Public Private Partnership in Economy | Indian Economy for UPSC CSE PDF Download

Introduction

A public-private partnership (PPP) is a long-term contract between a private party and a government agency for the provision of a public asset or service, in which the private party assumes major risk and management responsibilities (World Bank, 2012). Financing a project through a public-private partnership can enable it to be completed sooner or even make it possible in the first place.

What is PPP?

• PPP is a long term relationship between public and private sectors, involving the sharing of risks and rewards of multi sector skills, expertise and finance to deliver the desired outcomes.
• Large-scale government projects, such as roads, bridges, or hospitals, can be completed with private funding through public-private partnerships.
• These collaborations thrive when private-sector technology and innovation are combined with public-sector incentives to complete work on time and within budget.

Features of PPP

• The private sector is in charge of carrying out or operating the project, and it bears a significant percentage of the project's risks.
• During the project's operating life, the public sector's responsibility is to supervise the private partner's performance and enforce the contract's requirements.
• The costs of the private sector may be recovered in whole or in part from charges connected to the use of the project's services, as well as through payments from the public sector.
• Payments in the public sector are dependent on contract performance standards.
• Although this is not always the case, the private sector frequently contributes the majority of the project's capital costs.

Advantages of PPP

• India has a significant infrastructure need, as well as a funding gap. PPPs can help to meet both the need and the funding gap. PPP projects frequently involve the private sector arranging and financing.
• This relieves the public sector of the need to meet financing needs through its own revenues (taxes) or borrowing and it is advantageous in countries where the public sector's ability to raise capital is limited, such as India.
• PPPs can enable more infrastructure investment and increased access to infrastructure services by shifting financial responsibility away from the public sector.
• The allocation of risk, as well as the associated performance rewards and penalties, create incentives in the PPP contract that encourage the private partner to achieve efficiency at each stage of the project and to implement efficiency improvements wherever possible.
• The public sector can limit its own exposure to cost escalation by shifting risk to private partners.
• PPPs can be structured to create a whole-of-life focus, in which the private partner designs the project to account for the link between construction and operation in order to reduce costs over the life of the project.
• The release of information into the public domain, for use in the media and by interested and concerned individuals, NGOs, and private sector participants themselves, is critical to increasing transparency and reducing opportunities for corrupt practices.
• A well-designed public-private partnership (PPP) process can bring procurement out from behind closed doors. The PPP tendering and awarding process should be based on open competitive bidding in accordance with international best practices.

Limitations of PPP

• The PPP project must be well-defined, including risk allocation and a clear statement of the service output requirements. The long-term nature of PPP contracts necessitates more advanced planning and specification of contingencies.
• Tendering and negotiating is an expensive process. Typically, transaction advisors and legal experts will be required.
• PPPs frequently cover a long period of service provision (eg. 15-30 years, or the life of the asset). Any agreement that extends so far into the future is bound to be fraught with uncertainty.
• If the public sponsor's requirements or the conditions confronting the private sector change during the life of the PPP, the contract may need to be modified to reflect the changes.
• This can result in significant costs for the government, and the benefit of competitive bidding to determine these costs is usually not available.
  • This issue can be mitigated by selecting relatively stable projects as PPPs and specifying how future contract variations will be handled and priced in the original contract terms.
• Once in the construction and operation phases, the public success of the PPP will be determined by the sponsor's ability to monitor performance against standards and enforce contract terms.
• A project should ideally be procured as a PPP based on a clear demonstration that it provides value for money (VFM) when compared to public sector procurement.
• However, demonstrating value for money in advance is difficult due to uncertainties in predicting what will happen over the course of the project and a lack of information about comparable previous projects.

Models of PPP

• BOT(Build Operate Transfer): This is a traditional PPP model in which the private partner is responsible for designing, building, operating (during the contracted period), and transferring the facility back to the public sector.
• BOO(Build Own Operate): Under this model, the private party will own the newly constructed facility.
• BOOT(Build Own Operate Transfer): In this variant of BOT, the project is transferred to the government or a private operator after a predetermined period of time.
• BOLT(Build Operate Lease Transfer): In this approach, the government grants a concession to a private entity to build (and possibly design) a facility, own the facility, lease the facility to the public sector, and then transfer ownership of the facility to the government at the end of the lease period.
• DBFOT(Design Build Operate Transfer): In this model, the private party is solely responsible for the project's design, construction, financing, and operation during the concession period.
• LDO(Lease Develop Operate): In this type of investment model, either the government or a public sector entity retains ownership of the newly created infrastructure facility and receives payments from the private promoter under a lease agreement.
• Operation and Maintenance Contract (O&M): Under this model, a private-sector partner operates a publicly-owned asset for a set period of time. The assets remain in the hands of the public partner.

Kelkar Committee on PPP

• The Kelkar committee to evaluate PPP in India was formed to study and assess the existing public-private partnership (PPP) model in India.
• The committee was formed by the Indian government and is led by Vijay Kelkar.
• The committee was established in the aftermath of India's 2015 Union Budget by Arun Jaitley, the country's then-finance minister. It consisted of ten people.

Terms of Reference of the Committee

• Review of PPP policy experience, including variations in contract content and difficulties encountered with specific variations and conditions.
• Risk analysis in PPP projects in various sectors, as well as the existing framework for sharing such risks between the project developer and the government, with the goal of recommending the best risk-sharing mechanism.
• Propose design changes to PPP contractual arrangements based on the foregoing and international best practices, as well as our institutional context.
• Measures to strengthen government capacity for the effective implementation of PPP projects.

Recommendations of this committee

• The establishment of 3P India.
• The case-based risk allocation formula for various project participants.
• Establishment of independent regulatory agencies.
• An amendment to the Prevention of Corruption Act to distinguish between errors of judgment and willful corrupt practices.
• Use the PPP model for the airport, port, and railway projects.
• Banks and other financial institutions should be permitted to issue zero-coupon bonds.
• A consortium's number of banks should be limited.
• Banks improve their risk assessment and evaluation capabilities.
• Specific guidelines for the encashment of bank guarantees.
• To provide for the monetization of completed projects.
• Make a procedure for resuming stalled projects.
• PPP should only be used for large projects.
• Development of a built-in mechanism for renegotiation.
• Concession agreements in various sectors will be reviewed as models.
• Public sector undertakings should be discouraged from participating in PPP road toll collection.
• Establishment of an Infrastructure PPP Project Review Committee (IPRC) comprised of a finance and economics expert, a lawyer, and at least one related technocrat with at least 15 years of experience.
• Establishment of an Infrastructure PPP Adjudication Tribunal (IPAT) led by a former Supreme Court/High Court Judge and comprised of at least one technical and financial expert each.

Conclusion

New projects, particularly large-scale transit projects, are important for increasing mobility and a series of changes in land-use patterns. PPPs have the potential to improve and accelerate the delivery of infrastructure projects. Currently, PPP contracts are more concerned with financial benefits. Before implementing this model, a thorough evaluation of the efficacy and likely benefits of increasing private sector participation in metro rail projects is required. In its document 'Strategy for New India @75,' NITI Aayog set a target of 36% investment by 2022-23, up from 28% in 2017-2018. A lot of measures will be required to boost both private and public investment in order to increase the rate of investment (gross fixed capital formation as a share of GDP).