget
limitations.
4
Successful
partnerships
can
lead
to
happy
employees.
In many partnerships created today, public employees are retained and usually at
equal or improved benefits. One of the greatest areas of improvement for employees
is with opportunities for career growth -- private companies spend more on training
and personnel development than their public-sector counterparts, as a way of gaining
the maximum efficiency out of every person, and the maximum amount of job
satisfaction.
5
Successful
partnerships
can
lead
to
better
public
safety.
For example, many mundane activities in Police department such as processing of
crime reports can be passed on to private-sector partners, whereby police officers can
spend more time on the streets doing the jobs for which they are trained. This has
been done in USA.
6 Partnerships give many children better educational opportunities.
Public-Private Partnerships could be instrumental in constructing new school
buildings. In US and UK, by working with a private real estate development

41

company, city and county school systems were able to build state-of-the-art facilities
with a modern computer lab, gym and library.
7 Private-sector companies are working with central, state and local governments to
build roads, making it possible to finance construction and upkeep without having to
impose general tax increases. While tolling is one of the means of generating the
revenue to cover the investment, other methods such as annuity and shadow tolling
have been successfully tried.
8 Clean, safe water is achieved through public-private partnerships.
Public-private partnerships have enabled the construction of state-of-the-art water
management facilities, while using efficient operations to hold down costs to
ratepayers and provide a way of meeting those "un-funded mandates". Many States
have successfully implemented projects for supplying 24x7 water supply with taking
care of weaker sections of society as well.
9 Partnerships make the information revolution accessible to more people.
This is the age of information technologies, but there can be a hefty cost of getting a
system operating. Through public-private partnerships, many governments are now
able to fully participate in "E-government" with their constituents, or effectively
coordinate government activities and budgets. Better service, improved tools and
saving money are exactly what public-private partnerships are all about.
10 Governments themselves are the biggest supporters of public-private partnerships.
While there can be substantial misperceptions about the value of partnerships, a look
at who endorses them should clarify the picture. Government of India, as in other
countries, has been promoting PPP for the last three decades. Numerous surveys
indicate why -- governments traditionally realize cost savings of 20 to 50 percent
when the private-sector is involved in providing services.

42

Appendix V
STRENGTHS AND WEAKNESSES OF PPP
1 Strength
One of the main strength of PPPs is their ability to deliver value for money in
public service procurement and operation by utilizing the skills, resources and
experience of each partner. Public sector provides its strength and expertise in
identifying public needs, service requirements and desired outcomes with strength of
governance and citizen support where as private sector brings in its capacity to
effectively utilize assets through better operational efficiency, innovative technology,
managerial effectiveness for better management of the construction and operation of
services.
Benefits to the Public Sector :
The Government i.e. the public sector derives fiscal, economic, technological
and social benefits from PPP. The foremost is that it allows to raise capital for higher
priority work that might otherwise not be possible due to budgetary constraints. This
also enables the optimal allocation of public resources for infrastructure development.
It entails accurate costing of the project and optimal allocation of risks. The
economic benefits are derived by way of speedy reliable and efficient delivery of the
facilities. The infrastructure development catalyses the other developmental activities
in the region there by creating a virtuous circle leading to enhance quality of life of
the people. It also provides new role for the Government and opportunities for
innovation, capacity building and technological enhancement. Additionally, it allows
public sector to realise value for money for the entire life of project or service rather
than just initial construction phase as is the case in traditional model of public
procurement. Figure 6 shows the main advantage of cost and time overrun cost risks
getting transferred to private sector in PPP.
Fig. 6: Risk Transfer Advantage in PPP Project from Conventional Procurement

43

Conventional Project Procurement

PPP Project Procurement

Cost
Overrun

Construction
Phase

No Payment Until the

facility is Ready

Time Overrun

Estimated
Capital
Cost

Running Cost
Overruns
Estimated Running
Cost
10

15

20

Operation and Maintenance

Phase

yrs.

0
Construction
Phase

Payment based on Usage

Payment Based on Availability

10

15

20 yrs

Operation and Maintenance

Phase

Benefits to the Private Sector:

The benefits to the private sector accrues as a wide range of business opportunities are
available which otherwise were previously confined to public sector. It also offers
opportunities to them in the designing and delivering innovative solutions.

Benefits to the Public:

The public and the user is benefited to get the services in a more efficient and cost
effective manner. Appropriately designed and implemented PPP projects can yield
better quality services without compromising public policy objective.
2 Weaknesses
Like in any service delivery mechanism, PPPs also have draw backs and risks.
This needs to be recognized so as to minimize or eliminate them. The main draw
backs could be identified as;

As the management of out puts in PPP projects is transferred to the private

sector, the public sector has very limited role to intervene as long as the
services are delivered. The public body have no day to day control over the
management of the project thereby may not be able to utilize its own expertise
in the area.
That the process of PPP procurement can be time consuming and some what
expensive. It is, therefore, essential that a PPP project is structured in a
detailed and clear cut manner for the desired out put for its successful
realization. Although this is important to the development of projects that are
affordable and appropriate value for money, it has the potential to make
procurement lengthy and costly procedure.

44

The cost of finance in the private sector including both debt and equity is
typically between 1% and 3% higher than the public sector cost debt on a non
risk adjusted basis. This has effect of increasing the over all cost of PPP in
comparison to the traditional procurement method.
PPPs can some times be rather inflexible instruments specially given the long
term nature of most PPP contracts. There is limited potential for modifying
services or flexible spending.
Under PPP arrangements lines of accountability can be less straight forward
and transparent than under traditional methods of procurement where
accountability is more direct. This assumes more significance in these areas
of public service provision which may require greater public demand for
accountability and responsiveness than any others. This may also some times
result in public criticism and scepticism or even hostility towards PPP
arrangements.

Appendix VI
COMMON MISCONCEPTION ABOUT PPP

A few of the most common misconceptions about PPPs are as below:1.

They are the same as privatization: The key motivation for the PPP
arrangements is to introduce competition in public service provision. This directly
contrasts for privatization which transforms a public monopoly into a private one and
does not achieve the benefits of partnership between public and private sectors which
are available under PPP.
2.
Public Authorities loose control over service provision. PPPs do not entail the
loss of Public Authorities ability to implement policies or regulate service provision.
Done well, PPPs can be shaped by public authorities to integrate with their existing
objectives, policies and regulations. Through well defined PPP contracts the public
sector can ensure retention of control over its assets and services.
3. PPPs only apply to infrastructure projects. PPP can also be used to deliver a wide
range of public services (which may not necessarily be large infrastructure projects) in
an effective and innovative manner. For example they can be utilized in the delivery
of service that do not involve major capital projects such as data service provision,
refuse collection or maintenance of existing public facilities.
4. End users of the service will be ultimately responsible for servicing the debt one
way or another. Therefore PPPs should not be entered into just to keep the debt of
the balance sheet of the public agency
5. Service quality will decline ;

45

There is no obvious relationship between the manner of service delivery, whether

PPP or more traditional methods, and the quality of the service. In fact, through
contractual provisions concerning quality control, the public body has the ability to
specify the standard of performance required, and the character of PPP arrangements
suggest that service quality would be enhanced as a result. Given their financial
interest in the projects success, private partners have a strong incentive to improve
the quality of the service.
6. Public sector staff will lose out
There is often anxiety among public sector staff that PPPs invariably lead to job
losses or to a worsening in employment terms and conditions. However any PPP
contract must conform to local labour legislation and existing collective agreements.
Any changes in staffing levels must be consistent with existing labour contracts, and
should preferably come about through attrition rather than through redundancy.
7. The cost of the service will increase to facilitate private profit
Public authorities may be wary of entering into PPPs because they fear that the
costs of provision (whether met through user charges or through public subsidy) will
be higher than those of publicly provided services that are by nature, non-profit.
However, PPPs only make sense in regard to value for money if they can provide
services at a price lower than, or at least commensurate with, existing public
provision. Under the terms of a PPP, any profits must arise through increased
productivity and expanded services, not increased fees.
8. The public sector can finance services at a lower cost than the private sector.
While the public sector may sometimes be able to finance projects at a lower cost than
the private sector by borrowing through the public fund, this will not always apply.
Moreover, it is crucial that public sector agencies focus on the overall benefits to be
gained from PPP arrangements, rather than simply lower upfront costs.
The principal reason to follow a PPP route is to avoid public sector debt. The primary
motivation for entering into PPP relationship is to bring about greater efficiency,
motivation and value for money. The public sector and the private sector should
forge the partnership for a win- win situation.

46

Appendix VII

PPP AND CONVENTIONAL PROCUREMENT

1 The major difference between the conventional procurement method of public
services and through PPP is that, in the former, the cost to community in initial stages
is quite high since the investment for creation of the facility has to come from public
funds as compared to PPP method where private sector makes the investment.
However, during the stage of operating the facility, the community would be incurring
some cost by way of payment of user fee, in PPP mode, besides deriving benefits ( for
example savings on vehicle operating cost, on travel time and on accidents in case of
road sector), whereas the community would not be paying any user fee in
conventional procurement but benefits would accrue to them ( Fig. 7).
Fig.7: Cost and Benefit under Public versus Private Financed Project

Cost and Benefit Flows to Community under

Public Versus Private Financed Project

Source; World Bank Toolkit for Highways

2 It is generally recognized that the proportion of investment procured through PPP

within mature PPP markets is around 15% of total investment. As a result, 85% of
public sector procurement would continue to be procured through conventional
methods. If we look at road funding, the picture is similar. Worldwide, government
budgets currently finance 95% of investment in the road network, while less than 5%
is financed directly through tolls (ie direct charges by the user). In the USA, the
picture is similar with tolls currently providing only 8% of all U.S. highway revenue.
China, with the most extensive toll network in the world (20,000 km) and the largest
PPP market in developing countries until 2006 applies PPP procurement for an
estimated 6-9% of its total highway investments (estimate from the late 1990s, World
Bank, A Decade of Action in Transport; 2007).

47

In Africa, the picture is similar. PPP investments are estimated to have provided 1015% of total infrastructure investment over the past twenty years in African countries.
Moreover, whilst significant increased investments are planned in the highways
sector, the emphasis on private sector funding in the 1980s and 1990s has been
criticized as being a policy mistake.
Some countries however suggest a higher rate of PPP investments, notably India and
Chile, which may suggest that a higher role for PPP is possible to fund major highway
investment programs subject to a suitable enabling environment.
PPP programs should be seen as complementing and not replacing conventional
procurement methods.

Appendix VIII
ENABLING ENVIRONMENT FOR PPP
1 Drivers of PPP
The development of a successful PPP program requires two key drivers: political will
and bankable projects. The subsequent implementation of such projects necessitates
that an enabling environment for PPP be established for finance to be mobilized and
the partnership to work effectively and to the benefit of both parties.
1.1 Political will to introduce PPP: A state considering the launch of a PPP policy
for the provision of infrastructure facilities and/or public services must announce
firmly its intention to do so in an unequivocal manner. The government should
demonstrate strong commitment to pursue policy objectives within an evolving
political environment. Private sector partners need to understand the involvement of
the public authorities knowing what framework has been set up: strategy, means,
management process and principles are all important elements in the private
investors evaluation.
1.2 Bankable projects suitable for funding by the private sector :
The
key
issues that need to be examined in the PPP process are: the strategic justification for
the project, whether the project represents value for money, whether the project is
affordable, whether the project is commercially viable or bankable, and whether the
authority has the right resources, skills, and organization to manage the process. The
fundamental for the identification of PPP procurement options is to have projects with
sound economic and financial credentials. A thorough project preparation and the
identification of suitable procurement routes under PPP is necessary to be ensured.
The private sector should also perform rigorous project analysis and estimate the
project parameters independently. Initially, the best projects should be selected which
are of sufficient size to attract the private sector, not too complex or risky and which

48

need little government support. This reduces the exposure of the project to
inconsistent public commitment and inadequate fiscal space/financial support.
2 PPP Policy Framework
2.1 The route to an enabling environment passes through the PPP policy framework
which comprises a number of interlocking structures including legal and regulatory,
risk management, institutional, financial, private sector and other aspects. However,
this framework is established in the context of a number of constraints, the nature and
extent of which shall depend on the particular economic, social and political
conditions prevalent in the country. These constraints such as political instability or
lack of political will, underdeveloped financial markets or economic instability, lack
of transparency, weak public institutions, lack of PPP experience or low PPP skills.
Experience with PPP worldwide, suggests that it is useful, if not essential, to have a
PPP policy framework in place, to facilitate planning and implementation and instil
confidence and understanding in all participants in the PPP process. This includes
both public and private partners. Generally all countries have embarked on the PPP
process in that way. This framework provides a set of rules that gives confidence to
both the public sector which has to implement the rules and also the private sector
which has to invest time and money and aims to ensure that both will achieve, within
acceptable bounds, their objectives.
A PPP policy framework is an evolving tool; it should not be viewed as an ideal or
even something to be aimed at in total at once. Required changes will take time to
agree and implement and will only be felt in the medium- to long-term. It should thus
be developed with a long-term process in mind which would allow its progressive
adaptation and improvement in line with the experience from implementation of the
PPP program.
2.2 Constraints
Constraints to PPP policy are reflective of the specific environment and which have a
determining impact on the development and success of PPP programs. They may
hinder, delay or even prevent the establishment of the required components of the PPP
policy framework:
Political Instability
Economic Instability
Under-developed financial markets
Less number of users
Low capacity or unwillingness to pay
Popular resistance to levying of user charges
Lack of PPP experience / low PPP skills
Weak public institutions (low traffic enforcement/overloading)
Lack of transparency
2.3 Addressing the constraints
Setting up a PPP policy requires redefining the role of Government. The changing
focus should reduce the Governments functions as supplier, but increases its
functions as regulator - the enabler of competition. This means that governments need
to create the proper institutional framework for competition, set economically
efficient charges for the use of publicly provided infrastructure, carefully appraise the
allocation of scarce public resources and increase community participation in decision

49

making. Constraints limiting private sector involvement can only be removed through
long-term and in-depth reforms. Long-term reform aiming at developing and
structuring the construction industry would be appropriately required (Table 1).
Table 1: Constraints and Reform for PPP
Table below gives a gist of actions to address the cons
Types of Particular
constraints constraints

Type of reform needed

Political
constraints

Specific actions

Political instability Good governance principles

Lack
of
transparency Weak
public institutions
Legal and Weak
public Adjust the legal framework
Regulatory institutions
to facilitate PPP
Constraints
Set up regulatory body
Clarify
procurement
procedures

Ensure and demonstrate

commitment to PPP policy
and projects.

Economic
and
financial
constraints

Economic
instability
Under-developed
financial markets
Less number of
users Low incomes

Economic development
Secure revenues
from
dedicated funds
Develop financial markets
(reform banking
system, set up infrastructure
investment
Develop methodologies
for public risk assessment

Use Financial Institutions

for
risk
mitigation,
facilitation of regulatory
dialogue and provision of
technical assistance
Stable
economic
management
Support development
of domestic financial
markets and integration
into regional initiatives

Economic
and
financial
constraints

Economic
instability
Under-developed
financial markets
Less number of
users Low incomes

Economic development
Secure revenues
from
dedicated funds
Develop financial markets
(reform banking
system, set up infrastructure
investment
Develop methodologies
for public risk assessment

Use Financial Institutions

for
risk
mitigation,
facilitation of regulatory
dialogue and provision of
technical assistance
Stable
economic
management
Support development
of domestic financial
markets and integration
into regional initiatives
Assess sensitivity of
the public on levy of user
charges
Viability gap
funding
to
subsidize/support poorest
user
Define standards
Use technical assistance

Social and Popular resistance Coherent

strategy
at
cultural
to payment of user national level for levy of
constraints charges
user charges

Public
sector

Lack
of
experience/

PPP Creation of a businesslike

low agency
with
clear

Training for improved

contract management and
regulation

50

constraints

PPP skills, weak

public institutions
(poor
traffic
enforcement/
overloading)

assignment
of
responsibilities over
the various parts of the
network.
Build
up
progressive experience on
PPPs from maintenance
contracts to concessions.
PPP Develop capacity of the
low private sector (local
contractors and consultants)
Move from input (quantity)
to output
(performance) type of
contracts.

Training and sensitization

on PPP and in legal and
financial issues

Private
sector
constraints

Lack
of
experience/
PPP skills

Involve users at all stages

of the project
Define performance
indicators for maintenance
Conduct
sufficient
preliminary
studies

Appendix IX
PROJECT FINANCING
1 Infrastructure PPPs typically require financing; that is, external funds are required
for the initial investment costs that are recovered over time from future revenue
streams. The funds may be sourced from the public sector or the private sector.
Regardless of the source of finance, such funds have a cost and, therefore, impact the
projects economics and required tariffs (and thus affordability). A governments cost
of funding is typically lower than that of a private operator. Private financing may
therefore increase the financial costs of PPP. However, the efficiency gains from PPP
are expected to outweigh this additional cost and result in net savings and efficiency
gains, with an ultimate benefit to consumers. In addition, public sector financing is
usually scarce, creating one of the initial drivers for PPP. The operator will typically
establish a project company for implementing the contract, often called special
purpose vehicle (SPV). The company owners may be a consortium of companies or a
single large company. The company owners will not usually finance all project
requirements; instead, they will provide a proportion as equity and borrow the
remainder of the required financing from financial institutions or place debt securities
in the capital market. The creditworthiness (bankability) of a project depends on a
number of factors, some of which are within the control of the government when
designing PPP. They include commercially attractive project design and tariffs
(shorter payback and, hence, financing periods) as well as strong off-take
arrangements to reduce market/revenue risk (predictability of cash flows), together
with the level of certainty and transparency of regulatory settings, which affect future
cash flows. Infrastructure project financing in general, whether from banks or bond
markets, faces a number of challenges including
(i) long-term debt maturities to match project cash flows,
(ii) limits to the availability of debt financing to match revenue steams,
(iii) limited available equity and resulting high degree of leverage, and
(iv) no security/ guarantee except for project assets available (nonrecourse
financing).
Project finance, is a specialized activity and, depends on prevailing market conditions.
To make financing possible or to secure better borrowing rates, the operator may seek

51

credit enhancement through insurance or guarantees. These might include (partial)

credit guarantees (e.g., from the government itself or from a development finance
institution) or political risk guarantees (from insurers or development finance
institution) against the government or regulator not adhering to agreements (e.g., takeor-pay off-take agreement, concession agreement, etc.). To determine the amount of
debt finance the project can sustain, lenders perform their own calculations related to
project performance and cash flow. These include debt service cover ratios, loan life
coverage ratios, and project life coverage ratios. Project financing requires a very
thorough appraisal process because of the sole reliance on project cash flows. Lenders
will undertake due diligence exercises to get comfort that the project assumptions and
risks are reasonable. Bidders may not fully know the prospective financing
arrangements until the last stage of the contracting process. The final arrangements
and risk allocations will only be put in place when the contract is near certain. That is
why, the stage of Financial Closure is very crucial in projects taken up on PPP, since
that is the stage when the financial arrangements and commitments get tied up .
2 Tariff Design
2.1 Tariffs need to balance a number of objectives: (i) stipulated service standard and
associated costs,
(ii) customers willingness and ability to pay,
(iii) resulting cost recovery,
(iv) required economics (return on investment) for private operator, and
(v) need for/availability of subsidies.
The right combination of factors must be determined through an iterative optimization
process using the project model ( Fig. 8).
Fig. 8: Tariff Design Process

Cost Recovery

Service
Standard

Subsidy

Tariff
Structure

Willingness/
Ability to Pay

(Source: Heather Skilling and Nils Janson. 2006).

2.2 The Iterative Process of Designing Tariffs

The following objectives provide an appropriate starting point for designing tariffs:
cost recovery/return on investment,
incentives for efficiency,
fairness and equity,
simplicity and comprehensibility.

52

 balancing the objectives

tariff adjustments
stakeholder involvement
2.2.1 Cost recovery/return on investment
The combination of service standards (costs) and tariffs (revenues) determines the
commercial viability of a project. Beyond that, the private operator has the chance to
improve the ultimate financial outcome by being particularly efficient in investment
and operations. Therefore, a private operator will only get involved in a project if it
sees a fair chance to make a profit given a predetermined set of service standards and
tariffs. The internal rate of return (IRR) and return on equity (RoE) are the most
commonly used measures to assess the financial attractiveness from a private
operators perspective. A private operator will assess the potential IRR of a project
against its own cost of equity, adjusted for the perceived risk of the project. Revenues
are considered adequate if they enable an operator to maintain, replace, modernize,
and expand its services and assets.
2.2.2 Incentives for efficiency
Tariffs should give incentives to private operators and investors to achieve efficiency
in operations (supply-side efficiency) and make necessary and/or desired investments.
A cost-plus pricing regime, which guarantees the operator recovery of all costs plus
a profit, does not provide an incentive for efficiency and too low a tariff may not be
sufficient to entice new investment. Prices also need to send the correct signal to
customers to use the service with appropriate economy as a scarce resource (demand
management or demand-side efficiency). Pricedemand elasticity should also be taken
into account and optimized (e.g., for toll road usage). Pricing structures should also
reflect variations of marginal costs (investment, operation) by location, customer type,
period, etc. This can be achieved by effectively charging different rates to different
customers or by prescribing coverage and service levels and allowing overall tariffs to
cross-subsidize more costly customers.
2.2.3 Fairness
As a starting point for determining fairness, tariffs should reflect costs and different
customer groups/classes should observe tariffs that reflect the cost of supplying them
and should be affordable. For example, people in similar circumstances pay similar
amounts or people accepting lower quality of services should have their bills lowered.
However, some services, like water and wastewater services, are often considered a
public service, and no customer should be denied access to water on the grounds of
poverty. Specific subsidies or cross-subsidies built into the tariff system can address
this situation. Government subsidies can be used to make a project commercially
viable from the perspective of the private operator even if the desired combination of
service and tariff levels does not result in sufficient cost recovery. This will only
make sense if the aggregate cost to the government under PPP (including subsidy) is
lower than the cost to the government of operating the service fully under the public
sector or the cost of not providing the service at the required service levels.
Government subsidies can be general, i.e., applying to the overall project, or
specific, in which case they are tied to service provision to deserving (low-income)
consumer segments. Some subsidies are designed as community service obligations
and mandated in regulatory or license standards or paid for by direct and indirect
public sector transfers to beneficiaries. Governments typically provide subsidies to

53

reduce tariff levels for the purposes of helping the poor, addressing public health
issues, addressing environmental issues, and/or because of political constraints on
raising tariffs.
2.2.4 Simplicity and comprehensibility
The objective of simplicity and comprehensibility means that tariffs should be easily
accessible and understandable to employees and consumers of the utility. For
example, if a tariff structure is too complex, customers may not understand the
implication of changes in consumption for their bills or the range of options available
to them. However, over simplification may result in incentives being lost or a
negative impact on fairness.
2.2.5 Balancing the objectives
There is a need to balance these above objectives against one another. For example,
the objective of incentives may conflict with the objective of simplicity at times
because on cost grounds it may make sense to have a very complex tariff structure. A
similar conflict could arise with the fairness objective. There is a further requirement
that certain fundamentals be in place including a definition of a reasonable rate of
return, an understanding of how assets will be valued, and whether any additional
returns are to be allowed. After evaluating these factors and determining the
appropriate allocation of risks in PPP, the initial tariff rates and tariff structure are set
in place until an adjustment is warranted.
2.2.6 Tariff Adjustments
To expect one set of tariffs, or even a tariff structure or regime, to remain viable and
appropriate over the typical life of a PPP project is unrealistic. It is therefore essential
to define practical rules for adjustments. This requires defining:
The triggers or drivers for a price adjustment, such as changes in raw material prices
(such as oil prices), inflation, and exchange rate fluctuations);
The mechanisms by which the adjustment will be made, including cost plus and
price cap regulation; and
The frequency of adjustments including cost pass-through, tariff indexation, tariff
resets, and extraordinary tariff adjustments.
2.2.7 Stakeholder Involvement
The early involvement of all stakeholders in the PPP process helps develop an
enabling environment. The stakeholders provide valuable information on the points of
concern, the performance expectations, and potential risks. This input is also critical
to assess whether key business assumptions of the proposed PPP (in particular
tariffs/fees) are realistic and enforceable. Avoiding consultation invites the risk of
later opposition, which slows or derails the process. Ongoing consultation with
stakeholders is important at every stage. Consultation with potential bidders and
partners is also critical to ensure that the proposed PPP design meets their
requirements. Otherwise, there is a risk that the PPP design includes an unrealistic
combination of (politically) desirable features (high-level service, low prices, no
redundancies, no subsidies, and short concession periods) that will make the project
unattractive to bidders or unsustainable. Collecting informal feedback from the
market during the preparation stage is therefore critical.

54

Appendix X
PUBLIC PRIVATE PARTNERSHIP (PPP) MODELS
1 Forms of PPP
The forms of PPP and the extent of Private Sector participation is depicted in
following Figure 9.
Fig. 9: Public and Private Sector Participation in Various Forms of PPP

Private Sector

Public Sector

Design
Finance

Construct

O&M
Ownership
Service

Management

Contract

Contract

Lease

Concession BOT/BOO

Divest

Source : The World Bank Toolkit

2 The PPP models vary from short-term simple management contracts (with or
without investment requirements) to long-term and very complex BOT form, to
divestiture.
These models vary mainly by:

55

Ownership of capital assets

Responsibility for investment
Assumption of risks, and
Duration of contract
The PPP models can be classified into five broad categories in order of generally (but
not always) increased involvement and assumption of risks by the private sector.
These are:
Supply and Management contracts
Turnkey projects
Lease
Concessions
Private ownership of assets.
3 Management Contracts:
A management contract is a contractual arrangement for the management of a part or
whole of a public enterprise by the private sector. Management contracts allow
private sector skills to be brought into service design and delivery, operational
control, labour management and equipment procurement. However, the public sector
retains the ownership of facility and equipment. The private sector is provided
specified responsibilities concerning a service and is generally not asked to assume
commercial risk. The private enterprise is paid a fee to manage and operate services.
Normally, payment of such fees is performance-based. Usually, the contract period is
short, typically two to five years. But longer period may be used for large and
complex operational facilities such as a port or airport.
There are several variants under the management contract including:
Supply or service contract
Maintenance management
Operational management
3.1 Supply or Service Contract:
Supply of equipment, raw materials, energy and power, and labour are typical
examples of supply or service contract. A private concessionaire can itself enter into a
number of supply or service contracts with other entities/ providers for the supply of
equipment, materials, power and energy, and labour. Non-core activities of an
organization (public or private) such as catering, cleaning, medical, luggage handling,
security, and transport services for staff can be undertaken by private sector service
providers. Such an arrangement is also known as outsourcing. Some form of licensing
or operating agreement is used if the private sector is to provide services directly to
users of the infrastructure facility. Examples of such an arrangement include, catering
services for passengers on railway systems (the Indian Railways, for example). The
main purpose of such licensing is to ensure the supply of the relevant service at the
desired level of quantity and quality.
3.2 Maintenance management
A public partner (Centre, state, or local government agency or authority) contracts
with a private partner to operate, maintain, and manage a facility or system providing
a service. Under this contract option, the public partner retains ownership of the
public facility or system, but the private party may invest its own capital in the facility

56

or system. Any private investment is carefully calculated in relation to its

contributions to operational efficiencies and savings over the term of the contract.
Generally, the longer the contract term, the greater the opportunity for increased
private investment because there is more time available in which to recoup any
investment and earn a reasonable return. Many local governments use this contractual
partnership to provide wastewater treatment services. Assets maintenance contracts
are very popular with transport operators. Sometimes equipment vendors/suppliers
can also be engaged for the maintenance of assets procured from them.
3.3 Operational management
A public partner (Centre, state, or local government agency or authority) contracts
with a private partner to provide and/or maintain a specific service. Under the private
operation and maintenance option, the public partner retains ownership and overall
management of the public facility or system. Management contracts of major transport
facilities such as a port or airport may be useful when local manpower or expertise in
running the facility is limited. Management contracts are also quite common in the
transport sector for providing some of the non-transport elements of transport
operations such as the ticketing system of public transport and reservation systems.
Operational management of urban transport services can also be contracted out to the
private sector. In the simplest type of contract, the private operator is paid a fixed fee
for performing managerial tasks. More complex contracts may offer greater incentives
for efficiency improvement by defining performance targets and the fee is based in
part on their fulfilment.
4 Turnkey
Turnkey is a traditional public sector procurement model for infrastructure facilities.
Generally, a private contractor is selected through a bidding process. The private
contractor designs and builds a facility for a fixed fee, rate or total cost, which is one
of the key criteria in selecting the winning bid. The contractor assumes risks involved
in the design and construction phases. The scale of investment by the private sector is
generally low and for a short-term. Generally, in a turnkey transaction, the private
partners use fast-track construction techniques (such as design-build) and are not
bound by traditional public sector procurement regulations. This combination often
enables the private partner to complete the facility in significantly less time and for
less cost than could be accomplished under traditional construction techniques. This
type of private sector participation is also known as Design-Build.
5 Affermage/ Lease
In this category of arrangement an operator (the leaseholder) is responsible for
operating and maintaining the infrastructure facility and services, but generally the
operator is not required to make any large investment. The arrangements in an
affermage and a lease are very similar. The difference between them is technical.
Under a lease, the operator retains revenue collected from customers/users of the
facility and makes a specified lease fee payment to the contracting authority. Under an
affermage, the operator and the contracting authority share revenue from
customers/users. Following In the affermage/lease types of arrangements, the operator
takes lease of both infrastructure and equipment from the government for an agreed
period of time. Generally, the government maintains the responsibility for investment
and thus bears investment risks. The operational risks are transferred to the operator.
However, as part of lease, some assets may be transferred on a permanent basis for a

57

period which extends over the economic life of assets. Fixed facilities and land are
leased out for a longer period than for mobile assets. Land to be developed by the
leaseholder is usually transferred for a period of 15-30 years. It may be noted here that
if the assets transferred to the private sector under a lease agreement are constrained
in their use to a specific function or service, the value of assets is dependent upon the
revenue potential of that function or service. If assets are transferred to the private
sector without restrictions of use, the asset value is associated with the optimum use
of the assets and the revenues that they can generate. Its variants are:
5.1
Lease/Purchase
A lease/purchase is an instalment-purchase contract. Under this model, the private
sector finances and builds a new facility, which it then leases to a public agency. The
public agency makes scheduled lease payments to the private party. The public
agency accrues equity in the facility with each payment. At the end of the lease term,
the public agency owns the facility or purchases it at the cost of any remaining unpaid
balance in the lease.
Under this arrangement, the facility may be operated by either the public agency or
the private developer during the term of the lease. Lease/purchase arrangements have
been used by the General Services Administration for building federal office
buildings and by a number of states to build prisons and other correctional facilities.
5.2
Sale/Leaseback
This is a financial arrangement in which the owner of a facility sells it to another
entity, and subsequently leases it back from the new owner. Both public and private
entities may enter into sale/leaseback arrangements for a variety of reasons. An
innovative application of the sale/leaseback technique is the sale of a public facility to
a public or private holding company for the purposes of limiting governmental
liability under certain statues. Under this arrangement, the government that sold the
facility leases it back and continues to operate it.
5.3
Tax-Exempt Lease
A public partner finances capital assets or facilities by borrowing funds from a private
investor or financial institution. The private partner generally acquires title to the
asset, but then transfers it to the public partner either at the beginning or end of the
lease term. The portion of the lease payment used to pay interest on the capital
investment is tax exempt under state and federal laws. Tax-exempt leases have been
used to finance a wide variety of capital assets, ranging from computers to
telecommunication systems and municipal vehicle fleets.
5.4
LDO or BDO: Lease-Develop-Operate or Build-Develop-Operate
Under these partnerships arrangements, the private party leases or buys an existing
facility from a public agency; invests its own capital to renovate, modernize, and/or
expand the facility; and then operates it under a contract with the public agency. A
number of different types of municipal transit facilities have been leased and
developed under LDO and BDO arrangements.
6 Concessions
In this form of PPP, the Government defines and grants specific rights to an entity
(usually a private company) to build and operate a facility for a fixed period of time.
The Government may retain the ultimate ownership of the facility and/or right to

58

supply the services. In concessions, payments can take place both ways:
concessionaire pays to government for the concession rights and the government may
also pay the concessionaire, which it provides under the agreement to meet certain
specific conditions. Usually such payments by government may be necessary to make
projects commercially\ viable and/or reduce the level of commercial risk taken by the
private sector, particularly in the initial years of a PPP programme in a country when
the private sector may not have enough confidence in undertaking such a commercial
venture. Typical concession periods range between 5 to 50 years. It may be noted that
in a concession model of PPP, an SPV may not always be necessary. Concessions
may be awarded to a concessionaire under two types of contractual arrangements:
Franchise
BOT type of contracts
6.1 Franchise
Under a franchise arrangement the concessionaire provide services that are fully
specified by the franchising authority. The private sector carries commercial risks and
may be required to make investments. This form of private sector participation is
historically popular in providing urban bus or rail services. Franchise can be used for
routes or groups of routes over a contiguous area.
6.2 Build-Operate-Transfer (BOT)
In a Build-Operate-Transfer or its other variants type of arrangement, the
concessionaire undertakes investments and operates the facility for a fixed period of
time after which the ownership reverts back to the public sector. In this type of
arrangement, operating and investment risks are substantially transferred to the
concessionaire. However, in a BOT type of model the government has explicit and
implicit contingent liabilities that may arise due to loan guarantees provided and
default of a sub-sovereign government and public or private entity on non-guaranteed
loans. By retaining ultimate ownership, the government controls policy and can
allocate risks to those parties best suited to bear them or remove them. In a BOT
concession, often the concessionaire may be required to establish a special purpose
vehicle (SPV) for implementing and operating the project. The SPV may be formed as
a joint venture company with equity participation from multiple private sector parties
and the public sector. In addition to equity participation, the government may also
provide capital grants or other financial incentives to a BOT project. BOT is a
common form of PPP in most of sectors in India and other Asian countries. A key
distinction between a franchise and BOT type of concession is that, in a franchise the
authority is in the lead in specifying the level of service and is prepared to make
payments for doing so, whilst in the BOT type the authority imposes a few basic
requirements and may have no direct financial responsibility. A typical structure for
BOT project is indicated in Fig. 10.

59

Fig. 10: Typical BOT Structure

Govt./ Municipal Entity

Concession
Shareholders

Agreement

Agreement

Shareholders

Concessionaires
Users/

Special Purpose

Customers

Company
(SPC)
Lenders
Loan
Agreement
Turnkey
Contract

Designer, Contractor
And Supplier

Operation &
maintenance
Agreement

Operator and
Maintenance Holder

BOT has following variants:

6.2.1 DBFOM: Design-Build-Finance-Operate
With the Design-Build-Finance-Operate (DBFO) approach, the responsibilities for
designing, building, financing, operating and maintaining are bundled together and
transferred to private sector partners. There is a great deal of variety in DBFO
arrangements especially the degree to which financial responsibilities is actually
transferred to the private sector. One commonality that cuts across all DBFO projects
is that they are either partly or wholly financed by debt leveraging revenue streams
dedicated to the project. Direct user fees (tolls) are the most common revenue source.
However, others ranging from lease payments to shadow tolls and vehicle registration
fees. Future revenues are leveraged to issue bonds or other debt that provide funds for
capital and project development costs. They are also often supplemented by public
sector grants in the form of money or contributions in kind, such as right-of-way. In
certain cases, private partners may be required to make equity investments as well.
Value for money can be attained through life-cycle costing.
6.2.2 Design-Build-Finance-Operate-Maintain-Transfer (DBFOMT)
The Design-Build-Finance-Operate-Maintain-Transfer partnership model is the same
as a DBFO except that the private sector owns the asset until the end of the contract
when the ownership is transferred to the public sector.
6.2.3 BROT : Build-Rehabilitate-Operate-Transfer
The arrangement, where a private developer builds an add-on to an existing facility or
completes a partially built facility and rehabilitates existing assets, then operates and
maintains the facility at its own risk for the contract period. BROT is a popular form
of PPP in the water sector.

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6.2.4 DBO: Design-Build-Operate

A single contract is awarded for the design, construction, and operation of a capital
improvement. Title to the facility remains with the public sector unless the project is a
design/build/operate/ transfer or design/build/own/operate project. This method
involves one contract for design with an architect or engineer, followed by a different
contract with a builder for project construction, followed by the owner's taking over
the project and operating it. A simple design-build approach creates a single point of
responsibility for design and construction and can speed project completion by
facilitating the overlap of the design and construction phases of the project. On a
public project, the operations phase is normally handled by the public sector under a
separate operations and maintenance agreement. Combining all three passes into a
DBO approach maintains the continuity of private sector involvement and can
facilitate private-sector financing of public projects supported by user fees generated
during the operations phase.
6.2.5 DBOM: Design-Build-Operate-Maintain
The design-build-operate-maintain (DBOM) model is an integrated partnership that
combines the design and construction responsibilities of design-build procurements
with operations and maintenance. These project components are procured from the
private section in a single contract with financing secured by the public sector. The
public agency maintains ownership and retains a significant level of oversight of the
operations through terms defined in the contract.
6.2.6 BBO: Buy-Build-Operate
A BBO is a form of asset sale that includes a rehabilitation or expansion of an existing
facility. The government sells the asset to the private sector entity, which then makes
the improvements necessary to operate the facility in a profitable manner.
6.2.7 BOOT: Build-Own-Operate-and-Transfer
BOOT is based on the granting of a Concession by a Principal (the Union or
Government or a local authority) to the Concessionaire, who is responsible for the
construction, financing, operation and maintenance of a facility over the period of the
Concession before finally transferring the facility, at no cost to the Principal, a fully
operational facility. During the Concession period the Promoter owns and operates the
facility and collects revenue in order to repay the financing and investment costs,
maintain and operate the facility and make a margin of profit.
6.2.8 BTO: Build-Transfer-and-Operate
BTO is a contractual arrangement whereby the public sector contracts out the building
of an infrastructure facility to a private entity such that the Concessionaire builds the
facility on a turn-key basis, assuming cost overrun, delay and specified performance
risks. Once the facility is commissioned satisfactorily, title is transferred to the
implementing agency. The private entity however, operates the facility on behalf of
the implementing agency under an agreement.

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6.2.9 BT: Build-and-Transfer

BT is a contractual arrangement whereby the Concessionaire undertakes the financing
and construction of a given infrastructure or development facility and after its
completion turns it over to the Government Agency or Local Government unit
concerned, which shall pay the proponent on an agreed Schedule its total investments
expended on the project, plus a reasonable rate of return thereon. This arrangement
may be employed in the construction of any infrastructure or development project,
including critical facilities which, for security or strategic reasons, must be operated
directly by the Government.
6.2.10 BOT Annuity
BOT Annuity is the contractual arrangement quite similar to BOT but return on
investment is not through the levy and collection of user fee directly from the users.
Instead the owner/ Government pays to the Concessionaire an amount annually or
bi-annually (Annuity) which he bids. In this type of arrangement, Concessionaire does
not take risks associated with investment and operating risks.
6.2..11 BLT: Build-Lease-and-Transfer
BLT is a contractual arrangement whereby a Concessionaire is authorized to finance
and construct an infrastructure or development facility and upon its completion turns
it over to the government agency or local government unit concerned on a lease
arrangement for a fixed period after which ownership of the facility is automatically
transferred to the government agency or local government unit concerned.
6.2.12 ROT: Rehabilitate-Operate-and-Transfer
ROT is a contractual arrangement whereby an existing facility is turned over to the
private sector to refurbish, operate and maintain for a franchise period, at the expiry of
which the legal title to the facility is turned over to the government. The term is also
used to describe the purchase of an existing facility from abroad, importing,
refurbishing, erecting and consuming it within the host country.
6.2.13 ROO: Rehabilitate-Own-and-Operate
ROO is a contractual arrangement whereby an existing facility is turned over to the
private sector to refurbish and operate with no time limitation imposed on ownership.
As long as the operator is not in violation of its franchise, it can continue to operate
the facility in perpetuity.
6.2.14 Developer Finance
The private party finances the construction or expansion of a public facility in
exchange for the right to build residential housing, commercial stores, and/or
industrial facilities at the site. The private developer contributes capital and may

62

operate the facility under the oversight of the government. The developer gains the
right to use the facility and may receive future income from user fees.
While developers may in rare cases build a facility, more typically they are charged a
fee or required to purchase capacity in an existing facility. This payment is used to
expand or upgrade the facility. Developer financing arrangements are often called
capacity credits, impact fees, or extractions. Developer financing may be voluntary or
involuntary depending on the specific local circumstances
6.3 Private Ownership of Assets
In this form of participation, the private sector remains responsible for design,
construction and operation of an infrastructure facility and in some cases the public
sector may relinquish the right of ownership of assets to the private sector. It is argued
that by aggregating design, construction and operation of infrastructure services into
one contract, important benefits could be achieved through creation of synergies. As
the same entity builds and operates the services, and is only paid for the successful
supply of services at a pre-defined standard, it has no incentive to reduce the quality
or quantity of services. Compared with the traditional public sector procurement
model, where design, construction and operation aspects are usually separated, this
form of contractual agreement reduces the risks of cost overruns during the design
and construction phases or of choosing an inefficient technology, since the operators
future earnings depend on controlling costs. The public sectors main advantages lie
in the relief from bearing the costs of design and construction, the transfer of certain
risks to the private sector and the promise of better project design, construction and
operation.
There can be three main types under this form:
Build-Own-Operate type of arrangement
Private Finance Initiative (a more recent innovation)
Divestiture by license or sale
6.3.1 Build-Own-Operate
In the Build-Own-Operate (BOO) type, the private sector builds, owns and operates a
facility, and sells the product/service to its users or beneficiaries. This is the most
common form of private participation in the power sector in many countries. For a
BOO power project, the Government (or a power distribution company) may or may
not have a long-term power purchase agreement (commonly known as off-take
agreement) at an agreed price from the project operator. In many respects, licensing
may be considered as a variant of the BOO model of private participation. The
Government grants licences to private undertakings to provide services such as fixed
line and mobile telephony, Internet service, television and radio broadcast, public
transport, and catering services on the railways. However, licensing may also be
considered as a form of concession with private ownership of assets. Licensing
allows competitive pressure in the market by allowing multiple operators, such as in
mobile telephony, to provide competing services. There are two types of licensing:
quantity licensing and quality licensing. By setting limits through quantity licensing,
the government is able to moderate competition between service providers and adjust
supply between one area and other. Quality licensing however, does not place any
restriction on number of providers or the amount of service produced but specifies the

63

quality of service that needs to be provided. The government may get a fee and a
small share of the revenue earned by the private sector under the licensing
arrangement.
6.3.2 Private Finance Initiative
In the Private Finance Initiative (PFI) model, the private sector similar to the BOO
model builds, owns and operates a facility. However, the public sector (unlike the
users in a BOO model) purchases the services from the private sector through a longterm agreement. PFI projects therefore, bear direct financial obligations to
government in any event. In addition, explicit and implicit contingent liabilities may
also arise due to loan guarantees provided to lenders and default of a public or private
entity on non-guaranteed loans. In the PFI model, asset ownership at the end of the
contract period may or may not be transferred to the public sector. The PFI model also
has many variants. The annuity model for financing of national highways in India is
an example of the PFI model. Under this arrangement a selected private bidder is
awarded a contract to develop a section of the highway and to maintain it over the
whole contract period. The private bidder is compensated with fixed semi-annual
payments for his investments in the project. In this approach the concessionaire does
not need to bear the commercial risks involved with project operation. Apart from
building economic infrastructure, the PFI model has been used also for developing
social infrastructure such as school and hospital buildings, which do not generate
direct revenues.
6.3.3 Divestiture
This third type of privatization is clear from its very name. In this form a private
entity buys an equity stake in a state-owned enterprise. However, the private stake
may or may not imply private management of the enterprise. True privatization,
however, involves a transfer of deed of title from the public sector to a private
undertaking. This may be done either through outright sale or through public
floatation of shares of a previously corporatised state enterprise. Full divestiture of
existing infrastructure assets is not very common. However, there are many examples
of partial divestiture.
6.4 Joint Venture
Joint ventures are alternatives to full privatization in which the infrastructure is coowned and operated by the public sector and private operators. Under a joint venture,
the public and private sector partners can either form a new company or assume joint
ownership of an existing company through a sale of shares to one or several private
investors. The company may also be listed on the stock exchange. A key requirement
of this structure is good corporate governance, in particular the ability of the company
to maintain independence from the government. This is important because the
government is both part owner and regulator, and officials may be tempted to meddle
in the companys business to achieve political goals. From its position as shareholder,
however, the government has an interest in the profitability and sustainability of the
company and can work to smooth political hurdles. The private partner assumes the
operational role and a board of directors generally reflects the shareholding
composition or expert representation. Requirements of PPP Partners under Different
PPP Arrangements are given in following Table 2.

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Table 2: Requirements of PPP Partners for PPP Arrangements

Private Sector
Requirements
Fair Profit

Service
Contracts
Required

Management
Contracts
Required

Reward for Risk

Mitigation
Clear Legal /
Regulatory
Structure
Growth Potential

Leases
Required

BOT
Agreements
Required

DBFO
Concessions
Required

Partial
Divestiture
Required

Full
Divestiture
Required

Desirable

Desirable

Required

Required

Automatic

Required

Required

Required

Required

Required

Desirable

Desirable

Desirable

Desirable

Political Support

Desirable

Required

Required

Required

Political Stability

Desirable

Desirable

Desirable

Desirable

Government
Requirements
Leveraging
Funding
Accelerating
Project
Implementation
Improving
Service Levels
Improving
Service
Coverage
Efficiency Gains
Ease
of
Implementation
Maximizing
Societal Benefits
Transparency /
Open
Competition

Yes

Important

Important

Important

Important

Important

Important

Important

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Important

Yes

Yes

Yes

Important

Important

Important
Desirable

Important
Desirable

Important
Desirable

Important
Desirable

Important
Desirable

Relevant

Relevant

Relevant

Important

Important

Important

Important

Relevant

Relevant

Relevant

Important

Important

Important

Important

Reasonable
Control of Grant
Funds

Required

Required

Required

Required

Avoiding Undue
Private Profit

Required

Required

Required

Required

Efficiency Gains

Desirable

Important

Important

Important

Important

Yes

Yes

Yes

Required

Required

Required

Leveraging
Private Funds
Lender
Requirements
Rigorous

Desirable

Desirable

Yes

65

Financial
Analysis
Conservative
Cost/Revenue
Assumptions

Required

Required

Required

Certainty of
Grant and State
funding

Required

Required

Required

Clear
Legal
regulator
structure
Technical
Ability of
Owner/
Operator

Required

Required

Required

Required

Required

Required

Political Stability

Desirable

Desirable

Desirable

Source: Guidelines For Successful Public Private Partnerships, 2003 , European

Commission, Directorate-General Regional Policy
6.5 Objectives of Various Forms of PPP
Table 3 illustrates the main objectives of various forms of PPP
Table 3: Main Objectives of PPP Forms
Govt.
Objectives

Improve
efficiency
Transferring
Risk
Improving
Service
Quality
Maintaining
control of
service
provision

Forms of PPP
Service Management Lease
Concessions Build
Contract Contract
Contract Contract
Operate
Transfer
p
p
p
n
n

Divesture
n

p or n

Legends : n - to a large extent, p - to a limited extent, # - not usually

Source : The World Bank Toolkit for Highways

6.6 The key features of main forms of PPP are given in Annex IV

66

Summary of Key Features of Main Modes of PPP

Annex IV

SERVICE
CONTRACT

MANAGEMENT
CONTRACTS

LEASE
CONTRACTS

CONCESSIONS

BUILD-OPERATETRANSFER (BOT)

Scope

Multiple contracts
for a variety of
support
services
such as meter
reading, billing etc.

Management
of
entire operation of a
major component

Responsibility for
management,
operations
and
specific renewals

Responsibility for
all operations and
for financing and
execution
of
specific\investments

Investment in and
operations
of
a
specific
major
component, such as a
treatment plant

Asset Ownership

Public

Public

Public

Public/Private

Public/Private

Duration
Operation
&
Maintenance
Responsibility
Capital Investment
Commercial Risk
Overall Level of
Risk Assumed by
Private Sector
Compensation
Terms

1-3 years
Public

2-5 years
Private

10-15 years
Private

25-30 years
Private

Varies
Private

Public
Public
Minimal

Public
Public
Minimal/moderate

Public
Shared
Moderate

Private
Private
High

Private
Private
High

Unit prices

Portion of tariff
revenues

All on part of tariff

revenues

High

Competition

Intense
ongoing

Fixed fee, preferably

with
performance
incentives
One
time
only,
contracts no usually
renewed

Useful as part of
strategy
for
improving
efficiency
of
public company;
Promotes
local
private
sector
development
Requires ability to
administer multiple
contracts
and
strong enforcement
of contract laws

Initial contract only;

sub-sequent
contracts
usually
negotiated
Improves
operational
and
commercial
efficiency;
Mobilizes
investment finance;
Develops local staff

One time only; often

negotiated without
direct competition

Special Features

Initial
contract
only, sub-sequent
contracts usually
negotiated
Improve
operational
and
commercial
efficiency;
Develops
local
staff

Management may not Potential conflicts How to compensate

have
adequate between
public investments
and
control over key body which does ensure
good
elements, such as investments
and maintenance during
budgetary resources, the
private last 5-10 years of
staff policy, etc.
operator
contract
Source: ADB, Public-Private-Partnership Handbook; Heather Skilling and Kathleen Booth 2007.

Does not necessarily

improve efficiency of
ongoing operations;
May
require
guarantees

Problems
Challenges

and

and

Interim
solution
during
preparation
for more intense
private participation

Mobilizes investment
finance;
Develops
local staff

67