Public Private Partnership

Public-Private Partnerships (PPPs) are collaborations between the government and private companies to deliver public projects or services. PPPs help in filling funding gaps and leveraging private sector expertise to improve the quality and efficiency of public services. They involve sharing risks and responsibilities between the public and private sectors. PPPs have been used in various sectors like infrastructure, healthcare, and housing to address challenges and drive development. By combining resources and expertise from both sectors, PPPs contribute to economic growth and improve the delivery of essential services to the public.

Public-Private Partnerships (PPPs) are agreements between governments and private companies aimed at improving public services. They're all about teamwork – the government and private sector joining forces to get things done more efficiently and effectively. By tapping into the private sector's skills and financial know-how, PPPs aim to produce better results.

These partnerships can make public services better in three big ways. First off, they encourage innovation, leading to higher-quality projects. Second, they divide the risks between the public and private sectors, giving private companies a reason to work hard even after the project is up and running. And third, they help bridge the gap in knowledge between the government and private businesses.

What is Public-Private Partnership (PPP or P3 or 3P)?

Public-Private Partnership (PPP) refers to an agreement between a government or government-owned entity and a private sector entity. Typically, this arrangement involves the private sector investing in or managing public assets or services for a set period. Risks are clearly assigned between the private and public entities. The private entity is selected through open competitive bidding and receives performance-based payments aligned with predetermined standards set by the public entity or its representative.

1. Private Sector Responsibility: In PPPs, the private sector takes charge of running or managing the project and shoulders a significant portion of its risks.
2. Public Sector Oversight: Throughout the project's operation, the public sector oversees the performance of the private partner and ensures that the contract's terms are upheld.
3. Cost Recovery Mechanisms: The expenses incurred by the private sector may be recuperated through user fees or payments from the public sector, either in full or in part.
4. Performance-Based Payments: Payments made by the public sector are contingent upon the private partner meeting predefined performance criteria outlined in the contract.
5. Capital Investment by the Private Sector: While not always the case, it's common for the private sector to contribute the majority of the project's capital costs.

1. Financial constraints: Government often face financial issues while funding large infrastructure projects. Private sector can play an important role here in bringing additional financial resources.
2. Efficiency : Private sector is motivated towards profits which brings effeciency in project execution and management.
3. Risk sharing: Private sector can bring down the burden of government by sharing the risk to manage the public infrastructure like construction, finances, operations etc.
4. Innovation : Private companies often bring innovative approaches advanced technologies, and management practices which can improve the public infrastructure.
5. Improved service delivery: PPPs can improve the service delivery by introducing innovative measures and high efficiency.
6. Government can focus on core activities like education, health etc. by engaging the private sector in infrastructure projects.

1. Build Operate Transfer (BOT): In this classic PPP model, the private partner handles everything from designing and constructing to operating the facility for a specified period before transferring it back to the public sector.
2. Build Own Operate (BOO): Under this model, the private entity not only builds but also retains ownership of the constructed facility.
3. Build Own Operate Transfer (BOOT): Similar to BOT, except in this variation, the project ownership is eventually transferred to either the government or another private operator after a predetermined timeframe.
4. Build Operate Lease Transfer (BOLT): Here, the private entity constructs and owns the facility, leases it to the public sector, and eventually transfers ownership back to the government at the lease's end.
5. Design Build Finance Operate Transfer (DBFOT): In this model, the private party takes full responsibility for designing, building, financing, and operating the project for a specified period.
6. Lease Develop Operate (LDO): In LDO, the government or a public entity retains ownership of the infrastructure while leasing it to a private promoter, who operates it and makes lease payments.
7. Operation and Maintenance Contract (O & M): Under this arrangement, a private company operates and maintains a publicly-owned asset for a contracted period, with ownership remaining with the public partner.
8. Hybrid Annuity Model (HAM): HAM is a blend of two infrastructure development approaches: Engineering, Procurement, and Construction (EPC) and Build, Operate, Transfer (BOT). In this model, EPC constitutes 40% while BOT-Annuity constitutes 60%. The National Highway Authority of India (NHAI) provides up to 40% of the project cost in installments, while the road developer raises the remaining 60%.

1. Meeting Infrastructure Needs: PPPs address infrastructure requirements and funding shortfalls by involving the private sector in project arrangement and financing.
2. Relieving Public Sector Financial Burden: PPPs lessen the burden on the public sector to fund projects solely through taxes or borrowing, which is especially beneficial in countries like India where public capital is limited.
3. Boosting Infrastructure Investment: By shifting financial responsibilities away from the public sector, PPPs facilitate more significant infrastructure investments which not only broaden access to infrastructure services to the common people but also increase economic activity across the sectors.
4. Incentivizing Efficiency and Risk Management: PPP contracts incentivize private partners to operate efficiently and manage risks effectively throughout the project lifecycle, thus promoting cost-effective delivery.
5. Mitigating Cost Escalation Risks: Risk allocation to private partners helps the public sector limit exposure to cost escalation, enhancing financial predictability and project sustainability.
6. Long-term Focus: PPP structures encourage a holistic approach where private partners design projects considering construction and operational phases, leading to long-term cost reductions.
7. Enhancing Transparency: Public release of project information promotes transparency, allowing media, NGOs, and stakeholders to scrutinize projects and minimize corrupt practices.

Government Support for PPPs:

1. Viability Gap Funding (VGF) Subsidy
• VGF provides a capital grant of up to 40% of the project cost to support economically justified infrastructure projects.
• Accessible through competitive bidding, particularly for projects falling slightly short of financial viability.
2. India Infrastructure Project Development Fund (IIPDF)
• The scheme aids Central and State Governments as well as local bodies by offering financial support for various project development activities.
• This includes funding for feasibility reports, project structuring, and other essential tasks related to PPP projects.
3. India Infrastructure Finance Company Limited (IIFCL)
• IIFCL offers long-term debt financing for infrastructure projects with extended gestation periods.
• Recognizing the need for sufficient debt finance in such projects, IIFCL plays a crucial role in filling this gap in the market.
4. Foreign Direct Investment (FDI)
• FDI up to 100% in equity of Special Purpose Vehicles (SPVs) within the PPP sector is permitted through the automatic route across most sectors.
• This encourages foreign investment and participation in PPP projects, boosting their scale and effectiveness.

Viability Gap Funding (VGF) is a scheme designed to bolster infrastructure projects that are economically sound but lack financial viability. Here's what you need to know about it:

1. Support for Marginal Viability: VGF targets projects that are almost financially viable but require additional assistance to become fully feasible.
2. Selective Criteria: This support is exclusively available for infrastructure projects where private sector sponsors are chosen through a competitive bidding process.
3. Financial Limits: The total VGF provided does not surpass twenty percent of the Total Project Cost. However, the government or relevant statutory entity may consider allocating additional grants, up to another twenty percent of the Total Project Cost, if deemed necessary.
4. Form of Assistance: VGF is typically granted as a capital grant during the project's construction phase, aiming to alleviate financial burdens and encourage project progress.

The India Infrastructure Project Development Fund (IIPDF) plays a crucial role in enhancing the quality and quantity of bankable projects processed through the nation's project pipeline. Here's an overview:

1. Financial Assistance: IIPDF offers support covering up to 75% of project development expenses, assisting sponsoring authorities in meeting various project development costs.
2. Project Development Expenses: This includes expenses incurred to achieve Technical Close of PPP projects, crucial for their successful implementation.
3. Recovery Mechanism: Upon successful completion of the bidding process, project development expenditures are recovered from the winning bidder, ensuring sustainable funding for future projects.
4. Cost Reduction Strategy: Recognizing the significant procurement costs associated with PPPs, particularly transaction advisory services, the Department of Economic Affairs (DEA) advocates for the IIPDF as a means to alleviate financial burdens on sponsoring authorities.

The India Infrastructure Finance Company (IIFC) serves a vital role in addressing the pressing need for long-term debt to finance infrastructure projects. Here's an overview:

1. Long-term Debt Provision: IIFC provides long-term debt financing for infrastructure projects, especially those with extended gestation periods, ensuring adequate financial support for their development.
2. Sufficient Tenure: Debt finance facilitated by IIFC comes with a tenure sufficient to enable cost recovery over the project's lifespan, mitigating financial risks associated with infrastructure ventures.
3. Gap Bridging: Recognizing deficiencies in the Indian capital markets concerning long-term debt instruments, IIFC was established to bridge this gap and facilitate sustainable financing for infrastructure development.

1. PPP Projects in India: As of November 2020, India has initiated approximately 1100 PPP projects, amounting to a total investment commitment of $274.96 billion.
2. Health Sector Reform: NITI Aayog has introduced a PPP model aimed at addressing gaps in medical education and the shortage of qualified doctors by linking private medical colleges with functional district hospitals.
3. Power Sector Revitalization: The Government plans to launch the Atal Distribution Transformation Yojana (ADITYA) Scheme, incentivizing states to involve private sectors in improving the efficiency of distribution companies. This initiative is crucial for India's ambition to become a $5 trillion economy.
4. Privatization in Railways: Tejas Express, India's first private train, operates under the PPP model, with private players managing services such as housekeeping, catering, and ticketing, while Indian Railways provides physical infrastructure.
1. Developing railway infrastructure in India is expensive, and the sector often struggles with limited funds and a backlog of maintenance and upgrade projects.
2. Public-Private Partnerships (PPPs) offer a solution by tapping into private-sector capital and technology. PPPs in railways involve sharing rail tracks, leading to increased efficiency and revenue for states and reduced costs for private investors.
3. Introducing the private sector fosters competition in a previously monopolized sector, enhancing services and enabling the modernization of railway infrastructure.
5. Urban Housing Transformation: Government-funded urban housing is being transformed into Affordable Rental Housing Complexes (ARHC) through PPPs, aimed at providing migrants with affordable housing options in urban areas.

The Kelkar committee was established by the Indian government to evaluate the existing public-private partnership (PPP) model in India.

1. Leadership: Led by Vijay Kelkar, the committee was tasked with studying and assessing the effectiveness of PPPs in the country.
2. Origins: The committee's formation followed the 2015 Union Budget of India and was initiated by Arun Jaitley, the then-finance minister.
3. Composition: Consisting of ten members, the committee comprised experts from various relevant fields to provide comprehensive insights into PPPs in India.

1. Periodic Reviews: The Committee suggests conducting frequent reviews, ideally every three years, to ensure the effectiveness of PPP projects.
2. Attitude Change: It emphasizes the importance of building trust between public and private sector partners involved in PPPs.
3. Amendment to Prevention of Corruption Act: The Committee recommends amending the Prevention of Corruption Act to differentiate between genuine errors and corrupt practices.
4. Capacity Building Programs: Structured capacity building programs are suggested for various stakeholders, including implementing agencies, banks, and financial institutions, to enhance their capabilities.
5. Optimal Risk Allocation: The Committee stresses the need for a tailored approach to risk allocation across different PPP projects, rather than a one-size-fits-all strategy.
6. Dispute Resolution Mechanism: It calls for the establishment of a quick, fair, and efficient dispute resolution mechanism for PPP projects.
7. Discouragement of Small PPP Projects: Small PPP projects may not justify the associated costs and complexities, so the Committee advises against their adoption.
8. Discouragement of Unsolicited Proposals:The Committee suggests actively discouraging unsolicited proposals to maintain transparency and fairness in the procurement process.
9. Exclusion of State-Owned Entities: State-owned entities should not be permitted to bid for PPP projects, according to the Committee.
10. Suitability Assessment for PPP: PPP should only be considered after a thorough assessment of its suitability for a specific project.
11. Monetization of Viable Projects: The Committee proposes considering monetization of successful projects with stable revenue flows after the Engineering, Procurement, and Construction (EPC) phase.
12. Divestment of Equity: Equity in completed infrastructure projects may be divested to long-term investors, including domestic and foreign institutional investors.
13. Encouragement of Deep Discount Bonds: Encouraging banks and financial institutions to issue Deep Discount Bonds or Zero Coupon Bonds is recommended to lower debt servicing costs and user charges initially.

1. Complexity of Project Definition: PPP projects require thorough definition, including risk allocation and service output requirements, demanding meticulous planning and contingencies.
2. Costly Tendering Process: Tendering and negotiation involve significant expenses, with the need for transaction advisors and legal experts.
3. Uncertainty in Long-Term Contracts: PPP contracts often span decades, introducing uncertainty due to potential changes in requirements or conditions, leading to contract modifications and associated costs.
4. Monitoring and Enforcement Challenges: Success depends on the government's ability to monitor performance and enforce contract terms during construction and operation phases.
5. Difficulty in Demonstrating Value for Money: Proving value for money beforehand is challenging due to project uncertainties and limited information on comparable projects.
6. Mismatch in Objectives: Misalignment of objectives between government and private sectors can hinder PPP success, necessitating clarity and alignment from the outset.
7. Differences in Organizational Cultures: Varied organizational cultures between public and private sectors may lead to conflicts, requiring coordination mechanisms to foster mutual trust and clarity in roles and responsibilities.
8. Precise Agreements and Transparent Selection: Clear agreements and transparent selection processes are crucial to delineate roles and responsibilities accurately and build confidence between partners.

Public-Private Partnerships (PPPs) have emerged as a crucial mechanism for fostering development across various sectors in India and the world. The recent initiatives in healthcare, power, railways, and urban housing highlight the potential of PPPs to address critical challenges and drive progress.

Looking ahead, one key aspect is to streamline the PPP process, ensuring clarity in project definition, risk allocation, and contract terms. Additionally, enhancing transparency and accountability in PPP projects will build trust and confidence among stakeholders, paving the way for more successful partnerships. It has been found that many projects under PPP in India have gone wrong because of a lack of project knowledge and its implementation.

Furthermore, investing in capacity-building and knowledge-sharing initiatives will empower both sectors to effectively implement PPP projects and maximize their impact. Encouraging innovation and flexibility in PPP frameworks will also enable adaptation to evolving needs and circumstances, ensuring sustainability and long-term success.

By using PPPs as a strategic tool for development, India can harness the collective strengths of public and private entities to address massive infra challenges, drive economic growth, and improve the quality of life for its citizens.

(Sources: World Bank, NITI Aayog, NHAI, PIB)