1 THESIS

PPP IN INDIAN RAILWAYS- A CASE STUDY OF PIPAVAV PORT CONNECTIVITY

A dissertationSubmitted toPunjab University ChandigarhFor the award ofMaster of Philosophy in Social SciencesIn partial fulfillment for40th Advanced Professional Programme in Public Administration(2014-15)

ByBrijesh Kumar Gupta

INDIAN INSTITUTE OF PUBLIC ADMINISTRATION (IIPA)I.P. ESTATE, RING ROAD, NEW DELHI-110002CERTIFICATEI have the pleasure to certify that Shri Brijesh Kumar Gupta has pursued his research work and prepared the dissertation titled PPP In Indian Railways- A Case Study of Pipavav Port Connectivity under my guidance and supervision. The dissertation is the result of his own research and to the best of my knowledge, does not contain any part of work, which has been submitted for the award of any degree either in this university or any other University/Deemed University without proper citation. This is being submitted to Punjab University, Chandigarh for the degree of Master of Philosophy in Social Sciences (M. Phil) in partial fulfillment of the requirements for the Advanced Professional Programme in Public Administration (APPPA) of the Indian Institute of Public Administration (IIPA), New Delhi.

I recommend that the dissertation of Shri Brijesh Kumar Gupta is worthy of consideration for the award of the degree of Master of Philosophy (M. Phil) of Punjab University, Chandigarh.

(Prof. Rakesh Gupta)SupervisorIndian Institute of Public Administration I.P. Estate, Ring Road, New Delhi-110002

AcknowledgementsI am grateful to the Indian Institute of Public Administration and Department of Personnel and training, Government of India for giving me this opportunity to further enhance and enrich my skill set through participation in 40th APPPA. I have found the programme extremely useful and enlightening even after such long years of service. I would like to express my heartfelt gratitude to my guide Prof. Rakesh Gupta, who has always put me at ease, even in difficult circumstances, when I found the going tough. He has been extremely prompt in going through the manuscript word by word. Prof. Nand Dhameja has been the inspiring spirit behind the study. The way he brought out various aspects of Infrastructure management made me confident of dealing this topic.This study would not have been possible without the active guidance and support from officers of Ministry of Railway Shri S. K. Pathak ED/CE, Shri Mukul Saran Mathur ED/PPP/Traffic, Shri R. C. Rai ED/PPP/Finance and Shri Achal Khare ED/Infra/Civil. I am also very grateful to Shri Ashish Sharma GM/CRIS for valuable suggestions and help provided by him during writing of thesis. They all, were very helpful and kind enough to give me access to documents required for completing this work. Our course director Shri Suresh Mishra and APPPA office Staff Shri Manish Rawat have been extremely helpful and supportive during the writing of thesis.My wife Mrs. Sunita Agarwal and my son Rishabh Gupta have been pillar of strength during this study. They have allowed me to work without any disturbance whatsoever and motivated me to work harder. My son Rishabh Gupta helped me out whenever I had problems with WORD Software. I am also thankful to Shri Mool Chand for meticulous typing for long time.

Brijesh Kumar GuptaNew Delhi CONTENTSContentsPage

Certificate

Acknowledgements

Abbreviations

Chapter -1 Introduction

Chapter -2 Objectives & Methodology

Chapter -3 Literature Survey

Chapter -4 Private Investments

Chapter -5 Pipavav Port Rail Connectivity

Chapter -6 Analysis & Finding

Chapter -7 Conclusions

Annexure A

Annexure B

Annexure C

Annexure D

Annexure E

Bibliography

AbbreviationsBOT Build Operate and Transfer

BBOBuy Build Operate

BOOBuy Own Operate

BOOTBuild Own Operate Transfer

BLOTBuild Lease Operate Transfer

CAConcession Agreement

CAGRCompounded Annual Growth Rate

CCCash Contract

CONCORContainer Corporation of India

DBDesign and Build

DBFODesign Build Finance Operate

DBFOTDesign Build Finance Operate Transfer

DPDelivery Period

FDIForeign Direct Investment

GDPGross Domestic Product

GOIGovernment of India

GPPLGujarat Pipavav Port Limited

MCAModel Concession Agreement

MORMinistry of Railways

NPMNew Public Management

O & MOperation & Maintenance

PCPlanning Commission

PFIPrivate Finance Initiative

PRCLPipavav Railway Corporation Limited

PPPPublic Private Partnership

RPFRequest for Proposal

RFQRequest for Qualification

SPVSpecial Purpose Vehicle

VGFViability Gap Funding

WBWorld bank

Chapter 1INTRODUCTION

Indian Railways, the worlds third largest railway network has suffered due to lack of sufficient investment and populist policies of subsidising the fares. Lack of investments has turned once a mighty system into a slow and congested network, that crimps the economic growth. Indian Railways, an engine of economic growth of the country requires continuous infusion of funds and technology for its infrastructure and modernization. In order to arrange the sufficient funds for investment in infrastructure, Minister of Railways in his budget speech in Indian parliament in 2014 has announced that bulk of future projects requiring bulk investments in IR will be executed on PPP model.Indian railways (IR) started its 53 km journey between Mumbai and Thane on April 16, 1853 and is today one of the largest Railways in the world. The railway network, invariably referred to as the lifeline of the Indian economy. is spread over 109,221 Km. covering 6906 stations. Operating on three gauges, trains in India carry over 481 Billion Tonne Kilometres (BTKMs) and 695 Billion Passenger Kilometres (BPKMs) of goods and passenger traffic respectively every year. IR carries around 40% of freight traffic and 20% of the passenger traffic in the countryIR is one of the premier infrastructural wings of the economy ,builds and maintains infrastructure assets like Track, Electric traction, Signalling Systems, Telecom network, Stations / Terminals etc. Apart from operating goods and passenger trains, it operates suburban trains in various metros. It manufactures locomotives, coaching stock, wagon and components of rolling stock like Wheel & Axle. It runs workshops to maintain its rolling stock & is also involved in ancillary activities like catering, tourism etc.

1.1 PPP initiative in PastThe current legal framework under the Railways Act 1989 allows private railway systems in all forms. However, the government policy enunciated under Industrial Policy Resolution of 1991 as amended from time to time, reserves railway transportation for the public sector. It means that train operation can only be done by the public sector, while all other activities of design, construction, financing, and maintenance can be undertaken through private participation through award of concessions by Government of India. Presently, the Railways are managed through 17 Railway Administrations which are legal entities. In addition there are six port and other railways. These railway systems are members of the Indian Railway Conference Association, a body which deals with issues of inter railway movement of wagons and locomotives such as levy of hire charges for use of rolling stock belonging to other railways and neutral train examination for ensuring that railways do not pass on deficient wagons to other railways.The Railway Board was constituted under the Railway Board Act, 1905 and it is also a railway regulator, dealing with a large number of issues including tariff regulation. Railway Board and the Commissioner of Railway Safety, whose office is under administrative control of Ministry of Civil Aviation, jointly work as safety regulator. There are only two kinds of rail systems that lie outside the integrated IR network. The first includes the close circuit systems that is, the Merry- Go-Round systems created and operated by the NTPC for super thermal power plants. The other kind includes standalone metro rail systems which are planned for and financed by the Ministry of Urban Development. The private sector has been largely associated in design, financing, construction, and maintenance of fixed infrastructure in railways. Construction activity in rail sector is normally undertaken by the private sector through contracts. However, no large Engineering Procurement and Construction contracts are being awarded to Construction Supervision Consultants. Design, build, finance, maintain, and operate concessions are being given to SPVs, which are JVs between IR and private sector strategic partners.Unlike ports, highways & airports, where a regulator offers certain level of stable returns to private investors, railways by virtue of their monopolistic nature of operation, do not offer an alternative to customers among various Railways. The tariff policy is also fixed by the Government. There is thus a need for separate accounting for infrastructure and train operations for initiating any long term PPP regulatory framework. 28. It would thus be seen that Ministerial, commercial, and regulatory powers are vested with a single entity. While it is possible for other infrastructure projects in ports, highways & airports to be an independent system which could be operated and maintained independently of the existing system, the same is not possible for Railways. Here any project has to be supplementary or an extension to an existing larger railway network. Due to this historical perspective, railway activities are not readily available to private sector which poses a new challenge of building capacity with private sector through PPPDuring the XI FYP, the share of the private investment in major infrastructure sectors is: electricity (49%), telecom (80%), roads (20%), ports (81%) and airports (64%). In contrast, share of the private investment in railways has been negligible (5%).1.2 Risks in PPPA project under PPP mode may be subjected to a number of technical, environmental, economic and political risks particularly in developing countries and emerging markets. Financial institutions and project sponsors may occationally find that the risks inherent in project development and operation are unacceptable. To cope with these risks, projects in these industries (such as power plants or railway lines) are generally completed by a number of specialist companies operating in a network with each other that allocates risk in a way that is proportional to their exposure to the project.Infrastructure projects have at least three phases, namely preparation and promotion, construction and operating phase. Thus, task of the project management is to find a way to mitigate these phase specific risks . The key issue of the promotion and preparation stage is the commercial and political risks related to the procurement .The major risks in different infrastructure project are summarized below in the table.

Phase namePrimary riskRisk subgroups

Promotion and preparing phaseCommercial and political riskCompetitiveness risk,legislative delay risk

Construction phaseConstruction and political riskTechnological risk, Supply risk,Regulatory risk, Government intervention risk

Operating phaseCommercial and political riskDemand risk, Revenue risk, Technological risk, Government intervention risk

1.2.1 Preparation and promotion phase

The success of this stage is highly dependent on how government arranges the procurement of PPP project. The ultimate goal is to have competitive and short procurement. High competition lowers the total cost of PPP project for the government. Secondly, short procurement means cost savings for both public and private sector.Government can make procurement more efficient by preparing project well in advance. In this way, government can speed up the procurement process. Government can also help competition by making procurement process transparent, providing clear bidding criteria and avoiding legislative delays.Before announcing procurement, government should consider carefully what exactly is needed to be achieved by PPP. The aim of the project should be crystal clear for the government, because only then negotiations with a private sector can go immediately into details. Also, clarity over PPP project objectives should exist among the public authorities. Well defined project proposal including full scope and objectives of the project is likely draw more attention among the private sector actors than vague and unclear project description.Moreover, the PPP project should have full support of government, without political unity exists, problems are likely occur in the procurement process. Lack of political support can cause legislative delays. For instance, difficulties may appear while PPP company is applying for necessary legal permissions for the project from various government offices.In sum, the commercial and political risks are always present in the preparation and promotion phase. Thus, the key behind the successful outcome of this phase is governments strong political engagement and unity over project objectives in procurement process, and competitive procurement.1.2.2 Construction phaseThe risk of construction phase is that project will not be completed on time and for the price stated in contract. The availability problems and increased price of input supplies may incur extra costs on project. In addition, delivery of supplies may not arrive in time for the construction. Moreover, one of the sub-contractors may pull out of the pack and leave the project causing severe damage to other parties. Sub-contractors might not perform as expected resulting in delays on the project. Moreover, government may partly delay construction work by demanding certain assessments during the construction and halting the work. In sum, project management is facing construction and political risks on construction phase. To overcome these risks project management should avoid cost overruns and delays.1.2.3 Operating phaseOperating phase includes political and commercial risks. Here, the risks comprise mainly technical, market and regulatory risks, which may effect on returns. The main source of the revenue in railway partnerships is usually the operating payments; passenger service fees, cargo tolls, license fees, provisions and government subsidies. Cuts and disruptions in service are likely to effect negatively on the revenue. Indeed, customers might change their type of transportation if they cannot account on it.The change in government policies may cause remarkable expenses for the private sector. For instance, new safety regulations increasing the safety standards may force private sector to reform some of its railway assets. Even small changes in signaling systems may lead into replacement of whole signaling system and cost fortunes for the private sector.In the operating phase in particular commercial risk is significant. A private sector provider of infrastructure must be able to generate sufficient operating profits to repay private sector contributions to financing. Predictability of the future revenues is, therefore, of crucial importance particularly in PPPs which include very time-consuming construction period where a strong negative cash flow appears during the long construction period. After the start of the operation period, cash flow grows slowly due to large interest payments1.3 Windfall gains/ losses These are gains/losses which occur due to unforeseen circumstances in a service may be due to unexpected demand or due to change in government regulation since these profits/gains are unforeseen hence there is no uniform formula to distribute these gains/losses among the various stakeholders. Up till now no provisions are made in the contract for the windfall gains/losses however in recently issued document Overview of Framework for Participative Models of Rail Connectivity and Domestic & Foreign Direct Investment for BOT Model it is brought out that in case actual user fee in a particular year is in excess of 120% or 150% of the projected revenue, 50% or 75% of the excess revenue respectively will be paid to MoR by the concessionaire. This system has in built incentive for the concessionaire to make efforts to bring more revenue.

Chapter 2Objectives & Methodology

2.1 Objective of ResearchBalancing of the risk among the different stakeholders according to their responsibilities and shared equity as decided by various provisions of concession contracts is of utmost importance for the success of any PPP projects. On the basis of projected investment for initial scope of work to be provided by different stakeholders and projected likely revenues to be shared during the different phases of project construction and operation are normally covered under the provisions of concessionaire contract. However, it has been observed there are huge uncertainties in the original projected estimates of investments for meeting their obligations and availability of projected revenues during the execution and operation of PPP projects, hence it is quite imperative that necessary provisions are included in concession contracts for sharing windfall gains/losses which cannot be foreseen at the time of formulation of project proposal. These provisions will not only satisfy different stakeholders to share uncertain risks/revenues at various stages of project execution and maintenance but also necessary for maintaining transparency requirements which are very important involving the public agencies like IR. Proper drafting of provisions for sharing windfall gains and losses will ensure building trust and confidence among the various stakeholders of the PPP project, hence, these are very important for the success of these projects undertaken by agencies from using the public funds.

The process of the PPP project is often itself a learning process for many organizations. Thus, it is important to look already established PPP projects under magnifying class to identify potential pitfalls to avoid them in future. The aspect of learning from PPP projects makes case studies very valuable for all governments planning to reform railway sector . Study of PRCL rail connectivity project involves a systematic approach for a better railway PPP mechanisms and methods, with the expectation that these can improve future results. Provisions of PRCL concessionaire agreement are scrutinized with an objective to identify the most efficient ways of mitigating the risks and overcome challenges specific to ppp projects .We try to identify those mechanisms, techniques, elements and principles behind the success or failure to overcome these specific challenges.

2.2 Research QuestionsIn view of above an attempt was made to study the answer of following questions.a) How risk sharing and revenue sharing are balanced in concession agreement between PRCL and Indian Railways.b) Are the existing provisions in PRCL concession agreement are adequate to take care uncertainties due to wind fall gains/losses. If not, what are problems faced in this regard during construction and operation of a rail connectivity project of Pipavav port in Gujarat c) What are suggested provisions to taking care uncertainties due to windfall gains/losses during concessionaire period?

2.3 MethodologyRelevant documents pertaining to rail connectivity project of Pipavav port in Gujarat on Indian railways were collected in regards conceptualization, construction phase, operation phase and other aspects like maintenance etc. All these details will be analyzed on the basis of actual problems faced in pipavav port connectivity project financed by arranging the investments through PPP model.2.4 LIMITATIONSThe concept of public-private partnership encompasses a variety of different partnerships and relationships, which are not covered fully in the thesis. The paper focuses on one particular case study of PPP JV model port connectivity project, within which the topic is analyzed .To get generalized conclusion it is pertinent that results of numbers of PPP projects are studied , hence this is a limitation.

CHAPTER 3LITERATURE SURVEYIt is widely acknowledged within the relevant literature that there is no clear definition for PPP which would cover all aspects of different relationships that these PPPs encompass (Daube, Vollrath, & Alfen, 2007; Hodge & Greve, 2007; OECD, 2008) and at the same time restricting it to a more narrow description. As Weihe (2006) argues, the concept of PPP is nebulous it allows for great variance across parameters such as time, closeness of cooperation, types of products/services, costs, complexity, level of institutionalization as well as number of actors involved, as a result, nearly any type of the relationships that include both the private and the public sector (whether it is a service contract or a joint venture) may be called a public-private partnership (PwC, 2005). In order to make some distinction between the variety of definitions present, Weihe (2006) attempted to classify them into 5 categories: local regeneration, policy, infrastructure3, development and governance approaches. The local regeneration and the policy approaches are similar due to perceiving PPP concept as a very wide definition that covers changes in policies of environment, economic renewal, development, and institutional set up. The difference between the two is that the local regeneration approach focuses on the local level while policy approach on the national. The third approach the infrastructure approach covers the cooperation of private and public sector in order to create and maintain infrastructure, as well as deal with the financial and legal aspects of such projects. The fourth approach the development approach concentrates on the development of infrastructure in developing countries where corruption, social deprivation, global disasters are present. This approach includes many forms of cooperation between the public and private sectors such as strategic or entrepreneurial partnerships. The last approach is the governance approach which does not specify any context or policy as it emphasizes on organizational and management side, as well as new ways of cooperation and governing. For the purpose of this thesis, the concept of PPP will be limited to the infrastructure approach.3.1 DEFINITIONEven thought the concept has been narrowed down, there are still many definitions explaining what a PPP is under the approach chosen. For example, the European Commission (2004, p. 3) defines PPPs as forms of cooperation between public authorities and the world of business which aim to ensure the funding, construction, renovation, management or maintenance of an infrastructure or the provision of a service; whereas OECD (2008, p. 12) defines it as an arrangement between the government and one or more private partners (which may include the operators and the financers) according to which the private partners deliver the service in such a manner that the service delivery objectives of the government are aligned with the profit objectives of the private partners and where the effectiveness of the alignment depends on a sufficient transfer of risk to the private partners. Further examples of definition include the one proposed by IMF (2006, p. 1) that explains the concept as the arrangements where the private sector supplies infrastructure assets and infrastructure-based services that traditionally have been provided by the government, and EIB (2004, p. 2) that views PPP as a relationship of the two sectors which has an aim of introducing private sector resources and/or expertise in order to help provide and deliver public sector assets and services... used to describe a wide variety of working arrangements from loose, informal and strategic partnerships, to design build finance and operate (DBFO) type service contracts and formal joint venture companies. An overview of the PPP definitions under the variety of international organizations draws someConclusions on the basic set of features that characterise PPP under the infrastructure approach: long term contractual arrangement between the public and private sector; functions are bundled; responsibility for the provision of the services is shared; resources are shared: the private sector brings in capital, skills, experience, commercial innovation, etc.; the public sector delivers skills, political authority, access to publicly run services, assets, etc.; risks and rewards are shared.In order to understand the PPP concept fully, it is also useful to distinguish it from the traditional procurement mode. The reason for this is that the boundaries between the two modes are ambiguous. In order to remove this ambiguity the main differences between the two modes are identified and explained.First of all, the main differentiating point between PPP and traditional procurement is that in PPPs risks are shared between the private and public partners whereas in a conventional procurement most of the risks are retained by the government4 (European Commission, 2005; OECD, 2008) . This is in line with the functions included in the contracts. In a PPP different tasks are bundled together and, as a result, private partner takes responsibility for the whole package of the associated risks. In the conventional procurement, on the other hand, the government usually purchases a single function from a private partner and, as a result, the private partner is responsible only for the risks associated with this function. Consequently, in the traditional procurement the private partner has no incentives to incorporate decisions that may favour future operations as after completion of the task, the private partner is no longer involved in the operations of the asset/service. For instance, if the government proposed a tender to deliver a package of services, such as design, build and maintain a facility, the private partner involved would be incentivized from the very beginning to make decision that could minimize the future risks associated with cost overruns. Such an example has been identified in the international experience by Grimsey and Lewis (2004, p. 135), where an innovative decision to construct 45-degrees windowsills in UK hospital was proposed with an intention to save future cleaning costs. It is hardly likely that such a decision would have been made in the conventional procurement case. A government would propose a tender to design a facility with input requirements already specified. The specific requirements can be seen as a frame from the private partners point of view as these requirements restrict private partner to innovate and come up with more efficient solutions. The aim of the private partner responsible for a design function is to design a facility while incorporating all the details required and within the budget stated. The review of function bundling and risk allocation in both procurement cases help to determine what defines a PPP and a traditional procurement approach.Secondly, the two modes differ between each other when the function specification is considered. What this means is that, in a PPP, government states what it expects from the private partner in output terms, whereas in the conventional procurement it does that through input specification. Considering the aforementioned example, in a PPP case, government might require a hospital to be big enough to accommodate 300 people and to be kept in a good condition by clarifying what good condition means, whereas in the conventional procurement option, a government would request a certain size, with a certain number of rooms, with specific materials used, etc. In the PPP case, private partner is free to use its skills and innovation in order to provide the outputs required in a most efficient way, whereas the latter case does not allow such a freedom as a private sector is restricted to the requirements specified.Thirdly, in a PPP approach, returns to the private partner are linked to the performance of their functions, i.e. the provision of outputs specified by the government, whereas in a conventional procurement approach, private partner is remunerated for the completion of a specific function. This contributes to the level of incentives attached to the private partner: in a PPP case, if a private partner does not operate as expected, it might incur some sort of penalties (Harris, 2004), if it operates better than expected, it may be awarded by, for example, receiving higher portion of additional profits. In a traditional procurement case, on the other hand, private partner is not awarded for an extra value added to the task it was responsible for, however, it might be penalized for the uncompleted function. Considering all this, the private partner in a traditional procurement is not encouraged to provide more than the government requested for, which means some possible gains might be overlooked.Fourthly, the relationships involved in both of the procurement modes differ (OECD, 2008). In the traditional procurement, in order to deliver the services and infrastructure required, the government acts as an intermediary on the one side it deals with direct users of the services, taxpayers, and financial markets, and on the other side with other private companies. The idea behind such a relationship structure is that the government gathers financing directly from the users of the service, taxpayers and financial markets, and uses it to remunerate the other side the private companies for the capital goods provided to deliver the public service and develope the infrastructure. If the project is handled through a public-private partnership, the intermediary role of the government is decreased public authority deals with the taxpayers and the single private operator only. The role of the private operator, on the other hand, is enhanced: private operator becomes responsible for the intermediary role it collects financing from the direct users of the service and financial markets and remunerates the other side other private companies for the capital goods provided.

3.2. TYPES OF PPPSThe spectrum of different PPPs range from the short term service contracts to concessions. Nevertheless, as the focus of this thesis is the concept of PPP under an infrastructure approach, the overview of different PPP modes will be limited to the ones that are covered by the PPP approach chosen. These modes have common characteristics, such as: being long term, involving risk transfer, shared responsibility, resources and rewards.In general, private partner involvement arrangements in PPPs differ between each other depending on the level of responsibilities and risks transferred to the private partner (Amekudzi & Morallos, 2008). The responsibilities concerned include activities such as: designing, building, financing, maintaining, operating, and owning the facilities. The allocation of risks will be discussed in more detail later in the paper; however, what matters at this point is the amount of risks transferred and retained by the government.Most common forms in the infrastructure approaches are: Turnkey procurement, which includes: BOT (build-operate-transfer), BBO (buy-build-operate), etc. (European Commission, 2003, 2005); DBFO (Design-Build-Finance-Operate), which includes: DBOM (designbuild-operate-maintain), BOOT (build-own-operate-transfer), concessions, etc. (Deloitte Research, 2006; European Commission, 2005; IMF, 2004).Turnkey procurement6 is described as the scheme where the private partner takes on the responsibility to design, construct and operate the asset, whereas the public sector retains the responsibility for the financial risks involved. Using this procurement mode, public sector sets the quality outputs required and by doing so it ensures that the private sector brings the necessary efficiency gains as well as the asset is maintained to the standards expected. This mode of procurement is used in water and waste projects as it ensures incentivized management and maintenance of the asset through the bundling of functions passed on to the private partner (European Commission, 2005).DBFO scheme7 is characterized by involving a private partner with responsibilities (financing, designing, building, constructing, and operating the asset/service) attached to it. Public sectors role is to set the specific output requirements for the private partner, whereas private partners role is to fulfill those requirements. The DBFO schemes are usually long term and involve bundling of functions in order to provide private partners with the necessary incentives for it to operate in the most efficient and innovative way. These schemes involve performance linked payment mechanisms with an aim to ensure the presence of motivation for the private partner to operate on its full capacity. The idea behind such schemes is that the private partner designs, builds, operates and maintains the asset for the agreed term. At the end of this term, the asset is either transferred back to the government or is left under the ownership of the private partner depending on the specific structure of the scheme chosen. For example, one of the most common schemes under DBFO is concession. Concession is described as a PPP scheme, where exclusive rights to operate an asset or provide certain services are granted to a private company (usually a SPV8), which in return has to design, build, finance and operate the asset/service for the time agreed upon. These exclusive rights usually permit the private partners to collect the revenues from the direct users of the asset/service. Concessionaires typically own the rights to the asset/service during the time of concession, however, at the end of this period the ownership of the asset/service is usually transferred back to the public sector (Deloitte Research, 2006; European Commission, 2005; IMF, 2006). Literature overview shows that concession is usually assumed to be a form of PPP (Deloitte Research, 2006; European Commission, 2004; IMF, 2006; Ng, Xie, Cheung, & Jefferies, 2007; PwC, 2005), however, OECD (2008) argues the opposite. First of all, it states, that the amount of risk transferred differs in PPPs and concessions: concessions involve higher level of risks allocated to the private partner, compared to other forms of PPPs. Secondly, it is usual for concessionaires to collect revenues from the direct users of the asset/service and, according to OECD, this feature differentiates concession from other PPP forms. As a result, OECD concludes that concessions should not be treated as a PPP. The international experience shows that most of the time DBFO schemes are used in transport sector for building highways, bridges, railways, whereas concessions are chosen for mobile phone services, toll roads or provision of municipal water.The similarities between the turnkey procurement and DBFO schemes are that the activities involved are same in both of the schemes, differing only in the amount of functions involved in the arrangements. What differentiates the two schemes is that in the first one the majority of risks remains within the public sector, whereas in the latter risks are shared between the partners, allowing for the possibility to transfer the optimal amount of risks to the private partner.3.3 REASONS FOR IMPLEMENTING PPPSThe main objective of procuring a public project through a PPP mechanism is to achieve value for money (VFM) (Grimsey & Lewis, 2004; Harris, 2004; New South Wales Government; Quiggin, 2004; Shaoul, 2005) which as Grimsey and Lewis (2005, p. 347) argue is the optimum combination of whole life cycle costs, risks, completion time and quality in order to meet public requirements. This definition assents to the one implied by the European Commission (2003, p. 55) which identifies a set of factors that determine value for money: life cycle costs, allocation of risks, time required to implement a project, quality of a service, and ability to generate additional revenues. Following this, a general principal used to determine whether a project should be implemented through a PPP or a traditional procurement is to evaluate which procurement mode ensures lower life cycle costs, better allocation of risks, quicker implementation, higher quality and additional profits. In other words, additional value for money represents additional efficiency gains delivering or maintaining the same service or asset in a more cost efficient or a more qualitative way than it would have been if the government retained the full responsibility for delivering/maintaining service/asset concerned (EIB, 2004, p. 4; Meidute & Paliulis, 2011; Nisar, 2006). EIB (2004) argues that the critical aspect in order to reach value for money is the ability to share risks and rewards appropriately. OECD (2008) confirms this view recognizing that main reasons for PPP establishment are the appropriate risk allocation and value for money gains9. Grimsey and Lewis (2005, p. 347), however, imply that the value for money gains can only be achieved if the following conditions are present: a competitive environment, optimal risk allocation and if the comparison between the financing options is handled in a fair, realistic and comprehensive way. Furthermore, when questioning PPPs ability to deliver additional gains, one should consider the qualitative benefits of PPPs whether they are achievable and whether they really provide the benefits expected. It is essential therefore to check whether the private partner is capable of bringing in skills that the government lacks and whether it has the expertise and know-how necessary to operate more efficiently compared to the government (PwC, 2005).According to the literature review, further reasons that lie behind the use of PPP as a procurement mode differ between countries depending on the environment present. For example, the main aim of a PPP at the early stage of its development in the United Kingdom was to finance the public infrastructure projects (Grimsey & Lewis, 2004; IMF, 2006; Meidute & Paliulis, 2011). The issue at that time consisted of a growing need for public infrastructure development (as it also is the case in Hong Kong (Cheung, Chan, & Kajewski, 2009)) and a lack of available public funds to finance this need. As a result, a new initiative took place Private Finance Initiative (PFI) with the purpose to provide additional funds for public infrastructure projects. On the other hand, countries like Australia do not have such an issue. They are capable of financing projects by themselves, however, they still choose to involve the private sector for the possibility of achieving additional value (Cheung et al., 2009). Moreover, Hong Kong and Australia involve a private partner into the procurement of public services with the aim to ensure a better quality of services. This, on the other hand, does not seem to be the prioritized reason for the PPP development in the United Kingdom, which emphasizes the point that reasons to implement PPP depend on the circumstances surrounding countries economic and political environment.In many of the countries the choice for PPPs, however, is due to financial reasons (such as lack of public funds and restricted public investment). This reason is amplified when a tight fiscal environment following the development of European Monetary Union (EIB, 2004, p. 4) is considered as due to this European countries experience difficulties in organizing large investment sums to finance public infrastructure projects from the public funds only.All in all, in theory, the main reason to develop PPPs lies behind the concept of value for money, creating additional benefits due to private partners expertise, know-how, ability to operate efficiently and generate additional revenues. Despite the theoretical foundations, it is evident that PPPs are also often used in cases when there is a lack of public funds for the growing need for public infrastructure.3.4. VALUE FOR MONEYThe allocation and valuation of projects risks is inherent in the value for money concept (European Commission, 2003; Grimsey & Lewis, 2004; Nisar, 2006; Sarmento, 2010). The aim of the risk transfer is to transfer only those risks that the private partner could offset in a most efficient and least costly way(Grimsey & Lewis, 2004; Harris, 2004; Nisar, 2006). Risk allocation produces highest value for money once the optimal risk transfer point is identified: transferring too much or too little risks results in either procuring an inefficient project or procuring a project with excess costs incurred by the government (for example, if risks are transferred to the private partner that it does not have control over or cannot control it at least-cost, then the private partner will require higher premium for these additional risks assumed (Hodge, 2004)), consequently, producing lower value for money (Amekudzi & Morallos, 2008).Unfortunately, there is no universal solution regarding risks allocation for every single project, however, there is a general agreement on how different risks should be allocated. To begin with, risks in general are allocated to different categories, such as, for example, proposed by OECD (2008): legal and political risks in addition to the commercial ones. Categories are differentiated on the basis of who takes the responsibility for the risks concerned private partner or the government authority. For example, construction, supply and demand side risks lie under the commercial risk category (market risk, project risk and internal risk) as they are handled better by the private partner, whereas legal and political risks are assumed to be handled better by the government. Other categorization is proposed by Li, Akintoye, and Hardcastle (2001), who distribute risks into three levels: macro, meso and micro. Macro level covers risks outside the project environmental, political, legal risks that are concerned with national or industry level. Meso level risks emerge within the projects implementation phase design, construction, operation. Finally, the micro level risks concern risks that appear between the partners involved, they rest on the idea that both of the parties have different incentives and objectives, and therefore, risks due to power struggle, differences in working methods and environment between the partners may emerge. 3.5. ADVANTAGES AND DISADVANTAGES OF PPPAs it has already been reviewed, the appropriately constructed PPPs entail the advantage of delivering better value for money compared to the traditional procurement approach. Delivering projects on time and on budget set (Meidute & Paliulis, 2011) are two of the most important advantages that are hidden under the concept of value for money. As study conducted by UKs National Audit Office (2003) showed, from all conventionally procured projects, 70% were delivered late and 73% with costs exceeding the initial budget (data of 1999), whereas only 22% of PFI projects were late and only 24% delivered project in excess of the budget (data of 2002). The reason for such a difference lies behind the risks transferred in line with additional responsibility and accountability attached to the private partner in the case of PPP, what incentivizes the private partner to operate in the most efficient way. In addition, due to the long term characteristics of the partnerships, partners involved tend to act in a more cooperative way to each other in this case creating additional synergy benefits. Private partner manages complex financial arrangements as well as highly technical tasks more efficiently by using its innovative skills, on the other hand the public sector preferably controls the legal system, regulation and policies. As a result, a combination of the leading features of both of the partners produces a higher value (Harris, 2004).The other advantage of PPPs lies behind the construction of the proposal to procure a public project. Government constructs PPP proposals that focus more on outputs rather than inputs. As a result, such mindset encourages government to perform a thorough discussion on which services should be provided, what standards should be expected, and what is the aim of the service provided/asset developed. Such a detailed discussion on service provision or asset development requires a detailed analysis of the project which in some of the cases may hinder the government from moving ahead if the project becomes inadequate. In addition, such kind of initial discussions encourage the government to think about the project with long term strategic goals in mind rather than focus on short term objectives.Furthermore, PPPs ability to spread the costs of large investments over the lifetime of the asset is seen as an attractive advantage for the public sector. This eases the current debt of the government sector as it does not have to incur large cash outflows immediately. It follows, that the government can get projects financed even though in reality there are no public funds available. This advantage could be considered from two points of view: first large investment costs are spread out, and second private funds are considered as the new financing opportunities for the government (Meidute & Paliulis, 2011). On the other hand, this advantage should be considered with caution as sometimes the government might be incentivized to prove better value for money for a PPP project than it actually is just to guarantee the financing of the project.Finally, from the private partners point of view, PPPs deliver opportunity for the private sector to get involved in the new markets (telecommunication, municipal water systems, energy, etc.) that otherwise would be closed for the private sectors participation. In addition to this, the private partner involved in the new markets has a support of the government, which may facilitate gathering the funds required.On the other hand, one of the main disadvantages of PPPs is large bidding and contractual costs, which refer both to the government and the private partner. Large bidding costs of the PPP projects act as a rejecting force for the private parties as they are unwilling to invest heavily in the bidding process just to be rejected later. What concerns government, large preparation costs consist of feasibility studies, lawyers, etc. Moreover, PPP projects are highly complicated. Usually, they involve more than two parties: public, private and banking sectors, and all of these parties have their own contradicting aims. In order to construct a unified agreement, a lot of time and capital needs to be invested on complex negotiations.Furthermore, PPPs are said to deliver benefits because they transfer a significant amount of risks to the private partner. Nevertheless, it should be kept in mind that even though most of the risks are transferred to the private partner, the final entity that is responsible for providing services to the public is the government. As a matter of fact, if the private partner goes bankrupt, solely the government has to deal with the consequences and try to find other expedients how to keep delivering the service to the public. This implies that even though the risks are contractually transferred to the private partner, in practice, government retains a large portion of them in case of the private partners failure.Moreover, in a PPP agreement, government bounds itself to a single private partner for a long term period and it agrees today for services/assets that will be in use in further future. There is a certain amount of risk concerning the future consumers need for the specific service. The idea behind the risks concerned is that the partnership may end up delivering services that are no longer required by the public. As a result, the partnership will appear to be less valuable than initially expected.Finally, PPPs work well only for specific projects, which are complex and require specific private partners know-how, skills, and experience. Therefore, advantages that are attached to PPPs are attained only if certain project characteristics are met, whereas if the project is simple, executing it trough a PPP implies higher preparation costs, and as a result, lower value for money.Considering all of the above, the main idea behind the PPP option is to have a project intricate enough that its complexity could justify additional preparation and negotiation costs. Developing a project through a PPP usually ensures additional benefits such as implementing the project on time and on budget. Nevertheless, these benefits should be considered while keeping in mind the risks involved in having the long term agreement between private and public sectors for a certain service provisions.3.6 CRITICISM OF PPPSEven though the majority of the international institutions seem to favour the PPP option (EC, UK Treasury, OECD, IMF), some of the researchers see PPPs as a language game in the politics PPP is regarded as another way of privatizing a service/asset (Hodge & Greve, 2007). This point of view has been neglected by many other researchers who represent arguments proving that PPPs differ from the privatization (Grimsey & Lewis, 2004; Harris, 2004; Hong Kong Efficiency Unit, 2008; OECD, 2008). One of the first differences identified is the sale/transfer concerned. PPP involves government granting a right to the private party to develop and provide certain services/assets for a period of time, whereas privatization, in general terms, involves the sale of the asset. This assents to the amount of risks transferred. In PPP case, the amount transferred differs on the type of PPP chosen. Concession is the mode of PPP that involves the largest amount of risks transferred to the private partner; however, it still does not encompass the transfer of all risks. On the other hand, privatization includes the sale of the full package, which means the transfer of all associated risks. In this case, government is left with no direct responsibility for the service provided/asset developed, whereas in a PPP case, government is the one that retains the initial control and responsibility for the service/asset (Harris, 2004). If the private partner goes bankrupt, the service/asset is transferred back to the government. If the private partner does not operate to the standard required, the government has a right to intervene and punish the private partner. All in all, it is true that privatization and PPP share some similarities, but the idea of PPP is that it shares some superior features of the privatization as well as of the conventional procurement mode as Grimsey and Lewis (2004) argue: PPP fills in the missing gap between privatization and the traditional procurement approach.Other critiques concentrate on the idea that the government should be fully responsible for the services provided as this is the role of the government and not the private sector. However, as Harris (2004, p. 3) argues, the provision of public services (such as free education, transportation or health) by the government is comparatively recent development. So the question rises whether it is the actual provision of the services or is it the regulation and control of the service provision (what kind of services to deliver, what kind of standard should be kept, what policy to follow, etc.) that is the role of the government? As Harris (2004) concludes the role of the government is to ensure that a policy is being adopted. If delivering the policy through the parties that are able to do that in the best possible way while additionally creating value for money to the public means that the private partner should be involved, then the advantages of private partners efficiency and innovative skills should be utilized.Further critique concerns the view that PPPs are a trendy politics. This means that countries might favour PPPs over the conventional procurement due to the lack of public funds available. Owing to this, the government is left with a choice not between a PPP and a conventional procurement project but with a choice between a project and no project at all as a government is unable to finance the project from its own funds (Robinson, 2000; Shaoul, 2005). The problem of such a preference for PPPs is that there is a high degree of possibility for approval of projects that do not generate better value for money but are accepted for the financial resources only getting a project procured while having debt off governments balance sheet (Maski & Tirole, 2008). In addition to this, as value of PPPs are most of the times assessed by using PSC, problems appear when hypothetical risk-adjusted nature of the model is considered. The PSC depends highly on the assumptions employed (Amekudzi & Morallos, 2008), one of the most important one being the rate used to discount the cash flows of the PSC. Furthermore, when risks allocation is performed, it is criticized that not all of the risks may be identified and valued (Amekudzi & Morallos, 2008; OECD, 2008; Shaoul, 2005), thus leading to inaccurate PSC estimate. As OECD (2008) argues some of the risks may be left out and neither of the party initially agrees to take responsibility for it, however, once the risk evolves, it is the government and the public that have to bear the consequences and not the private partner, leaving some element of value for money out of the initial estimate. Considering all this, the value for money estimate may be easily adjusted in order to make the PPP proposal more attractive, which is seen as a problem when the only reason for PPP project implementation is the lack of public funds.Moreover, it has been noted that an advantage of PPP is its ability to spread out the huge initial investment costs throughout the years of the lifetime of the asset. This means that the government avoids large investments today and is able to incur them later on in smaller amounts. However, who may guarantee that the government with increasing number of PPPs will be capable of financing these payments in later years? Will it pass this contingent liability to the future taxpayers (Harris, 2004)? In addition, who can be reassured that the same service/infrastructure will be necessary in, for example, 30 years? In addition, will the taxpayers be happy for paying taxes for the services that are unnecessary anymore? These questions are especially relevant to the cases of PPPs where the government contracts to pay availability payments for the services provided by the private partner.Overall, PPPs attract some significant critiques, however, it should be noted that PPPs are not a magic solution for the conventional procurement issues. The true experiences of PPPs have not been observed yet as it takes time to acknowledge the full impact of each PPP, however, the initial stages of the PPP and the theoretical foundations allow PPPs to be considered as a possible way to bring on additional efficiency gains to the public sector.

Chapter 4Private InvestmentsThere is a growing demand for investment to improve the quality of public services. Public sectors or governments worldwide are experiencing significant challenges as public resources are often insufficient to meet the increasing demand for new infrastructure projects to facilitate and sustain economic growth. As a result, there has been a growing and intense debate about the respective roles of the public and private sectors in the delivery of traditional public services. The United Kingdom and many other developed countries in Europe, United States, Canada, Australia, New Zealand and many developing and middle-income countries from Asia, Latin America and the Caribbean, Eastern Europe, Africa and the Middle East have now recognised the importance of the private sector in the delivery of traditional public services.There are various definitions of the term public-private partnership (PPP). PPP is a generic term for any type of partnership involving the public and private sectors to provide services. It is generally a contractual arrangement where the private sector performs some part of a public sector service delivery responsibilities or functions by assuming the associated risks in return for payment. A recent research paper by the World Bank (2007) defines a PPP broadly as an agreement between a government and a private firm under which the private firm delivers an asset, a service, or both, in return for payments contingent to some extent on the long-term quality or other characteristics of outputs delivered. The Indian definition of PPP states that Public Private Partnership (PPP) Project means a project based on a contract or concession agreement, between a Government or statutory entity on the one side and a private sector company on the other side, for delivering an infrastructure service on payment of user charges. Private Sector Company means a company in which 51% or more of the subscribed and paid up equity is owned and controlled by a private entity. But regardless of the definitions, the objective is to utilise the strengths of the different parties to improve public service delivery and should always be underpinned by clear principles and contractual commitment reflecting a balance between profit and the need for regulation to ensure value for money in the use of public resources. Under a PPP approach, public sector expertise are complemented by the strengths of the private sector such as technical knowledge, greater awareness of commercial and performance management principles, ability to mobilise additional investment, innovation, better risk management practices, and knowledge of operating good business models with high level of efficiency. In a developing country like India, the model of this type has enormous opportunities in the upliftment of economy specially in infrastructural and service sectors.4.1 Evolution and Development of PPPsPublicprivate partnerships have a long history in many countries, but grew significantly more popular during the 1980s. At this point, private sector thinking was introduced and used in the public sector, and market-based criteria were applied to the delivery of public products and services. During the 1990s, New Public Management (NPM) and market-based philosophies further influenced public management in many countries. Because the degree of complexity of the problems needing to be solved increased as a result of growing interdependencies between assignments and parties involved, more partnerships between public and private sectors were formed.Publicprivate partnerships have the longest tradition in the USA. In the 1950s and 1960s, PPPs in the USA were set out by the federal government as a tool for stimulating private investment in intercity infrastructure and regional economic development. They became an explicit instrument during President Carters administration: the 1978 National Urban Policy and Urban Development action grant (UDAG) encouraged cities to go from private investment subsidies to joint equity venture PPPs.Throughout the 1980s, PPPs increasingly became a derivative of the privatization movement and government rethinks. Private providers were assumed able to provide higher quality goods and services at lower cost, thereby significantly reducing the governments tasks and responsibilities. It was not only in the USA that PPPs assumed greater importance in the latter half of the twentieth century. In Spain, early examples occurred in the 1960s and toll roads had already been developed by 1968. In the UK, the 1979 Conservative government believed that central government was too involved in the economy and needed to step down in favour of utilising private capital. Enterprise zones and urban development corporations (UDCs) were important instruments in this ambition. In the UK in the late 1980s, the Thatcher administration turned to PPPs as the preferred method for economic regeneration. City Challenge, the programme that encouraged local authorities to propose schemes for economic regeneration in partnership with local businesses, replaced UDCs. The UK thinking on partnerships was significantly influenced by the best practices in the USA.Other parts of Europe also started using PPPs in the late 1980s. Examples of PPPs in developed countries can also be found outside Europe and the USA. In Australia, for example, the introduction of publicprivate arrangements for the provision of infrastructure dates back to the early 1990s. In many countries worldwide we see similar trends in private sector involvement and PPP developments. At first sight the rationale behind publicprivate cooperation is similar: in all countries, governments are relying increasingly on private sector money and skills. However, there are major differences in the motives and procurement rules in different forms of PPP between countries.4.2 Types of PPP ModelsThere are various types of PPPs, established for different reasons, across a wide range of market segments, reflecting the different needs of governments for infrastructure services. Although the types vary, two broad categories of PPPs can be identified: the institutionalised kind that refers to all forms of joint ventures between public and private stakeholders; and contractual PPPs.

4.2.1 Concession ModelConcessions, which have the longest history of public-private financing, are most associated with PPPs. By bringing private sector management, private funding and private sector know-how into the public sector, concessions have become the most established form of this kind of financing. They are contractual arrangements whereby a facility is given by the public to the private sector, which then operates the PPP for a certain period of time. Oftentimes, this also means building and designing the facility as well. The normal terminology for these contracts describes more or less the functions they cover. Contracts that concern the largest number of functions are Concession and Design, Build, Finance and Operate contracts, since they cover all the above-mentioned elements: namely finance, design, construction, management and maintenance. They are often financed by user fees (e.g. for drinking water, gas and electricity, public transport etc. but not for social PPPs e.g. health, prisons, courts, education, and urban roads, as well as defence).4.2.2 Public Finance Initiative (PFI) ModelAnother model is based on the UK Private Finance Initiative (PFI) which was developed in the UK in 1992. This has now been adopted by parts of Canada, France, the Netherlands, Portugal, Ireland, Norway, Finland, Australia, Japan, Malaysia, the United States and Singapore (amongst others) as part of a wider reform programme for the delivery of public services. In contrast to the concession model, financing schemes are structured differently. Under PFI schemes, privately financed contracts for public facilities and public works cover the same elements but, in general, are paid, for practical reasons, by a public authority and not by private users. For Example, public lighting, hospitals, schools etc. come under such scheme.There are a range of PPP models that allocate responsibilities and risks between the public and private partners in different ways.The following terms are commonly used to describe typical partnership agreements:Buy-Build-Operate (BBO): Transfer of a public asset to a private or quasi-public entity usually under contract that the assets are to be upgraded and operated for a specified period of time. Public control is exercised through the contract at the time of transfer.Build-Own-Operate (BOO): The private sector finances, builds, owns and operates a facility or service in perpetuity. The public constraints are stated in the original agreement and through on-going regulatory authority.Build-Own-Operate-Transfer (BOOT): A private entity receives a franchise to finance, design, build and operate a facility (and to charge user fees) for a specified period, after which ownership is transferred back to the public sector.Build-Operate-Transfer (BOT): The private sector designs, finances and constructs a new facility under a long-term Concession contract, and operates the facility during the term of the Concession after which ownership is transferred back to the public sector if not already transferred upon completion of the facility. In fact, such a form covers BOOT and BLOT with the sole difference being the ownership of the facility.Build-Lease-Operate-Transfer (BLOT): A private entity receives a franchise to finance, design, build and operate a leased facility (and to charge user fees) for the lease period, against payment of a rent.Design-Build-Finance-Operate (DBFO): The private sector designs, finances and constructs a new facility under a long-term lease, and operates the facility during the term of the lease. The private partner transfers the new facility to the public sector at the end of the lease term.Finance Only: A private entity, usually a financial services company, funds a project directly or uses various mechanisms such as a long-term lease or bond issue.Operation & Maintenance Contract (O & M): A private operator, under contract, operates a publicly owned asset for a specified term. Ownership of the asset remains with the public entity. (Many do not consider O&Ms to be within the spectrum of PPPs and consider such contracts as service contracts.)Design-Build (DB): The private sector designs and builds infrastructure to meet public sector performance specifications, often for a fixed price, turnkey basis, so the risk of cost overruns is transferred to the private sector. (Many do not consider DBs to be within the spectrum of PPPs and consider such contracts as public works contracts.)Operation License: A private operator receives a license or rights to operate a public service, usually for a specified term. This is often used in IT projects.4.2.3 PPP vs. PrivatisationThe central question on governance from the perspective of PPPs is how to organise the interaction between public and private sector. The main goal is to improve efficiency, quality of public services and products, and legitimacy. The question how to organise a PPP cannot be answered in general for every market, and, in most cases even for every project, the answer has to be customised. Confusion about the PPP concept is striking in the political and social discussion on these governance questions. Often, PPP is used as a synonym for privatization. Nevertheless, there are significant differences between PPP and privatisation. In PPPs, public and private parties (actors) share costs, revenues and responsibilities. Privatisation represents the transfer of tasks and responsibilities to the private sector, with both costs and revenues being in private hands. The confusion impedes a rational discussion about PPPs since all the disadvantages of privatisation are imputed to PPPs.The key differences between public-private-partnership and privatisation may be summarised as :Responsibility: Under privatisation the responsibility for delivery and funding a particular service rests with the private sector. PPP, on the other hand, involves full retention of responsibility by the government for providing service.Ownership: While ownership rights under privatisation are sold to the private sector along with associated benefits and costs, PPP may continue to retain the legal ownership of assets by the public sector.Nature of Service : While nature and scope of service under privatisation is determined by the private provider, under PPP the nature and scope of service is contractually determined between the two parties.Risk & Reward : Under privatisation all the risks inherent in the business rest with the private sector. Under PPP, risks and rewards are shared between the government (public) and the private sector.4.3 PPPs in IndiaThere is now over 10 years experience in India in the development and use of PPPs for delivering infrastructure services. Policies in favor of attracting private participation have met with varying degrees of success, but real progress has been made in some sectors, first in telecommunications, and now in ports and roads, and with individual projects in other sectors. There has been considerable innovation with different structures now being developed to attract private participation. But at the same time progress has been uneven.India had a few notable PPPs as early as the 19th century. The Great Indian Peninsular Railway Company operating between Bombay (now Mumbai) and Thana (now Thane) (1853), the Bombay Tramway Company running tramway services in Bombay (1874), and the power generation and distribution companies in Bombay and Calcutta (now Kolkata) in the early 20th century are some of the earliest examples of PPP in India. Since the opening of the economy in 1991 there have been several cautious and tentative attempts at PPP in India. However, most PPPs have been restricted to the roads sector. Large private financing in water supply has so far been limited to a few cities like Visakhapatnam and Tirupur. Most PPPs in water supply projects have been through municipal bonds in cities such as Ahmedabad, Ludhiana, and Nagpur. West Bengal has recorded significant success in housing and health sectors. For example, the housing projects coming up on the outskirts of Kolkata City are a good example of what a PPP model can deliver in terms of quality housing and quality living conditions to the lower middle class and the middle class. Gujarat and Maharashtra have had success especially in ports, roads, and urban infrastructure. Karnataka also has done well in the airport, power, and road sector. Punjab has had PPPs in the road sectorA study conducted by the World Bank of 12 states and 3 central agencies in 2005 in India found only 86 PPP projects awarded by states and select central agencies (not including power and telecom). Their total project cost is Rs 339.5 billion. An optimistic projection of PPPs growing by, say, five times between 2004 and 2006, in a country of Indias size, that is, around 500 projects, is not very encouraging. The largest number of PPP projects is in the roads and bridges sector, followed by ports, particularly Greenfield Ports. Apart from these two sectors, there are very few PPP initiativesAcross states and central agencies, the leading users of PPPs by number of projects have been Madhya Pradesh and Maharashtra, with 21 and 14 awarded projects, respectively, all in the roads sector, and the National Highways Authority of India (NHAI), with 16 projects. The other states or central agencies that have been important users of PPPs are Gujarat (9 projects) and Tamil Nadu (7), Karnataka (4) and Ministry of Shipping, Road Transport and Highways (MOSRTH) (4). However, looking at a breakdown by estimated project size, we see that MP becomes significantly less prominent due to the large number of relatively small-sized projects in its portfolio, falling to 3 percent of total project costs. States like Andhra Pradesh, Gujarat, and Punjab have legislation which clearly defines what infrastructure is and how these infrastructure projects are going to be executed by the private sector. Some other states have administrative frameworks in place for decision-making. Despite these frameworks, in the last five years the number of successful projects has not increased substantially. Madhya Pradesh and Maharashtra have exhibited the possibility of developing a PPP program in a single sector (roads) by building up capacities in line departments. However, they have no PPPs in other sectors, possibly in part because of the absence of platforms to transfer acquired skills to other departments. Gujarat, Andhra Pradesh, and Punjab have developed cross-sectoral enabling legislation and dedicated agencies but have not had a very successful track record in taking PPPs to the market. Some other states, such as Tamil Nadu, have developed a few PPPs across a wide range of sectors, without explicit cross-sectoral PPP units or legislation. Rajasthan has a cross-sector policy/ regulatory framework and a project development company but has concluded only one tourism project and a few road projects. Therefore, there seems to be no clear link between institutional structure and success of PPP. One possible reason for this is the non-availability of sufficient skilled staff in the Government of India as well as in the states, who could actually look at how PPP projects should be structured. This is one important area where significant capacity building is required, both at the Centre and in the states.Various studies in developed and developing countries have shown that there is a significant shortfall in infrastructure investment and lack of maintenance resulting in a deteriorating stock of public infrastructure capital to support the deliveryof core public services. Public-private partnership is an approach that is increasingly adopted to facilitate the improvement of public services where there are public sector budgetary constraints and there is a need for innovation by stimulating private investment in infrastructure facilities such as health, education, transport, defence and social housing, regeneration and waste management. The alternative public-private partnership is a whole-life or integrated approach from design to facilities management and service delivery aimed at addressing the problems associated with the traditional approach by creating a shift in emphasis from building contracting and lump sum payment to service contracting and performance-based payment. However, it is important that appropriate policy, strategic and implementation structures and processes are in place to address the key objectives of the public sector in PFI/PPP projects. Another critical success factor that should be added is sustainability to reflect the increasing need to balance economic objectives with environmental and social obligations. puttingTypically, in larger countries, the national PPP units will not undertake the projects but rather provide the policy, technical, legal and other support mechanisms to local authorities and government ministries that have the responsibility of the project together. Practically, it can help the relevant procuring authority more confidently manage the whole process from the development of the initial project design through to the bid evaluation process and post-financial close. In India, NHAI, MOSRTH attracting PPP projects, is an example of such mechanism. Though PPP is a relatively new approach to procurement, lessons could be drawn from the experiences of developed and developing countries on the conditions for the success of PPP. As a relatively late entrant in the PPP development process, India can learn and benefit from these lessons.

Chapter 5Pipavav Port Rail Connectivity 5.1 General Port Pipavav is located at Latitude 20 54N and Longitude 71 30E on the west coast of India, in the state of Gujarat. For decades the port was functioning as an anchorage serving the then existing minor Port called Port Albert Victor. It is protected by islands on either side, which act as a natural breakwater making the port safe in all weather conditions. The presence of these islands also leads to the tranquility in the harbor as well as ensures the wave height is less than 0.5m most of the time.In 1992, it was decided to develop the port as an all weather facility for handling bulk, liquid and container cargo. A private limited company called Gujarat Pipavav Port Limited (GPPL) was incorporated as a joint venture between Sea King Infrastructure Limited and Gujarat Maritime Board, a state owned organization.General cargo handling operations at the Port commenced in November 1996 followed by container handling operations in 1998. Presently, the container terminal offers direct services to Europe, US East Coast, China and the Far East. Port Pipavav is today recognized as one of the principal gateways on the West Coast of India.The port is being developed for handling 19 million tonnes of cargo per annum including 13 million tonnes of containerized cargo. APM Terminals is making an investment of US$ 245 million to develop the facilities. With available draft of 13.5 metres, the port is also able to handle Post-Panamax vessels.

5. 2ConnectivityInitially, there was no rail connection to the port. The nearest railhead was located at a distance of 18 km on the Rajula-Surendranagar metre gauge line of Western Railway, beyond which the broad gauge rail network was available. In the absence of a rail connection, the Port could not be adequately developed; hence its keenness for a proper rail connectivity, preferably a broad gauge rail link.Indian Railways had earlier sanctioned a project to convert the existing Rajula-Surendranagar metre gauge line into broad gauge as a part of the railways long-term plans for broad gauge network on the entire system. However, financial constraints had prevented its timely execution. In the meanwhile, the Ministry of Railways launched a programme for undertaking rail projects through public-private partnership.In 1998, GPPL proposed a joint venture with the Ministry of Railways to undertake the rail connectivity project which would include provision of a rail link of 18 km and conversion of the existing meter gauge line. Detailed feasibility studies and traffic projections established the financial viability of the proposed project. A memorandum of understanding (MoU) between Ministry of Railways and Gujarat Pipavav Port Limited was signed on 28 January 2000.Based on the techno-economic studies, a business plan of the proposed joint venture was prepared by financial consultants engaged by GPPL. This plan was reviewed in the Ministry of Railways, who then obtained formal approval of the Government of India. As a follow-up, Pipavav Railway Corporation Limited was incorporated in May 2000 as a joint venture with equal participation between the Indian Railways and the Gujarat Pipavav Port Limited.The above was followed by a host of agreements between various stakeholders Ministry of Railways, Western Railway (a constituent of Indian Railways), Gujarat Pipavav Port Limited, Pipavav Railway Corporation Limited. A Shareholders Agreement between MOR and GPPL was signed on 28 March 2001, Concession and Lease Agreements between MOR and PRCL on 28 June 2001.The Construction Agreement for the project between PRCL and Western Railway was signed on 13 March 2002, followed by Operation and Maintenance Agreement in January 2003. The Transportation and Traffic Guarantee Agreement was signed between GPPL, PRCL and Western Railway in February 2003. The table below shows the various contractual agreements and the dates of their execution between different parties.Table 1: Chronology of Agreements

Sl. No.AgreementParties to AgreementDate

1MoU for formation of SPVMOR & GPPL20.01..2000

2Concession AgreementMOR (GOI) & PRCL28.06.2001

3Lease AgreementMOR (GOI) & PRCL28.06.2001

4Construction AgreementPRCL & Western Railway (GOI)13.03.2002

5Memorandum & Articles of Association of PRCLPRCL17.04.2002

6Operation & Maintenance AgreementPRCL & WR (GOI)15.01.2003

7Transportation & Traffic Guarantee AgreementGPPL; WR and PRCL15.02.2003

8Shareholders AgreementMOR & GPPL28.03.2001

5.3 Concession AgreementUnder this agreement, the President of India through the Ministry of Railways is the Licensor and PRCL is the Concessionaire for the project. The concession period is for 33 years and permits PRCL to own and operate the project line both for freight and passenger operations. It enjoins upon the SPV to pay lease rent of Rs. 2 crore (20 million) per year to the Ministry of Railways for the use of land and other assets. In turn, the railways would pay to PRCL the apportioned revenue derived from the freight moved on the rail line after deducting the operational expenses. The revenue derived from passenger services is not apportioned, since there is a heavy subsidy component in the fare structure.5.4 Transportation and Traffic Guarantee Agreement Under this agreement, WR guarantees evacuation of traffic from the port by timely supply of wagons, and GPPL guarantees traffic of 1 MT in the first year, 2 MT in the second year and 3 MT in the third and each of the subsequent years. Failure on the part of either party attracts penalties. Shortfalls in offering of traffic on the part of GPPL or its evacuation by the railways is be converted into deemed traffic and proportionate revenue is to be credited to PRCL as compensation.5.5 Construction Agreement This agreement enjoins upon Western Railway to design and construct the railway line with the SPV procuring and supplying the construction materials. The specifications and standards laid down by the Ministry of Railways were to be followed.5.6 Operations and Maintenance Agreement It lays down the process, procedure and accountal of operating and maintenance practices to be followed by Western Railway and the SPV.It would be seen that there was a considerable time lag from the conceptualization of the project to the execution of various contractual agreements specifying the roles and responsibilities of the concerned stakeholders. This was mainly due to the fact that PRCL was the first joint venture under the Ministry of Railways and all agreements had to be evolved ab initio. There was also the usual bureaucratic zeal observed for safeguarding the interests of the government, with a mindset not fully attuned to the new paradigm of public-private partnership. Furthermore, all agreements had to be vetted by the Ministry of Law, Government of India.5.7 Project ProfileThe total length of project line is 268.84 km. A metre gauge (MG) railway line existed between Surendranagar and Rajula Junction. This stretch was converted to broad gauge. A new line of 18 km length was constructed between Rajula and Pipavav station. The alignment traverses Surendranagar, Amreli and Bhavnagar districts in Gujarat.The broad gauge rail line (1,676 mm gauge) was constructed fit for a maximum speed of 100 kmph. Standard III inter-locking is provided with Multi-Aspect Colour Light Signals and token-less block instruments. Level crossing gates are inter-locked by signalling with adjoining stations.The project involved construction of 198 bridges: 32 major and 166 minor bridges on the gauge conversion route and 3 major and 16 minor bridges on the new line section between Rajula and Pipavav. In the gauge conversion section (between Surendranagar and Rajula), the existing station buildings were utilised and two new stations were built, one each at Rajula and Pipavav. There are 35 railway stations on the rail route from Surendranagar to Pipavav.5.8 PRCLs PromotersPRCL was promoted by the Ministry of Railways (Govt. of India) and GPPL.Ministry of Railways: Railways are a full fledged Ministry with a Minister of Cabinet rank holding charge. IR is fully owned by the Government of India, administered by Railway Board. Indian Railways (IR), the fourth largest railway network in the world, has a route length of 63,500 km. IR has 1.5 million employees running over 8,000 passenger trains and 5,500 freight trains every day. It moves over 17 million passengers and 2.0 million tones of goods daily. Its rolling stock fleet includes some 8,300 locomotives, 4,400 coaching vehicles and 210,000 freight wagons.Gujarat Pipavav Port Limited: Gujarat Pipavav Port Limited (GPPL) is one of the first private sector ports in India. It was incorporated in 1992, as a joint venture between Sea King Infrastructure Limited (SKIL) and Gujarat Maritime Board for developing and operating an all-weather port for handling bulk, liquid and container cargo at Pipavav, in Amreli district of Gujarat. The cargo handling operations had commenced in 1998.GPPLs principal shareholders are:i. A.P.Moeller-Maersk Sealand (APMT/Maersk), one of the largest port container terminal operators in the world and the largest container shipping line, with around 20% worldwide market share. It holds 50.76% shares. APMT/Maersk is in the process of developing the Pipavav port into a world-class port with state-of-the-art container handling facilities and terminal management.ii. AMP Capital Investors,iii. New York Life International India Fund,iv. Industrial Development Bank of India (IDBI),v. Unit Trust of India (UTI) and Infrastructure.vi. Leasing & Financial Services Ltd. (IL&FS)The key developments from conceptualisation of Pipavav port to APMT/Maersk taking over its management control have been as follow: 1986 - Gujarat Maritime Board (GMB) initiates development of Pipavav Port February 1992 GMB enters into an MoU with Sea KingInfrastructure Ltd. (SKIL) group led by Mr. Nikhil Gandhi June, 1992 MoU converted into Joint Venture agreement July, 1997 Government of Gujarat (GoG) announces BOOT Policy - June 1998 GMB divests its entire equity in favour of SKIL Group - July 1998 GoG declares Model Concession Principles for ports September, 1998 Concession Agreement based on Model Principles signed September, 1998 Lead promoter SKIL licensed to develop, operate, and maintain the port April, 2005 GoG agrees to change the promoters SKIL group to A.P.Moller-Maersk group, Denmark May, 2005 APM Terminals takes full management control of the portGPPL is planning to enhance its cargo handling capacity to 19.16 MT by 2009-10, including 13.70 MT of containerised cargo and 5.56 MT of bulk cargo. The port expansion programme is being taken up in three phases with a capital investment of Rs.1,167.30 crore which is through equity contribution of Rs.200 crore, internal accruals of Rs.289.04 crore and debt of Rs.596.26 crore. A.P.MollerMaersk has committed an investment of Rs.1,200 crore for port infrastructure development. Three quay cranes will be installed for container-handling facilities in addition to the existing three quay cranes to enhance the container handling capacity to 1 million TEUs. GPPL commenced capital dredging project in December 2005 which was completed by April, 2006 to increase the draft to 13.5 m to handle post-Panamax vessels.Maersk Sealand, the port operator, has started dedicated weekly service between Pipavav and Salalah (Oman) and Jebel Ali (United Arab Emirates), which has contributed to increase in container throughput at Pipavav port.5.9 Shareholders AgreementThe basic structure of the company (PRCL) is defined in the Shareholders Agreement (SHA). In addition, the other formalities like registration of the Company, Memorandum of Articles of Association, registration with various government revenue agencies like Sales Tax etc were also completed. The salient features of the SHA are given in the table in Annexure - B. 5.10 Project Implementation ProcessProject Development Phase: The gauge conversion of the SurendranagarRajula MG line was an approved work of the WR to be completed at railways cost. However, it was not a priority line and therefore annual fund allocations were very meagre. In normal course, if the WR were to complete the conversion, it could take anything between 10- 15 years. It was not coinciding with the port development plans and hence the need for GPPL to contribute to the gauge conversion costs.Construction Phase: The construction phase started on the date of signing the construction agreement on 13th March 2002. Till then WR had been carrying out preliminary works on the erstwhile sanctioned Railway Gauge Conversion Project which mainly related to the strengthening of bridges and structures for BG trains.The Construction Phase was divided into the following main activities: - Procurement of material by PRCL Transportation to sites by PRCL Testing and certification of specifications by WR Labour contracts for track laying and linking by WR Signalling and telecom works, station buildings by WR New bridges for the new line between Rajula-Pipavav by WR Consolidation of track, testing and safety certification by WR

The main items of procurement were the following: Rails Concrete sleepers Stone ballast Rail switches Rail turnouts and traps CMS rail crossings Glued joints Track fastenings Sleeper fastenings Signalling cablesIn addition to the above materials, tools and material handling and transportation equipments like motor trolleys, road trucks and rail grinding and drilling machines, etc. were also procured for reducing the man power requirement by mechanization of processes. A Tender Committee was set up with Directors of PRCL Board representing MOR, GPPL and the CEO of PRCL to finalise procurements. Orders were placed and PRCL Board was apprised of the progress periodically.Placement of Orders: A strategy of splitting the orders for the same item among several suppliers was adopted. Incentives were given to suppliers for supplies made before time. Since Bhilai Steel Plant and IR had initially regretted to supply rails, international bids were called for. This process took a long time as it involved inspection of the mills abroad