PPP Model

JUL 29

Mains   > Economic Development   >   Indian Economy and issues   >   infrastructure

IN NEWS:

  • The Public Private Partnership (PPP) model in India’s major port sector has completed 25 years.

MORE ON NEWS:

  • Jawaharlal Nehru Port Authority entered into the first agreement with the private player, viz, Nhava Sheva International Container Terminal (NSICT) in July 1997 making it the first Port Terminal to be developed on PPP basis.
  • The government of India introduced private sector participation in major ports to infuse funds, induct the latest technology, improve management practices, and for the addition of capacity and enhancement of functional efficiency.

WHAT IS PUBLIC PRIVATE PARTNERSHIP (PPP)?

  • Public-Private Partnerships (PPP) involve collaboration between a government/statutory entity/government-owned entity and a private sector entity that can be used to finance, build, and operate projects such as public transportation networks, parks, and convention centers.

CHARACTERISTICS OF PPP:

  • The private sector is responsible for carrying out or operating the project and takes on a substantial portion of the associated project risks.
  • During the operational life of the project the public sector’s role is to monitor the performance of the private partner and enforce the terms of the contract.
  • The private sector’s costs may be recovered in whole or in part from charges related to the use of the services provided by the project, and may be recovered through payments from the public sector.
  • Public sector payments are based on performance standards set out in the contract.
  • Often the private sector will contribute the majority of the project’s capital costs, although this is not always the case.

MODELS OF PUBLIC PRIVATE PARTNERSHIP (PPP):

  • Various models of PPPs operate on different conditions on the private sector regarding level of investment, ownership control, risk sharing, technical collaboration, duration of the project, financing mode, tax treatment, management of cash flows etc.
  • The following are some of the important models of PPPs.
    • Build Operate and Transfer (BOT):
      • This is the simple and conventional PPP model where the private partner is responsible to design, build, operate (during the contracted period) and transfer back the facility to the public sector.
      • Role of the private sector partner is to bring the finance for the project and take the responsibility to construct and maintain it.
      • In return, the public sector will allow it to collect revenue from the users.
      • The national highway projects contracted out by NHAI under PPP mode is a major example for the BOT model.
    •  Build-Own-Operate (BOO):
      • This is a variant of the BOT and the difference is that the ownership of the newly built facility will rest with the private party here.
      • The public sector partner agrees to ‘purchase’ the goods and services produced by the project on mutually agreed terms and conditions.
    • Build-Own-Operate-Transfer (BOOT):
      • This is also on the lines of BOT. After the negotiated period of time, the infrastructure asset is transferred to the government or to the private operator. This approach has been used for the development of highways and ports.
    • Build-Operate-Lease-Transfer (BOLT):
      •  In this approach, the government gives a concession to a private entity to build a facility (and possibly design it as well), own the facility, lease the facility to the public sector and then at the end of the lease period transfer the ownership of the facility to the government.
    • DBFO (Design, Build, Finance and Operate):
      • In this model, the private party assumes the entire responsibility for the design, construction, finance, and operate the project for the period of concession.
    • Lease-Develop-Operate (LDO):
      • Here, the government or the public sector entity retains ownership of the newly created infrastructure facility and receives payments in terms of a lease agreement with the private promoter. This approach is mostly followed in the development of airport facilities.

ADVANTAGES OF PUBLIC-PRIVATE PARTNERSHIPS:

  • Access to private sector finance:
    • India has a very large infrastructure need and an associated funding gap. PPPs can help both to meet the need and to fill the funding gap.
    • PPP projects often involve the private sector arranging and providing finance. This frees the public sector from the need to meet financing requirements from its own revenues (taxes) or through borrowing.
    • The PPP route is also seen as an attractive alternative in developing countries where governments are faced with constraints on borrowing money for expensive projects.
  • Diversifying the risk involved:
    • A Public-Private Partnership is formed for large infrastructural projects.
    • These projects require large finance & risk. When public & private organisations join together, this risk is diversified among two.
  • Using private sector innovation and skills:
    • Private-sector technology and innovation can help improve the operational efficiency of providing public services.
  • Timely completion projects:
    • The project undertaken under these partnerships are of huge size and these kinds of projects require large human effort & time. So timely completion of the project is a bigger challenge.
    • When private companies consisting of high professionals join a public corporation, it becomes possible for timely completion. The efficiency of the project is increased due to highly efficient professionals in the partnership.
  • Increased transparency:
    • The key to increased transparency and reducing opportunities for corrupt practices is the release of information to the public domain.
    • A well-designed PPP process can bring procurement out from behind closed doors.
    • The PPP tender and award process is based on open, competitive bidding following international best practise procedures. This further improves the transparency.

DISADVANTAGES OF PUBLIC-PRIVATE PARTNERSHIPS:

  • Contract uncertainties:
    • PPPs often cover a long-term period of service provision (eg. 15-30 years, or life of the asset).
    • Any agreement covering such a long period into the future is naturally subject to uncertainty. If the requirements of the public sponsor or the conditions facing the private sector change during the lifetime of the PPP the contract may need to be modified to reflect the changes.
    • This can entail large costs to the public sector and the benefit of competitive tendering to determine these costs is usually not available.
  • Different organizational cultures and associated issues:
    • The values and moral standards of the private sector differ from the values and morals of the public sector’s standards.
    • Consequently, the cooperation between the public and private sectors can be problematic and inefficient
  • Decreases the employment opportunities in the public sector:
    • PPP decreases the roles & responsibilities of public sector organisations and most of the work is done by the private sector decreasing the government role.
    • This decreases the employment opportunities in the public sector.
  • Charge high prices for providing services:
    • Under the PPP model, the government is required to share return from projects with private organisations.
    • The private sector with a profit motive invests in public sector projects in return for income from these projects. After completion of the project, private companies charge high prices for providing services.
  • Enforcement and monitoring of the project:
    • Once it enters the construction and operation phases, the success of the PPP will depend on the ability of the government/public sector to monitor performance against standards and to enforce the terms of the contract.
  • Crony capitalism:
    • In many sectors, PPP projects have turned into conduits of crony capitalism. It is worth noting that a large chunk of politically connected firms in India are in the infrastructure sectors, which have used political connections to win contracts in the past.

Vijay Kelkar Committee on Revisiting and Revitalising the PPP model

In the Union Budget 2015-16, the Finance Minister Shri Arun Jaitley had announced that the PPP mode of infrastructure development has to be revisited and revitalised.  In pursuance of this announcement, a Committee on Revisiting & Revitalising the PPP model of Infrastructure Development was set-up which was chaired by Dr. Vijay Kelkar.

Key recommendations of the Committee includes:

  • Contracts need to focus more on service delivery instead of fiscal benefits.
  • Better identification and allocation of risks between stakeholders.
  • Prudent utilization of viability gap funds where user charges cannot guarantee a robust revenue stream.
  • Improved fiscal reporting practices and careful monitoring of performance.
  • Sector specific institutional frameworks may be developed to address issues for PPP infrastructure projects.
  • Amend the Prevention of Corruption Act, 1988 to distinguish between genuine errors in decision-making and acts of corruption.
  • An institutionalized mechanism like the National Facilitation Committee (NFC) to ensure time bound resolution of issues including getting timely clearances.
  • Government may develop a PPP law with endorsement from Parliament. It gives an authoritative framework to implementing executives along with an oversight responsibility to legislature and regulatory agencies.
  • Infrastructure PPP Project Review Committee (IPRC) should be set up for evaluating and sending recommendations in time-bound manner for a stress in projects under PPP model.
  • PPP model is not recommended for small scale projects in view of the transaction costs involved.

 

WAY FORWARD:

  • Private sector should be protected against any abrupt changes in the economic or policy environment.
  • Extension of PPP into new sectors such as health, other social sectors, and urban transport should be explored.
  • Private investment needs be encouraged in infrastructure through a renewed public-private partnership (PPP) mechanism on the lines suggested by the Kelkar Committee.

PRACTICE QUESTION:

Q. “PPPs have the potential to deliver infrastructure projects better and faster”. Critically analyse the statement with reference to the role of PPPs in infrastructure development in India.