Why Public Private Partnership is a good Alternative in Infrastructure Development?

Project

Submitted for the Partial Fulfilment for the Degree of B.A.LLB

Submitted To: - Submitted By:-

Reeta Rautela Sourabh Choudhary

Faculty of Economics B.A.LLB IVthSEM

Siddhartha Law College, Dehradun

[Affiliated to Uttrakhand Technical University]

Acknowledgment

I have taken efforts in this project. However, it would not have been possible without the kind

support of and help of many individuals and my teacher Mrs. Reeta Rautela. I would like to

extend my sincere thanks to all of them.

I am highly indebted to Siddhartha Law College for their guidance and constant supervision

as well as for providing necessary information regarding the project & also for their support

in completing the project.

I would like to express my gratitude towards my parents, my teacher and my friends for their

kind co-operation and encouragement which helped me in completion of this project.

ContentsIntroduction...........................................................................................................................................4

What is a PPP?.......................................................................................................................................5

Development of PPPs in India................................................................................................................8

Why Public-Private Partnerships?.........................................................................................................9

Legal and institutional frameworks for PPPs at the national level.......................................................10

Committee on Infrastructure...............................................................................................................10

India Infrastructure Finance Company Limited (IIFCL).........................................................................12

India Infrastructure Project Development Fund (IIPDF)......................................................................13

IntroductionInfrastructure shortages are proving a key constraint in sustaining and expanding India’s

economic growth and ensuring that all Indians are able to share in its benefits. To meet this

challenge, the Government of India is committed to raising investment in infrastructure from

its existing level of below 5% of GDP to almost 9%. This suggests that more than $450bn

will be required to fund infrastructural development in India over the next five years.

However, the scope for making improvements on this scale is fundamentally constrained by

the state of public finances. The combined deficit of the central and state governments is

roughly 10% of GDP and government borrowing is capped through the Fiscal Responsibility

and Budgetary Management Act. This necessarily limits the capacity of the State to finance

as much infrastructural development as is required and it is likely that at least one-third of the

finance needed for infrastructural development over the next five years will be funded by the

private sector. Responding to this challenge, the Government of India is actively promoting

the expansion of Public Private Partnership (PPP) activities across all key infrastructure

sectors including highways, ports, power and telecoms. To date, various PPP models have

been tried in India, including public contracting; passive public investment (equity, debt,

guarantee, grants); joint ventures; and long-term contractual agreements (BOT, BOOT,

BOLT). Regardless of the model pursued, however, the overwhelming consensus is that PPPs

are the primary means by which the Government of India will seek to overcome the

‘infrastructure deficit’. PPPs are a relatively new phenomenon in India but already more than

Rs.1000 billion worth of PPP projects are currently under development across the country.

Both central and state-level governments are hoping to build on this progress, both by scaling

up the use of PPPs in sectors where progress has already been made and introducing it into

sectors where few private projects have yet been realised. However, to achieve their

ambitions for the use of PPPs in infrastructure projects, both national and state governments

will need to provide for much higher visibility PPP programmes and also seek to disseminate

best practice, as both commercial and bureaucratic learning advances.

It is important to understand that PPPs are not catch-all solutions to the persistent difficulties

of under-investment and lack of resources for development. As the World Bank (2006) has

recently pointed out, in regard to Indian infrastructural development, PPPs represent a claim

on public resources that need to be understood and assessed. They often involve complex

transactions, needing a clear specification of the services to be provided and an understanding

of the way risks are allocated between the public and private sector. Moreover, the long-term

nature of many PPPs means that government has to develop and manage a relationship with

private providers to overcome unexpected events that can disrupt even the best designed

contracts. And ultimately, PPPs always involve projects for which, in the eyes of citizens,

government ultimately bears responsibility – even if the task of delivery has been contracted

out

What is a PPP?There is no widely accepted definition of a Public Private Partnership (PPP). In broadterms,

PPP refers to an arrangement between the public and private sectors with clear agreement on

shared objectives for the delivery of public infrastructure and/or public services. It is an

approach that public authorities adopt to increase private sector involvement in the delivery

of public services. In many countries, PPPs are now a central feature of ongoing efforts to

modernise public services and infrastructure.

The main features of PPPs include:

Cooperative and contractual relationships

PPPs represent cooperation between the government and the private sector. PPPs are not the

same as privatisation in that both public sponsors and private providers function as partners

throughout project development and delivery, and often in operation and maintenance. The

most successful partnership arrangements draw on the relative strengths of both the public

and private sector in order to establish complementary relationships between them. PPP

arrangements are long-term in nature, typically extending over a 15 to 30 year period. This is

a factor which helps to which establish productive and lasting relations between the public

and private sectors. Demonstrating an enduring public sector commitment to the provision of

quality services to consumers, under terms and conditions agreeable to both the government

and the private sector, PPPs are used to develop and operate public utilities and infrastructure.

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

Shared responsibilities

While the specific responsibilities for delivery will vary according to each project, a key

feature of PPPs is that these responsibilities will be shared between the public body and the

private consortium. In some initiatives, this might require the private sector company to

play a significant role in all aspects of delivery of the service, while in others its functions

may be more limited. However, unlike instances of privatisation, the overall role of

government remains unchanged in a PPP: it is the government which remains ultimately

accountable and responsible for the provision of high quality services that meet the public

need.

A method of procurement

PPPs are instruments for government bodies to deliver desired outcomes to the public sector,

by making use of private sector capital to finance the necessary assets or infrastructure. The

private company is rewarded for its investment in the form of either service charges from the

public body, revenues from the project, or a combination of the two. This renders affordable

those projects that might not otherwise have been feasible, because the public body was

unwilling or unable to borrow the requisite capital. PPPs allow the private sector to play a

greater role in the planning, finance, design, operation and maintenance of public

infrastructure and services than under traditional public procurement models. Moreover,

where traditional procurement models begin with the question of what assets the public body

has as its disposal and how these might be used to deliver required services, PPP

arrangements place the emphasis on the desired service or outcome as identified by the public

organisation and how the private sector might help to make this happen.

Risk transfer

A key element of PPPs is their potential to deliver public projects and services in a more

economically efficient manner. At the beginning of the relationship, potential risks associated

with the project are identified and each party adopts those which it is best equipped to

manage. The public sector can therefore transfer appropriate risks to the private partner, who

has the necessary skills and experience to manage them. For example, overall risk to the

public sector can be reduced by transferring those associated with design, construction and

operation to the private partner. The incentive for the private body comes in the form of

higher rates of return related to high standards of performance.

Flexible ownership

PPPs enable flexible arrangements between public and private bodies, where the public body

may or may not retain ownership of the project or facility that is produced. In some cases, the

private organisation may be contracted only to construct facilities or supply equipment,

leaving the public body as owners, operators and maintainers of the service. Alternatively, the

public sector may decide it is more cost-effective not to own directly and operate assets, but

to purchase these instead from the private entity. Services may be purchased for use by the

government itself, as an input to provide another service, or on behalf of the end user.

The Government of India defines PPPs as:

‘A partnership between a public sector entity (sponsoring authority) and a private sector

entity (a legal entity in which 51% or more of equity is with the private partner/s) for the

creation and/or management of infrastructure for public purpose for a specified period of time

(concession period) on commercial terms and in which the private partner has been procured

through a transparent and open procurement system’. (Department of Economic Affairs,

Ministry of Finance, Government of India, 2007a)

Other commonly cited definitions of PPPs include:

• The International Monetary Fund (IMF): ‘Public-private partnerships (PPPs) refer to

arrangements where the private sector supplies infrastructure assets and services that

traditionally have been provided by the government.’ (IMF 2004, p4)

• The World Bank: ‘PPP programs are projects that are for services traditionally provided by

the public sector, combine investment and service provision, see significant risks being borne

by the private sector, and also see a major role for the public sector in either purchasing

services or bearing substantial risks under the project.’ (World Bank 2006, p13)

• The Asian Development Bank (ADB): ‘PPPs broadly refer to long-term, contractual

partnerships between the public and private sector agencies, specifically targeted towards

financing, designing, implementing, and operating infrastructure facilities and services that

were traditionally provided by the public sector.’ (ADB 2006, p15)

• The European Union: ‘A PPP is the transfer to the private sector of investment projects

that traditionally have been executed or financed by the public sector” (European

Commission 2003, p96). Many other countries have legally defined PPPs in order to be clear

which projects should fall under contractual relations established through PPP arrangement.

Examples of countries that have sought to define PPP arrangements in law, include (World

Bank, 2006):

• Brazil, where the PPP law defines that public private partnership contracts are agreements

entered into between government or public entities and private entities that establish a legally

binding obligation to manage (in whole or part) services, undertakings and activities in the

public interest where the private sector is responsible for financing, investment and

management.

• Ireland legally defines PPPs as any arrangement made between a state authority and a

private partner to perform functions within the mandate of the state authority, and involving\

different combinations of design, construction, operations and finance.

• In South Africa, a PPP is defined in law as a contract between a government institution and

a private party where the latter performs an institutional function and/or uses state property,

and where substantial project risks are passed to the third party.

Development of PPPs in India

Despite its status as the world’s fourth largest (and second fastest growing) economy, India

continues to experience significant gaps in the supply of essential social and economic

infrastructure and services. Water, power, roads, and ports are all in urgent need of additional

supply and upgrade. In fact, what we might refer to as the ‘infrastructure deficit’ is widely

regarded as a major constraint in India’s attempts to sustain, deepen, and expand its economic

growth and competitiveness.2 Recent estimates suggest that the lack of quality infrastructure

is retarding India’s GDP growth by 1% and 2% each year. Moreover, the deficit in

infrastructural development is preventing the sectoral, regional, and broader socio-economic

strengthening of the economy. It is slowing the growth not only in the knowledge intensive,

high-tech sectors but also (and perhaps of greater import) in the manufacturing and

agriculture sectors – both sources of jobs for the low-skilled. For example, rural roads, power

grids, irrigation networks and national highways all have the potential to link poor rural

producers to markets in towns, cities, and ports. An improved infrastructure is thus a

necessary condition for both growth and poverty alleviation. It is no coincidence, then, that

more than two thirds of the Asian Development Bank’s 2006-08 assistance programme for

India, oriented to poverty reduction, is now focused on infrastructural development.3

How much is needed? Recognising the urgency of the need for ongoing infrastructural

investment, the Government of India (GOI) has, over the past decade and more, increased

spending through a series of important national programmes. These include the National

Highway Development Programme (NHDP), Bharat Nirman, Providing Urban Services in

Rural Areas (PURA), Jawaharlal Nehru National Urban Renewal Mission (JNNURM), the

Prime Minister’s Rural Roads Programme, National Rail Vikas Yojana, the National

Maritime Development Programme (NMDP), and a significant airport expansion programme.

Nevertheless, the Government has acknowledged that if the ‘infrastructure deficit’ is to be

overcome, investment will need to be raised to a level in line with broader economic

growth...In other words, gross capital formation in infrastructure (GCFI), which has remained

in the region of 4% of GDP4, must increase rapidly. By comparison, other leading economies

in the region, such as China, have been investing up to 10% of GDP in infrastructural

development. The Tenth Five Year Plan (2002-2007) projection on GCFI (at 2001-2 prices)

amounted to more than Rs 11,00,000 crore (US$250 billion). For the Eleventh Five Year Plan

(2007-12), estimates vary and continue to be revised on a regular basis – and inevitably,

upwards. According to one recent estimate, India needs to increase infrastructural spending

gradually to 8% of GDP (US$ 100 billion per year) by 2010 in order to realise a sustained

growth for the broader economy of 8–9%.5 The most recent Ministry of Finance report,

issued in May 2007, quotes a figure of US$ 384 billion by 2012. However, even this figure

may be a considerable underestimate of the amount of capital investment required to sustain

infrastructural development during the period of the Eleventh Plan.

Why Public-Private Partnerships?The scope for making improvements on the scale suggested above is fundamentally

constrained by the state of public finances. The combined deficit of the central and state

governments is roughly 10% of GDP. Government borrowing has been capped through the

Fiscal Responsibility and Budgetary Management Act. This necessarily limits state

participation in infrastructure financing, opening the door to innovative approaches such as

PPPs. Government preserves its basic role, but it is one that shifts from provider and manager

to that of enabler and regulator of basic services To that end, the Government of India has

been encouraging private sector investment and participation in all infrastructure sectors. As

the National Development Council has made clear: “‘Increased private participation has now

become a necessity to mobilise the resources needed for infrastructure expansion and

upgrading. Vinayak Chatterji, Chairperson of the Confederation of Indian Industry’s

Infrastructure Council, suggests that almost 70% of the required funds for infrastructural

development in India in the future will come from the public purse, while 20% will be

sourced from the private sector (foreign and domestic), and 10% from overseas development

assistance, such as the World Bank and Asian Development Bank (ADB).7 Indeed, the ADB

itself suggests that the proportion of funding from the private sector for infrastructural

investment is likely to be closer to 30%8 To date, various PPP models have been tried in

India, including public contracting; passive public investment (equity, debt, guarantee,

grants); joint ventures; and long term contractual agreements (BOT, BOOT, BOLT).

Regardless of the model pursued, the overwhelming consensus is that PPPs are the primary

means by which the Government of India will seek to close the very clear gap that has

appeared (and will continue to widen) in funding the level of infrastructural development

required if the Indian economy is to grow at its optimum rate.

Legal and institutional frameworks for PPPs at the national levelThere is no overarching legal framework for PPPs at the national level. However, the

Government of India (GOI) has launched several institutional initiatives for PPPs, including:

• A Committee on Infrastructure (CoI), chaired by the Prime Minister. Its functions are to

initiate policies, develop structures for PPPs, and oversee the progress of key infrastructure

projects;

• A Viability Gap Fund (VGF) and the India Infrastructure Finance Company Limited

(IIFCL). These provide long-term capital to help finance PPPs, as well capacity building and

other forms of assistance;

• An India Infrastructure Project Development Fund (IIPDF) within the Department of

Economic Affairs (DEA). Its role is to promote the development of credible and bankable

PPP projects.

• Institutional structures, for example: a PPP cell within the Department of Economic Affairs

(DEA) in the Ministry of Finance, whose tasks are to organise activities promoting the use of

PPPs, and administer proposals; and an inter-ministerial Public Private Partnership Appraisal

Committee (PPPAC), charged with determining the requalification of bidders under PPP, and

preparing toolkits and model concession agreements.

Committee on InfrastructureThe role of the CoI is to formulate and implement policies that enable the development of a

world-class infrastructure, and that promote the delivery of international-standard public

services. Key elements of this role involve the initiation of structures which maximise the use

of PPPs, and the close monitoring of specific infrastructure projects. The CoI is supported in

this role by the Empowered Subcommittee, whose task it is to formulate, review and approve

policy papers and proposals for submission to the CoI, as well as to follow up and oversee the

implementation of its policies. In addition, the CoI has established a Committee of

Secretaries tasked with preparing and implementing an Action Plan for developing adequate

road and rail links for India’s major ports.

Visibility Gap Fund

The VGF is a special facility located within the DEA and charged with supporting PPP

projects which, although economically justifiable, are not (in their early years) commercially

viable due to long gestation periods or external economic factors. It provides eligible state or

central level PPP projects with an upfront grant of up to 20 per cent of the project cost. This

funding generally comes in the form of a capital grant during the construction phase. If

necessary, the sponsoring agency or ministry can provide an additional 20 per cent of the

total funding. The Central Ministries, State Governments or Statutory Authorities are

required to make proposals in a prescribed proforma to the PPP cell of the DEA.

The following sectors are eligible for VGF support:

• Roads and bridges, railways, seaports, airports, inland waterways;

• Power;

• Urban transport, water supply, sewerage, solid waste management and otherphysical

infrastructure in urban areas;

• Infrastructure projects in Special Economic Zones;

• International convention centres and other tourism infrastructure projects.

• Any other sector may be added, with the approval of the Finance Minister. In order to be

awarded viability gap funding, a project must also meet the following DEA criteria:

• A transparent and competitive process must be used to select the private sector company

which is to develop, finance, construct and maintain the project.

• The project should provide a service which charges a predetermined fee to the user.

• The government should ensure that (1) the user charge would not be increased to reduce the

viability gap; (2) the project term will not be increased to reduce the viability gap; (3) the

capital costs are reasonable and based on standards and specifications usually applicable to

such projects; and (4) the capital costs will not be further restricted to reduce the viability

gap.

• The private company which is awarded the contract must be one in which at least 51 per

cent of the subscribed and paid up entity is owned and controlled by a private entity.

The Empowered Committee acts as the VGF’s approval mechanism, and operates according

to the following guidelines:

• VGF funding up to Rs 100 crore for each project will be sanctioned by the

Empowered Institution, which is chaired by the Additional Secretary,

Economic Affairs; • proposals up to Rs 200 crore will be sanctioned by the Empowered

Committee, which is chaired by the Secretary, Economic Affairs; and

• amounts exceeding Rs 200 crore will be sanctioned by the Empowered Committee with the

approval of the Finance Minister.

India Infrastructure Finance Company Limited (IIFCL)The IIFCL is an entirely government-owned company whose objective is to provide long-

term financing for infrastructure projects that the banks are unable or unwilling to support. It

borrows money, guaranteed by the Government of India, from multilateral organisations and

lends this to infrastructure projects, either directly or through the refinancing of long-term

debt. The IIFCL is prepared to lend up to 20 per cent of the total project cost. The lead bank

would undertake all disbursement and recovery of capital.

Certain conditions apply to IIFCL funding:

• Only commercially viable projects will be assisted. This does include those projects which

will become viable after receipt of VGF;

• The project must be developed, financed and operated by a public sector company, a private

sector company selected under a PPP initiative, or a private sector company;

• The project must be located in one of the following sectors: (i) Roads and bridges, railways,

seaports, airports, inland waterways and other

transportation projects; (ii) Power; (iii) Urban transport, water supply, sewage, solid waste

management and other physical infrastructure in urban areas; (iv)

Gas pipelines; (v) Infrastructure projects in Special Economic Zones; and (vi)

International convention centres and other tourism infrastructure projects.

• The projects are to be implemented through a Project Company set up on a non-recourse

basis;

• Projects will be preferred if they are based on duly standardised or model documentation by

their respective government. The IIFCL may subject ‘stand alone’ documents to detailed

scrutiny.

Appraisal is usually undertaken by the lead bank, rather than the IIFCL. The lead bank

assumes responsibility for the regular monitoring and evaluation of the project’s

compliance with agreed levels of performance, particularly for the purpose of disbursement

of IIFCL funds.

India Infrastructure Project Development Fund (IIPDF)The IIPDF has been established to provide the States and Central Ministries with financial

support for the development of high quality PPP projects. Costs associated with this

development may include those of engaging consultants and transaction advisors, which

would increase both the quantity and quality of successful PPPs, and provide the Government

with good quality feasibility reports, enabling it to make more informed decisions.

Typically it provides up to 75 per cent of development expenses, usually in the form of an

interest free loan. These costs are then recouped from the successful bidder. Should the bid

fail, the loan is converted into a grant. If for any reason the sponsoring authority does not

complete the bidding process, any money contributed would be returned to the IIPDF.

In order to be considered for support under this scheme, a project must meet the following

criteria:

• The proposal for assistance must be sponsored by Central Government Ministries or

Departments, State Governments, Municipal or Local Bodies or any other statutory authority;

• The sponsoring authority must set up and empower a PPP cell, charged with project

development activities and addressing wider policy and regulatory authorities. Where a

sponsoring authority employs a Transaction Advisor using a method of transparent

procurement, the IIPDF will contribute an appropriate portion of the costs of this.

The IIPDF is administered by the Empowered Institution, which is composed of the

following members:

• Additional Secretary, DEA- Chairperson

• Additional Secretary (Expenditure)

• Representative of Planning Commission not below the rank of Joint Secretary

• Joint Secretary in the line Ministry dealing with the subject

• Joint Secretary, DEA – Member Secretary

The functions of the Empowered Institution are to select development projects for funding,

and to establish the terms and conditions under which the finance will be provided and

recovered. It also sets the timelines for the disbursement and recovery of the money. In

examining applications for assistance, the Empowered Institution is supported by the PPP

Cell of the DEA.