A public-private partnership (PPP) is a contractual agreement between the public and the private sectors, whereby the private operator commits to provide public services that have traditionally been supplied or financed by public institutions. The ultimate goal of PPPs is to obtain more “value for money” than traditional public procurement options would deliver. When correctly implemented, PPPs are said to produce reduced life-cycle costs, better risk allocation, faster implementation of public works and services, improved service quality and additional revenue streams.
The core principle of PPPs lies in the risk allocation between the two parties. A well designed PPP redistributes the risk to the party that is best suited to manage it and to do it with the least cost. The PPP models vary from short-term simple management contracts (with or without investment requirements) to long-term and very complex BOT form to divestiture.
Introduction
The significance of Public-Private Partnership (PPP) model has been gaining increased thrust of late as the double whammy of rising urbanization (a combination of rural-to-urban migration and population growth) on one hand and fund crunch on the other put severe pressure on our cities’ already crumbling infrastructure. Besides, an unprecedented rise in prices of commodities, across the board, over the last few years too has hit the ever-constrained finances of urban local bodies hard. These make the task of developing new infrastructure really hard for ULBs, unless there is a strong financial support coming from the central/state government or other agencies like World Bank.
However, given India’s huge infrastructure deficit, the country requires massive investment to build and develop infrastructure like highways, healthcare, ports, airports, and even education. This makes the role of the private sector quite crucial for the two simple reasons – first, private sector participants can bring in the funding at such large scale, provided such investments have the potential to fetch good returns; second, private sector brings with it the required technical and managerial skills and also experience, which the public sector may be lacking in. Besides, private sector is viewed as being more productive and efficient as compared to their public sector counterparts. Aside, this (PPP) also enables the government to liberate and hence allocate vital resources to other activities for public good. According to Wikipedia, “Public-private partnership (PPP) describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies.”
The Government of India’s renewed thrust on bringing private sector investment in building and upgrading its infrastructure is slowly yielding the results. According to the Economic Survey 2007-08, “India has witnessed a rapid increase in private investment in infrastructure over the last five years.” Not only that India even betters other BRIC nations like China and Brazil (the other being Russia) when it comes to bringing in private sector participation in infrastructure development. In 2006, commitments to Indian infrastructure projects with private participation were around double that of Brazil and China, making India the leader amongst the middle and low income countries.
Given that, the Public-Private Partnership has emerged as a viable model for developing countries like India to give a boost to the infrastructure development. However, to reap the true benefits of private sector participation requires meticulous planning, on part of the government and governmental bodies like ULBs, which includes among others things like identify the objectives clearly, proper evaluation of the costs and sources of funding, setting up of a monitoring and coordinating body, and realistic estimates of the return. Also, it is equally important to select the proper mode of the PPP. The main defining feature of PPPs is the degree of private control over and involvement in financing. The next section discusses some of the major types of PPP models.
Types of PPPs
There are five major categories of public-private partnerships; some of these categories also contain several variants. ‘These models vary mainly by Ownership of capital assets, Responsibility for investment, Assumption of risks, and Duration of contract.
Types of PPP Schemes – At a Glance
Schemes Modalities
Service contracts The private party procures, operates and maintains an asset for
a short period of time. The public sector bears financial and
management risks
Operation and management The private sector operates and manages a public owned
contracts asset. Revenues for the private party are linked to performance
targets. The public sector bears financial and investment risks
Leasing-type contracts The private sector buys or leases an existing asset from the
• Buy-build-operate (BBO) government, renovates, modernizes, and/or expands it, and
• Lease-develop-operate (LDO) then operates the asset, again with no obligation to transfer
• Wrap-around addition (WAA) ownership back to the government
Build-operate-transfer (BOT) The private sector designs and builds an asset, operates it, and
• Build-own-operate-transfer (BOOT) then transfers it to the government when the operating contract
• Build-rent-own-transfer (BROT) ends, or at some other pre-specified time. The private partner
• Build-lease-operate-transfer (BLOT) may subsequently rent or lease the asset from the government.
• Build-transfer-operate (BTO)
Design-Build-Finance-Operate (DBFO) The private sector designs, builds, owns, develops, operates
• Build-own-operate (BOO) and manages an asset with no obligation to transfer ownership
• Build-develop-operate (BDO) to the government. These are variants of design-build-finance-
• Design-construct-manage-finance (DCMF) operate (DBFO) schemes.
Source: http://www.europarl.europa.eu/comarl/imco/studies/studies/0602_ppp_briefingnote_en.en.pdf
The major categories of PPP model are:
• Service Contracts,
• Operations and Management Contracts,
• Leases,
• Build-Operate-Transfer (BOT) Contract and its Variants, and
• Concession Agreements.
• Service Contracts
In service contracts, the private party is entrusted with the task of performing non-core activities in lieu of fees. This type of contract is also sometimes referred to as outsourcing. In this form of PPP, the private sector participant is entrusted with the task of procurement, operations and maintenance, while the government retains the ownership. Service contracts have a short duration, ranging from six months to a few years. The private party has to bear the financial and residual value risk.
The main objective in this type of PPP is to benefit from the operational efficiency and technical expertise of the private sector. In other words, the government benefits from the operational efficiency of the private sector without having to transfer the control over the quality of outputs. This mode is more suitable for projects like toll collection services, for the provision and maintenance of vehicles or other technical activities. Examples include cafeteria, security services etc. at government establishments. This form of PPP is suitable in cases where there is a wider opposition from common public about privatization of public (utility) services such as water or in cases where there is a need for the government to reduce its role and improve service efficiency.
Operations and Management Contracts
In this form of PPP, the onus of asset operation and management is on the private party while the ownership rests with the government. The duration of such contracts may range from three to five years, however, the same may be extended, depending on the nature and complexities of the projects. The investment and financial risk is borne by the government. The main objective of this type of contract is to benefit from the efficiency gains and technological know-how of
the private sector. Such contracts can also be useful in the transition stage leading to total divestiture or privatization.
Management contracts are useful options in preparing for PPP where
• The regulatory framework needs to be upgraded;
• Tariffs are too low and government needs time to develop a system of subsidies;
• Stakeholders have not yet agreed to long-term involvement of the private sector; or
• The country has no record of experience of public-private partnerships.
How they Compare?
Leases
In this model, ‘the private party purchases the income streams generated by publicly-owned assets in exchange for a fixed lease payment and the obligation to operate and maintain the asset.’ While the responsibility of planning and raising new investments rests on the government, the private party bears the commercial and demand risks. Therefore, in this type of PPP, the private party has every incentive to reduce the overall costs and improve operational efficiency. Leasing Agreements are appropriate for services such as public utilities like urban transport which can generate independent revenue streams.
Build-Operate-Transfer (BOT) Contracts and Variants
Also called Turnkey Procurement, in this type of PPP, the private sector participant owes the responsibility of designing, building and operations of the asset. Once again the ownership lies with the public sector while the private party bears the commercial risk. The BOT model has several stripped down/stepped up versions like BOOT (Build-Own-Operate-Transfer), BROT (Build-Rehabilitate-Operate-Transfer), BLOT (Build, Lease, Operate, Transfer) and BTO (Build, Transfer, Operate).
This model is best suited for projects which require massive funding and also involve building new infrastructure. These projects are also essentially of long gestation period. This kind of PPP model is generally used in public utilities such as building new power plants, drinking water supply, waste water treatment plants etc. Once again, the private operator has to meet the guidelines/specifications set by the public entity. However, a major drawback of this model
is that ‘the length and complexity of BOTs make these contracts difficult to design, a fact that often negates the positive effects of the initial competition.’
Concessions
Under concession contracts, a private operator is given a contractual right to use existing infrastructure assets to supply customers and to finance and manage all capital extensions and upgrades to the existing services supplied. The duration of this type of PPP is much longer than that in case of leasing agreement model.
A major characteristic of this model is that the private party bears the responsibility of both investment as well as operations and maintenance of the asset. However, the ownership once again, like in case of other models, rests with the public entity. The governments wrest the control of the asset back after the expiry of the concessions agreement period. Concessions model differs from the Leases model in the sense that in the latter the funding responsibility lies with the public sector or the government.
Outlook
By 2021, the share of India’s urban population will jump from the present 28% (of the overall population) to 40%, according to the ES 2007-08. That means by that time all the basic civic services like water supply, sanitation, solid waste, urban transport would have to accordingly be scaled up to meet with the jump in demand for such services. But are our ULBs equipped and geared up to meet these challenges? Definitely not. Against this backdrop, there is no denying the fact that the PPP model is the need of the hour, especially in the case of the developing economies. In case of geographically vast countries like India the challenges before the governments are all the more enormous. However, at the same time, this also presents immense opportunities for the private sector. For instance, according to the Economic Survey (ES) 2007-08, “The Eleventh Five Year Plan envisages total investment in physical infrastructure (electricity, railways, roads, ports, airports, irrigation, urban and rural water supply and sanitation) to increase from around 5 per cent of GDP in 2006-07 to 9 per cent of GDP by the end of the plan period if the targeted rate of growth of 9 per cent for the Eleventh Five Year Plan period (2007-12) is to be achieved.” Further, total investment in creating physical infrastructures such as roads, railways, ports, power, electricity, sanitation etc., would alone require a massive Rs.2,000,000 crore (or approx. $400 bn) during the said plan, as per the ES. The private sector’s investment is projected at one-third of the overall investment envisaged.
To ensure smooth function and success of the PPP model in the country, the government has already initiated several measures which are expected to give a big boost to the Public Private Partnership model in the days to come. To conclude, surely, this presents huge opportunities for the private sector to play and benefit by participating in the economic development process of the nation.
N Janardhan Rao, Lead Economist.
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