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INVESTMENT MODELS

Public Private Partnership (PPP)


India has systematically rolled out a PPP program for the delivery of high-priority public utilities
and infrastructure and, over the last decade or so, developed what is perhaps one of the largest PPP
Programs in the world. With close to 1300 PPP projects in various stages of implementation, according
to the World Bank, India is one of the leading countries in terms of readiness for PPPs. India has broad
experience in PPPs and has systematically rolled out a large PPP program over the last decade to deliver
high-priority infrastructure.
As per global ranking of the World Bank’s 2016 Logistics Performance, India jumped to 36th rank
in 2016 from 58th rank in 2014 in terms of providing qualitative physical infrastructure, which is quite
remarkable achievement. The Union Budget 2018-19, has increased total infrastructure outlay to Rs 5.97
lakh crore. The infrastructure sector is still facing multiple issues, for which the Government has
adopted a multi-pronged strategy to address them through various schematic interventions like NABH
Nirman, UDAN and Bharatmala.
Definition of PPPs
The Department of Economic Affairs (DEA) defines PPPs as:
PPP means an arrangement between a government or statutory entity or government owned entity on
one side and a private sector entity on the other, for the provision of public assets and/ or related
services for public benefit, through investments being made by and/or management undertaken by the
private sector entity for a specified time period, where there is a substantial risk sharing with the
private sector and the private sector receives performance linked payments that conform (or are
benchmarked) to specified, pre-determined and measurable performance standards.
Essential conditions in the definition are as under:
i. Arrangement with private sector entity: The asset and/or service under the contractual
arrangement will be provided by the Private Sector entity to the users. An entity that has a majority
non-governmental ownership, i.e., 51 percent or more, is construed as a Private Sector entity.
ii. Public asset or service for public benefit: The facilities/ services being provided are
traditionally provided by the Government, as a sovereign function, to the people.
iii. Investments being made by and/or management undertaken by the private sector entity:
The arrangement could provide for financial investment and/or non-financial investment by the
private sector; the intent of the arrangement is to harness the private sector efficiency in the
delivery of quality services to the users.
iv. Operations or management for a specified period: The arrangement cannot be in perpetuity.
After a pre-determined time period, the arrangement with the private sector entity comes to a
closure.
v. Risk sharing with the private sector: Mere outsourcing contracts are not PPPs.
vi. Performance linked payments: The central focus is on performance and not merely provision of
facility or service.
vii. Conformance to performance standards: The focus is on a strong element of service delivery
aspect and compliance to pre-determined and measurable standards to be specified by the
Sponsoring Authority.

Objectives of Public Private Partnerships


 Encourage private sector to invest in infrastructure sector
 Harness private sector efficiencies in asset creation, maintenance and service delivery;
 Provide focus on life cycle approach for development of a project, involving asset creation
and maintenance over its life cycle;
 Create opportunities to bring in innovation and technological improvements; and,
 Enable affordable and improved services to the users in a responsible and sustainable
manner.

Key Advantages For Using PPP Procurement:


• PPPs make projects affordable
• PPPs maximise the use of private sector skills
• With PPPs, risks are allocated to the party best able to manage or absorb each particular risk
• PPPs deliver budgetary certainty
• PPPs force the public sector to focus on outputs and benefits from the start
• With PPPs, the quality of service has to be maintained for the life of the PPP
• The public sector only pays when services are delivered
• PPPs encourage the development of specialist skills, such as life cycle costing
• PPPs allow the injection of private sector capital
• PPP transactions can be off balance sheet

How a PPP project is different from a conventional project?


There are significant differences between a conventional construction procurement project
and a PPP project that need to be clearly understood. The main differences include:
• PPP projects are different from conventional construction projects in terms of
project development, implementation, and management. The administrative and
approval processes in the case of PPP projects are also different.
• A PPP project is viable essentially when a robust business model can be developed.
• The focus of a PPP project should not be on delivering a particular class/type of
assets but on delivering specified services at defined quantity and levels.
• The risk allocation between the partners is at the heart of any PPP contract design
and is more complex than that of a conventional construction project. Both
partners should clearly understand the various risks involved and agree to an
allocation of risks between them.
• A PPP contract generally has a much longer tenure than a construction contract.
Managing the relationship between the private company and the implementing
agency over the contract tenure is vital for the success of a PPP project.

THE PPP PROCESS


Identifying, developing and implementing a project as a PPP involves a series of steps and should be
undertaken following a clear process.The PPPToolkit organises the PPP process into a sequence of
four phases:
Phase 1: PPP identification – A set of potential projects is identified through a strategic planning
process, which includes a needs analysis for the infrastructure services and an options analysis for
providing the services (including whether assets are required). Potential PPPs are then evaluated
for their suitability for development as PPPs and a pre- feasibility report is prepared.
Phase 2: Full feasibility study, PPP preparation, and clearance – A potential PPP that was
considered suitable in the Phase 1 analysis is studied in detail and an application is made for In-
principle Clearance to continue to the procurement Phase.
Phase 3: PPP procurement – the procurement process takes place, an application is made for final
approval, the preferred bidder is selected and the project is taken to technical close.
Phase 4: Contract management and monitoring – the Sponsoring Authority manages the PPP
throughout its life, including monitoring the private partner’s performance against the
requirements of the Concession Agreement. Phase 4 begins at the pre-operative stage, and spans
the construction stage (where relevant), the operations stage, and contract closure and asset
transfer.

Basic structure of a PPP arrangement


A typical PPP structure can be quite complex involving contractual arrangements between a
number of parties, including the government, project sponsor, project operator, financiers,
suppliers, contractors, engineers, third parties (such as an escrow agent), and customers.
The creation of a separate commercial venture called a Special Purpose/Project Vehicle
(SPV) is a key feature of most PPPs. The SPV is a legal entity that undertakes a project and
negotiates contract agreements with other parties including the government. An SPV is also the
preferred mode of PPP project implementation in limited or non-recourse situations, where the
lenders rely on the project’s cash flow and security over its assets as the only means to repay debts.
An important characteristic of an SPV as a company is that it cannot undertake any business that is
not part of the project. An SPV as a separate legal entity protects the interests of both the lenders
and the investors. The formation of an SPV has also many other advantages.
A project may be too large and complicated to be undertaken by one single investor
considering its investment size, management and operational skills required and risks involved. In
such a case, the SPV mechanism allows joining hands with other investors who could invest, bring
in technical and management capacity and share risks, as necessary.
The government may also contribute to the long-term equity capital of the SPV in exchange
of shares. In such a case, the SPV is established as a joint venture company between the public and
private sectors and the government acquires equal rights and equivalent interests to the assets
within the SPV as other private sector shareholders.

THE PPP MODELS


The level of private sector participation in infrastructure can cover a spectrum from short-term
service contracts at one end all the way through to full privatisation (disinvestment) at the other
Service contracts and disinvestments are generally not considered as PPPs in India. An
infrastructure PPP in India is therefore more than just a short-term contract for services with the
private sector but does not go so far as to include complete private sector ownership and control.
Government of India does not recognise service contracts, Engineering-Procurement-Construction
(EPC) contracts and divestiture/Disinvestment of assets as forms of PPP.
Types of PPPs
I. Operations and Maintenance(O&M)/ Service contract:
The Government bids out the right to deliver a specific service or gives part of the undertaking to
the private sector for operations and maintenance of the assets. The public partner retains
ownership and overall management of the public facility or system.
II. Management Contracts: These are of two types.
(i) Management Contract (without rehabilitation): This involves contracting to the private sector
most or all of the operations and maintenance of a public facility or service. Although the ultimate
obligation of service provision remains with the public authority, the day-to-day management
control is vested with the private sector. Usually the private sector is not required to make capital
investments. e.g., Karnataka Urban Water Supply and Improvement Project, performance based
maintenance contracts in highways.
(ii) Management Contract (with rehabilitation/ expansion ): This is similar to management contracts
but include limited investments for rehabilitation or expansion of the facility. This mode has been
adopted in the power distribution and water supply sectors e.g. Bhiwandi Distribution Franchise,
Latur Water Supply Project.
III. Engineering, Procurement and Construction (EPC) Model
Under this model, the cost is completely borne by the government. Government invites bids for
engineering knowledge from the private players. Procurement of raw material and construction
costs are met by the government. The private sector’s participation is minimum and is limited to
the provision of engineering expertise. It is similar to the Turnkey/ Design Build Contracts.
Turnkey/Design Build Contracts: A public agency contracts with a private investor/vendor to design
and build a complete facility in accordance with specified performance standards and criteria
agreed to between the agency and the vendor. The private developer commits to build the facility
for a fixed price and absorbs the construction risk of meeting that price commitment.
IV. Lease Contracts: Asset is leased, either by the public entity to the private partner or vice-versa.
(i) Lease Develop Operate Transfer (LDOT): In this type of PPP arrangement, assets are leased out to
the private sector under specific terms, to operate and maintain the asset for the term of the
concession period, after which the assets are transferred to the authority. e.g. Leasing of retail
outlets at railway stations by Indian Railways.
(ii) Build Lease Transfer (BLT) or Build-Own-Lease-Transfer (BOLT): Involves building a facility,
leasing it to the Govt. and transferring the facility after recovery of investment.
Primarily taken up for railway projects such as gauge conversion in India in the past, with limited
success.
(iii) Build-Transfer-Lease (BTL): Involves building an asset, transferring it to the Govt, and leasing it
back. Here the private sector delivers the service and collects user charges.
(iv) Affermage: It is a type of leasing agreement, under which the operator and the contracting
authority share revenue from customers/users.
V. Concessions and Build-Operate-Transfer (BOT)
(i) Concessions: Responsibility for construction (typically brownfield / expansions) and operations
with the private partner while ownership is retained by the public sector. A type of concession is
Area Concession, in which the private sector (concessionaire) is responsible for the full delivery of
services in a specified area, including operation, maintenance, collection, management, and
construction and rehabilitation of the system. For example, water distribution concession for a city
or area within the city.
(ii) Build-Operate-Transfer (BOT) Contracts: Responsibility for construction (typically greenfield)
and operations with the private partner while ownership is retained by the public sector. These are
also called Design Build Finance Operate Transfer (DBFOT). These contracts are of two types.
(a) BOT Toll/ User-Fee Based BOT: Under this, the private entity recovers the project cost through
user charges/toll. It is the most common form of BOT concession in India. e.g. NhavaSheva
International Container Terminal, Amritsar Interstate Bus Terminal, Delhi Gurgaon Expressway,
Hyderabad Metro, Salt Lake Water Supply and Sewage Disposal System.
(b) BOT Annuity: In this type of BOT model, the government harnesses private sector efficiencies
through contracts based on availability/performance payments. The granting authority pays the
concessionaire annuities on scheduled dates throughout the concession period.
(iii) Build-own-operate Transfer (BOOT) Contracts: Private partner has the responsibility for
construction and operations. Ownership is with the private partner for the duration of the
concession. For example, Greenfield minor port concessions in Gujarat are on a BOOT basis.
(iv) Build-own-operate (BOO): Under this structure the asset ownership is with the private sector
and the service / facility provision responsibility is also with the private sector.
(v) Build Own Operate Share Transfer (BOOST): This is a type of PPP model, in which a
concessionaire is authorized to finance, construct, own operate and maintain, share a part of the
revenue and transfer the infrastructure facility at the end of the period. The proponent is allowed to
recover its total investment, operating and maintenance costs plus a reasonable return thereon by
collecting tolls, fees, rentals or other charges from facility users.

The Recently Adopted Models


The government has decided to introduce Hybrid Annuity Model (HAM) to revive PPP (Public
Private Partnership) in highway construction. At present, three different models –PPP Annuity, PPP
Toll and EPC were followed by the government while adopting private sector participation. Launch
of the new model is due to the many problems with the existing ones. Large number of stalled
projects are blocking infrastructure projects and at the same time adding to NPAs of the banking
system. In this context, the government has introduced Hybrid Annuity Model (HAM) to rejuvenate
PPP.
1. The Hybrid Annuity Model (HAM)
In India, the new HAM is a mix of BOT Annuity and EPC models. As per the design, the government
will contribute to 40% of the project cost in the first five years through annual payments (annuity).
The remaining payment will be made on the basis of the assets created and the performance of the
developer. Here, hybrid annuity means the first 40% payment is made as fixed amount in five equal
installments whereas the remaining 60% is paid as variable annuity amount after the completion of
the project depending upon the value of assets created.
As the government pays only 40%, during the construction stage, the developer should find money
for the remaining amount. Here, he has to raise the remaining 60% in the form of equity or loans.
There is no toll right for the developer. Under HAM, Revenue collection would be the responsibility
of the National Highways Authority of India (NHAI).
Advantage of HAM is that it gives enough liquidity to the developer and the financial risk is shared
by the government. While the private partner continues to bear the construction and maintenance
risks as in the case of BOT (toll) model, he is required only to partly bear the financing risk.
2. Swiss Challenge Method
The Union cabinet in July 2015 gave its approval to redevelop 400 railway stations using the Swiss
challenge method. Describing the challenge, Jaitley said, “Swiss challenge method is a new process
of giving contracts...Any person with credentials can submit a development proposal to the
government. That proposal will be made online and a second person can give suggestions to
improve and beat that proposal.”
He added that an expert committee will accept the best proposal and the original proposer will get
a chance to accept it if it is an improvement on his proposal.
In case the original proposer is not able to match the more attractive and competing counter
proposal, the project will be awarded to the counter-proposal.
Advantages
The obvious advantages are that it cuts red tape and shortens timelines, and promotes enterprise
by rewarding the private sector for its ideas. The private sector brings innovation, technology and
uniqueness to a project, and an element of competition can be introduced by modifying the
Challenge.
Disadvantages
The biggest concerns are the lack of transparency and competition while dealing with unsolicited
proposals. Governments need to have a strong legal and regulatory framework to award projects
under the Swiss Challenge method. It can potentially foster crony capitalism, and allow companies
space to employ dubious means to bag projects. Given that governments sometimes lack an
understanding of risks involved in a project, direct negotiations with private players can be fraught
with downsides. In general, competitive bidding is the best method to get the most value on public-
private partnership projects. The government might also end up granting significant concessions in
the nature of viability gap funding, commercial exploitation of real estate, etc., without necessarily
deriving durable and long-term social or economic benefits.

3. Toll-Operate-Transfer (ToT) Model


Under the TOT model, stretches of national highway already constructed by the NHAI or a
concessionaire will be bid out to the private sector. The NHAI can securitise the toll
receivables by collecting upfront the concession fee. The private party (infrastructure
developers, private equity, institutional investors like pension, wealth funds) will operate
and collect toll on the stretch during the concession period.

CHALLENGES FACED BY PPPs IN INDIA


1. Regulatory environment: There is no independent PPP regulator in India currently. In order to
attract more domestic and international private funding of infrastructure, a more robust regulatory
environment, with an independent regulator is essential.
2.Lack of information: The PPP program lacks a comprehensive database regarding the
projects/studies to be awarded under PPP. An online data base, consisting of all the project
documents including feasibility reports, concession agreements and status of various clearances
and land acquisitions will be helpful to all bidders.
3.Project development: The project development activities such as, detailed feasibility study, land
acquisition, environmental/forest clearances etc., are not given adequate importance by the
concessioning authorities. The absence of adequate project development by authorities leads to
reduced interest by the private sector, mispricing and many times delays at the time of execution.
4.Lack of institutional capacity: The limited institutional capacity to undertake large and complex
projects at various Central ministries and especially at state and local bodies level, hinder the
translation of targets into projects.
5. Financing availability: The private sector is dependent upon commercial banks to raise debt for
the PPP projects. With commercial banks reaching the sectoral exposure limits, and large Indian
Infrastructure companies being highly leveraged, funding the PPP projects is getting difficult.
6. A closed approach towards renegotiating contracts and the failure to understand the meaning of
'partnership' are the main reasons why public-private partnership projects haven't had a smooth
run in India.

INITIATIVES BY GOVERNMENT OF INDIA FOR PROMOTING PPPs


In order to bridge the infrastructure gap, and to create an enabling environment for private
sector investment in infrastructure through PPPs, the Government of India has made a concerted
effort to develop a dedicated PPP programme, with several initiatives to support PPP development.
The initiatives include:
Institutional Support Mechanisms
 Public Private Partnership Approval Committee (PPPAC) was set up by the government in
2005 under the chairmanship of the Secretary, Department of Economic Affairs (DEA) to
streamline appraisal and approval of projects.
 A dedicated PPP cell was set up in the DEA to serve as the secretariat for the various
committees that appraise and approve central sector projects and for innovative
interventions and financial support mechanisms for facilitating PPPs in the country, and
managing training programmes for capacity building for PPPs.
 Standardized contractual documents have been prepared and notified, such as sector-
specific MCAs, which lay down the standard terms relating to allocation of risks, contingent
liabilities and guarantees as well as service quality and performance standards, and
standardized bidding documents.
 Transparent and competitive bidding processes have been established.
Financial Support Mechanisms
 The India Infrastructure Finance Company (IIFCL) has been setup with the specific mandate
to play a catalytic role in the infrastructure sector by providing long-term debt for financing
infrastructure projects. It is a wholly-owned Government of India company set up in 2006.
The IIFCL funds viable infrastructure projects through long-term debt, refinance to banks
and to issue tax free bonds. Steps have been taken to use foreign exchange reserves for
building infrastructure.
 The government introduced a scheme for financial support to PPPs in infrastructure, which
provides VGF with the purpose of meeting the financing gaps for infrastructure PPP
projects. The scheme provides financial support in the form of grants, one time or deferred,
to PPP projects to make them commercially viable by providing VGF upto 20% of the total
project cost by the Government of India and the sponsoring authority, if it so decides, may
provide additional grants out of its budget upto a further 20%. Viability Gap Funding under
the scheme is normally in the form of a capital grant at the stage of project construction.
 The scheme for India Infrastructure Project Development Fund (IIPDF) has been launched
to finance the cost incurred towards development of PPP projects. The IIPDF supports up to
75 % of the project development expenses.
 Foreign Direct Investment (FDI) upto 100% FDI in equity of SPVs in the PPP sector is
allowed on the automatic route for most sectors.
Capacity Building and Mainstreaming of PPPs
 National PPP Capacity Building Programme: The National PPP Capacity Building
Programme was launched in December 2010, and has been rolled out in 16 states and two
central training institutes, i.e. the Indian Maritime University and LalBahadurShastri
National Academy of Administration. So far, 160 training programmes have been conducted
to train over 5000 public functionaries who deal with PPPs in their domain.
 A dedicated website for PPPs “www.pppinindia.com” giving comprehensive information on
the PPP initiatives and various knowledge resources and government guidelines has also
been developed along with a web enabled database “www.infrastructureindia.gov.in” to
provide information on infrastructure projects including PPPs. The data base is a repository
of information on infrastructure projects and their status of implementation across sectors
and regions.
 As part of wide ranging efforts for knowledge dissemination on PPPs, the DEA has
developed online toolkits to help project authorities design and develop projects and has
published several knowledge products for PPP practitioners.The toolkits cover five
infrastructure sectors, namely highways, water and sanitation (W&S), ports, municipal solid
waste management (SWM), urban transport (bus rapid transport systems - BRTS).
Renegotiation of PPP Contracts
 A report on the framework for renegotiation of PPP contracts has been developed, with a
particular focus on the National Highway and Major Port Concessions. The report
identifiesissuesandchanges neededinthecontractualandinstitutionalarrangement post-
awardoftheprojects.Workon identificationofthelegalclausesin concession agreements is
underway.
Contract Management
 Guidance material has been developed for the highways, ports and the education sectors for
improving the post-award management of PPPs, with particular focus on day-to-day
monitoring and proactive management of key risks to preserve the interests of the users of
infrastructure services and the concessioning authority.
PPP Pilot Project Programme
 The DEA also has a PPP Pilot Projects Programme where the process of structuring PPP
projects in challenging sectors is hand held by the central government to develop
demonstrable PPP projects. The objective of the initiative is to develop robust PPP projects
and successfully enable bids for them to establish their replication potential in the sectors
concerned.

A Basic Requirement – Favourable Investment Climate


Naturally, success with PPPs requires a favourable investment climate. Like all private sector
economic activity, PPPs will benefit from:
 Secure and stable property rights, supported by
* Clear and capable legal framework
* Credible, transparent and consistent rule of law
 Fair, clear and transparent competitive procurement processes
 Stability in the environment affecting the operation of the project, including regulatory,
legal and market aspects
 A stable macroeconomic environment, in particular a stable price level and preferably a low
rate of inflation, a stable and convertible currency, and stable government finances and
access to funds.

Committee on Revisiting & Revitalising the PPP Model


of Infrastructure Development
The Committee on Revisiting and Revitalizing the PPP model of Infrastructure
Development (Chair: Dr. Vijay Kelkar) submitted its report to the Finance Ministry on
November 19, 2015. The key findings and recommendations of the committee are as
follows.
 Terms of reference of the Committee included: (i) reviewing the experience of PPP policy,
including the variations in contracts and the difficulties experienced, (ii) analysing the risks
involved in PPP projects in different sectors and the framework of risk sharing between the
project developer and the government, (iii) proposing design modifications to the
contractual arrangements of PPPs based on the above; and (iv) proposing measures to
improve capacity building in government for effective implementation of PPP projects.
 Revisiting PPPs: The Committee noted that, with the current demographic transition, and
the consequent growing need for better infrastructure, it is important for India to mature
its current model of PPPs. PPPs have the potential to deliver infrastructure projects better
and faster. Currently, PPP contracts focus more on fiscal benefits. The Committee
recommended that the focus should instead be on service delivery for citizens. Further,
fiscal reporting practices and performance monitoring of PPPs should be improved.
 The PPP model requires the involvement of a private partner to leverage financing and
improve operational efficiencies. Therefore, state owned enterprises or public sector
undertakings should not be allowed to bid for PPP projects. PPPs should not be used by the
government to evade its responsibility of service delivery to citizens. This model should be
adopted only after checking its viability for a project, in terms of costs and risks. Further,
PPP structures should not be adopted for very small projects, since the benefits are not
commensurate with the costs.
 Risk allocation and management: The Committee noted that inefficient and inequitable
allocation of risk can be a major factor leading to failure of PPPs. PPP contracts should
ensure optimal risk allocation across all stakeholders by ensuring that it is allocated to the
entity that is best suited to manage the risk. A generic risk monitoring and evaluation
framework should be developed covering all aspects of a project’s lifecycle. The Committee
also recommended the guidelines for risk allocation.
 Strengthening policy and governance: Ministry of Finance may develop a national PPP
policy document, endorsed by Parliament. The Committee also recommended formulating
a PPP law, if feasible. Further, the Prevention of Corruption Act, 1988 should be amended
to distinguish between genuine errors in decision making and acts of corruption by public
servants.
 Strengthening institutional capacity: The capacity of all stakeholders including regulators,
authorities, consultants, financing agencies, etc should be built up. A national level
institution should be set up to support institutional capacity building activities, and
encouraging private investments with regard to PPPs. Independent regulators must be set
up in sectors that are going for PPPs. An Infrastructure PPP Project Review Committee may
be set up to evaluate PPP projects. An Infrastructure PPP Adjudication Tribunal should also
be constituted. A quick, efficient, and enforceable dispute resolution mechanism must be
developed for PPP projects.
 Government should notify guidelines for auditing of PPPs, only enabling the review of
government internal systems. Special Purpose Vehicles (private partners) should follow
norms of corporate governance and financial disclosures as per the Companies Act, 2013.
 Strengthening contracts: Since infrastructure projects span over 20-30 years, a private
developer may lose bargaining power because of abrupt changes in the economic or policy
environment. The Committee recommended that the private sector must be protected
against such loss of bargaining power. This could be ensured by amending the terms of the
PPP contracts to allow for renegotiations. The decision on a renegotiated concession
agreement must be based on (i) full disclosure of renegotiated costs, risks and benefits, (ii)
comparison with the financial position of the government at the time of signing the
agreement, and (iii) comparison with the existing financial position of the government just
before renegotiation.
 “Unsolicited proposals (“Swiss Challenge”) may be actively discouraged as they bring
information asymmetries in the procurement process and result in lack of transparency
and in the fair and equal treatment of potential bidders in the procurement process,”

Steps To Revitalise PPPs (BUDGET-2017-18):


1. A mechanism to streamline institutional arrangements for resolution of disputes in infrastructure
related construction contracts, PPP and public utility contracts will be introduced as an amendment to
the Arbitration and Conciliation Act 1996.
2.Guidelines for renegotiation of PPP Concession Agreements will be issued keeping in view the long-
term nature of such contracts and potential uncertainties of the real economy, without compromising
transparency.
3.New credit rating system for infrastructure projects to be introduced: The intent seems to be to help
infrastructure projects access credit from multiple sources and at better rates. Balanced risk-sharing,
robust dispute mechanisms and adequate exit norms needed to foster PPP success in India.