PUBLIC PRIVATE PARTNERSHIP

PUBLIC PRIVATE PARTNERSHIP 

1.  Introduction:

The growth of a country is depend open the infrastructure facility of the country. If a country has no proper road network, no proper Railway network how a country can grow. To grow interest of the private company to establish a factory, Government should prepare a good transport facility for his staff & worker and also smooth transportation of raw material and finish goods. Further to that the arrangements of sufficient electricity also require very much to attract the entrepreneur. In order to ensure progress of the nation leading to a bright future, the government must provide these facilities.

But in India, Every year during budget our major amount of fund evoke by the military department and also our major foreign Money goes to collect the oil (Petrol, Diesel, etc.). So after that Government has no such fund for development of infrastructure of our country. Also our country has large road & railway network. So for the country like ours, the involvement of Private Company to build the infrastructure is very much needed. In the joint venture project, private company also earn a good amount of money by investing a good amount of money & as well as Government also gets an infrastructure without any investment. Common people are also happy, as they are the main party who gets the benefit of the infrastructure by spending of some money. This system i.e. joint venture with the private company with the government is called as Public Private Partnership or PPP or 3P or P3.

Public Private Partnership means an arrangement between a government / statutory entity / government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or public services, through investments being made and/or management being undertaken by the private sector entity, for specified period of time, where there is well defined allocation of risk between the private sector and the public entity and the private entity receives performance linked payments that conform (or are benchmarked) to specified and pre-determined performance standards, measurable by the public entity or its representative.

Essential conditions in the definition are as under:

Arrangement with private sector entity: The asset and/or service under the contractual arrangement will be provided by the Private Sector entity to the users. An entity that has a majority non-governmental ownership, i.e., 51 percent or more, is construed as a Private Sector entity.

Public asset or service for public benefit: The facilities/ services being provided are traditionally provided by the Government, as a sovereign function, to the people. To better reflect this intent, two key concepts are elaborated below:

‘Public Services’ are those services that the State is obligated to provide to its citizens or where the State has traditionally provided the services to its citizens.

‘Public Asset’ is that asset the use of which is inextricably linked to the delivery of Public Service, or, those assets that utilize or integrate sovereign assets to deliver Public Services. Ownership by Government need not necessarily imply that it is a PPP.

Investments being made by and/or management undertaken by the private sector entity: The arrangement could provide for financial investment and/or non-financial investment by the private sector; the intent of the arrangement is to harness the private sector efficiency in the delivery of quality services to the users.

Operations or management for a specified period: The arrangement cannot be in perpetuity. After a pre-determined time period, the arrangement with the private sector entity comes to a closure.

Risk sharing with the private sector: Mere outsourcing contracts are not PPPs.

Performance linked payments: The central focus is on performance and not merely provision of facility or service.

Conformance to performance standards: The focus is on a strong element of service delivery aspect and compliance to pre-determined and measurable standards to be specified by the Sponsoring Authority.

The above definition puts forth only the essential conditions for an arrangement to be designated as a Public Private Partnerships (PPP). In addition to these, some ofthe desirable conditions or ‘good practices’ for a PPP include the following:

Allocation of risks in an optimal manner to the party best suited to manage the risks. Private sector entity receives cash flows for their investments in and/or management of the PPP either through a performance linked fee payment structure from the government entity and/or through user charges from the consumers of the service provided.

Generally a long term arrangement between the parties but can be shorter term dependent for instance on the sector or focus of PPP.

Incentive and penalty based structures in the arrangement so as to ensure that the private sector is benchmarked against service delivery;

Outcomes of the PPP are normally pre-defined as output parameters rather than technical specifications for assets to be built, though minimum technical specifications might be identified. Such a structure is expected to leave room for innovation and technology transfer in project execution / implementation by the private sector entity.

The models where ownership of the underlying asset remains with the public entity during the contract period and project is transferred back to the public entity after the termination contract are the preferred forms of Public Private Partnership models. The final decision on the form of PPP is a determinant of the Value for Money analysis.

Some of the commonly adopted forms of PPPs include management contracts, build operate-transfer (BOT) and its variants, build-lease-transfer (BLT), design-build operate-transfer (DBFOT), operate-maintain-transfer (OMT), etc.

Build-own-operate (BOO) model is normally not the supported form of Public Private Partnership in view of the finite resources of the Government and complexities in imposing penalties in the event of non-performance and estimation of value of underlying assets in the event of early termination. Government of India does not recognise service contracts, Engineering-Procurement-Construction (EPC) contracts and divestiture of assets as forms of PPP

2.  Different Public Private Participation Schemes:

Build Operate Transfer (BOT): BOT and similar arrangements are a kind of specialized concession in which a private firm or consortium finances and develops a new infrastructure project or a major component according to performance standards set by the government. 

Under BOTs, the private partner provides the capital required to Build the new facility, Operate & Maintain (O&M) for the contract period and then return the facility to Government as per agreed terms. 

Importantly, the private operator now owns the assets for a period set by contract—sufficient to allow the developer time to recover investment costs through user charges.

BOTs generally require complicated financing packages to achieve the large financing amounts and long repayment periods required. At the end of the contract, the public sector assumes ownership but can opt to assume operating responsibility, contract the operation responsibility to the developer, or award a new contract to a new partner. The main characteristic of BOT and similar arrangements are given below:-

Design Build (DB): Where Private sector designs and constructs at a fixed price and transfers the facility.

Build Transfer Operate (BTO): Where Private sector designs and builds the facility. The transfer to the public owner takes place at the conclusion of construction. Concessionaire is given the right to operate and get the return on investment.

Build-Own-Operate (BOO): A contractual arrangement whereby a Developer is authorized to finance, construct, own, operate and maintain an Infrastructure or Development facility from which the Developer is allowed to recover his total investment by collecting user levies from facility users. Under this Project, the Developer owns the assets of the facility and may choose to assign its operation and maintenance to a facility operator. The Transfer of the facility to the Government, Government Agency or the Local Authority is not envisaged in this structure; however, the Government may terminate its obligations after specified time period.

Design-Build Operate (DBO): Where the ownership is involved in private hands and a single contract is let out for design construction and operation of the infrastructure project.

Design Build Finance Operate (DBFO): With the design–build–finance–operate (DBFO) approach, the responsibilities for designing, building, financing, and operating & maintaining, are bundled together and transferred to private sector partners. DBFO arrangements vary greatly in terms of the degree of financial responsibility that is transferred to the private partner

Build- Operate- Transfer (BOT): Annuity/Shadow User Charge: In this BOT Arrangement, private partner does not collect any charges from the users. His return on total investment is paid to him by public authority through annual payments (annuity) for which he bids. Other option is that the private developer gets paid based on the usage of the created facility.

3.  Parties involved in Public Private Partnership and their roles:

In the Public Private Partnership model project, third party, for example the public administration, delegates to a private sector entity to design and build infrastructure and to operate and maintain these facilities for a certain period. During this period the private party has the responsibility to raise the finance for the project and is entitled to retain all revenues generated by the project and is the owner of the regarded facility. The facility will be then transferred to the public administration at the end of the concession agreement without any remuneration of the private entity involved. Some or even all of the following different parties could be involved in any Public Private Partnership model project:

·         The host government: Normally, the government is the initiator of the infrastructure project and decides if the Public Private Partnership model project is appropriate to meet its needs. In addition, the political and economic circumstances are main factors for this decision. The government provides normally support for the project in some form. A government department or statutory authority is a pivotal party. It will:

1.    grant to the sponsor the "concession", that is the right to build, own and operate the facility,

2.    grant a long term lease of or sell the site to the sponsor, and

3.    Often acquire most or all of the service provided by the facility.

The government's co-operation is critical in large projects. It may be required to assist in obtaining the necessary approvals, authorizations and consents for the construction and operation of the project. It may also be required to provide comfort that the agency acquiring services from the facility will be in a position to honor its financial obligations.

The government agency is normally the primary party. It will initiate the project, conduct the tendering process and evaluation of tenderers, and will grant the sponsor the concession, and where necessary, the offtake agreement.

·         The concessionaire / Sponsors: The project sponsors who act as concessionaire create a special purpose entity which is capitalised through their financial contributions.The sponsor is the party, usually a consortium of interested groups (typically including a construction group, an operator, a financing institution, and other various groups) which, in response to the invitation by the Government Department, prepares the proposal to construct, operate, and finance, the particular project. The sponsor may be a company, partnership, a limited partnership, a unit trust, an unincorporated joint venture or a combination of one or more.

·         Construction Contractor: The construction company may also be one of the sponsors. It will take construction and completion risks, that is, the risk of completing the project on time, within budget and to specifications. These can be sizeable risks and the lenders will wish to see a construction company with a balance sheet of sufficient size and strength with access to capital that gives real substance to its completion guarantee.

·         Operation and Maintenance Contractor: The operator will be expected to sign a long term contract with the sponsor for the operation and maintenance of the facility. Again the operator may also inject equity into the project.

·         Lending banks: Most Public Private Partnership model project are funded to a big extent by commercial debt. The bank will be expected to finance the project on “non-recourse” basis meaning that it has recourse to the special purpose entity and all its assets for the repayment of the debt.

·         Other lenders: The special purpose entity might have other lenders such as national or regional development banks

·         Equity Investors:  It is always necessary to ensure that proposed investors in an infrastructure project have sufficient powers to enter into the relevant contracts and perform their obligations under those contracts. Two examples where powers must be carefully reviewed are life insurance companies and trustees of superannuation funds.

·         Parties to the project contracts: Because the special purpose entity has only limited workforce, it will subcontract a third party to perform its obligations under the concession agreement. Additionally, it has to assure that it has adequate supply contracts in place for the supply of raw materials and other resources necessary for the project

A Public Private Partnership model project is typically used to develop a discrete asset rather than a whole network and is generally entirely new or Greenfield in nature (although refurbishment may be involved). In a BOT Project the project company or operator generally obtains its revenues through a fee charged to the utility/ government rather than tariffs charged to consumers. A number of projects are called concessions, such as toll road projects, which are new build and have a number of similarities to Public Private Partnership model project.

4.  Financial structuring of Public Private Partnership Projects:

Under a public–private partnership (P3) for highway projects, a private partner may participate in some combination of design, construction, financing, operations, and maintenance, including the collection of toll revenues. With a form of highway P3 called a concession or a Design – Build – Finance – Operate - Maintain (DBFOM) contract, a concessionaire invests its own funds (known as equity) and borrows additional funds to pay for the construction of a highway project. The concessionaire maintains and operates the project for a specified period and expects to be repaid for its investment in the project over the period of the concession. P3s allow public agencies to access private equity capital to finance projects. P3s can accelerate the delivery of projects by helping public agencies raise the upfront capital necessary to construct a major infrastructure project all at once, rather than in stages. In some cases, private capital can mean the difference between developing a project and having no project at all. Project Financing Project financing is a specific type of financing used in P3s, through which an expected future revenue stream generated from users of a project or committed by a public agency is the primary means for repaying the upfront investment needed to fund it. Project financing is also known as nonrecourse financing, because the project’s lenders have no recourse or only limited recourse on the shareholders of the concessionaire in case the project runs into difficulties and the concessionaire is unable to repay them. Private firms often use project financing for large, high-risk projects because it can help to insulate them from financial risks associated with the project; however, the transaction costs related to implementing project finance structures are high, making the use of this type of financing inappropriate for smaller scale projects. The capital generated from private finance must be paid back with commitments of a long-term revenue stream to repay lenders and private investors, who typically demand a higher rate of return than investors in tax-exempt municipal bonds. Financial Structure of P3s Figure 1 depicts a common financing structure for P3 concession projects. Although a single company Financial Structuring of Public–Private Partnerships (P3s) TOOLKIT Lenders Concessionaire (SPV) Equity Investors Public Sponsor Availability Payment or Subsidy Shared Revenue Bonds, loans Repayments Equity Investments Dividends Funds to build, maintain, and operate Toll Revenue Facility.

Initial sponsors supply the initial equity of the project, and in some cases are required to keep a fraction until the end of the PPP contract without the possibility of transferring. The objective of this is to create long-term incentives. This is expensive for the initial sponsor for two reasons: first, because the cost of capital for the sponsor is high; and second, because by tying up resources for a long time, they cannot be deployed to other uses. As the sponsor specializes in the early, building part of the project, this limits its possibilities for future business. This means that projects must be very profitable to compensate the sponsors for this cost.

Even though the SPV remains active over the whole life of the project, until the assets revert to the government, there is a clear demarcation between financing during the construction phase and financing in the operational phase (Figure 2). During construction, sponsor equity (perhaps along with bridge loans and subordinated or mezzanine debt) is combined with bank loans and, sometimes, government grants in money or kind. In the case of projects that derive their revenues from user fees, the initial contribution to investment is sometimes supplemented with subsidies from the government if the project revenues are not sufficient to pay for the project.

As completion of the construction stage approaches, bondholders enter the picture and substitute for bank lending. Bond finance is associated with two additional entities: rating agencies and credit insurance companies. When the PPP project becomes operational, but only then, the sponsor’s equity may be bought out by a facilities operator, or even third-party passive investors, usually pension or mutual funds. Bondholders, of course, have priority over the cash flow of the project.

The life cycle of PPP finance and the change in financing source is determined by the different incentive problems faced in the construction and operational phases. Construction is subject to substantial uncertainty and major design changes, and costs depend crucially on the diligence of the sponsor and the building contractor. Thus, there is ample scope for moral hazard in this stage. Banks perform a monitoring role that is well suited to mitigate moral hazard, by exercising tight control over changes to the project’s contract and the behavior of the SPV and its contractors. To control behavior, banks disburse funds only gradually as project stages are completed. After completion and ramp-up of the project, risk falls abruptly and is limited only to events that may affect the cash flows from the project. This is suitable for bond finance because bondholders only care about events that significantly affect the security of the cash flows underpinning repayment, but are not directly involved in management or control of the PPP. This is appropriate for institutional and other passive investors, who by mandate can only invest small amounts of their funds in the initial stages of a PPP because of their high risk.

The project is intended to provide a service to users, but the fundamental contracting parties are the SPV and the procuring authority, which enforces the PPP contract and represents users of the project. Because contracts give at least some discretion to the procuring authority, cash flows and even the continuation of the concession may depend on its decisions. Thus, ambiguous service standards and defective conflict resolution mechanisms increase risk. In addition, user fees will be at risk if the political authority is tempted to buy support or votes by lowering service fees, either directly or by postponing inflation adjustments, in so-called regulatory takings. Similarly, if a substantial fraction of the SPV’s revenues are derived from payments by the procuring authority, these payments depend on the ability (or desire) of the government to fulfill its obligations. It follows that the governance structure of the procuring authority, its degree of independence and the financial condition of the government affect the level of risk perceived by debt holders.

Consider next the relationship of the SPV with construction and O&M contractors.  Many PPP projects involve complex engineering. In complex projects, unexpected events are more likely and it becomes harder to replace the building contractor. In these cases, the experience and reputation of the contractor become an issue. Moreover, the financial strength of the contractor is relevant because this determines its ability to credibly bear cost overruns without having to renegotiate the contract. Similarly, while the operational phase is less complex, revenue flows depend on whether the contracted service and quality standards are fulfilled, which depends on the O&M contractor. Again, the experience and, secondarily, the financial strength of the contractor concern debtholders. Debtholders also care about the type of risk-sharing agreements negotiated between the SPV and the contractors. Cost-plus contracts, which shift cost shocks to the SPV, are riskier than fixed-price contracts from their point of view.

Finally, debtholders care about the incentives of the sponsor, who provides around 30 per cent of the funding in the typical PPP project. This large chunk of equity has the lowest priority in the cash-flow cascade, and is theoretically committed for the length of the PPP contract to provide incentives to minimize the life-cycle costs of the project. Providers of funds worry about the financial strength and experience of sponsors, particularly during the construction and the ramp-up phase of complex transportation projects. They value previous successful experience in the industry and technical prowess, and look for evidence that the sponsor is committed to the project, both financially and in terms of time and reputation.

5.  Ideal Scheme for the Infrastructure Development:

PPP or Public-Private-Partnership is a unique concept which involves coming together of public and private sector with a purpose to develop public assets or for provision of public services. It is an elaborate arrangement between a state body and a privately owned entity which serves to promote private capital investment in public projects, especially those connected with infrastructure development. The agreement also includes sharing of assets and skills between state and privately owned bodies to be able to achieve the best possible outcome. The private entity receives performance linked payments based on a specific set of criteria.

A basic feature of any PPP scheme is that the project under consideration is usually a high priority one and is well-planned by the government. Another essential aspect is that both the sides assume some amount of risk and mutual value for the project. Some of the infrastructure projects usually covered under PPP model include building of highways, ports, airports, developing railways infrastructure, telecom facilities, power generation projects, and sanitation, water and waste management projects.

In India, the PPP model was introduced by UPA Government at the Centre for developing some of the major facilities including airports and metros. The model worked well in some cases but in some others, there arose a number of issues which could not be addressed properly. Considering the infrastructural growth needed to drive the economy further, the newly formed NDA Government has also come up with a number of proposals in the current Union Budget in which PPP model would be implemented to help achieve better and faster results.

Finance Minister laid stress that with more than 900 infrastructure projects are underway in the country, PPP model holds great potential for us but we must work to remove the inefficiencies in its implementation and develop a responsive dispute redressal mechanism. To this end, he announced the setting up of an exclusive institution called 3P India with a budget allocation of Rest 500 crore which would be responsible for resolving any disputes and issues arising in the planning and implementation of Public-Private-Partnership model.

There are several areas in which the government is looking forward to implement this model including high-end metro projects, rural and urban development projects. The main issues faced with proper implementation of this model is that infrastructure projects are usually long-term ones and a number of factors including cost of materials, policies and even economic conditions can change while the project is underway. If the initiative to set up a sophisticated mechanism for resolving such issues in implementation of PPP model is successful, it can attract big investments from private sector and lead to fast-paced development of infrastructure.

6.  Conclusion:

This PPP are a very useful tools / system for the developing country like India. Government should give some relaxation to modify the rules and the regulation to the private sector as more company may take interest on this and this leads our company from developing country to the developed country.