Unit-V PRIVATE SECTOR PARTICIPATION

PUBLIC PRIVATE PARTNERSHIP CONCEPT

Infrastructure projects have been traditionally funded with investment from
budgetary resources and funding from bilateral and multilateral
organisations. However, budgetary resources and borrowings have not been
sufficient to meet the funding required for infrastructure creation. In order to
fill the infrastructure gap, private capital from private sector participation has
been sought through public private partnership (PPP) route. PPP is defined as
an arrangement between a government/government owned entity on one
side and a private sector entity for the creation and/or management of
infrastructure for provision of services to public for a specified period of time
on commercial terms. In addition, private sector participation is expected to
usher efficiency gains arising from innovation, management, and marketing
skills offered by the private sector and greater incentives for the control of
construction, maintenance and operation costs.
In PPP, public agencies enter into a long-term contractual agreement with
the private sector with the aim of sharing the resources and skills of each
stakeholder in order to deliver a service or facility for use by general public.
Besides, sharing the resources and skills each party shares the risks and
rewards in the delivery of the service or the facility. PPP refers to different
arrangement of partnership between the parties incorporating one or more
of the following features:
Public agencies transfer the infrastructure facilities previously
controlled by them to the private sector entity usually for the term of
the arrangement. The existing facilities can be transferred to private
sector entity either at no cost or at a nominal fee from the private
sector.
Private sector entity either builds a new facility or extends and
renovates the existing facility.
Public agencies specify the operating features of the facility.
Private sector is obligated to provide the services using the facility for
a defined period of time (usually within the specifications on operations
and pricing).
Private sector entity either agrees to transfer the facility to the public
sector (with or without payment) at the end of the contractual period
or owns and operates the infrastructure facility in perpetuity.
BENEFITS OF PPP
Governments have adopted the innovative public private partnership route
for development of infrastructure projects mainly to get additional private
capital to overcome the budgetary constraints faced by them in building the
infrastructure. In addition to the availability of private capital, private sector
participation brings in the following benefits to the government.
PPPs allow for allocation of risks to the party best able to manage
them. Public sector can pass on those risks which can be effectively
managed by the private sector and retain those risks which they are in
a better position to manage them or their consequences. Much of the

risks associated with the design and construction of infrastructure

projects, which were traditionally borne by public sector, are
transferred to private sector and this in turn insulates the governments
from such risks. The effect of the optimal risk allocation is that the
project will achieve better value for money and benefit from the
efficiency gains than they otherwise would if retained wholly under
government control.
PPPs enable faster delivery of projects. The pace at which the projects
are launched can be accelerated as the projects are freed from the
constraints of public sector spending. In addition, private sector has
the incentive to expedite the project delivery in order to avoid
inflationary cost increases, keep the project cost low, and bring forward
the revenue stream. Contractual conditions such as early completion
bonus payments and inclusion of construction period within concession
period further provide the incentive for private sector to expedite the
project delivery.
PPPs encourage innovation and efficiency. The combination of public
and private sectors unique motivations and skills; and the competitive
process for contract award provide high potential for innovative
approaches to public infrastructure delivery with PPPs. PPPs facilitate
greater flexibility to private sector to maximize the use of new and
innovative approaches to financing, development, construction,
operation and maintenance. Involvement of leading technical and
financial experts assists in rigorous assessment of project feasibility;
close examination of project costs and risks; and imaginative
approaches to provide solutions to apparently difficult problems.
Moreover, adoption of flexible and innovative approaches will
encourage high standards of performance and efficiency. In case of
certain arrangements of PPPs which integrate project development and
delivery, private sector has the incentive to optimize expenditure and
maximize innovation to achieve greatest level of cost efficiency over
the life cycle of the project through a life cycle approach.
PPP projects can be completed more reliably on time and within
budget. Private sector is strongly motivated to complete the project as
early as possible to control its costs so that the payment stream can
commence. The private sector is under the pressure to complete the
project within budget as the project cost is fixed before construction
commences. There is more certainty of project outcomes as the project
sector will effectively manage the risks of cost and time overruns
which have been allocated to them through contractual arrangements.
PPPs can facilitate transfer of technology and training. PPPs can attract
experts and organizations with international standing and experience
which can be a catalyst for technology transfer and exchange. In
addition to technology transfer, the local staff can be trained and the
operational methods and techniques of local firms can be enhanced on

account of exposure to international management techniques and

state-of-the-art technology.
PPPs can provide access to international finance and foster the local
capital markets. PPPs provide a medium for investments from abroad.
This will help them access the global bank and capital markets and
develop domestic investment environment. This will in turn help in
development of existing local capital markets and acts as a catalyst in
the creation of new ones.
PROJECT FINANCE BASIC FEATURES
Project financing typically involves the following features:
1. Agreement to complete the project and commitment to provide all the
funding necessary to complete the project
2. Established demand for the project outputs such that the project will
generate sufficient cash to meet all its operating expenses and debt
servicing requirements, even if the project fails to perform on account
of force majeure or for any other reason. This could also be in the form
of agreement by a party who will be purchasing the project output.
3. Assurance for availability of adequate funds during operation phase of
the project to maintain and restore the project in operating condition.
Project finance can therefore be used for financing only those projects those
are financially sound such that it is able to generate enough funds to service
debt and earn returns for the equity investors. And, the `assets created as
part of the project should be able to organise into an independent economic
unit such that the project has the unquestioned ability to generate sufficient
cash to repay its debts. Along with the assets, the project should also include
all the facilities that are necessary to make it an economically independent
and viable operating entity.
Build-Operate-Transfer (BOT) and Build-Own-Operate-Transfer (BOOT)
Print This Page
New Centers. In some cases, the enterprise customer wants to set up a new
service delivery center or service architecture or infrastructure. It may enlist
the assistance of a service provider in the design of the operations,
procurement of the necessary equipment, real estate and technology, and in
the recruitment, hiring and training of the personnel for the new service
delivery center.
BOT vs. BOOT. To address such situations, outsourcing planners have learned
from project financing the structures for build-operate-transfer (BOT) and
build-own-operate-transfer (BOOT) models.
They are essentially
identical.
Common Elements: In each case, the enterprise customer gets access
to technology, expertise, knowledge and operating capital. In each
model, the service provider assembles the people, the processes and
the technology and then provides services as an outsourcer under the
classic outsourcing model. At the agreed time, the service provider

transfers the service delivery operation (including infrastructure) to the

enterprise customer.
BOOT: In the BOOT model, the enterprise customer also gets the
benefit of the service providers financing of the capital expenses
necessary to start a new service center or service delivery platform.
In a pure BOOT, the service provider owns and finances the
infrastructure in addition to managing it for a fee.
BOT: In the BOT model, the enterprise customer provides the financing
for the new infrastructure. In a pure BOT, the service provider does
not own the infrastructure but is a concessionaire entitled to manage it
for a fee that covers its operating expenses.
Time Lapse Scenario. Thus, where the enterprise customer wants help in
building its own captive, the BOT or BOOT model provides a legal structure
for the supplier to build and, for a time, manage the entire service delivery
center before assigning it to the customer. This model reflects traditional
project financing for building transportation infrastructure such as
highways, airports, bridges, tunnels and ports for governments. In the
public sector, BOT relationships are sometime called public-private
partnerships. [LINK TO THAT PAGE = SEE BELOW]
Accounting. An essential element of BOT is its cost accounting. The cost
structure for BOT involves amortization of capital investment. The pricing
structure will reflect this amortization if the service provider owns any
physical assets, license agreements or real property used for service
delivery.
Advantages. The BOT and BOOT models offer several advantages to the
enterprise customer. It saves:
time because the service provider is presumably more expert at
assembling the infrastructure and obtaining local regulatory consents;
money (and maybe market share) because the benefits of the new
infrastructure can be enjoyed sooner;
effort because the service provider is performing the effort,
presumably at lower salaries.
Disadvantages. The BOT and BOOT models have certain drawbacks for the
enterprise customer.
Additional costs are incurred to pay a profit to the service provider for
the value of its know-how and time in assembling the service delivery
infrastructure.
Tie-in effects arise, since the enterprise customer commits to work
with the particular service provider (as in any class outsourcing model)
and cannot escape for low switching costs until the service providers
investment is amortized or recaptured.
Inflexibility results from the enterprise customers commitment to
purchase the infrastructure, whether up front, by imputed selfamortizing mortgage payments or at the end. This ties up the
enterprise customers capital and credit, unless the enterprise
customer can structure the financial risk so that the service provider

retains ownership until the customer exercises, in effect, a call option

to acquire the service center infrastructure.
BOOT (build, own, operate, transfer) is a public-private partnership
(PPP) project model in which a private organization conducts a large
development project under contract to a public-sector partner, such as
a government agency. A BOOT project is often seen as a way to
develop a large public infrastructure project with private funding.
Here's how the BOOT model works: The public-sector partner contracts
with a private developer - typically a large corporation or consortium of
businesses with specific expertise - to design and implement a large
project. The public-sector partner may provide limited funding or some
other benefit (such as tax exempt status) but the private-sector
partner assumes the risks associated with planning, constructing,
operating and maintaining the project for a specified time period.
During that time, the developer charges customers who use the
infrastructure that's been built to realize a profit. At the end of the
specified period, the private-sector partner transfers ownership to the
funding organization, either freely or for an amount stipulated in the
original contract. Such contracts are typically long-term and may
extend to 40 or more years.
BOOT is sometimes known as BOT (build, own, transfer). Variations on
the BOOT model include BOO (build, own, operate), BLT (build, lease,
transfer) and BLOT (build, lease, operate, transfer)

Brief notes on BOOT,BOLT,BOT as used in infrastructure projects

The above three expressions are used in the context of infrastructure
projects.
Infrastructure is the word used to collectively refer to the facilities like roads,
railways, bridges, manufacturing plants etc. A good infrastructure is a
prerequisite for economic growth. The infrastructure development was taken
up on a large scale during the last decade. The Government envisaged the
nation wide infrastructure development through the participation of the
private sector. The investment required for these projects were huge and the
gestation period of these projects were also quite high. The Government with
a view to encourage the private participation in these developmental
projects offered various business, models like BOOT, BOLT & BOT.
BOOT means Build Own Operate & Transfer.
Under this scheme the private participant will get an opportunity to own and
operate the facility for some time and during this period the developer can
commercially exploit the facility so developed. After the specified period the
facility would be transferred to the Government.
BOLT
BOLT means Build Own Lease & Transfer.

The Private participant will lease the facility to the Government and the
Government will pay the lease charges for a specific period and on the
completion of the lease period the facility is transferred to the Government.
BOT
BOT means Build Operate & Transfer
Under this scheme the private participant will not be owning the facility. The
private participant would be entitled to operate the facility for a specific
period during which the revenues from the operation would be shared
between the private participant and the Government or the Government will
be paid lease charges by the private participant. On completion of the
specified time the facility will be transferred to the Government.