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PPP Projects in Infrastructure

What takes the government 50 years toachieve can be done by the private sector in atenth of time

- Milton Friedman(an American economist , statistician. )

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What is PPP ?Government of Indias Definition

Public Private Partnership (PPP) Project means, a projectbased on a contract or concession agreement, between a

Government or statutory entity on the one side and a privatesector company on the other side, for delivering aninfrastructure service on payment of user charges.Private Sector Company means a company in which 51% ormore of the subscribed and paid up equity is owned andcontrolled by a private entity.

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Contd

What is meant by PPP ?They broadly refer to long-term, contractual partnerships betweenthe public and private sector agencies, specifically targeted towardsfinancing, designing, implementing, and operating infrastructurefacilities and services that were traditionally provided by the publicsector.These collaborative ventures are built around the expertise andcapacity of the project partners and are based on a contractualagreement, which ensures appropriate and mutually agreedallocation of resources, risks, and returns.This approach of developing and operating public utilities andinfrastructure by the private sector under terms and conditionsagreeable to both the government and the private sector is calledPPP or P3 or private sector participation (PSP).

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Roles and responsibilities :-

PPPs do not mean reduced responsibility and accountability of the government.They still remain public infrastructure projects committed tomeeting the critical service needs of citizens.

The government remains accountable for service quality, pricecertainty, and cost-effectiveness (value for money) of thepartnership.Government remains actively involved throughout the projects

life cycle.Under the PPP format, the government role gets redefined asone of facilitator and enabler, while the private partner plays therole of financier, builder, and operator of the service or facility.

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Contd

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 assumessocial, environmental, and political risks.The private sector brings along operational efficiencies,innovative technologies, managerial effectiveness, access toadditional finances, and construction and commercial risksharing.

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The salient features of a PPP :-

Not all projects with private sector participation are PPPprojects.PPPs are those ventures in which the resources required by theproject in 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 privatemanagement of public service through a long-term contract

between an operator and a public authority, privatizationinvolves outright sale of a public service or facility to the privatesector. A typical PPP example would be a toll expressway projectfinanced and constructed by a private developer.

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Contd

A PPP project is essentially based on a significant opportunity for the private sector to innovate in design, construction, servicedelivery, or use of an asset.To be viable, PPPs need to have clearly defined outputs, avenuesfor generating nongovernmental revenue, and sufficientcapacity in the private sector to successfully deliver projectobjectives.

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PPP strengths and effectiveness :-

Robust and dynamic structure;Government in an enabler role;Government ownership is high;Governance structure ensures consumer and public interests aresafeguarded;Commercial interest protected;Domicile risks to parties that are well equipped to deal withthem;Transparent and well-conceived contracts;Documentation recognizes rights and responsibilities of allproject-related parties;

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Contd

Concerns of all stakeholders addressed;Involves participation of a large number of institutions :government, politicians, banks, financial institutions, investors,contractors, consumers, NGOs, etc.

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Fundamental qualities of a PPP project :-

The project must have emerged from a government-ledplanning and prioritization process. The project must be suchthat, regardless of the source of public or private capital, thegovernment would still want the project to be implemented

quickly.Shared risk allocation is a principal feature of a PPP project. Theprivate sector must genuinely assume some risk.... Value should be for both sides, which means government

should also genuinely accept some risks and not transfer theentire risk to the private sector, and vice versa.

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Relevance of PPPs for India :-

Massive deficit in infrastructure services

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 economicand social development have led to greater demand for betterquality and coverage of water and sanitation services, sewageand drainage systems, solid-waste management, roads andseaports, and power supply.Increased demand has put the existing infrastructure undertremendous pressure and far outstripped its supply.

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Contd

Water While 90% of the urban population has access to potable watersupply, the actual availability of water in the cities is only 5 6hours a day.

Less than 60% of the households have sanitation and less than half have tap water on their premises.About 40 50 million people are estimated to be living in slums.Poor urban development is not only undermining the quality of lifefor Indias urban citizens but also constraining local and nationalgrowth.As much as 70% of irrigation and 80% of domestic waterrequirement is met from groundwater, which has meanthaphazard and unsustainable use of aquifers and depleting watertable.

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Contd...

Power

Over 40% of Indias population, mostly rural, does not haveaccess to electricity.Despite the increase in installed generation capacity,shortages in normal and peak energy demand have beenaround 8% and 12% on an average.Less than 20% of Indias enormous hydroelectric potentialhas been tapped.Transmission and distribution losses in India remain very high, at around 28 30%, as compared to other developingcountries, where they are less than 10%.

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Contd

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-lane.The traffic situation in the cities has worsened due to amassive increase in personal vehicles, inadequate city roads,and poor quality of public transport.Airport and seaport infrastructure and train corridors arestrained under capacity constraints.

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Contd

Growing government emphasis oninfrastructure spending

Growing recognition of the prevailing infrastructure deficitin the country and its impeding impact on sustainingeconomic growth as well as poverty reduction has madedevelopment of social and economic infrastructure amongthe highest priorities of the Government of India (GOI).The GOI has recognized that with better infrastructureIndias growth can be higher, with the benefits reaching amuch larger section of the population.

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Contd

It has increased its spending on infrastructure through a seriesof national programs such as the National Highway Development Program (NHDP), Bharat Nirman, ProvidingUrban Services in Rural Areas (PURA), Jawaharlal NehruNational Urban Renewal Mission (JNNURM), the PrimeMinisters Rural Roads Program, National Rail Vikas Yojana,National Maritime Development Program (NMDP), airportexpansion programs, etc.

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Contd

Growing emphasis on private sectorparticipation

These projected investment requirements can not be metfrom governments budgetary resources .The scope for making improvements is limited by the stateof public finances.The combined deficit of the Union and state governments isaround 10% of GDP.

Governments can also not borrow arbitrarily, since theirborrowing has been capped through the Fiscal Responsibility and Budgetary Management Act.

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Contd The Approach Paper to the Eleventh Plan states that Onehas 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 aresolution which mentions that increased privateparticipation has now become a necessity to mobilize theresources needed for infrastructure expansion and

upgradation.Given the large resource requirements and the budgetary and borrowing constraints, GOI has been encouragingprivate sector investment and participation in all sectors of

infrastructure.

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What governments should not do in a PPPproject

Offer a project without detailed project development;Make commitments that cannot be kept;Change goalposts after award of concession and revisit project

design;Not recognize that each project is a business and not a mereasset;Regret that the business is profitable within the framework

agreement;Superimpose public processes on private initiatives; andNot fully exploit the capacity of the business to grow in thestate.

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... and what they should do

Protect officers who take the initiative on PPP; Align the economic interest of all stakeholders;Define PPP projects on a holistic basis;Induct the private sector as partners;

Establish frameworks that permit failures; andEncourage plurality of approaches.

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Presented by :-

Kunal Nagrani

Harminder Kaur

Parth Mehta

Saloni Soni

Ashesh Trivedi

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Thank You