Essay and Answer Writing

The PPP model of development [2012]

In 2011, the Government of India defined a Public-Private-Partnership or PPP or 3P as an arrangement between a government entity and a private sector entity for the provision of public services or assets. The model ensures that a collaboration between the two partners would lead to successful completion of large scale projects. Around the world, the private sector finds it difficult to meet the financial requirements of infrastructure in isolation while tackling the risks which are inherent to building infrastructure. The essay evaluates the role of PPP in India and whether it really has been beneficial for us. 
 
What is PPP?
A public–private partnership is a cooperative arrangement between two or more public and private sectors, typically of a long-term nature. It involves government and business that work together to complete a project and/or to provide services to the population. The term can cover hundreds of long-term contracts with a wide range of risk allocations, funding arrangements, and transparency requirements. The advancement of PPPs, as a concept and a practice, is a product of the new public management of the late 20th century and globalisation pressures. 
 
The Government of India defines a PPP as a partnership between a public sector entity (sponsoring authority) and a private sector entity (a legal entity in which 51% or more of equity is with the private partner/s) for the creation and/or management of infrastructure for public purpose for a specified period of time (concession period) on commercial terms and in which the private partner has been procured through a transparent and open procurement system.
 
Governments have used such a mix of public and private endeavours throughout history. Muhammad Ali of Egypt utilised ‘concessions’ in the early 1800s to obtain public works for minimal cost. Much of the early infrastructure of the United States was built by what can be considered public-private partnerships.
 
In economic theory, public–private partnerships have been studied through the lens of contract theory. From an economic theory perspective, what distinguishes a PPP from traditional public procurement of infrastructure services is that in the case of PPPs, the building and operating stages are bundled. Hence, the private firm has strong incentives in the building stage to make investments with regard to the operating stage.
 
Different models of PPP funding are characterised by which partner is responsible for owning and maintaining assets at different stages of the project. Examples of PPP models include:
 
·Design-Build (DB): The private-sector partner designs and builds the infrastructure to meet the public-sector partner’s specifications, often for a fixed price.
·Operation and Maintenance Contract (O&M): The private-sector partner, under contract, operates a publicly-owned asset for a specific period of time. The public partner retains ownership of the assets.
·Build-Own-Operate (BOO): The private-sector partner finances, builds, owns and operates the infrastructure component in perpetuity. The public-sector partner's constraints are stated in the original agreement and through on-going regulatory authority
·Buy-Build-Operate (BBO): This publicly-owned asset is legally transferred to a private-sector partner for a designated period of time.
·Operation License: The private-sector partner is granted a license or other expression of legal permission to operate a public service, usually for a specified term.
 
PPP in India
Since the infrastructure development requires huge investments, the government of India has started on a policy of promoting Public Private Partnership (PPP) as a means of augmenting investment in infrastructure. The PPPs provide an opportunity to exploit the efficiencies of private sector in project implementation besides adding to the public resources.
 
·The Eleventh Plan (2007-2012) had laid considerable emphasis on increasing the investment to bridge the gap in infrastructure development. The Plan had, therefore, emphasised on the need for massive expansion on investment in infrastructure based on a combination of public and private investment, the latter through various forms of PPPs.
·The Twelfth Plan (2012-2017) had tried to continue its push on accelerating the pace of investment in infrastructure. 
 
Some of the major PPPs undertaken are:
·Delhi, Mumbai, Hyderabad and Bengaluru airports
·Ultra-mega power projects at Sasan and Mudra
·Jhajjar power transmission project in Haryana
·298 national and state highway projects
 
Benefits
The financial crisis of 2008 onwards brought about renewed interest in PPP in both developed and developing countries. Facing constraints on public resources and fiscal space, while recognising the importance of investment in infrastructure to help their economies grow, governments are increasingly turning to the private sector as an alternative additional source of funding to meet the funding gap.
 
·A way of introducing private sector technology and innovation
·Incentivising the private sector to deliver projects on time and within budget
·Utilising PPPs as a way of developing local private sector capabilities through joint ventures with large international firms
·Using PPPs as a way of gradually exposing state owned enterprises and government to increasing levels of private sector participation and structuring PPPs in a way to ensure transfer of skills
·Supplementing limited public sector capacities to meet the growing demands
·Extracting long-term value-for-money through appropriate risk transfer to the private sector over the life of the project – from design/ construction to operations/ maintenance
 
Risks
PPPs have been highly controversial as funding tools, largely over concerns that public return on investment is lower than returns for the private funder. PPPs are closely related to concepts such as privatisation and the contracting out of government services.
 
·Across the world PPPs are facing problems, performance of PPPs has been very mixed according to study conducted by various research bodies.
·It is also argued that PPP is a mere tool for governments who find it difficult to push privatisation, or when politically it is difficult to contract out.
·Loans for infrastructure projects are believed to comprise a large share of the non-performing asset portfolio of public sector banks in India.
·Development, bidding and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes - the government should therefore determine whether the greater costs involved are justified. A number of the PPP and implementation units around the world have developed methods for analysing these costs.
·There is a cost attached to debt. While the private sector can make it easier to get finance, finance will only be available where the operating cash flows of the project company are expected to provide a return on investment.
·Private sector will do what it is paid to do and no more than that and therefore incentives and performance requirements need to be clearly set out in the contract. Focus should be on performance requirements that are out-put based and relatively easy to monitor
·Government’s responsibility continues: citizens will continue to hold the government accountable for the quality of utility services. 
·Government will also need to retain sufficient expertise, whether the implementing agency and/ or via a regulatory body, to be able to understand the PPP arrangements, to carry out its own obligations under the PPP agreement and to monitor performance of the private sector and enforce its obligations. 
 
Recent developments in India
·In 2006, the Government set up the India Infrastructure Finance Company Limited (IIFCL). This company provides long-term debt for financing infrastructure projects.
·Further, in 2007, the Government of India launched the India Infrastructure Project Development Fund (IIPDF). This fund supports up to 75% of the project development expenses.
·The Finance Minister in the Union Budget 2015-16 announced that the PPP mode of infrastructure development has to be revisited and revitalised. It set up the Vijay Kelkar Commission. It recommended that: contracts need to focus more on service delivery instead of fiscal benefits; better identification and allocation of risks between stakeholders; and prudent utilisation of viability gap funds where user charges cannot guarantee a robust revenue stream.
 
Conclusion
The Indian infrastructure is growing at an exponential speed. As of now, most PPPs are restricted to road development. The sector still has a lot of scope and the PPPs are taking measures to achieve them. Given the long-term nature of these projects and the complexity associated, it is difficult to identify all possible contingencies during project development and events and issues may arise that were not anticipated in the documents or by the parties at the time of the contract. It is more likely than not that the parties will need to renegotiate the contract to accommodate these contingencies. New projects especially large-scale transit projects are significant for increasing mobility. PPPs have the potential to deliver infrastructure projects better and faster. Currently, PPP contracts focus more on fiscal benefits. There is need for a serious assessment of the efficacy and the likely benefits of increasing private sector participation in metro rail projects before the adoption of this model.

 




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