CONTENTS:

 ABOUTPPP:  FACILITATING PUBLICPRIVATE PARTNERSHIP  WHY PPP  RELEVENCE OF PPP IN INDIA  STATUS IN INDIA  MANAGING A PPP PROJECT  CHALLENGES

ABOUTPPP: Public Private Partnership (PPP) Project means a project based on a contract or concession agreement, between a Government or statutory entity on the one side and a private sector company on the other side, for delivering an infrastructure service on payment of user charges. Private Sector Company means a company in which 51% or more of the subscribed and paid up equity is owned and controlled by a private entity.

While there is no single definition of PPPs, they 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. These collaborative ventures are built around the expertise and capacity of the project partners and are based on a contractual agreement, which ensures appropriate and mutually agreed allocation of resources, risks, and returns. This approach of developing and operating public utilities and infrastructure by the private sector under terms and conditions agreeable to both the government and the private sector is called PPP or P3 or Private Sector participation (PSP).

Facilitating PublicPrivate Partnership: High priority, government-planned project. The project must have emerged from a government-led planning and prioritization process. The project must be such that, regardless of the source of public or private capital, the government would still want the project to be implemented quickly.

Genuine risk allocation. Shared risk allocation is a principal feature of a PPP project. The private sector must genuinely assume some risk....

 Mutually valuable. Value should be for both sides, which means government should also genuinely accept some risks and not transfer the entire risk to the private sector, and vice versa

In a PPP, the private partner could be a private company, a consortium, or a nongovernmental organization (NGO). Typically, a PPP project involves a public sector agency and a private sector consortium which comprises contractors, maintenance companies, private investors, and consulting firms. To enable the flow of private funds and resources into public infrastructure and services, the PPP is operationalized through a contractual relationship between a public body (the conceding authority) and a private company (the concessionaire). This partnership could take many contractual forms, which progressively vary with increasing risk, responsibility, and financing for the private sector. However, the most common partnership options are (i) Service Contract; (ii) Management Contract/Lease; (iii) Build Operate Transfer (BOT); (iv) Concession (v) Joint

Venture; and (vi) Community-based Provision. Most contracts take the form of Concession and Design, Build, Finance, and Operate contracts, to cover the finance, design, management, and maintenance obligations. These contracts are usually financed by user fees or tariffs or by government subsidies.

WHY PPP: Governments are increasingly constrained in mobilizing the required financial and technical resources and the executive capacity to cope with the rising demand for water supply, sewerage, drainage, electricity supply, and solid-waste management. Rapid economic growth, growing urban population, increasing ruralurban migration, and all-round social and economic development have compounded the pressure on the existing infrastructure, and increased the demandsupply gap in most of the developing world. Countries and governments, especially in the developing world, are experiencing increasing pressure from their citizens, civil society organizations, and the media to provide accessible and affordable infrastructure and basic services. While

the infrastructure gap is rising, government budgetary resources are increasingly constrained in financing this deficit. The pressure has also come from the international compact on Millennium Development Goals (MDGs), under which country progress in terms of access to safe drinking water, sanitation, health, etc. is being monitored. Rising costs of maintaining and operating existing assets, inability to increase revenue and cut costs and waste, and rising constraints on budgets and borrowing, do not allow governments to make the required investments in upgrading or rehabilitating the existing infrastructure or creating new infrastructure.

The political economy of infrastructure shortages, constrained public resources, and rising pressure from citizens and civil society have combined to push governments and policymakers to explore new ways of financing and managing these services. Governments have been pushed to exploring new and innovative financing methods in which private sector investment can be attracted through a mutually beneficial arrangement. Since neither the public sector nor the private sector can meet the financial requirements for infrastructure in isolation, the PPP model has come to represent a logical, viable, and necessary option for them to work together. The emergence of PPPs is seen as a sustainable financing and institutional mechanism with the potential of bridging the infrastructure gap. PPPs primarily represent value for money in public procurement and efficient operation. Apart from enabling private investment flows, PPPs also deliver efficiency gains and enhanced impact of the investments. The efficient use of resources, availability of modern technology, better project design and implementation, and improved operations combine to deliver efficiency and effectiveness gains which are not readily produced in a public sector project. PPP projects also lead to faster implementation, reduced lifecycle costs, and optimal risk allocation. Private management also increases accountability and incentivizes performance and maintenance of required service standards. Finally, PPPs result in improved delivery of public services and also promote public sector reforms.

The foremost benefit of adopting the PPP route is the ability to access capital funding from the private sector, considering that funding is getting increasingly limited from public sector budgets. Thus, PPPs allow governments to overcome their budgetary and borrowing constraints and raise finance for high-priority public infrastructure projects. Essentially, governments are able to use private finance through PPPs to build infrastructure projects that would previously have been built by the public sector using public sector finance. PPP projects also leverage available public capital by converting capital expenditure into flow-of-service payments

RELEVENCE OF PPP IN INDIA: Despite becoming the second fastest growing and the fourth largest1 economy of the world, India continues to face large gaps in the demand and supply of essential social and economic infrastructure and services. Rapidly growing economy, increased industrial activity, burgeoning population pressure, and all-round economic and social development have led to greater demand for better quality and coverage of water and sanitation services, sewerage and drainage systems, solid-waste management, roads and seaports, and power supply. Increased demand has put the existing infrastructure under tremendous pressure and far outstripped its supply.

Water

While 90% of the urban population has access to potable water supply, the

actual availability of water in the cities is only 56 hours a day. Less than 60% of the households have sanitation and less than half have tap water on their premises. About 40 million people are estimated to be living in slums. Poor urban development is not only undermining the quality of life for Indias urban citizens but also constraining local and national growth. As much as 70% of irrigation and 80% of domestic water requirement is met from groundwater, which has meant haphazard and rampant use of aquifers and depleting water table.

Power: Over 40% of Indias population, mostly rural, does not have access to electricity. Despite the increase in installed generation capacity, shortages in normal

and peak energy demand have been around 8% and 12% on an average between 2000 and 2004. Indias average electricity consumption of 359 kWh in 19962000 was far behind other countries such as China (717 kWh) and Malaysia (2378 kWh). Less than 20% of Indias enormous hydroelectric potential has been tapped. Transmission and distribution losses in India remain very high, at around 2830%, as compared to other developing countries, where they are less than 10%. Roads and ports: Indias road network continues to suffer from low capacity, low coverage, and low quality. 40% of villages do not have access to allweather roads. Only 12% of the national highways are four-lane. The traffic situation in the cities has worsened due to a massive increase in personal vehicles, inadequate city roads, and poor quality of public transport. Airport and seaport infrastructure and train corridors are strained under capacity constraints

Lack of infrastructure is preventing the sect oral, regional, and socioeconomic broadening of the economy and its benefits, and is affecting inclusive growth in India. The benefits of accelerated growth of the last decade have not been shared by large sections of the population which are labour dependent, low skilled, rural based, and working in agriculture and manufacturing sectors. Infrastructure shortages have slowed the growth of manufacturing industries and agriculture, which are the laborabsorbing markets for the low skilled. Poverty levels remain significant, with about one-fourth of the population living in poverty. Infrastructure is now seen as the necessary condition for growth and poverty alleviation. Studies by the ADB and others have confirmed a strong linkage between infrastructure investments, economic growth, and reduction of poverty. Rural roads, rural electrification and irrigation networks, power grids, and national highways have the potential to link poor rural producers to their powe r sources and markets in towns, cities, and ports. Greater investments in infrastructure are the answer. Growing recognition of the prevailing infrastructure deficit in the country and its impeding impact on sustaining economic growth as well as poverty reduction has made development of social and economic infrastructure among the highest priorities

of the Government of India (GOI). The GOI has recognized that with better infrastructure Indias growth can be higher, with the benefits reaching a much larger section of the population. It has increased its spending on infrastructure through a series of national programs such as the National Highway Development Program (NHDP), Bharat Nirman, Providing Urban Services in Rural Areas (PURA), Jawaharlal Nehru National Urban Renewal Mission (JNNURM), the Prime Ministers Rural Roads Program, National Rail Vikas Yojana, National Maritime Development Program (NMDP), airport expansion programs, etc. The government acknowledges that investment in infrastructure will have to be at the same rate as the economic growth that is being targeted. In other words, gross capital formation in infrastructure (GCFI), which has remained around 4% of GDP during 1997-98 up to 2003-4, needs to be increased progressively and rapidly.

The massive gap between the existing infrastructure investment and the projected requirement in India has come into sharper focus. The Tenth Five Year Plan projection on the total investment required for infrastructure (at 2001-2 prices) is over Rs 11,00,000 crore (US$250 billion). The India Infrastructure Report, 1996, had projected the need for increasing infrastructure investment from under 5% to about 8% of GDP by 2005-6. In 1999, public investment in infrastructure was 2.8% of GDP while private investment was merely 0.9% of GDP. At the end of the 1990s, however, actual investment (public and private) in infrastructure remained at under 4% of GDP per annum, according to the World Bank.3 In other words investment in road, rail, air, and water transport, power generation, transmission and distribution,

telecommunication, water supply, irrigation, and water storage will need to increase from 4.6% of GDP to 78% during the Eleventh Plan. Private sector estimates for investment requirements are much higher. According to one estimate,4 India needs to increase infrastructure spending gradually to US$100 billion per annum (8% of GDP) by 2010, to realize sustained growth of 89%. Other agencies estimate the investment requirement over the next five years to be around $330 billion, and that Indias infrastructure sector could absorb foreign direct investment (FDI) of $150 billion over the next few years.

These projected investment requirements cannot be met from governments budgetary resources. The scope for making improvements is limited by the state of public finances. The combined deficit of the Union and state governments is around 10% of GDP. Governments cannot also borrow arbitrarily, since their borrowing has been capped through the Fiscal Responsibility and Budgetary Management Act. The Approach Paper to the Eleventh Plan states that One has to reach out to the private sector, and private savings, and to the other mechanisms available in the market today to raise funds (Planning Commission, June 2006, An Approach to the Eleventh Five Year Plan). The National Development Council (NDC) has passed a resolution which mentions that increased private participation has now become a necessity to mobilize the resources needed for infrastructure expansion and upgradation. The Approach Paper to the Eleventh Plan has called for aggressive promotion of private partnership in infrastructure development. Given the large resource requirements and the budgetary and borrowing constraints, the GOI has been encouraging private sector investment and participation in all sectors of infrastructure. The government has recognized that while public investment in infrastructure would continue to increase, private participation needs to expand significantly to address the existing deficit in infrastructure services. Approval committee for PPP projects: The Cabinet Committee on Economic Affairs (CCEA) in its meeting of 27th October, 2005 approved the procedure for approval of public private partnership (PPP) projects. Pursuant to this decision, a Public Private Partnership Approval Committee (PPPAC) was set up comprising of the following:
y y y y y

Secretary, Department of Economic Affairs (in the Chair) Secretary, Planning Commission Secretary, Department of Expenditure; Secretary, Department of Legal Affairs ; and Secretary of the Department sponsoring a project.

The Committee would be serviced by the Department of Economic Affairs, who has set-up a special cell for servicing such proposals. The Committee may co-opt experts as necessary.

Guidelines for appraisal/ approval of PPP projects: Different guidelines for different categories of central sector PPP projects have been issued by the government from time to time. These are: a. Guidelines for formulation, appraisal and approval of Public Private Partnership (PPP) Projects costing less than Rs.100 Crore b. Guidelines for formulation, appraisal and approval of Public Private Partnership (PPP) Projects (i) Of all sectors costing more than Rs.100 crore and less than Rs.250 crore (ii) Under NHDP costing Rs.250 crore or more and less than Rs.500 crore c. Procedure for approval of PPP Projects and Guideline for formulation, appraisal and approval of Public Private Partnership (PPP) Projects in Central Sector . Does the government extend financial support for PPP projects:

The Scheme for Financial Support to Public Private Partnerships (PPPs) in Infrastructure. (Viability Gap Funding Scheme) of the Government of India provides financial support in the form of grants, one time or deferred, to infrastructure projects undertaken through public private partnerships with a view to make them commercially viable. It is a Plan Scheme administered by the Ministry of Finance. Suitable budgetary provisions are made in the Annual Plans on a year-to- year basis for the scheme.

Has the government provided any funds for the scheme? To address the financing needs of these projects, various steps have been taken like setting up of India Infrastructure Finance Company and launching of a Scheme to meet Viability Gap Funding (VGF) of PPP projects. Setting up of infrastructure funds are also being encouraged and multilateral agencies such as Asian Development Bank have been permitted to raise Rupee bonds and carry out currency swaps to provide long term debt to PPP projects.

India Infrastructure Project Development Fund: For providing financial support for quality project development activities for PPP projects to the the Central and the State Governments and local bodies, Scheme and Guidelines of of India Infrastructure Project Development Fund (IIPDF), have been notified The IIPDF would assist ordinarily up to 75% of the project development expenses. On successful completion of the bidding process, the project development expenditure would be recovered from the successful bidder. the purpose of the IIPDF fund: The procurement costs of PPPs, and particularly the costs of transaction advisors, are significant and often pose a burden on the budget of the Sponsoring Authority. Department of Economic Affairs (DEA) has identified the IIPDF as a mechanism through which Sponsoring Authority will be able to source funding to cover a portion of the PPP transaction costs, thereby reducing the impact of costs related to procurement on their budgets. From the Government of Indias perspective, the IIPDF must increase the quality and quantity of bankable projects that are processed through the Central or States project pipeline. Viability Gap Funding scheme: The scheme aims at supporting infrastructure projects that are economically justified but fall short of financial viability. Support under this scheme would be

available only for infrastructure projects where private sector sponsors are selected through a process of competitive bidding. The total Viability Gap Funding under this scheme will not exceed twenty percent of the Total Project Cost; provided that the Government or statutory entity that owns the project may, if it so decides, provide additional grants out of its budget, but not exceeding a further twenty percent of the Total Project Cost. How is the government funding done under Viability Gap Funding (VGF)? The government will provide a Viability Gap Funding (VGF) which shall not exceed 20 per cent of the Total Project Cost; provided that the Government or statutory entity that owns the project may, if it so decides it will provide additional grants out of its budget, but not exceeding a further 20 per cent of the Total Project Cost. VGF under this scheme will normally be in the form of a capital grant at the stage of project construction. Proposals for any other form of assistance may be considered by the Empowered Committee and sanctioned with the approval of Finance Minister on a case-to-case basis. VGF up to Rs. 100 crore for each project may be sanctioned by the Empowered Institution subject to the budgetary ceilings indicated by the Finance Ministry. the eligibility criteria for getting support under the VGF scheme: In order to be eligible for funding under VGF Scheme, a PPP project should meet the following criteria: (a) The project should be implemented i.e. 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 process of open competitive bidding; provided that in case of railway projects that are not amenable to operation by a Private Sector Company, the Empowered Committee may relax this eligibility. (b) The PPP Project should be from one of the sectors mentioned above (See question

4) (c) The project should provide a service against payment of a pre-determined tariff or user (d) The concerned Government/statutory entity should certify, with reasons:
y

charge.

That the tariff/user charge cannot be increased to eliminate or reduce the viability gap of the PPP; That the Project Term cannot be increased for reducing the viability gap; and That 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.

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Provided that the Empowered Committee may, with approval of the Finance Minister, add or delete sectors/sub-sectors from the aforesaid list. What is the procedure for getting Viability Gap funding? Project proposals may be posed by a Government or statutory entity which owns the underlying assets. The proposals shall include the requisite information necessary for satisfying the eligibility criteria specified above. Projects based on standardized/model documents duly approved by the respective Government would be preferred. Stand-alone documents may be subjected to detailed scrutiny by the Empowered Institution. The Empowered Institution will consider the project proposals for Viability Gap Funding and may seek the required details for satisfying the eligibility criteria. Within 30 days of receipt of a project proposal, duly completed as aforesaid, the Empowered Institution will inform the sponsoring Government/statutory entity whether the project is eligible for financial assistance under this Scheme. In case the project is based on standalone documents (not being duly approved model/standard documents), the approval process may require an additional 60 (sixty) days.

In the event that the Empowered Institution needs any clarifications or instructions relating to the eligibility of a project, it may refer the case to the Empowered Committee for appropriate directions. Notwithstanding the approvals granted under this scheme, projects promoted by the Central Government or its statutory entities are approved and implemented in accordance with the procedures specified from time to time. In cases where viability gap funding is budgeted under any on-going Plan scheme of the Central Government, the inter-se allocation between such on-going scheme and this scheme is determined by the Empowered Committee. STATUS IN INDIA:

Public Private Partnership: Provision of public infrastructure assets/services through private investment and management for a specified period of time

Year-wise PPP contract Awarded

y Growth rate of PPP projects by value in the last three years over previous 8

years is 104%

y More than 117 PPP deals closed in the last three years when compared to 104

in the previous 8 years

y By awarding authority, Central sector dominates in value. Though more in

number, state awarded projects are much less in value. Increasingly larger PPP projects are reaching financial closure

y Road projects account for 81% of the total projects (46% by value) y Ports account for 13% of the total number of projects (32% by value)

y 41% of the projects are of a contract value less than Rs. 100 crore, 37% of a

value between Rs. 100 Rs. 500 crore and the balance 22% of a contract value greater than Rs. 500 crore

y Significant potential for PPPs in Health and Education sector, State and

Municipality responsibility areas

MANAGING A PPP PROJECT: Design, procurement and contract management

Risk-transfer is critical:  The efficiency of a PPP contract depends on the effective transfer of some risks to the private partner  Private entities are efficient in the management of a project if they have money at stake, and if they face risks that they can manage  A private manager protected from risks will only manage rents; if risks are not clearly allocated to the private partner, it could realise that it is more profitable trying to shift risks to the public sector than managing those risks

Efficiency and innovation:

 Efficiency is also linked to a certain minimum degree of flexibility in the tender rules and in the draft contract, allowing the bidders to present innovative designs and processes, and allowing the private partner to adapt to changes (technological, commercial, demographic, legal) in an efficient way  And this flexibility requires an output- and outcome-focused procurement approach, significantly different from the traditional one

CHALLENGES:

 How to marry private sector motivation for profit with public sector concel for public service (the need for inclusiveness)  How to apportion risk in a manner that is fair, rational and sustainable;  How to manage the partnership through a tightly-framed concession agreement over a 2030 year period, in a rapidly changing environment;

 How to develop capacities in the concerned financial institutions so that they are able to appraise projects which have a life span of 1520 years since effective due diligence by these institutions will be critical for proper screening of PPP proposals brought to them by developers

CONCLUSION: ` Though there r some execusional challenges are there it is very important for government to invite private investments for infrastructure development ` Though India lead developed countries in private investment but the region needs more investment to meet demands