(Online Course) Public Administration for IAS Mains Exams
Topic: Organisations: Public - Private Partnerships
(With Adaptation from www.pppinharyana.gov.in)
Public Private Partnership (PPP) is a contract between a
pubic sector institution/municipality and a private party, in which the private
party assumes substantial financial, technical and operational risk in the
design, financing, building and operation of a project. Traditionally, private
sector participation has been limited to separate planning, design or
construction contracts on a fee for services basis-based on the public agency’s
PPP Project means a project based a contract or concession agreement, between a
government or statutory entity on the one side and a private sector company on
the other side, for delivering an infrastructure services on a payment of use
charges. Private Sector Company means a company in which 51% or more of the
subscribed and paid up equity is owned can controlled by a private entity.
- Delivery of quality services that provides Value for Money (VFM)
- New options for public sector finances (parallel vs. sequential
- Utilization of private sector expertise and efficiency in delivery of
- Good Principle of PPP
Risk transfer (who does what best)
- Performance standards and competition (payment upon delivery-output
- Maintains value of public assets-whole-life.
What is not a PPP?
The way a PPP is defined in the regulation makes it clear that:
- A PPP is not a simple outsourcing of functions where substantial
financial, technical and operational risk is retained by the instruction
- A PPP is not a donation by a private party for a public good
- A PPP is not the ‘commercialization’ of a public function by the
creation of a state-owned enterprise.
- A PPP does not constitute borrowing by the state.
Types of PPP:
Services Contract: The public authority remains the
primary provider of the infrastructure services and contracts out only portions
of its operation to the private partner. The private partner must perform the
service at the agreed cost and must typically meet performance standards set by
the public sector. The government pays the private partner a predetermined fee
for the service, which may be a one time fee, based on unit cost, or some other
Management Contract: Although ultimate obligation for
service provision remains in the public sector, daily management control and
authority is assigned to the private partner or contractor. In most cases, the
private partner or contractor. In most cases, the private partner provides
working capital but not financing for investment. The private contractor is paid
a predetermined rate for labour and other anticipated operating cost.
Lease contract: The duration of the leasing contract is typically for 10 years
and may be renewed for up to 20 years. Responsibility for services provision is
transferred from the public sector to the private sector and financial risk for
operation and maintenance is borne entirely by the private sector operator. In
particular, the operator is responsible for losses and for unpaid consumers’
debts. Leases do not involve any sale of assets to the private sector.
Concessions: A concession contract is typically valid
for 25-30 years operator has sufficient time to recover the capital invested and
earn an appropriate tcturn over the concession. Government may contribute to the
capital investment cost by way of subsidy (Viabilit Funding - VGF) to enhance
commercial viability of the concession. The concessions are effective provide
investment for creation of new facilities or rehabilitation facilities.
Build Operate Transfer (BOT): BOT and similar arrangements are a kind or
specialized concession in which a private firm or consortium finances and
develops a new infrastructure project or a major component according to
performance standards set by the government. Under BOTs, the private partner
provides the capital required to Build the new facility, Operate & Maintain
(O&M) for the contract period and then return the facility to Government as per
agreed terms. Importantly, the private operator now owns the assets for a period
set by contract-sufficient to allow the developer time to recover investment
costs through user charges.
BOTs generally require complicated financing packages to
achieve the large financing amounts and long repayment periods required. At the
end of the contract, the public sector assumes ownership but can opt to assume
operating responsibility, contract the operation responsibility to the
developer, or award a new contract to a new partner. The main characteristic of
BOT and similar arrangements are given below:-
- Design Build (DB): Where Private sector designs and constructs at a
fixed price and transfers the facility.
Build Transfer Operate (BTO): Where Private sector
designs and builds the facility. The transfer to the public owner takes
place at the conclusion of construction. Concessionaire is given the right
to operate and get the return on investment.
Build-Own-Operate (BOO): A contractual arrangement whereby a
Developer is authorized to finance, construct, own, operate and maintain an
Infrastructure or Development facility from which the Developer is allowed to
recover his total investment by collecting user levies from facility users.
Under this Project, the Developer owns the assets of the facility and may choose
to assign its operation and maintenance to a facility operator. The Transfer of
the facility to the Government. Government Agency or the Local Authority is not
envisaged in this structure; however, the Government, may terminate its
obligations after specified time period.
Design-Build Operate (DBO): Where the ownership is involved
in private hands and a single contract is let out for design construction and
operation of the infrastructure project.
Design Build Finance Operate (DBFO): With the
design-build-finance-operate (DBFO) approach, the responsibilities for
designing, building, financing, and operating & maintaining, are bundled
together and transferred to private sector partners. DBFO arrangements vary
greatly in terms of the degree of financial responsibility that is transferred
to the private partner
Build- Operate- Transfer (BOT): Annuity/Shadow User Charge:
In this BOT Arrangement, private partner does not collect any charges from the
users. His return on total investment is paid to him by public authority through
annual payments (annuity) for which he bids. Other option is that the private
developer gets paid based on the usage of the created facility.
Joint Venture: Joint ventures are alternatives to full
privatization in which the infrastructure is co-owned and operated by the public
sector and private operators. Under a joint venture, the public and private
sector partners can either form a new company (SPV) or assume joint ownership of
an existing company through a sale of shares to one or several private
investors. A key requirement of this structure is good corporate governance, in
particular the ability of the company to maintain independence from the
government, because the government is both part owner and regulator. From its
position as shareholder, however. the government has an interest in the
profitability and sustainability of the company and can work to smoothen
PPP Models Supported by the Government
User-Fee Based BOT models: Medium to large scale PPPs
have been awarded mainly in the energy and transport sub-sectors (roads, ports
and airports). Although there are variations in approaches, over the years the
PPP model has been veering towards competitively bid concessions where costs are
recovered mainly through user charges (in some cases partly through VGF from the
Annuity Based BOT models: In sectors/projects not
amenable for sizeable cost recovery through user charges, owing to
socio-political-affordability considerations, such as in rural, urban, health
and education sectors, the government harnesses private sector efficiencies
through contracts based on availability/performance payments. Implementing
annuity model will require necessary framework conditions, such as payment
guarantee mechanism by means of making available multi-year budgetary support, a
dedicated fund, letter of credit etc. Government may consider setting-up a
separate window of assistance for encouraging annuity-based PPP projects. A
variant of this approach could be to make a larger upfront payment (say 40% of
project cost) during the construction period.
Performance Based Management! Maintenance contracts: In an
environment of constrained economic resources, PPP that improves efficiency will
be all the more relevant. PPP models such as performance based
management/maintenance contracts are encouraged. Sectors amenable for such
models include water supply, sanitation, solid waste management, road
Modified Design-Build (Turnkey) Contracts: In traditional
Design-Build (DB) contract, private contractor is engaged for a fixed-fee
payment on completion. The primary benefits of DB contracts include time and
cost savings, efficient risk-sharing and improved quality. Government may
consider a Turnkey DB approach with the payments linked to achievement of
tangible intermediate construction milestones (instead of lump-sum payment on
completion) and short period maintenance / repair responsibilities.
Penalties/incentives for delays/early completion and performance guarantee
(warranty) from private partner may also be incorporated. Subsequently, as the
market sentiment turns around these projects could be offered to private sector
through operation-maintenance-tolling concessions.