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Informative note on Public Private Partnership (PPP)

PPP involves a contract between a public sector authority and a private party, in which the

private party provides a public service or project and assumes substantial financial, technical

and operational risk in the project

The Department of Economic Affairs (DEA) defines PPPs as:

PPP means an arrangement between a government or statutory entity or government owned

entity on one side and a private sector entity on the other, for the provision of public assets and/

or related services for public benefit, through investments being made by and/or management

undertaken by the private sector entity for a specified time period, where there is a substantial

risk sharing with the private sector and the private sector receives performance linked payments

that conform (or are benchmarked) to specified, pre-determined and measurable performance

standards.

Background

The most significant criteria for a continued growth rate of an economy rest on the provision of a

quality infrastructure. According to the Planning Commission, an approximation of 8 percent of

the GDP needs to be invested. This would help in acquiring a prospective economy as stated in

the 11th Five Year Plan. Fund investment of over US $ 494 billion has been conceived of

according to the 11th Five Year Plan with effective from 2007 to 2012.In order to meet such demands, various Public Private Partnerships or PPPs are being

promoted for implementation of infrastructure projects. PPP is often described as a private

business investment where 2 parties comprising government as well as a private sector

undertaking form a partnership. The deficit can be overcome by ensuring much more private

capital investment.

Constraints

y Sufficient instruments as well as the ability to undertake long-term equity cannot beprovided by the market in the present financial scenario. Also financial liability required

by infrastructure projects would not be sufficed.

y Most sectors face a lot of hindrance in enabling a regulatory framework as well as a

consolidated policy. So its important to convert such policies into PPP friendly. To

achieve the desires results, active participation of various state projects are essential.

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y Lack of ability of private sectors to fit into the risk of investing in diversified projects also

needs to be overcome. Modernization of new airports, transmission systems and

building power generating plants are some of the avenues which required skilled

manpower.

y Ability of public institutions to manage the PPP process should also be subdued.

Maximizing the return of the stakeholders needs to be managed due to the involvement

of long term deals including the life cycle of the asset infrastructure.

y Lack of credibility of bankable infrastructure projects used for financing the private sector

should also be overcome. Inconsistency is still visible in the limitations of PPP projects,

despite of continued initiatives by States and Central ministries.

y Inadequate support to enable greater acceptance of PPPs by the stakeholders forms

another source of constraint.

Steps Taken

Several initiatives have been undertaken by Government of India to enable a greater PPP

framework in order to eradicate the above mentioned constraints. Various foreign as well as

private investments by waving off charges are encouraged. Framing of standardized contractual

documents for laying down the terminologies related to risks, liabilities and performance

standards have been devised. Approval schemes for PPPs in the central sector has been

streamlined through Public Private Partnership Appraisal Committee or PPPAC. A website has

been launched for the purpose of virtual PPP market serves as an online database for PPPprojects.

Further, The Department of Economic Affairs, Ministry of Finance, Government of India (DEA)

with funding support from the World Bank, AusAID South Asia Region Infrastructure for Growth

Initiative and the Public Private Infrastructure Advisory Facility (PPIAF) has prepared a toolkit to

facilitate identification, assessment, development, procurement and monitoring of PPP projects.

The PPP Toolkit is a web-based resource that has been designed to help improve decision-

making for infrastructure PPPs in India and to improve the quality of the infrastructure PPPs that

are implemented in India.

Characteristics of PPPs

A PPP typically has the following characteristics:

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y the private sector is responsible for carrying out or operating the project and takes on a

substantial portion of the associated project risks

y during the operational life of the project the public sectors role is to monitor the

performance of the private partner and enforce the terms of the contract

y the private sectors costs may be recovered in whole or in part from charges related to

the use of the services provided by the project, and may be recovered through payments

from the public sector

y public sector payments are based on performance standards set out in the contract

y often the private sector will contribute the majority of the projects capital costs, although

this is not always the case

Risk a key focus of PPP design

Allocating risk to achieve added efficiency is what makes PPP a potentially powerful way of

reducing project-related costs and achieving improved value for money for the public sector.

The level of risk can be changed by allocating responsibility for individual risks to those who are

best able to manage them. On their own both the public and private sectors are weaker in their

ability to control certain risks. One of the goals of a well-designed PPP is to pick out the

strengths and combine them together. The result should be that a partnership of public and

private parties is stronger and more efficient than either party by itself.

Approval Committees for PPP

1. Public Private Partnership Approval Committee (PPPAC)

The Cabinet Committee on Economic Affairs (CCEA) in its meeting of 27th October, 2005

approved the procedure for approval of public private partnership (PPP) projects. Pursuant to

this decision, a Public Private Partnership Approval Committee (PPPAC) was set up comprising

of the following:

y Secretary, Department of Economic Affairs (in the Chair)

y Secretary, Planning Commission

y Secretary, Department of Expenditure;

y Secretary, Department of Legal Affairs ; and

y Secretary of the Department sponsoring a project.

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The Committee would be serviced by the Department of Economic Affairs, who has set-up a

special cell for servicing such proposals. The Committee may co-opt experts as necessary

2. Committees constituted pursuant to CCEA's decision dated 22.03.07 regardingModification of Appraisal Procedure for PPPs

The Cabinet Committee on Economic Affairs (CCEA) in its meeting of 22nd March, 2007

approved modification in approval procedure for Public Private Partnership (PPP) projects.

Pursuant to the decision of the CCEA, a Committee for appraisal of PPP projects of all sectors

of cost greater than Rs.100 crore but less than Rs.250 crore is being set up comprising of the

following:

a. Secretary, Department of Economic Affairs

b. Secretary of the Ministry/Department sponsoring the project.

For appraisal of individual projects under NHDP which are of Rs.250 crore or more but less than

Rs.500 crore and which fulfill certain specified conditions, a Committee comprising of the

following is being set up:

a. Secretary, Department of Economic Affairs

b. Secretary, Department of road Transport and Highways

3. Viability Gap Funding (VGF)

Cabinet Committee on Economic Affairs in its meeting of 25th July, 2005 approved the Scheme

for support to Public Private Partnerships in Infrastructure. In pursuance of the decision of the

Cabinet, it has been decided to constitute an Empowered Committee and Empowered

Institution for approving financial assistance to such projects which satisfies all the eligibility

criteria as prescribed in the scheme.

The composition of Empowered Committee will be as follows:

i. Secretary {Economic Affairs)

ii. Secretary (Planning Commission)

iii. Secretary (Expenditure)

iv. Secretary of the line Ministry dealing with the subject

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Guidelines for approval of PPP

Different guidelines for different categories of central sector PPP projects have been issued by

the government from time to time.

These are:

y Guidelines for formulation, appraisal and approval of Public Private Partnership (PPP)

Projects costing less than Rs.100 Crore

y Guidelines for formulation, appraisal and approval of Public Private Partnership (PPP)

Projects

(i) of all sectors costing more than Rs.100 crore and less than Rs.250 crore

(ii) Under NHDP costing Rs.250 crore or more and less than Rs.500 crorey Procedure for approval of PPP Projects and Guideline for formulation, appraisal and

approval of Public Private Partnership (PPP) Projects in Central Sector

Conclusion

Provision of public services and infrastructure has traditionally been the exclusive domain of the

government. However, with increasing population pressures, urbanisation and other

developmental trends, governments ability to adequately address the public needs through

traditional means has been severally constrained. This has led the Governments across the

world to increasingly look at the private sector to supplement public investments and provide

public services through Public Private Partnerships.

So far 195 PPP projects have been granted approval in India with an aggregate Project Cost of

Rs. 198,417.51 crores.