Sample Material of Public Administration Study Kit: Chapter IV - Organisations: Public - Private Partnerships

Sample Material of Public Administration Study Kit (Paper - I)

Chapter IV - Organisations: Public - Private Partnerships

PUBLIC-PRIVATE PARTNERSHIP

(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 spefications.

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.

Why PPP:

  • Delivery of quality services that provides Value for Money (VFM)
  • New options for public sector finances (parallel vs. sequential development)
  • Utilization of private sector expertise and efficiency in delivery of public services.
  • Good Principle of PPP Risk transfer (who does what best)
  • Performance standards and competition (payment upon delivery-output focus)
  • 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 stateowned enterprise.
  • A PPP does not constitute borrowing by the state.

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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 basis.

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 political hurdles.

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