Download - Pub Ad Report
-
7/31/2019 Pub Ad Report
1/34
A Report on
Need Of Public-Private Partnerships in India.
In partial fulfillment of the course
Public Administration
HUM C 351
Under the guidance of:
Mr. Umesh Dhyani
Prepared by:
Varun Chandra
2006B5A2545
1
-
7/31/2019 Pub Ad Report
2/34
ACKNOWLEDGEMENTS
I would like to express my gratitude to Mr Umesh Dhyani for his sincere advice
and guidance which went a long way in completing this report successfully.
I would also like to thank my colleagues for their support and advice.
This report really turned out to be an enjoyable and learning experience.
2
-
7/31/2019 Pub Ad Report
3/34
Table Of Contents
Acknowledgements
A) Introduction
B) Public Private Partnership: A Brief Review
1. Understanding PPP.
1. Govt. Of India's Definition
2. What is Meant By PPP?
3. Roles and Responsibilities
4. Fundamental Qualities Of A PPP Project
5. Salient Features Of PPP
6. Key Considerations in PPP's
7. Key Lessons From Global Experience With PPP
2. Various Forms and Formats of PPP.
1. New Project Formats
1. Design-Build
2. Design-Build-Maintain
3. Design-Build-Operate
3
-
7/31/2019 Pub Ad Report
4/34
4. Design-Build-Operate-Maintain
5. Build-Own-Operate-Transfer
6. Build-Own-Operate
7. Design-Build-Finance-Operate
2. PPP's in Existing Services And Facilities
1. Service Contracts
2. Management Contract
3. Lease
4. Concession
5. Divestiture
C)Why PPP's?
1. Growing Popularity
2. Limitations Of Government Resources
3. Need For New Financing And Institutional Mechanisms
4. Benefits And Strengths
5. Access To Crucial Financing
6. Rigorous Risk Appraisal And Optimum Allocation
4
-
7/31/2019 Pub Ad Report
5/34
D) Need Of PPP's In India
1. Relevance Of PPP's in India
1. Massive deficit In Infrastructure Services
1. Water
2. Power
3. Roads And Ports
2. Deficient Infrastructure as a Binding Constraint
3. Global Competitiveness
4. Inclusive Growth And Poverty Reduction
5. Growing Government Emphasis On Infrastructure Spending
6. Growing Emphasis On Private Sector Participation
2. The Case For Public-Private Partnerships
1. Bringing Development Forward
2. On-Time And On-Budget Delivery
3. Shifting Construction And Maintenance Risk To The Private Sector
4. Cost Savings
1. Construction Savings
2. Reduced life-cycle costs
5
-
7/31/2019 Pub Ad Report
6/34
5. Strong Customer Service Orientation
6. Enabling The Public Sector To Focus On Outcomes And Core
Business
E)Conclusion
References
6
-
7/31/2019 Pub Ad Report
7/34
A) INTRODUCTION
The new buzzword in development planning circles in the country is 'PublicPrivate Partnerships' (PPPs). The 11th Five Year Plan (2007-2012) document
mentions the term at least 249 times, advocating it in sectors ranging from water
management, forestry, education and health to protection of monuments and
sustenance of arts and crafts. However, its key role is seen in infrastructure.
Infrastructure bottlenecks are often presented as the major hurdles restricting the
booming Indian economy from achieving 8 per cent plus GDP growth rates. The
Preface to the 11th Five Year Plan document says that "Poor quality ofinfrastructure seriously limits India's growth potential in the medium term and the
Eleventh Plan outlines a comprehensive strategy for development of both rural
and urban infrastructure." The 11th Plan estimates that to maintain an average
annual growth rate of 9%, the investment in infrastructure would have to rise
from Rs.259,839 crores in 2007-08 to Rs.574,096 crores in 2011-12 at constant
2006-07 price, aggregating to Rs.2,011,521 crores over five years. In the terminal
year, this works out to be 9 per cent of the GDP, up from 5 per cent of the GDP in
2006-07.
This is a huge amount, and the Government claims that it can't mobilize this
without increased contributions from the private sector. Moreover, it argues that
its first priority is expenditure on social sector and livelihood support programmes
for the poor, "the strategy for infrastructure development has been designed to rely
as much as possible on private sector investment through various forms of PPPs."
The Government of India's Committee on Infrastructure which monitors PPPs
notes that 244 PPP projects are ongoing and another 76 are in the pipeline in the
country. These projects are in various sectors like roads, ports, power, water and
urban infrastructure.
7
-
7/31/2019 Pub Ad Report
8/34
B) PPP: A BRIEF REVIEW
1.Understanding PPP
Government of Indias Definition :
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 upequity is owned and controlled by a private entity.
What is meant by PPP? :
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).
Roles and responsibilities.
PPPs do not mean reduced responsibility and accountability of the
government. They still remain public infrastructure projects committed to
8
-
7/31/2019 Pub Ad Report
9/34
meeting the critical service needs of citizens. The government remains
accountable for service quality, price certainty, and cost-effectiveness (value
for money) of the partnership. Government remains actively involved
throughout the projects life cycle. Under the PPP format, the government
role gets redefined as one of facilitator and enabler, while the private partnerplays the role of financier, builder, and operator of the service or facility. PPPs
aim to combine the skills, expertise, and experience of both the public and
private sectors to deliver higher standard of services to customers or citizens.
The public sector contributes assurance in terms of stable governance,
citizens support, financing, and also assumes social, environmental, and
political risks. The private sector brings along operational efficiencies,
innovative technologies, managerial effectiveness, access to additional
finances, and construction and commercial risk sharing.
Fundamental qualities of a PPP project :
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.
What are the salient features of a PPP?
Not all projects with private sector participation are PPP projects. Essentially,
PPPs are those ventures in which the resources required by the project in
9
-
7/31/2019 Pub Ad Report
10/34
totality, along with the accompanying risks and rewards/returns, are shared
on the basis of a predetermined, agreed formula, which is formalized
through a contract. PPPs are different from privatization. While PPPs involve
private management of public service through a long-term contract between
an operator and a public authority, privatization involves outright sale of apublic service or facility to the private sector. A typical PPP example would
be a toll expressway project financed and constructed by a private developer.
A PPP project is essentially based on a significant opportunity for the private
sector to innovate in design, construction, service delivery, or use of an asset.
To be viable, PPPs need to have clearly defined outputs, avenues for
generating nongovernmental revenue, and sufficient capacity in the private
sector to successfully deliver project objectives.
What are the key considerations in PPPs?
PPPs often involve complex planning and sustained facilitation.
Infrastructure projects such as roads and bridges, water supply, sewerage and
drainage involve large investment, long gestation period, poor cost recovery,
and construction, social, and environmental risks. When infrastructure is
developed as PPPs, the process is often characterized by detailed risk and
cost appraisal, complex and long bidding procedures, difficult stakeholdermanagement, and long-drawn negotiations to financial closure. This means
that PPPs are critically dependent on sustained and explicit support of the
sponsoring government. To deal with these procedural complexities and
potential pitfalls of PPPs, governments need to be clear, committed, and
technically capable to handle the legal, regulatory, policy, and governance
issues.
Key Lessons From Global Experience with PPP:
Detailed policy for implementing PPP
Proper Planning by government
Project development by government
10
-
7/31/2019 Pub Ad Report
11/34
Full Support by government
Proactive public communication
Transparent Bidding Process
Clear Policy On Unsolicited proposals
Defined Sources Of Revenue
Proper Allocation Of Risk
Adequate Protection For Lenders
2.What are the various PPP forms and formats?
In a PPP, the private partner could be a private company, a consortium, or a
non governmental 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.
The consortium often forms a special company or a special purpose vehicle
(SPV). The SPV signs a contract with the government and with thesubcontractors to build the facility and then maintain it. 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 :
New Projects:-
Design-Build (DB)
Under this model, the government contracts with a private partner to design
and build a facility in accordance with the requirements set by the
government. After completing the facility, the government assumes
11
-
7/31/2019 Pub Ad Report
12/34
responsibility for operating and maintaining the facility. This method of
procurement is also referred to as Build-Transfer (BT)
Design-Build-Maintain (DBM)
This model is similar to Design-Build except that the private sector alsomaintains the facility. The public sector retains responsibility for operations.
Design-Build-Operate (DBO)
Under this model, the private sector designs and builds a facility. Once the
facility is completed, the title for the new facility is transferred to the public
sector, while the private sector operates the facility for a specified period.
This procurement model is also referred to as Build-Transfer-Operate (BTO)
Design-Build-Operate-Maintain (DBOM)
This model combines the responsibilities of design-build procurements with
the operations and maintenance of a facility for a specified period by a
private sector partner. At the end of that period, the operation of the facility
is transferred back to the public sector. This method of procurement is also
referred to as Build-Operate-Transfer (BOT).
Build-Own-Operate-Transfer (BOOT)
The government grants a franchise to a private partner to finance, design,
build and operate a facility for a specific period of time. Ownership of the
facility is transferred back to the public sector at the end of that period.
Build-Own-Operate (BOO)
The government grants the right to finance, design, build, operate and
maintain a project to a private entity, which retains ownership of the project.
The private entity is not required to transfer the facility back to the
government.
Design-Build-Finance-Operate/Maintain (DBFO, DBFM or DBFO/M)
12
-
7/31/2019 Pub Ad Report
13/34
Under this model, the private sector designs, builds, finances, operates
and/or maintains a new facility under a long-term lease. At the end of the
lease term, the facility is transferred to the public sector. In some countries,
DBFO/M covers both BOO and BOOT.
Existing Services And Facilities:-
PPPs can also be used for existing services and facilities in addition to new
ones. Some of these models are described below.
Service Contract:
The government contracts with a private entity to provide services the
government previously performed.
Management Contract:
A management contract differs from a service contract in that the private
entity is responsible for all aspects of operations and maintenance of the
facility under contract.
Lease
The government grants a private entity a leasehold interest in an asset. The
private partner operates and maintains the asset in accordance with the
terms of the lease.
Concession
The government grants a private entity exclusive rights to provide operate
and maintain an asset over a long period of time in accordance with
performance requirements set forth by the government. The public sector
retains ownership of the original asset, while the private operator retainsownership over any improvements made during the concession period.
Divestiture
The government transfers an asset, either in part or in full, to the private
sector. Generally the government will include certain conditions with the sale
13
-
7/31/2019 Pub Ad Report
14/34
of the asset to ensure that improvements are made and citizens continue to
be served.
The public sponsor of the PPP decides the degree of private participation required
for the particular project. This decision is usually based on the governments
objectives of undertaking the project, the degree of control it desires, and the
ability of the PPP consortium to deliver the required service. It is also influenced
by the provisions of the existing legal and regulatory framework, the structuring
ofthe project to attract private resources, and the potential to generate future cash
flows.
14
-
7/31/2019 Pub Ad Report
15/34
-
7/31/2019 Pub Ad Report
16/34
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.
3. Need For New Financing
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 beneficialarrangement. 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.
4.Benefits And Strengths
The emergence of PPPs is seen as a sustainable financing and institutionalmechanism 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 fasterimplementation, reduced life cycle costs, and optimal risk allocation. Private
management also increases accountability and increases performance and
maintenance of required service standards. Finally, PPPs result in improved
delivery of public services and promote public sector reforms.
PPP Strengths and Effectiveness:-
16
-
7/31/2019 Pub Ad Report
17/34
Robust and Dynamic Structure
Government in an enabler role
Government ownership is high
Governance structure ensures consumer and public interests are safeguarded
Commercial interests are protected
Domicile risks to parties that are well equipped to deal with them
Transparent and well-conceived contracts
Documentation recognizes rights and responsibilities of all project-related
parties
Concerns Of All Stakeholders addressed
Involves Participation of a large number of institutions: governments,
politicians, banks, financial institutions, investors, contractors, consumers,
NGO's, etc.
5.Access To Crucial Financing
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.
17
-
7/31/2019 Pub Ad Report
18/34
6.Rigorous Risk Appraisal And Optimum Allocation
The high degree of economic extendability of public infrastructure, and the
commercial and socioeconomic risks involved in developing and operating them,
have made it difficult to appropriate returns from infrastructure investments. The
long gestation period of infrastructure projects also requires sustainable financial
and operational capacity. Therefore, there is increasing reluctance in both the
public and private sectors to absorb all the costs and assume all the risks of
building and operating these assets alone. Since the private sector assumes the risk
of nonperformance of assets and realizes its returns if the assets perform, the PPP
process involves a full-scale risk appraisal. This results in better cost estimation
and better investment decisions.
18
-
7/31/2019 Pub Ad Report
19/34
D) NEED OF PPP'S IN INDIA
1.Relevance Of PPP's In India
Massive Deficit In Infrastructure Services:
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 greaterdemand 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 unsustainable
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
19
-
7/31/2019 Pub Ad Report
20/34
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 otherdeveloping 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 all-weather roads.
Only 12% of the national highways are four-laned. 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.
Deficient Infrastructure As A Binding Constraint
The infrastructure shortages are proving to be the leading binding constraint
in sustaining, deepening, and expanding Indias economic growth and
competitiveness.2 This has also been emphasized in the mid-term appraisalof the Tenth Five Year Plan. It is widely believed that lack of good quality
infrastructure is costing India 12% growth in gross domestic product (GDP)
every year. Good quality infrastructure has been the main enabler of higher
level of economic growth in developed as well as developing countries like
USA, Russia, Malaysia, and China. The Expert Group on Commercialization
of Infrastructure estimated the loss due to poor roads and congestion at
around Rs 200 billion per annum. The Economic Survey of India, 2005-06,estimates that power shortages of 12% at peak levels and 8% at nonpeak
levels are equivalent to around $3.4 billion of forgone generation capacity or
an approximate GDP loss of around $68 billion. The annual cost of
environmental degradation, on account of lack of sewerage and solid-waste
management systems and surface water harvesting is 4.5% of GDP. Water
20
-
7/31/2019 Pub Ad Report
21/34
pollution accounts for 6% of the economic cost of environmental
degradation.
Global Competitiveness
Indias global competitiveness remains constrained and is adversely affectedby lack of infrastructure, which is critical for improved productivity across all
sectors of the economy. Poor infrastructure is also a major barrier to foreign
direct investment (FDI). Recent surveys have shown that Indias poor
infrastructure (road network, ports, distribution networks, and in particular
power supply) is a cause for concern and a major barrier to investment.
Upgradation of transport (roads, railways, airports, and ports), power, and
urban infrastructure is therefore seen as critical for sustaining Indias
economic growth, along with improved quality of life, increase in
employment opportunities, and progress towards the elimination of poverty.
Inclusive Growth And Poverty Reduction
Lack of infrastructure is preventing the sectoral, 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 labor dependent, lowskilled, rural based, and working in agriculture and manufacturing sectors.
Infrastructure shortages have slowed the growth of manufacturing industries
and agriculture, which are the labor-absorbing 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, economicgrowth, 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 power sources and markets in towns,
cities, and ports. Greater investments in infrastructure are the answer.
Growing Government Emphasis on infrastructure Spending
21
-
7/31/2019 Pub Ad Report
22/34
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, withthe 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.
However, estimated investment requirements far exceed government
resources. 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% ofGDP per annum, according to the World Bank. 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.
22
-
7/31/2019 Pub Ad Report
23/34
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 8 9%. Some other agencies estimate the investment
requirement over the next five years to be around $330 billion.
Growing Emphasis On Private Sector Participation
These projected investment requirements can not 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 can also not 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.
Given the large resource requirements and the budgetary and borrowing
constraints, GOI has been encouraging private sector investment and
participation in all sectors of infrastructure. It 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.
2. Case For PPP's
Public-private partnerships are unlikely to entirely replace traditional
infrastructure financing and development any time soon, if ever. PPPs are just one
tool among many. Governments typically have a number of objectives when
23
-
7/31/2019 Pub Ad Report
24/34
building infrastructure: getting good value for money, timely delivery, meeting
public needs and so on. The procurement model that best addresses these
objectives is the one that should be chosen in each individual circumstance.
PPPs have shown their potential as an important way to meet these objectives and
address infrastructure shortages. For example, they provide new sources of capital
for public infrastructure projects. Private equity, pension funds and other sources
of private financing must still be repaid, but shifting the responsibility for
arranging the financing to the private partner can help deliver infrastructure if a
public entity is unwilling or unable to shoulder the full debt or the associated risk
of the project at a certain point in time.
While PPPs hold significant benefits as an infrastructure delivery tool, the model is
not without its critics. Some of the criticisms are well-grounded and merit careful
consideration when evaluating the relative pros and cons of delivery method
alternatives. Others, however, are driven by a misunderstanding of PPPs or are
based on outdated or incomplete information. For those who would like a fuller
understanding of these issues, the most common objections to PPPs are taken up
in the appendix. PPPs also present formidable challenges, both at earlier and later
stages of market development. Addressing these challenges and maximizing the
benefits of PPPs require governments to operate in a new way.
Six additional benefits help to explain the strong growth of PPPs.
Bringing Construction Forward
Conventional procurements typically require the public sector to provide
significant upfront capital even though the benefits of the project may be
delayed or uncertain. Most forms of PPP enable the public sector to spread
the publics cost of infrastructure investment over the lifetime of the asset,much as homeowners do when they take out home mortgages. As a result,
infrastructure projects can be brought forward by years, allowing users to
benefit from the investment much sooner than is typical under pay-as-you-go
financing. For example, the creative financing approach used for the Virginia
Pocahontas Parkway PPP project eliminated what might have been a 15-year
24
-
7/31/2019 Pub Ad Report
25/34
delay in construction while financing was assembled.22 In many cases, the
private contractor also has a strong incentive to complete the project as
quickly as possible because it needs the stream of revenues to repay the
capital costs.
On-Time And On-Budget Delivery
With payments better aligned to the delivery of project objectives, public-
private partnerships also have a solid track record of completing construction
on time or even ahead of schedule. In Canada, for example, Terminal 3 at the
Toronto Pearson Airport was completed 18 months ahead of schedule under
a PPP contract.
The United Kingdoms National Audit Office reported in 2003 that 73 percentof non-PFI construction projects were over budget and 70 percent were
delivered late. In contrast, only 22 percent of the PFI projects came in over
budget and 24 percent were late.
Shifting Construction And Maintenance Risk to The Private Sector
Politics and budget pressures play havoc with proper maintenance of existing
infrastructure. There always seems to be another, higher priority: some
program or crisis requires more urgent funding than rehabilitating an aging
road or school. Or a budget deficit may push funding for infrastructure
maintenance further down the priority list. Or an upcoming election may
lead politicians to delay funding for rehabilitating a wastewater treatment
plant to make way for a sexier program or project. Moreover, the effect of
reducing spending on maintenance is rarely immediate; politicians who opt
to cut back such spending may have left office long before society begins to
complain loudly about crumbling roadbeds or overburdened electricitynetworks.
The result: maintenance is often deferred. In some countries, only 10 percent
of the road network is being maintained. California currently carries
25
-
7/31/2019 Pub Ad Report
26/34
approximately $12.5 billion in deferred transportation maintenance at the
state level and $10.5 billion locally.
Such deferred maintenance imposes huge costs in the long runfor
example, early intervention costs about 20 percent less than maintenance
postponed to the latter quarter of a roads life. Continual deferral results
more safety problems in a shorter infrastructure lifespan, reduced quality of
services, and generally worse financial outcomes.
Well-designed PPPs can ameliorate these problems by transferring certain construction
and maintenance risks to the private partner. Among the risks that can be assumed by
the private partner are:
Design risk
Meeting required standards of delivery
Incurring excessive cost overruns during construction
Completing the facility on time
Underlying costs to the service delivery operator, and the future costs
associated with the asset
Industrial action against or physical damage to the asset
Certain market risks associated with the project
The ability to shift some or all of these risks to the private sector is an
important benefit of PPPs. Payment structures require the assets be available
and properly maintained over time. The public sector thereby gains greater
confidence in the level of its spending commitments over the lifetime of the
asset. Greater cost transparency, in turn, supports more effective planningand helps to avoid cuts in other service areas as a result of unexpected
infrastructure costs.
Cost Savings
26
-
7/31/2019 Pub Ad Report
27/34
Cost savings from PPPs typically materialize in several different forms: lower
construction costs, reduced life-cycle maintenance costs, and lower costs of
associated risks.
Construction savings: Experience from several countries has demonstrated
that PPPs cost comparatively less during the construction phase of the
contract. The savings typically result from innovation in design and better
asset requirements. A report commissioned by the UK Treasury found in
2000 that among a sample of 29 PFI projects for which public sector
comparisons were available, the average savings were close to 17 percent.25
In the United States, the costs of completing construction for segments of the
Denver E-470 toll road that used a PPP approach came in $189 million below
the original cost estimate of $597 million.26 In Australia, eight Partnerships
Victoria projects were on average 9 percent less expensive than under the
typical procurement process.
On the other hand, the capital costs can also be higher in certain cases as the
private sector tends to take a longer term view of all life-cycle costs rather
than a narrow view of the lowest individual costs.
Reduced life-cycle costs: In traditional contracting, the private sectors roleis typically limited to immediate construction. This can create a perverse
incentive to economize on elements of construction today even though
maintenance costs might be higher in the long run. Shifting long-term
operation and maintenance responsibilities to the private sector creates a
stronger incentive to ensure long-term construction quality because the firm
will be responsible for maintenance costs many years down the road. This
creates a strong incentive to do preventative maintenance and reduces the
risk of future fluctuations in operations costs. This way the public benefits
from this life-cycle efficiency. A UK study of benefits flowing from operating
PFI projects found that, on average, the government expects to achieve a
saving of 17 percent over the whole life cost of services by using the PPP
approach, with savings as high as 45 percent in one of the cases.
27
-
7/31/2019 Pub Ad Report
28/34
Strong Customer Service Orientation
Private sector infrastructure providers, often relying on user fees from
customers for revenue, have a strong incentive to focus on providing superior
customer service. Moreover, as the asset is no longer managed by the public
sector, the public sector is able to concentrate more on ensuring the provider
maintains certain customer service levels.
In the case of accommodation PPPs, such as schools or defense facilities,
customer satisfaction metrics can be built into the contract to ensure a strong
customer orientation. In the United Kingdom, more than three-quarters of
end users reported their public-private partnership projects were performing
as expected or better than expected; one-quarter said that the facilities were
far surpassing expectations.
Innovation in customer service delivery helps to account for such high
satisfaction levels. Motorists using the Citylink private tollway in Melbourne,
Australia, for example, receive alerts when their account is low and can top
up their accounts from their mobile phone. A mobile customer service unit
traverses the city around the clock, visiting customers at work and at home,
helping to install tags and answer account questions. Dissatisfied customers
can file complaints with the City Link Ombudsman, an independent dispute
resolution service that investigates complaints and proposes ways to resolve
the issues. The private operator has also introduced a customer charter and
customer performance scorecard; by measuring City Link's performance
against charter targets and making the results public, the process has
increased transparency and accountability.
In the United States, the owners of the 91 express lanes in southern
California hold focus groups to learn more about how to please customers.
Enabling The Public Sector To Focus on Outcomes and Core Business
When they are properly structured, public-private partnerships enable
governments to focus on outcomes instead of inputs. Governments can focus
28
-
7/31/2019 Pub Ad Report
29/34
leadership attention on the outcome based public value they are trying to
create. The destination, not the path, becomes the organizing theme around
which the project is built. School PPPs provide a powerful example of how
partnerships enable school officials to shift their focus to the core business of
learning. When school officials at the Montaigne secondary school near TheHague in the Netherlands needed additional school capacity, they could have
just chosen the usual route of getting bids from several contractors to build a
school. Instead, they concluded that what they really wanted to buy was a
quality learning environment and not just a physical assetin this case a
school building. To that end, they entered a PPP with a consortium of private
firms that provide cleaning, care taking, security, grounds maintenance and
information technology, leaving school teachers and officials free to spend all
their time on the core mission, teaching children.
29
-
7/31/2019 Pub Ad Report
30/34
E) CONCLUSION
The infrastructure challenge before governments today may seem overwhelming.
The historical boom-and-bust spending cycle has created huge infrastructure
deficits around the world, the consequences of which are significant for bothcitizens who have to deal with decrepit facilities or long delays before new
infrastructure is delivered, and governments fighting to stay competitive in todays
flat world. Slowly governments are realizing that inaction is simply not an option.
PPPs alone are not a panacea. Rather, they are one tool governments have at their
disposal for facilitating infrastructure deliverya tool that requires careful
application. By making the best use of the full range of delivery models that are
available and continuing to innovatelearning from failure instead of retreating
from it the public sector can maximize the likelihood of meeting its
infrastructure objectives and take PPPs to the next stage of their development. This
development, in turn, will enable this relatively new delivery model to play a far
larger role in closing the infrastructure gaps bedeviling governments across the
world.
Ever since India embarked on its first phase of Reform in early 1990s,
infrastructure development has remained the top priority of the Government.
Unfortunately the infrastructure growth has not been commensurate with the
demands made on it by an economy that was growing at more than 6% p.a. This
period also witnessed a consistent move towards fiscal discipline that further
curtailed room for accommodating increasing government funding of major
infrastructure projects. The pressures of globalization further accentuate the
infrastructure gap in the country.
With the economy now clocking a growth rate of over 8%, it is estimated that US$320 billion would be required by the infrastructure sectors put together over the
next 5 years. A significant percentage of this investment should come from the
private sector. Public Private Partnerships (PPP) present the most attractive option
of meeting the above targets, not only in providing resources to an extent but also
in upgrading the standards of delivery through greater efficiency.
30
-
7/31/2019 Pub Ad Report
31/34
Government has attempted to bring out several innovative schemes aimed at
leveraging its position to the fullest given its various commitments, which at times
could seem mutually conflicting. Whereas to attract the private sector
commercially viable projects should be on offer and to inculcate the discipline of
user pay principle provision of these services should be based on payment oftariff, Government must fulfill its commitment to inclusive growth which makes it
obligatory to fix the tariffs based on the capacity of the common man to pay. Due
diligence is also essential given the substantial contingent liability that could
devolve on the State in such projects.
While encouraging PPPs, the govt. clearly perceives broadly four constraints:
a) Weakness in enabling policy and regulatory framework. Substantial work need
to be done in making sector policies and regulations PPP friendly. A large number
of these projects are in the States and without the active participation of the States
it would not be possible to achieve satisfactory results. the long-term equity and
debt financing needed by infrastructure projects.
b) The market presently does not have adequate instruments and capacity to meet
c) There is also a lack of shelf of credible, bankable infrastructure projects, which
could be offered for financing to the private sector. Some initiatives have beentaken both at the central as well as the states level to develop PPP projects these
tend to be isolated cases and have demonstrated a marked lack of consistency.
d) There is also lack of capacity in public institutions and officials to manage the
PPP process. Since these projects involve long term contracts covering the life
cycle of the infrastructure asset being created, it is necessary to manage this
process to maximize returns to all the stakeholders.
Government has taken measures to create enabling framework for PPPs by
addressing issues relating to policy and regulatory environment. Progressively
more sectors have been opened to private and foreign investment, levy of user
charges is being promoted, regulatory institutions are being set up and
strengthened, fiscal incentives are given to infrastructure projects, standardized
contractual documents including the Model Concession Agreement are being
31
-
7/31/2019 Pub Ad Report
32/34
notified, approval mechanism for PPPs in the Central sector had been streamlined
through setting up of PPPAC and a website exclusively devoted to PPPs has been
launched to serve as a virtual market place for PPP projects. To address financing
needs of these projects, various steps have been taken like setting up of India
Infrastructure Finance Company and launching of a new Scheme to meet ViabilityGap Funding (VGF) of PPP projects. Setting up of infrastructure funds are also
being encouraged and multilateral agencies such as ADB have been permitted to
raise Rupee bonds and carry out currency swaps to provide long term debt to PPP
projects. Recently, Citigroup and IDFC have joined together to launch a US$ 2
billion infrastructure equity fund and I am assured that it would be fully
subscribed before 31 March 2007. An infrastructure debt Fund of US$ 3 billion is
also under consideration of the same combine. Blackstone has also shown interest
in putting together another large infrastructure Fund for India and are in
discussion with the officials of the Ministry of Finance. Merchant Bankers and
multilateral agencies are also being encouraged to provide credit enhancement
services for raising cheaper money from market, ECB norms have been eased and
the overall limit raised to $22 billion annually. Indian FIs are also being
encouraged to develop an appetite for financing instruments such as take-out
finance. To meet the capacity building requirements in the sector, Technical
Assistance from World Bank and ADB has been received and necessary measuresare being taken to implement various schemes like assisting the State
Governments and Central Ministries in hiring consultants, preparation of a manual
on PPPs to guide the users and undertake training programmes for public officials.
The opportunities for private investment in infrastructure projects are immense. As
the reach of PPP increases across the sectors, the capacity in the private sector to
manage these projects over their entire life cycle of 20 to 30 years would also have
to be enhanced. Government of India now permits FDI in most infrastructure
sectors to the extent of 100%. It is time that the foreign strategic investors begin to
take greater interest in project development and management activity in India. I
am happy to note that in this international conference organized by the World
Bank in collaboration with the Finance Ministry, several major private sector
players from abroad are also taking part. They would, in addition to sharing with
32
-
7/31/2019 Pub Ad Report
33/34
the participants the best practices from around the world they will also take back
with them a sense of what is happening in India and the excitement of an
economy on the upswing.
33
-
7/31/2019 Pub Ad Report
34/34
F) REFERENCES
Department Of Economic Affairs (DEA)
Ministry Of Finance GOI
Asian Development Bank (ADB)
Deloitte Research Study
The World Bank
International Finance Corporation
PPIAF- Public Private Infrastructure Advisory Facility
Price Waterhouse Cooper ( PWC) Research
www.infrastructure.gov.in
www.pppinindia.com
Department Of Planning and Planning Commission
http://www.infrastructure.gov.in/http://www.pppinindia.com/http://www.pppinindia.com/http://www.infrastructure.gov.in/