ASSIGNMENT

PGPM – 42
MANAGEMENT OF PUBLIC PRIVATE
PARTNERSHIPS

V.RAMMOHAN.
(Reg. No. 211-07-31-9614-2131)

National Institute of Construction Management &

Research

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 DIFFERENT PUBLIC PRIVATE PARTICIPATION SCHEMES:

The following are the different types of options available in “Public Private
Participation”:
I. Service Contracts
II. Management Contracts
III. Affermage or Lease Contracts
IV. Build Operate Transfer (BOT) and similar arrangements
V. Concessions
VI. Joint Ventures

Each option implies varying levels of responsibility and risk to be assumed by the
private operator, together with differences in structures and contract forms.

I. Service Contracts :
Under a Service Contract, the government (Public Authority) hires a private company
or entity to carry out one or more specified tasks or services for a period, typically 1 – 3 years. The
public authority remains the primary provider of the infrastructure service and contracts out only
potions of its operation to the private partner. The private partner must perform the service at the
agreed cost and must typically meet performance standards set by the public sector. Government
generally use competitive bidding procedures to award service contracts, which tend to work well
given the limited period and narrowly defined nature of these contracts.
Under a Service Contract, the government pays the private partner a predetermined
fee for the service, which may be based on a one-time fee, unit cost or other basis. Therefore, the
contractor’s profit increases if it can reduce its operating costs, while meeting required service
standards. One financing option involves a cost-plus-fee formula, where costs such as labour are
fixed, and the private partner participates in a profit-sharing system. The private partner typically
does not interact with the consumers. The government is responsible for funding any capital
investments required to expand or improve the system.

II. Management Contracts :

A management contract expands the services to be contracted out to include some or
all of the management and operation of the public service (i.e. utility, hospital, port authority, etc.).
Although ultimate obligation for service provision remains in the public sector, daily management

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 control and authority is assigned to the private partner or contractor. In most cases, the private
partner provides working capital but no financing for investment.
The private contractor is paid a predetermined rate for labour and other anticipated
operating costs. To provide an incentive for performance improvement, the contractor is paid an
additional amount for achieving pre-specified targets. Alternatively, the management contractor can
be paid a share of profits. The public sector retains the obligation for major capital investment,
particularly those related to expand or substantially improve the system. The contract can specify
discrete activities to be funded by the private sector. The private partner interacts with the customers,
and the public sector is responsible for setting tariffs. A management contract typically, however,
will upgrade the financial and management systems of a company and decisions concerning service
levels and priorities may be made on a more commercial basis.

III. Affermage or Lease Contracts :

Under Affermage or Lease Contract, the private partner is responsible for the service
in its entirety and undertakes obligations relating to quality and service standards. Except for new
and replacement investments, which remain the responsibility of the public authority, the operator
provides the service at his expense and risk. The duration of the leasing contract is typically for 10
years and may be renewed for up to 15 years. Responsibility for service provision is transferred from
the public sector to the private sector and the financial risk for operation and maintenance is borne
entirely by the private sector operator. In particular, the operator is responsible for losses and for
unpaid consumers’ debts. Leases do not involve any sale of assets to the private sector.
Under this arrangement, the initial establishment of the system is financed by the
public authority and contracted to a private company for operation and maintenance. Part of tariff is
transferred to the public authority to service loans raised to finance extensions of the system.
An affermage is similar, but not identical, to a lease contract. Unlike a lease where the
payment to the contracting authority, an affermage allows the private sector to collect revenue from
the customers, pays the contracting authority an affermage fee, and retains the remaining revenue.
The affermage can be more appealing to the private partner as it reduces some risks associated with
low-cost recovery in sales. The affermage fee is typically an agreed rate per every unit sold.

IV. Concessions :
A Concession makes the private sector operator (Concessionaire) responsible for the
full delivery of services in specified area, including operation, maintenance, collection, management
and construction and rehabilitation of the system. Importantly, the operator is now responsible for all
capital investment. Although the private sector operator is now responsible for providing the assets

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 such assets are publicly owned even during the concession period. The public sector is responsible
for establishing performance standards and ensuring that the concessionaire meets them. In essence,
the public sector’s role shifts from being the service provider to regulating the price and quality of
service.
The concessionaire collects the tariff directly from the system users. The tariff is
typically established by the concession contract, which also includes provisions on how it may be
changed over time. In rare cases, the government may choose to provide financing support to help
the concessionaire fund its capital expenditures. The concessionaire is responsible for any capital
investments required to build, upgrade or expand the system, and for financing those investments out
of its resources and from the tariffs paid by the system users. The concessionaire is also responsible
for working capital. A concession contract is typically valid for 25 – 30 years so that the operator has
sufficient time to recover the capital invested and earn an appropriate return over the life of the
concession. The public authority may contribute to the capital investment cost if necessary. This can
be and investment “subsidy” (viability gap financing) to achieve commercial viability of the
concession. Alternatively, the government can be compensated for its contribution by receiving a
commensurate part of the tariff collected.

V. Build – Operate – Transfer and Similar Arrangements :

BOT and similar arrangements are a kind of specialized concession in which a private
firm or consortium finances and develops a new infrastructure project or a major component
according to performance standards set by the government.
Under BOTs, the private partner provides the capital required to build the new
facility, importantly, the private operator now owns the assets for a period set by contract-sufficient
to allow the developer time to recover invest costs through user charges. The public sector agrees to
purchase a minimum level of output produced by the facility, sufficient to allow the operator to
recover its costs during operation. A difficulty emerges if the public sector has overestimated
demand and finds itself purchasing output under such an agreement (“take – or – pay”) when the
demand does not exist. Alternatively, the distribution utility might pay a capacity charge and a
consumption charge, thus sharing the demand risk between the public and private partners. BOTs
generally require complicated financing packages to achieve the large financing amounts and long
repayment periods required.
At the end of the contract, the public sector assumes ownership but can opt to assume
operating responsibility, contract the operation responsibility to the developer or award a new
contract to new partner. The distinction between a Bot – type arrangement and a concession – as the
term is used here – is that a concession generally involves extension to and operation of existing

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 systems, whereas a BOT generally involves large “green – field “ investments requiring substantial
outside finance, for both equity and debt. However, in practice, a concession contract may include
the development of major new components as well as extension to existing systems, and BOTs
sometimes involve extension of existing facilities.
There are many variations on the basic BOT structure including build – transfer –
operate (BTO) where the transfer to the public owner takes place at the conclusion of construction
rather than the end of the contract and build – own – operate (BOO) where the developer constructs
and operates the facility without transferring ownership to the public sector. Under a design – build –
operate (DBO) contract, ownership is never in private hands. Instead, a single contract is let out for
design, construction and operation of the infrastructure project. With the design – build – finance –
operate (DBFO) approach, the responsibilities for designing, building, financing and operation are
bundled together and transferred to private sector partners. DBFO arrangements vary greatly in terms
of the degree of financial responsibility that is transferred to the private partner.

VI. Joint Venture :

Joint ventures are alternatives to full privatization in which the infrastructure is co-
owned 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 and 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 company’s business to achieve political goals. Form 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 board of
directors generally reflects the shareholding composition or expert representation.
The Joint Venture structure is often accompanied by additional contracts (concessions
or performance agreements) that specify the expectations of the company. Joint Ventures also take
some time to develop and allow the public and private partners considerable opportunity for dialogue
and cooperation before the project is implemented. Under the joint venture structure, both public and
private partners have to be willing to invest in the company and share certain risks.

VII. Hybrid Arrangements :

Contract arrangements that incorporate different characteristics of a range of contract
types can also be developed. Called “Hybrid Arrangements”, these bring together the attributes most

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suitable to a particular project’s requirements and the operating conditions. Hybrid arrangements
provide a tailored solution in terms scope, risk sharing, and/ or scope that is most directly suitable to
the project at hand. Obviously, the variation is endless, but examples include:
 A “management contract plus” arrangement, in which the performance-related element of the
management contract is substantial enough to transfer real risk. For instance, the payment of bonuses
to the management contractor might be linked to achievement to increases in the operating cash flow
of the utility by a predetermined amount. To achieve the bonus (if sufficiently large), the contractor
may put additional inputs at risk to achieve the cash flow outputs.
 An “Affermage-lease plus” arrangement has the ability to share responsibility for
investments. Under a standard affermage/ lease, the contracting authority retains full responsibility
for undertaking and financing new investment even through the operator may be in a better position
to manage new construction and some other investment obligations.
In some cases, the operator is given a limited investment responsibility, such as
extension of network service coverage in certain areas. Alternatively, the operator and contracting
authority may reach an agreement to co-finance investments.

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PARTIES INVOLVED IN PUBLIC PRIVATE PARTICIPATION AND THEIR ROLES:
The parties involved in public private participation are generally as follows:
I. The Government :
The government is represented either through a ministry or a government body (such
as a State Government or a Municipal Body) with its own body of authorized personnel empowered
to negotiate and take decisions regarding the implementation of the project. The main interest of the
government in relation to the implementation of the infrastructure project by a private entity should
be to ensure that only necessary and required projects are authorized and the projects that are
authorized are indeed implemented within the time frame and at the costs that ensure their viability
not only at a commercial level but also at a social / public level. This would entail that an adequate
and balanced frame work is provided to ensure the speedy implementation of the projects. This also
ensures that the facility is built to the required standards and within the reasonable costs estimated at
the time of authorization of the project.
II. Sponsors :
The concerned group from the non-government sector that is seeking or that has been
selected to implement the project are commonly referred to as the “Sponsors” or “Developers”.
III. Lenders – Financing Agency (He is not a shareholder) :
The group of legal entities, institutions, companies and other persons that provide the
debt financing for the development of the project are referred to as the “Lenders”.
IV. Investors :
The persons who invest money (as opposed to lending on commercial terms) into the
development of the project are referred to as “Investors”. The main difference between lenders and
investors is that lenders do not look towards acquiring a participatory interest in the implementation
of the project and its consequent returns, but only seek to lend money on commercial terms in order
to ensure an adequate increase in the amounts lent through the payment of periodic interest on the
amount till the complete repayment of the amount borrowed. This difference in the nature of their
interests in financing the implementation of the project distinguishes the amount of risk that the
lenders are willing to accept regarding the project. It is regarding the project. It is common to find the
same entity being an investor with regard to certain amounts, and, at the same time, being a lender
with regard to another amount. The differentiating factor between the two is the risk the entity is
undertaking in relation to the specified sums and the manner in which its interests in relation to the
sums forwarded are protected.

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V. Contractors :
As an infrastructure project involves expertise that is seldom present within the
capability of any single sponsor or contractor, there are various groups of contractors selected by the
sponsors to implement the various segments of the project. The contractors are commonly identified
by the nature of the responsibilities they undertake. Generally the main contractor involved in the
implementation of an infrastructure project is the contractor undertaking to construct the
infrastructure facility. This contractor is identified on the basis of the scope of work actually being
sought to be contracted out.
One of the prevalent methods is to contract out the entire scope of work relating to
Engineering, procurement and construction of an infrastructure facility to one contractor who is
referred to as the EPC contractor. Another method is to contract out the work of formulating the
design of the facility to a contractor distinct from the contractor undertaking to construct the facility.
This method is not preferred as it causes complication regarding the allocation of responsibility for
any defect detected in the facility at a later stage.
The operation and maintenance of the facility upon completion of construction is
contracted out to contractors specializing in the operation and maintenance of the particular facility
(referred to as the O & M Contractor or the O & M Operator). It is very common to find the work of
operation of the facility being contracted to a contractor distinct from the one to whom the
responsibility of the maintenance of the facility allocated.
VI. Project Vehicle – Special purpose vehicle :
The particular entity vested with the right to implement the project is commonly
referred to as the Project Vehicle or the Special Purpose Vehicle. Sponsors generally seek to
implement a project through a specific legal entity formed by them. The reason for such structuring
is to transfer the risks to a special purpose company / vehicle rather than undertake it themselves.
The documentation relating to the implementation of the project is entered by the Project Vehicle.
The extent to which the sponsors succeed in isolating the risks relating to the implementation of the
project is ultimately decided only after an analysis of the project documents and the finance
documents. The shareholders’ agreement generally provides for the allocation of responsibilities and
distribution of risks between the sponsors themselves. It also ensures equity funding of the project
and sponsor participation, provides the framework for the management of the implementation of the
project and mechanism for the settlement of disputes between the sponsors.
VII. Users of Consumers :
The users of an infrastructure facility or consumers of the infrastructure facility
service are generally members of the common public and may be , at times, be represented by a
public interest forum of a consumer body. In India, generally the users of the facility are represented

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by the government itself. However, it is not uncommon to find that at times, an infrastructure facility
is designed for use for a clearly identified and defined set of users or even a single user. In such
circumstances the facility is referred to as a “Captive Use Facility” or a “Facility having captive
consumption”. In cases of captive facilities the defined set of users are represented directly by their
representatives who actively participate in the documentation of the project.
VIII. Regulator (Like TRAI) :
The body vested with the authority and powers to regulate the development and
provision of the related infrastructure service, if in existence, would also be a participant in the
development of an infrastructure project. Ideally, prior to opening of any infrastructure sector to
private participation, a regulatory body for that sector should be first constituted in order to regulate
the conflict of interest from the various participants, so involved in the development of the project. In
India, however, there has been no such planned opening of infrastructure sectors.
The existing infrastructure regulatory bodies are the “Telecommunications Regulatory
Authority of India”, commonly referred to as the TRAI, which had been constituted pursuant to the
Telecom Regulatory Authority of India Act 1997, to regulate the provision of telecommunication
services by the various licensees and the electricity regulatory commissions established a central and
state levels pursuant to the Electricity Regulatory Commissions Act 1998 and a few state electricity
reform legislations which seek to regulate the electricity sector under their jurisdiction.
IX. Other Authorities (NHAI, AAI, etc.):
Apart from the regulatory authorities there are certain other authorities that have been
established for the purposes of providing specific infrastructure services. In the sectors where such
development authorities have been established, it is these authorities that would, subject to the
relevant legislation grant the rights to private developers for implementation of the project. Such
authorities are the arms of the government and are authorized to control and develop a specific
infrastructure. Examples of such authorities are. “The Airports Authority of India established under
the Airports Authorities of India Act 1994, which is in charge of the development, operation and
maintenance of airports in India. The National Highways Authority of India established under the
National Highways Authorities of India Act 1988, which is in charge of the development, operation
and maintenance of the National Highways that have been notified to be under its control. The
various port trusts established pursuant to the Major Port Trusts Act 1963 which have control over
the development, operation and maintenance of the specific major ports for which they have been
constituted under the Major Port Trusts Act 1963.

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FINANCIAL STRUCTURING OF PUBLIC – PRIVATE PARTNERSHIP PROJECTS:

Definition of Public-Private Partnership:

A project based on a contract or concession agreement, between a government or
statutory entity on one side and a private sector company on the other side, for delivering an
infrastructure service on payment of user charges
The financial structuring of PPP Project should establish the appropriate mix of debt,
equity and mezzanine financing. The main components of project cost are as follows:
i. Pre-investment costs: The costs incurred by sponsors in developing the project
concept and preliminary design.
ii. Bidding and procurement related costs: The costs involved in collecting sufficient
information for bidding documents and bids.
iii. Project development costs: The costs involved in further developing and refining the
scheme.
iv. Construction costs: Construction cost for development of the asset.
v. Operating costs: The cost involved in operation and maintenance of the facility till
transfer.
vi. Termination cost: The cost involved in bringing the asset to the acceptable standards
at the time of transfer.

Numerous mechanisms provide support as forms of government subsidy to a PPP

Project. These include:
 A Viability Gap Fund (VGF) as a capital funding support, or a part-capital, part-operations
and maintenance (O&M) period support
 Land being given on license and / or lease
 Additional land being given for commercial exploitation by the SPV
 Guaranteed cash flows, typically as semi-annuity payments, which remove part or all of the
collection risk in annuity projects
 Take-or-pay covenants that mitigate demand risk
 Waivers of stamp-duty, registration charges and entry tax on certain projects
 Customs duty waiver on certain capital goods for specific projects
 Income tax holidays under the Income Tax Act (normally a 10 year block in a 20 year
window)
 Programs and funds (e.g. the Jawaharlal Nehru National and Urban Renewal Mission) to
emphasize projects being taken through a PPP format

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  The budgeting process of the government takes into account fiscal requirement of PPP and
non-PPP projects

A government’s cost of funding is typically lower than that of a private operator even
of the same originating country. Providing private financing may therefore increases 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). Due to this arrangement, the Entrepreneur can borrow
funds without increasing their liabilities beyond their investment in the project. Lenders assume a
part of the project risk since they lend without full recourse and primarily on the basis of project
assets. The company owners may be consortium of companies or a single large company. The
company owners will not usually finance all project requirements; instead they will provide
proportion as equity and borrow the remainder of the required financing from financial institutions or
place debt securities in the capital market.
Project financing is a specialized activity and, depending on prevailing market
conditions, may or may not be available at any time. To make financing possible or to secure better
borrowing rates, the operator may seek 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. take-or-pay off-take agreement,
concession agreement, etc.).
Sources of financing:
A. Equity:
a. Entrepreneur
b. Institutional Investors (Insurance Company, Mutual Funds, etc.)
B. Debt/ Mezzanine:
a. Commercial Banks – Generally Short to Medium Term Loans/ Credit Facilities
(generally not exceeding 7 years)

The rate of return on private financing must be sufficient not only to repay the lenders
but also to give reasonable return to the entrepreneur towards his equity involved, technical
expertise, risks assumed and business efforts.

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 The financing structure shall be suitably selected from debt, equity and narrative
financing. Most of the times, the financial support from lenders comes on limited recourse basis, i.e.
recourse is available against the project company and its assets including Real Estate, Plant &
Equipment, Contractual Rights, Performance Guarantees, etc. However, the most important asset is
the contractual right in respect of revenue flow which is considered to be sufficient for repayment of
finance.
The equity generally comes from the Entrepreneur but it can be contributed by
Institutional Investors, Local or International Capital Markets and Specialized Funds.
The financial requirements should have dependable source of revenue from project
sufficient to service the principal and interest payment on the project debt and reasonable return on
equity participation. Therefore the total project cost must be meticulously worked out and adhered to.
While examining the Internal Rate of Return before award of the Project, the
Government should ensure that the same is not low so as to make project pass through the risk of
delay and abandonment and not so high that the equity holder shall earn huge profits causing indirect
loss to the Government.

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DISCUSSION ON SYSTEM OF PPP FOR INFRASTRUCTURE DEVELOPMENT:

The term “Public Private Partnership (PPP)” describes a range of possible

relationships among public and private entities in the context of infrastructure and other services.
PPPs present a frame work that – while engaging the private sector – acknowledge and structure the
role for government in ensuring that social obligations are met and successful sector reforms and
pubic investments achieved. A strong PPP allocates the task, obligation, and risks among the public
and private partners in an optimal way. Privatization is most common and more widely accepted in
the infrastructure sector. It is usually accompanied by sector-specific regulatory arrangements to take
account of social and policy concerns related to the sale, and continuing operation of assets used for
public services.
Sectors in which PPPs have been completed worldwide include:
 Power generation and distribution
 Water and sanitation
 Refuse and disposal
 Pipelines
 Hospitals
 School buildings and teaching facilities
 Stadiums
 Air traffic control
 Prisons
 Railways
 Roads
 Billing and other information technology systems
 Housing

Infrastructure (telecommunications, electricity generation, transmission, and

distribution, natural gas transmission and distribution, transport and water) accounted for half of
privatization/ PPP proceeds in developing countries in 1990-2003.
Projects are generally championed by the (i) political system and the minister-in-
charge, (ii) senior officers of the government and (iii) industry or pubic associations.

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Priority issues facing government in Leading and Championing Public Private Partnership
Development and Implementation
 The economic downtime’s impact on promoters ability to take up projects
 Failure of some of the early bird projects in delivering the high expectations
 Continuing issues in land acquisition and support infrastructure, which delay the projects
 Incumbent officials’ resistance to change and to adopt PPP policy

Strategies implemented to address the issues

 Space out the projects in a manner that reduces cost while maintaining serviceability
 Conduct capacity building programs to instill the need for proper project development
 Set in place frameworks that expedite land acquisition – primarily reasonable compensation
and proper resettlement and rehabilitation
 Train government officials
 Carefully supervise pilot projects
 Provided fiscal stimulus of PPPs

Advantages of Private Participation through PPP;

1. Funds Management: The private sector financing is a new source of capital which reduces
the borrowings and direct expenditure which facilitates improvement of Government’s
credit rating.
2. Accelerate promotion of projects: which otherwise would be kept aside pending
availability of funds.
3. Efficiency of Service: The project can be efficiently implemented and operated due to
investor’s interest of early completion and better operations and maintenance to earn
quicker and better profit.
4. Thorough appraisal: The project involves private lenders/ share holders who make in
depth study of feasibility and viability of the project.
5. Low O&M Costs: The private entrepreneurs develop an efficient O & M structure to
reduce their outgoings which is not generally observed in Government machinery.
6. Time Specific Performance: Since the concession period, which includes construction
period, is fixed, the entrepreneur is eager to ensure project execution in the shortest possible
time. Thus the time overrun factor is virtually eliminated.
7. Technological Avenues: Private entrepreneur can bring new technologies for engineering/
plant and equipment/ O&M for better performance which is not easily possible for
Government due to lengthy administrative procedures.

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 8. Availability of Foreign Investment: The private entrepreneur can join with a foreign
entity as a shareholder and bring foreign investment in the development work.
9. Better Risk Management: The risks are better managed by the entrepreneur by efficient
management system, controls, monitoring and speedy corrective actions since the
entrepreneur is concerned about returns. Government’s risks are considerably reduced as
most of them are shifted entrepreneurs.
10. Diversion of Government Revenues: The government revenues which would have been
utilized on the project can be shifted to other priorities like Health, Education, etc.
11. Flexibility: The entrepreneur has got flexibility to execute the project in terms of
construction contract, selection of agency, selection of lenders, terms of repayments, etc.
which is not possible and speedy in government.
12. Stimulation of Public Sector: The Public Sector is encouraged to do reasonably profitable
business in the service of the people by way of infrastructure development.
13. Public Awareness: The public is made aware that better services bear a cost and public has
to pay for better services.

However, there are few following disadvantages:

1. Commitment of entrepreneur only up to end of concession period
2. At times, project cost is more than conventional cost

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