Public Private Partnership

PUBLIC-PRIVATE PARTNERSHIPS

Public-private partnerships involve collaboration between a government agency and a private-sector company that can be used to finance, build, and operate projects, such as public transportation networks, parks, and convention centers.

When public sector incentives are combined with private sector innovation and technology to finish work on schedule and within budget, these partnerships function effectively.

Risks for public partners include the possibility that agreed-upon usage fees won’t be supported by demand, as might be the case for a toll road or bridge, while risks for private enterprise include cost overruns, technical flaws, and an inability to meet quality standards.

Public-private partnerships often involve concessions of tax or other operating revenue, protection from liability, or partial ownership rights over nominally public services and property to private sector, for-profit entities.

Advantages of Public-Private Partnerships

Private-sector technology and innovation, for example, can help improve the operational efficiency of providing public services. For its part, the public sector offers incentives to the private sector to ensure that projects are completed on schedule and within budget.

Furthermore, by diversifying the economy, the nation can more easily support its infrastructure and grow related industries like construction, equipment, support services, and other businesses.

Make sure the public sector receives the required funding, and that public resources are managed more efficiently.

Assure prompt and higher-quality delivery of public services.

The majority of investment projects are completed on schedule and don’t require unanticipated additional costs from the public sector.

A private organisation is given the chance to receive a long-term payment.

PPP projects are implemented using the experience and expertise of the private sector.

The right PPP project risk allocation makes it possible to spend less on risk management.

Assets created under PPP agreements may frequently be excluded from the public sector’s balance sheet.

Disadvantages of Public-Private Partnerships

There could be a higher cost for the infrastructure or services.

Postponing public sector payments obligations for PPP projects to later periods may have a negative impact on public sector fiscal indicators in the future.

The process for procuring PPP services is lengthier and more expensive than that of traditional public procurement.

The lengthy, intricate, and relatively rigid nature of PPP project agreements stems from the inability to anticipate and assess every specific event that may impact the project’s future.

Public-private partnerships also create risks from the general public’s and taxpayers’ point of view. Private operators’ partnership with the government may insulate

them from accountability to the users of the public service for cutting too many corners, providing substandard service, or even violating peoples’ civil or Constitutional rights. At the same time, the private partner may enjoy a position to raise tolls, rates, and fees for captive consumers who may be compelled by law or geographic natural monopoly to pay for their services.

With any situation where ownership and decision rights are separated, public-private partnerships can create complex principal-agent problems. This may facilitate corrupt dealings, pay-offs to political cronies, and general rent-seeking activity by attenuating the link between the private parties who make important decisions over a project, from which they stand to benefit, and accountability to the taxpayers who foot at least part of the bill and who may be left holding the bag in terms of ultimate liability for the project’s outcome.

PUBLIC-PRIVATE PARTNERSHIPS MODELS

Managing an adequate amount of funds for infrastructure development has always been a challenge for India. Public-Private Partnerships (PPPs) were developed by the government during the reform era with the goal of luring private sector investments, both domestic and foreign. A brief review of the major PPP models (few of them are non-PPP models, too) are given below.

Build-Operate-Transfer-Toll (BOT-TOLL)

It was among the first PPP models. In addition to splitting project costs with the government, the private bidder was responsible for building, maintaining, running the road, and collecting tolls from moving cars. The private company that offered to give the government the maximum amount of toll revenue won the bid.

The private company was responsible for “all risks” pertaining to land purchase, construction (damage), inflation, delays-related cost overruns, and advertisements. The only things the government had to worry about were regulatory clearances.

This model’s inherent flaws made it unfeasible for the private bidder; for example, unjustified delays in land acquisition caused by legal disputes, cost overruns, and traffic movement uncertainties (commercial risk) rendered road projects economically unfeasible.

BOT-Annuity

By primarily lowering the risk for the private players, this model was an improvement over the BOT-TOLL model and was intended to reverse the private companies’ declining interest in road projects.

In addition to splitting project costs, the private partner was in charge of building, maintaining, and running the road projects without having any say over who pays the toll on traffic.

The private players were compensated with an annual fixed amount of money known as an “annuity”; the party offering the lowest “annuity” was awarded the project. The government was in charge of toll collection.

Private players were not exposed to any commercial risk, such as traffic, which made this model different from the previous one (BOT-TOLL). However, they were still highly vulnerable to other risks, such as delays in land acquisition, inflation, cost overruns, and construction. Over time, the risks associated with this model continued to make it unfeasible for the private sector.

Engineering- Procurement-Construction (EPC) Model

In this model, the government paid for the entire project cost (i.e., it was not a PPP model and was instead awarded to bidders as regular contracts) and assumed most of the risks associated with it, including those related to land acquisition, delays, inflation, and commercial risks.

The government was to assume responsibility for maintenance, operation, and toll collection of the road projects after they were designed, built, and turned over by the private developers.

The private player who offered to build roads at the lowest cost/price while guaranteeing the required quality levels was awarded the contract. It means, the private player in this model was only exposed to the construction-related risks which is a normal risk involved in any contract given by the government to the private party.

EPC Model could have been a temporary way out to develop road projects as it was fully funded by the government—the reform era had aimed to attract investment from the private players by evolving a ‘business model’ for the road sector—needed to develop a new PPP model.

Hybrid Annuity Model (HAM)

A combination of the EPC and BOT-ANNUITY models is the Hybrid Annuity Model (HAM). According to this model, the government and the private player split the project’s costs 40:60 each.

The private player is in charge of building the roads and turning them over to the government, which will handle toll collection (if desired); upkeep of the roads will remain the private player’s responsibility until the annuity period.

The government provides a set amount of financial compensation to private players for a predetermined period of time (usually 15 years, though this is negotiable). In a bidding war, the private player who offers the lowest annuity wins the contract.

The majority of the major risks in this model land acquisition, clearances, operation, toll collection, and commercial are covered by the government, while the risks associated with inflation and cost overruns are divided according to the project cost sharing ratio.

However, the risks associated with construction and maintenance remain with the private sector (the degree of risk that private players face may increase due to government delays in land acquisition and clearances).

Swiss Challenge Model

For the first time, the Indian government declared that this model would be used to revitalise the nation’s railway stations. Public procurement, or this method of awarding contracts, is highly adaptable and can be applied to both PPP and non-PPP projects.

In this, one bidder is asked by the government to submit the proposal for the project which is put in public domain. Afterwards, several other bidders submit their proposals aimed at improving and beating the original (first) bidder finally an improved bid is selected (called a counter proposal). If the original bidder is not able to match the counter proposal, the project is awarded to the counter bidder. Government has made it an online method.

Though the Government of India used this model for the first time, this has already been used by several states by now Karnataka, Andhra Pradesh, Rajasthan, Madhya Pradesh, Bihar, Punjab and Gujarat for roads and housing projects.

PPP Model for other sectors

Although the PPP model was initially developed for the infrastructure industry, there have been suggestions recently to apply it to other fields as well, including healthcare, education, and even agriculture. The model is getting popular support from the urban local bodies in the country and it is believed that in the Smart Cities scheme it could play a very lucrative role.