PUBLIC PRIVATE PARTNERSHIP

INTRODUCTION

Public Private Partnership (PPP), is a work model that is based on a contract or concession agreement between a government or statutory entity on one side and a private sector company on the other side, for delivering an infrastructure service on payment of user charges.

Its goal is to combine the best capabilities of the public and private sectors for mutual benefit.

PPPs are used for building of new and/or upgrade existing public facilities. In PPP model the private sector assumes a greater role in the planning, financing, design, construction, operation, and maintenance of these facilities.

TYPES OF PPPDesign-Build (DB):Build Own Operate (BOO):Build Operate Transfer (BOT):Build-Own-Operate-Transfer (BOOT):Buy Build Operate (BBO):Design Build-Operate (DBO):Design-Build-Maintain (DBM):Build-Develop-Operate (BDO):Build-Own-Lease-Transfer (BOLT):Contract Add and Operate (CAO):Develop Operate and Transfer (DOT):Rehabilitate Operate and Transfer (ROT):Rehabilitate Own and Operate (ROO):Lease Renovate Operate and Transfer (LROT):Design-Build-Finance-Operate/Maintain(DBFO, DBFM)

Design Build (DB)

In 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 the responsibility for operating and maintaining the facility.

It is also called as Build-Transfer (BT)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

party is not required to transfer the facility back to the government.

Build Operate Transfer (BOT):The private business builds and operates the public facility for a significant time period. At the end of the time period, the facility ownership transfers to the public

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.Buy Build Operate (BBO):The government sells the facility to the private business. The private business refurbishes and operates the facility.Design Build-Operate (DBO):A single contract is awarded to a private business which designs, builds, and operates the public facility, but the public retains legal ownership.Design-Build-Maintain (DBM):This model is similar to Design-Build except that the private sector also maintains the facility. The public sector retains responsibility for operations.

Build-Develop-Operate (BDO):The private business buys the public facility, refurbishes it with its own resources, and then operates it through a government contract.Build-Own-Lease-Transfer (BOLT):The government grants the right to finance and build a project which is then leased back to the government for an agreed term and fee. The facility is operated by the government. At the end of the agreed tenure the project is transferred to the government.Contract Add and Operate (CAO):CAO can be said to be a contractual agreement whereby the project developer adds to an existing infrastructure facility which it rents from the government and operates the expanded project over an agreed as a period franchise. There may or may not be a transfer arrangement with regard to the added facility provided by the project developer.

Develop Operate and Transfer (DOT):DOT can be said to be a contractual arrangement whereby favourable conditions external to the new infrastructure project which is to be built by a private developer are integrated into the arrangement by giving that entity the right to develop adjoining property, and thus, enjoy some of the benefits created by the investment such as higher property or rent values.Rehabilitate Operate and Transfer (ROT):ROT can be said to be a contractual arrangement whereby an existing facility is turned over to a private entity to refurbish, operate and maintain for a specific period as a franchisee, on the expiry of which, the legal title to the facility is turned over to the government. It is also used to describe the purchase of an existing facility from abroad, refurbishing, erecting and consuming it within the host country.Rehabilitate Own and Operate (ROO):ROO can be said to be a contractual arrangement whereby an existing facility is turned over to the private sector for refurbishing and operation with no time limit on ownership. As long as the operator has not violated the franchise, it can continue to operate the facility in perpetuity.

Lease Renovate Operate and Transfer (LROT):LROT can be said to be a contractual arrangement whereby an existing infrastructure facility is handed over to private, parties on lease, for a particular period of time for the specific purpose of renovating the facility and operating it for a specific period of time; on such terms and conditions as may be agreed to with the government for recovering the costs with an agreed return and thereafter, transferring the facility to the government. The MoP has adopted this route for the renovation of existing power plants.Design-Build-Operate (DBO):Under this model, the private sector design and builds a facility on the turn-key basis. 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 model is also referred to as Build-Transfer-Operate (BTO).Design-Build-Finance-Operate/Maintain (DBFO, DBFM or DBFO/M):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.

BENEFITS OF PPP

Improved and expanded infrastructure services that would not be there otherwise. Technology transfer, training of local personal and development of national capital markets.Stimulate Economic Growth Competition and innovation Faster implementation which in turn improves the efficiency Relieving the government budget and borrowing Providing a benchmark with which to judge the public sector’s performance Better allocation of risk between the public and private sectors Improve service delivery Improve cost-effectiveness Increase investment in public infrastructure Reduce public sector risk Deliver capital projects faster Improve budget certainty Make better use of assets Private sector participation brings with it a more commercial approach to infrastructure provision, reducing political intervention..

FRAMEWORK For PPP’s In INDIA

To address various constraints in the PPP model, several initiatives have been taken by the GoI to create an enabling framework for PPPs by addressing issues relating to policy and regulations. Progressively, more sectors have been opened to private and foreign investments, regulatory institutions are being set up and strengthened, and incentives are given to infrastructure projects.The GoI has come out with various initiatives such as: Viability gap funding (VGF) A SPV- Indian Infrastructure Finance Company Limited (IIFCL) Indian Infrastructure Development Fund Empanelment of Transaction Advisers (TA’s)

Viability Gap Funding (VGF) Scheme:

It provides financial support to infrastructure projects undertaken on PPP mode- at the stage of project construction. These grants are either one time or deferred basis, and are strictly restricted for the purpose of making the projects commercially viable. The MoF administers this scheme.

The scheme is applicabe only to ‘infrastructure service’, which includes roads and bridges, railways, seaports, airports, inland waterways, power, urban transport, water supply, sewerage, solid waste management and other physical infrastructure in urban infrastructure projects in SEZ’s, International Convention Centres and other tourism infrastructure projects.

Another prerequisite for the applicability of the scheme is that the project should provide the infrastructure service against the payment of a pre determined tariff or user charge.

Under this scheme, the support of the government in the mode of VGF shall not exceed 20% of the total project cost; but the government or statutory entity may grant an additional 20%, only out of its own budget.

Indian Infrastructure Finance Company Limited (IIFCL):

Has been set up to play a crucial role in the infrastructure sector by providing long-term financing to infrastructure projects in India. IIFCL raises funds both from the domestic as well as external markets on the strength of the government guarantees. An offshore SPV, Indian Infrastructure Finance Company (UK) Limited has been set up to utilise part of foreign exchange reserves for infrastructure development. Lending by IIFCL is restricted to projects involving ‘infrastructure services’. IIFCL finances only commercially viable projects. IIFCL therefore, also finances those PPP projects, which become viable after receiving the VGF. IIFCL restricts its lending to only projects implemented i.e., developed, financed and operated for the project term by a public sector company, a private sector company selected under a PPP initiative or a private sector company.

Indian Infrastructure Project Development Fund (IIPDF)

IIPDF is a fund set up for the purpose of providing financial support for project development activities to the states and the central ministries.

IIPDF has been created in the DEA, MoF, and GoI for supporting the development PPP projects.

IIPDF is the scheme for funding to cover a portion of the PPP transaction costs, thereby reducing the impact of costs related to procurement on their budgets.

IIPDF is not aimed to act as a source of grant funding for the sponsoring authorities but to assist the sponsoring authorities with up to 75% of their project development expenses.

RISKS IN PPP· Market and revenue risks.· Design risks· Construction risks· Operating risks· Financial risks· Political risks· Legal risks· Environment risks· Force Majeure risks

RISKS OF PRIVATE PARTIES IN PPP PROJECTS

RISK MITIGATION:

RISK MITIGATION STRATEGIES:Infrastructure Facility: The main aim of the government should be to ensure the

construction, operation and maintenance of the required infrastructure facility at specific standards, within a certain time frame and ensure its transfer at certain standards, upon the developer obtaining the agreed returns.

Certain Costs: The government should ensure that

The cost of construction, operation and maintenance of the infrastructure facility are certain and can adequately balance the requirements of the private developer and those of the general users or consumers and the

lenders.

Prevent unjust enrichment by Developer: The government should ensure that theprivate parties vested with the control and operation of a public service or a public facility should not abuse their position to unjustly profit from the venture at the expense of public money.

Prevent Abuse of Monopoly: The government should ensure that the private developersdo not abuse their natural monopoly position in respect of the provision of an infrastructure facility and that they exercise their rights specifically vested with a public character in the interests of the public, as a public utility.

Return of the Facility to Public: The government should ensure that the facility istransferred for use to the public after the satisfaction of the terms on the basis of which private participation had been based.

Environment: The government should ensure that the facility is constructed, operated andmaintained with the minimum possible impact on the environment or an acceptable level of impact on the environment.

Rehabilitation and Social impact: The government should ensure that the personsdisplaced by the implementation of a project are adequately rehabilitated and the social impact of the project is ascertained prior to its planning and implementation as to provide for suitable mitigation measures.

The government should support the development of infrastructure projects as it doesnot have the revenue or the technical resources to develop the required infrastructure in various sectors.

The government should provide for a suitable legal framework and policies withinwhich the specific concerns relating to the development of infrastructure projects through private participation and bankability of projects can be addressed.

· The private developer should not become the basket for storing all risks simply on the basis that it is obtaining a commercial return. It should be kept in mind that thecommercial return would be derived over a long period of time and at the risk of a high degree of upfront investment. This also enables the government revenues from becomingfree from the demands of providing such infrastructure facilities and at the same time allowing for the development of such facilities.

Certainty of Costs: Each application, each risk and each uncertainty has an attached cost.The aim of the developer should be to ensure that project costs can be determined and controlled in a certain manner.Return on Investment: The project and the documentation should be capable ofproviding an adequate return to investors in the project. This is a universal necessity in order to justify any private investment in any venture.Bankability: The project and the documentation should be bankable so as to enable thedeveloper to arrange for the required debt facilities to implement the project.

Distribution and Management of Risk: The documentation in relation to the projectshould be such so as to enable passage of various risks that are not within the control of Special Purpose Vehicle but it has been allocated to it under the main concession orlicense. The developer should not be straddled between the various documents with risks it has no control over or is not capable of absorbing. Thus, the risks allotted under theconcession or license should flow down to the various contractors under the relevant documentation with the contractors.Vesting of Adequate Rights: The special purpose vehicle should be vested with all therights required for enabling it to develop the project. This includes the right to create adequate security in favour of the lenders.

Control over the Revenue Stream: The special purpose vehicle should have adequatecontrol over the revenue stream to create security in favour of the lenders.

Provision of level playing field: In most infrastructure sectors, there is a great conflict of interest between the government as the service provider and government as the grantor of the concession. There should be specific arrangements provided for minimizing the adverse impact of such a potential conflicts of interests.

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