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A Report on

Need Of Public-Private Partnerships in India.

In partial fulfillment of the course

Public Administration

HUM C 351

Under the guidance of:

Mr. Umesh Dhyani

Prepared by:

Varun Chandra

2006B5A2545

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ACKNOWLEDGEMENTS

I would like to express my gratitude to Mr Umesh Dhyani for his sincere advice

and guidance which went a long way in completing this report successfully.

I would also like to thank my colleagues for their support and advice.

This report really turned out to be an enjoyable and learning experience.

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Table Of Contents

Acknowledgements

A) Introduction

B) Public Private Partnership: A Brief Review

1. Understanding PPP.

1. Govt. Of India's Definition

2. What is Meant By PPP?

3. Roles and Responsibilities

4. Fundamental Qualities Of A PPP Project

5. Salient Features Of PPP

6. Key Considerations in PPP's

7. Key Lessons From Global Experience With PPP

2. Various Forms and Formats of PPP.

1. New Project Formats

1. Design-Build

2. Design-Build-Maintain

3. Design-Build-Operate

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4. Design-Build-Operate-Maintain

5. Build-Own-Operate-Transfer

6. Build-Own-Operate

7. Design-Build-Finance-Operate

2. PPP's in Existing Services And Facilities

1. Service Contracts

2. Management Contract

3. Lease

4. Concession

5. Divestiture

C)Why PPP's?

1. Growing Popularity

2. Limitations Of Government Resources

3. Need For New Financing And Institutional Mechanisms

4. Benefits And Strengths

5. Access To Crucial Financing

6. Rigorous Risk Appraisal And Optimum Allocation

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D) Need Of PPP's In India

1. Relevance Of PPP's in India

1. Massive deficit In Infrastructure Services

1. Water

2. Power

3. Roads And Ports

2. Deficient Infrastructure as a Binding Constraint

3. Global Competitiveness

4. Inclusive Growth And Poverty Reduction

5. Growing Government Emphasis On Infrastructure Spending

6. Growing Emphasis On Private Sector Participation

2. The Case For Public-Private Partnerships

1. Bringing Development Forward

2. On-Time And On-Budget Delivery

3. Shifting Construction And Maintenance Risk To The Private Sector

4. Cost Savings

1. Construction Savings

2. Reduced life-cycle costs

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5. Strong Customer Service Orientation

6. Enabling The Public Sector To Focus On Outcomes And Core

Business

E)Conclusion

References

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A) INTRODUCTION

The new buzzword in development planning circles in the country is 'PublicPrivate Partnerships' (PPPs). The 11th Five Year Plan (2007-2012) document

mentions the term at least 249 times, advocating it in sectors ranging from water

management, forestry, education and health to protection of monuments and

sustenance of arts and crafts. However, its key role is seen in infrastructure.

Infrastructure bottlenecks are often presented as the major hurdles restricting the

booming Indian economy from achieving 8 per cent plus GDP growth rates. The

Preface to the 11th Five Year Plan document says that "Poor quality ofinfrastructure seriously limits India's growth potential in the medium term and the

Eleventh Plan outlines a comprehensive strategy for development of both rural

and urban infrastructure." The 11th Plan estimates that to maintain an average

annual growth rate of 9%, the investment in infrastructure would have to rise

from Rs.259,839 crores in 2007-08 to Rs.574,096 crores in 2011-12 at constant

2006-07 price, aggregating to Rs.2,011,521 crores over five years. In the terminal

year, this works out to be 9 per cent of the GDP, up from 5 per cent of the GDP in

2006-07.

This is a huge amount, and the Government claims that it can't mobilize this

without increased contributions from the private sector. Moreover, it argues that

its first priority is expenditure on social sector and livelihood support programmes

for the poor, "the strategy for infrastructure development has been designed to rely

as much as possible on private sector investment through various forms of PPPs."

The Government of India's Committee on Infrastructure which monitors PPPs

notes that 244 PPP projects are ongoing and another 76 are in the pipeline in the

country. These projects are in various sectors like roads, ports, power, water and

urban infrastructure.

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B) PPP: A BRIEF REVIEW

1.Understanding PPP

Government of Indias Definition :

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 upequity is owned and controlled by a private entity.

What is meant by PPP? :

While there is no single definition of PPPs, they broadly refer to long-term,

contractual partnerships between the public and private sector agencies,

specifically targeted towards financing, designing, implementing, and

operating infrastructure facilities and services that were traditionally

provided by the public sector. These collaborative ventures are built around

the expertise and capacity of the project partners and are based on a

contractual agreement, which ensures appropriate and mutually agreed

allocation of resources, risks, and returns. This approach of developing and

operating public utilities and infrastructure by the private sector under terms

and conditions agreeable to both the government and the private sector is

called PPP or P3 or private sector participation (PSP).

Roles and responsibilities.

PPPs do not mean reduced responsibility and accountability of the

government. They still remain public infrastructure projects committed to

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meeting the critical service needs of citizens. The government remains

accountable for service quality, price certainty, and cost-effectiveness (value

for money) of the partnership. Government remains actively involved

throughout the projects life cycle. Under the PPP format, the government

role gets redefined as one of facilitator and enabler, while the private partnerplays the role of financier, builder, and operator of the service or facility. PPPs

aim to combine the skills, expertise, and experience of both the public and

private sectors to deliver higher standard of services to customers or citizens.

The public sector contributes assurance in terms of stable governance,

citizens support, financing, and also assumes social, environmental, and

political risks. The private sector brings along operational efficiencies,

innovative technologies, managerial effectiveness, access to additional

finances, and construction and commercial risk sharing.

Fundamental qualities of a PPP project :

High priority, government-planned project:- The project must have emerged

from a government-led planning and prioritization process. The project

must be such that, regardless of the source of public or private capital, the

government would still want the project to be implemented quickly.

Genuine risk allocation:- Shared risk allocation is a principal feature of a

PPP project. The private sector must genuinely assume some risk.

Mutually valuable:- Value should be for both sides, which means

government should also genuinely accept some risks and not transfer the

entire risk to the private sector, and vice versa.

What are the salient features of a PPP?

Not all projects with private sector participation are PPP projects. Essentially,

PPPs are those ventures in which the resources required by the project in

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totality, along with the accompanying risks and rewards/returns, are shared

on the basis of a predetermined, agreed formula, which is formalized

through a contract. PPPs are different from privatization. While PPPs involve

private management of public service through a long-term contract between

an operator and a public authority, privatization involves outright sale of apublic service or facility to the private sector. A typical PPP example would

be a toll expressway project financed and constructed by a private developer.

A PPP project is essentially based on a significant opportunity for the private

sector to innovate in design, construction, service delivery, or use of an asset.

To be viable, PPPs need to have clearly defined outputs, avenues for

generating nongovernmental revenue, and sufficient capacity in the private

sector to successfully deliver project objectives.

What are the key considerations in PPPs?

PPPs often involve complex planning and sustained facilitation.

Infrastructure projects such as roads and bridges, water supply, sewerage and

drainage involve large investment, long gestation period, poor cost recovery,

and construction, social, and environmental risks. When infrastructure is

developed as PPPs, the process is often characterized by detailed risk and

cost appraisal, complex and long bidding procedures, difficult stakeholdermanagement, and long-drawn negotiations to financial closure. This means

that PPPs are critically dependent on sustained and explicit support of the

sponsoring government. To deal with these procedural complexities and

potential pitfalls of PPPs, governments need to be clear, committed, and

technically capable to handle the legal, regulatory, policy, and governance

issues.

Key Lessons From Global Experience with PPP:

Detailed policy for implementing PPP

Proper Planning by government

Project development by government

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Full Support by government

Proactive public communication

Transparent Bidding Process

Clear Policy On Unsolicited proposals

Defined Sources Of Revenue

Proper Allocation Of Risk

Adequate Protection For Lenders

2.What are the various PPP forms and formats?

In a PPP, the private partner could be a private company, a consortium, or a

non governmental organization (NGO). Typically, a PPP project involves a

public sector agency and a private sector consortium which comprises

contractors, maintenance companies, private investors, and consulting firms.

The consortium often forms a special company or a special purpose vehicle

(SPV). The SPV signs a contract with the government and with thesubcontractors to build the facility and then maintain it. The PPP is

operationalized through a contractual relationship between a public body

(the conceding authority) and a private company (the concessionaire). This

partnership could take many contractual forms, which progressively vary

with increasing risk, responsibility, and financing for the private sector.

However, the most common partnership options are :

New Projects:-

Design-Build (DB)

Under this model, the government contracts with a private partner to design

and build a facility in accordance with the requirements set by the

government. After completing the facility, the government assumes

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responsibility for operating and maintaining the facility. This method of

procurement is also referred to as Build-Transfer (BT)

Design-Build-Maintain (DBM)

This model is similar to Design-Build except that the private sector alsomaintains the facility. The public sector retains responsibility for operations.

Design-Build-Operate (DBO)

Under this model, the private sector designs and builds a facility. Once the

facility is completed, the title for the new facility is transferred to the public

sector, while the private sector operates the facility for a specified period.

This procurement model is also referred to as Build-Transfer-Operate (BTO)

Design-Build-Operate-Maintain (DBOM)

This model combines the responsibilities of design-build procurements with

the operations and maintenance of a facility for a specified period by a

private sector partner. At the end of that period, the operation of the facility

is transferred back to the public sector. This method of procurement is also

referred to as Build-Operate-Transfer (BOT).

Build-Own-Operate-Transfer (BOOT)

The government grants a franchise to a private partner to finance, design,

build and operate a facility for a specific period of time. Ownership of the

facility is transferred back to the public sector at the end of that period.

Build-Own-Operate (BOO)

The government grants the right to finance, design, build, operate and

maintain a project to a private entity, which retains ownership of the project.

The private entity is not required to transfer the facility back to the

government.

Design-Build-Finance-Operate/Maintain (DBFO, DBFM or DBFO/M)

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Under this model, the private sector designs, builds, finances, operates

and/or maintains a new facility under a long-term lease. At the end of the

lease term, the facility is transferred to the public sector. In some countries,

DBFO/M covers both BOO and BOOT.

Existing Services And Facilities:-

PPPs can also be used for existing services and facilities in addition to new

ones. Some of these models are described below.

Service Contract:

The government contracts with a private entity to provide services the

government previously performed.

Management Contract:

A management contract differs from a service contract in that the private

entity is responsible for all aspects of operations and maintenance of the

facility under contract.

Lease

The government grants a private entity a leasehold interest in an asset. The

private partner operates and maintains the asset in accordance with the

terms of the lease.

Concession

The government grants a private entity exclusive rights to provide operate

and maintain an asset over a long period of time in accordance with

performance requirements set forth by the government. The public sector

retains ownership of the original asset, while the private operator retainsownership over any improvements made during the concession period.

Divestiture

The government transfers an asset, either in part or in full, to the private

sector. Generally the government will include certain conditions with the sale

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of the asset to ensure that improvements are made and citizens continue to

be served.

The public sponsor of the PPP decides the degree of private participation required

for the particular project. This decision is usually based on the governments

objectives of undertaking the project, the degree of control it desires, and the

ability of the PPP consortium to deliver the required service. It is also influenced

by the provisions of the existing legal and regulatory framework, the structuring

ofthe project to attract private resources, and the potential to generate future cash

flows.

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maintaining and operating existing assets, inability to increase revenue and cut

costs and waste, and rising constraints on budgets and borrowing, do not allow

governments to make the required investments in upgrading or rehabilitating the

existing infrastructure or creating new infrastructure.

3. Need For New Financing

The political economy of infrastructure shortages, constrained public resources, and

rising pressure from citizens and civil society have combined to push governments and

policymakers to explore new ways of financing and managing these services.

Governments have been pushed to exploring new and innovative financing methods in

which private sector investment can be attracted through a mutually beneficialarrangement. Since neither the public sector nor the private sector can meet the

financial requirements for infrastructure in isolation, the PPP model has come to

represent a logical, viable, and necessary option for them to work together.

4.Benefits And Strengths

The emergence of PPPs is seen as a sustainable financing and institutionalmechanism with the potential of bridging the infrastructure gap. PPPs primarily

represent value for money in public procurement and efficient operation. Apart

from enabling private investment flows, PPPs also deliver efficiency gains and

enhanced impact of the investments. The efficient use of resources, availability of

modern technology, better project design and implementation, and improved

operations combine to deliver efficiency and effectiveness gains which are not

readily produced in a public sector project. PPP projects also lead to fasterimplementation, reduced life cycle costs, and optimal risk allocation. Private

management also increases accountability and increases performance and

maintenance of required service standards. Finally, PPPs result in improved

delivery of public services and promote public sector reforms.

PPP Strengths and Effectiveness:-

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Robust and Dynamic Structure

Government in an enabler role

Government ownership is high

Governance structure ensures consumer and public interests are safeguarded

Commercial interests are protected

Domicile risks to parties that are well equipped to deal with them

Transparent and well-conceived contracts

Documentation recognizes rights and responsibilities of all project-related

parties

Concerns Of All Stakeholders addressed

Involves Participation of a large number of institutions: governments,

politicians, banks, financial institutions, investors, contractors, consumers,

NGO's, etc.

5.Access To Crucial Financing

The foremost benefit of adopting the PPP route is the ability to access capital

funding from the private sector, considering that funding is getting increasingly

limited from public sector budgets. Thus, PPPs allow governments to overcome

their budgetary and borrowing constraints and raise finance for high-priority

public infrastructure projects. Essentially, governments are able to use private

finance through PPPs to build infrastructure projects that would previously have

been built by the public sector using public sector finance. PPP projects also

leverage available public capital by converting capital expenditure into flow-of-

service payments.

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6.Rigorous Risk Appraisal And Optimum Allocation

The high degree of economic extendability of public infrastructure, and the

commercial and socioeconomic risks involved in developing and operating them,

have made it difficult to appropriate returns from infrastructure investments. The

long gestation period of infrastructure projects also requires sustainable financial

and operational capacity. Therefore, there is increasing reluctance in both the

public and private sectors to absorb all the costs and assume all the risks of

building and operating these assets alone. Since the private sector assumes the risk

of nonperformance of assets and realizes its returns if the assets perform, the PPP

process involves a full-scale risk appraisal. This results in better cost estimation

and better investment decisions.

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D) NEED OF PPP'S IN INDIA

1.Relevance Of PPP's In India

Massive Deficit In Infrastructure Services:

Despite becoming the second fastest growing and the fourth largest1

economy of the world, India continues to face large gaps in the demand and

supply of essential social and economic infrastructure and services. Rapidly

growing economy, increased industrial activity, burgeoning population

pressure, and all-round economic and social development have led to greaterdemand for better quality and coverage of water and sanitation services,

sewerage and drainage systems, solid-waste management, roads and

seaports, and power supply. Increased demand has put the existing

infrastructure under tremendous pressure and far outstripped its supply.

Water:

While 90% of the urban population has access to potable water supply, the

actual availability of water in the cities is only 56 hours a day. Less than

60% of the households have sanitation and less than half have tap water

on their premises. About 40 million people are estimated to be living in

slums. Poor urban development is not only undermining the quality of life

for Indias urban citizens but also constraining local and national growth.

As much as 70% of irrigation and 80% of domestic water requirement is

met from groundwater, which has meant haphazard and unsustainable

use of aquifers and depleting water table.

Power:

Over 40% of Indias population, mostly rural, does not have access to

electricity. Despite the increase in installed generation capacity, shortages

in normal and peak energy demand have been around 8% and 12% on an

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average between 2000 and 2004. Indias average electricity consumption

of 359 kWh in 19962000 was far behind other countries such as China

(717 kWh) and Malaysia (2378 kWh). Less than 20% of Indias enormous

hydroelectric potential has been tapped. Transmission and distribution

losses in India remain very high, at around 2830%, as compared to otherdeveloping countries, where they are less than 10%.

Roads And Ports:

Indias road network continues to suffer from low capacity, low coverage,

and low quality. 40% of villages do not have access to all-weather roads.

Only 12% of the national highways are four-laned. The traffic situation in

the cities has worsened due to a massive increase in personal vehicles,

inadequate city roads, and poor quality of public transport. Airport and

seaport infrastructure and train corridors are strained under capacity

constraints.

Deficient Infrastructure As A Binding Constraint

The infrastructure shortages are proving to be the leading binding constraint

in sustaining, deepening, and expanding Indias economic growth and

competitiveness.2 This has also been emphasized in the mid-term appraisalof the Tenth Five Year Plan. It is widely believed that lack of good quality

infrastructure is costing India 12% growth in gross domestic product (GDP)

every year. Good quality infrastructure has been the main enabler of higher

level of economic growth in developed as well as developing countries like

USA, Russia, Malaysia, and China. The Expert Group on Commercialization

of Infrastructure estimated the loss due to poor roads and congestion at

around Rs 200 billion per annum. The Economic Survey of India, 2005-06,estimates that power shortages of 12% at peak levels and 8% at nonpeak

levels are equivalent to around $3.4 billion of forgone generation capacity or

an approximate GDP loss of around $68 billion. The annual cost of

environmental degradation, on account of lack of sewerage and solid-waste

management systems and surface water harvesting is 4.5% of GDP. Water

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pollution accounts for 6% of the economic cost of environmental

degradation.

Global Competitiveness

Indias global competitiveness remains constrained and is adversely affectedby lack of infrastructure, which is critical for improved productivity across all

sectors of the economy. Poor infrastructure is also a major barrier to foreign

direct investment (FDI). Recent surveys have shown that Indias poor

infrastructure (road network, ports, distribution networks, and in particular

power supply) is a cause for concern and a major barrier to investment.

Upgradation of transport (roads, railways, airports, and ports), power, and

urban infrastructure is therefore seen as critical for sustaining Indias

economic growth, along with improved quality of life, increase in

employment opportunities, and progress towards the elimination of poverty.

Inclusive Growth And Poverty Reduction

Lack of infrastructure is preventing the sectoral, regional, and socioeconomic

broadening of the economy and its benefits, and is affecting inclusive growth

in India. The benefits of accelerated growth of the last decade have not been

shared by large sections of the population which are labor dependent, lowskilled, rural based, and working in agriculture and manufacturing sectors.

Infrastructure shortages have slowed the growth of manufacturing industries

and agriculture, which are the labor-absorbing markets for the low skilled.

Poverty levels remain significant, with about one-fourth of the population

living in poverty. Infrastructure is now seen as the necessary condition for

growth and poverty alleviation. Studies by the ADB and others have

confirmed a strong linkage between infrastructure investments, economicgrowth, and reduction of poverty. Rural roads, rural electrification and

irrigation networks, power grids, and national highways have the potential

to link poor rural producers to their power sources and markets in towns,

cities, and ports. Greater investments in infrastructure are the answer.

Growing Government Emphasis on infrastructure Spending

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Growing recognition of the prevailing infrastructure deficit in the country

and its impeding impact on sustaining economic growth as well as poverty

reduction has made development of social and economic infrastructure

among the highest priorities of the Government of India (GOI). The GOI has

recognized that with better infrastructure Indias growth can be higher, withthe benefits reaching a much larger section of the population. It has

increased its spending on infrastructure through a series of national

programs such as the National Highway Development Program (NHDP),

Bharat Nirman, Providing Urban Services in Rural Areas (PURA), Jawaharlal

Nehru National Urban Renewal Mission (JNNURM), the Prime Ministers

Rural Roads Program, National Rail Vikas Yojana, National Maritime

Development Program (NMDP), airport expansion programs, etc. The

government acknowledges that investment in infrastructure will have to be

at the same rate as the economic growth that is being targeted. In other

words, gross capital formation in infrastructure (GCFI), which has remained

around 4% of GDP during 1997-98 up to 2003-4, needs to be increased

progressively and rapidly.

However, estimated investment requirements far exceed government

resources. The massive gap between the existing infrastructure investment

and the projected requirement in India has come into sharper focus. The

Tenth Five Year Plan projection on the total investment required for

infrastructure (at 2001-2 prices) is over Rs 11,00,000 crore (US$250 billion).

The India Infrastructure Report, 1996, had projected the need for increasing

infrastructure investment from under 5% to about 8% of GDP by 2005-6. In

1999, public investment in infrastructure was 2.8% of GDP while private

investment was merely 0.9% of GDP. At the end of the 1990s, however, actual

investment (public and private) in infrastructure remained at under 4% ofGDP per annum, according to the World Bank. In other words, investment in

road, rail, air, and water transport, power generation, transmission and

distribution, telecommunication, water supply, irrigation, and water storage

will need to increase from 4.6% of GDP to 78% during the Eleventh Plan.

Private sector estimates for investment requirements are much higher.

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According to one estimate,4 India needs to increase infrastructure spending

gradually to US$100 billion per annum (8% of GDP) by 2010, to realize

sustained growth of 8 9%. Some other agencies estimate the investment

requirement over the next five years to be around $330 billion.

Growing Emphasis On Private Sector Participation

These projected investment requirements can not be met from governments

budgetary resources. The scope for making improvements is limited by the

state of public finances. The combined deficit of the Union and state

governments is around 10% of GDP. Governments can also not borrow

arbitrarily, since their borrowing has been capped through the Fiscal

Responsibility and Budgetary Management Act. The Approach Paper to the

Eleventh Plan states that One has to reach out to the private sector, and

private savings, and to the other mechanisms available in the market today

to raise funds (Planning Commission, June 2006, An Approach to the

Eleventh Five Year Plan). The National Development Council (NDC) has

passed a resolution which mentions that increased private participation has

now become a necessity to mobilize the resources needed for infrastructure

expansion and upgradation.

Given the large resource requirements and the budgetary and borrowing

constraints, GOI has been encouraging private sector investment and

participation in all sectors of infrastructure. It has recognized that while

public investment in infrastructure would continue to increase, private

participation needs to expand significantly to address the existing deficit in

infrastructure services.

2. Case For PPP's

Public-private partnerships are unlikely to entirely replace traditional

infrastructure financing and development any time soon, if ever. PPPs are just one

tool among many. Governments typically have a number of objectives when

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building infrastructure: getting good value for money, timely delivery, meeting

public needs and so on. The procurement model that best addresses these

objectives is the one that should be chosen in each individual circumstance.

PPPs have shown their potential as an important way to meet these objectives and

address infrastructure shortages. For example, they provide new sources of capital

for public infrastructure projects. Private equity, pension funds and other sources

of private financing must still be repaid, but shifting the responsibility for

arranging the financing to the private partner can help deliver infrastructure if a

public entity is unwilling or unable to shoulder the full debt or the associated risk

of the project at a certain point in time.

While PPPs hold significant benefits as an infrastructure delivery tool, the model is

not without its critics. Some of the criticisms are well-grounded and merit careful

consideration when evaluating the relative pros and cons of delivery method

alternatives. Others, however, are driven by a misunderstanding of PPPs or are

based on outdated or incomplete information. For those who would like a fuller

understanding of these issues, the most common objections to PPPs are taken up

in the appendix. PPPs also present formidable challenges, both at earlier and later

stages of market development. Addressing these challenges and maximizing the

benefits of PPPs require governments to operate in a new way.

Six additional benefits help to explain the strong growth of PPPs.

Bringing Construction Forward

Conventional procurements typically require the public sector to provide

significant upfront capital even though the benefits of the project may be

delayed or uncertain. Most forms of PPP enable the public sector to spread

the publics cost of infrastructure investment over the lifetime of the asset,much as homeowners do when they take out home mortgages. As a result,

infrastructure projects can be brought forward by years, allowing users to

benefit from the investment much sooner than is typical under pay-as-you-go

financing. For example, the creative financing approach used for the Virginia

Pocahontas Parkway PPP project eliminated what might have been a 15-year

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delay in construction while financing was assembled.22 In many cases, the

private contractor also has a strong incentive to complete the project as

quickly as possible because it needs the stream of revenues to repay the

capital costs.

On-Time And On-Budget Delivery

With payments better aligned to the delivery of project objectives, public-

private partnerships also have a solid track record of completing construction

on time or even ahead of schedule. In Canada, for example, Terminal 3 at the

Toronto Pearson Airport was completed 18 months ahead of schedule under

a PPP contract.

The United Kingdoms National Audit Office reported in 2003 that 73 percentof non-PFI construction projects were over budget and 70 percent were

delivered late. In contrast, only 22 percent of the PFI projects came in over

budget and 24 percent were late.

Shifting Construction And Maintenance Risk to The Private Sector

Politics and budget pressures play havoc with proper maintenance of existing

infrastructure. There always seems to be another, higher priority: some

program or crisis requires more urgent funding than rehabilitating an aging

road or school. Or a budget deficit may push funding for infrastructure

maintenance further down the priority list. Or an upcoming election may

lead politicians to delay funding for rehabilitating a wastewater treatment

plant to make way for a sexier program or project. Moreover, the effect of

reducing spending on maintenance is rarely immediate; politicians who opt

to cut back such spending may have left office long before society begins to

complain loudly about crumbling roadbeds or overburdened electricitynetworks.

The result: maintenance is often deferred. In some countries, only 10 percent

of the road network is being maintained. California currently carries

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approximately $12.5 billion in deferred transportation maintenance at the

state level and $10.5 billion locally.

Such deferred maintenance imposes huge costs in the long runfor

example, early intervention costs about 20 percent less than maintenance

postponed to the latter quarter of a roads life. Continual deferral results

more safety problems in a shorter infrastructure lifespan, reduced quality of

services, and generally worse financial outcomes.

Well-designed PPPs can ameliorate these problems by transferring certain construction

and maintenance risks to the private partner. Among the risks that can be assumed by

the private partner are:

Design risk

Meeting required standards of delivery

Incurring excessive cost overruns during construction

Completing the facility on time

Underlying costs to the service delivery operator, and the future costs

associated with the asset

Industrial action against or physical damage to the asset

Certain market risks associated with the project

The ability to shift some or all of these risks to the private sector is an

important benefit of PPPs. Payment structures require the assets be available

and properly maintained over time. The public sector thereby gains greater

confidence in the level of its spending commitments over the lifetime of the

asset. Greater cost transparency, in turn, supports more effective planningand helps to avoid cuts in other service areas as a result of unexpected

infrastructure costs.

Cost Savings

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Cost savings from PPPs typically materialize in several different forms: lower

construction costs, reduced life-cycle maintenance costs, and lower costs of

associated risks.

Construction savings: Experience from several countries has demonstrated

that PPPs cost comparatively less during the construction phase of the

contract. The savings typically result from innovation in design and better

asset requirements. A report commissioned by the UK Treasury found in

2000 that among a sample of 29 PFI projects for which public sector

comparisons were available, the average savings were close to 17 percent.25

In the United States, the costs of completing construction for segments of the

Denver E-470 toll road that used a PPP approach came in $189 million below

the original cost estimate of $597 million.26 In Australia, eight Partnerships

Victoria projects were on average 9 percent less expensive than under the

typical procurement process.

On the other hand, the capital costs can also be higher in certain cases as the

private sector tends to take a longer term view of all life-cycle costs rather

than a narrow view of the lowest individual costs.

Reduced life-cycle costs: In traditional contracting, the private sectors roleis typically limited to immediate construction. This can create a perverse

incentive to economize on elements of construction today even though

maintenance costs might be higher in the long run. Shifting long-term

operation and maintenance responsibilities to the private sector creates a

stronger incentive to ensure long-term construction quality because the firm

will be responsible for maintenance costs many years down the road. This

creates a strong incentive to do preventative maintenance and reduces the

risk of future fluctuations in operations costs. This way the public benefits

from this life-cycle efficiency. A UK study of benefits flowing from operating

PFI projects found that, on average, the government expects to achieve a

saving of 17 percent over the whole life cost of services by using the PPP

approach, with savings as high as 45 percent in one of the cases.

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Strong Customer Service Orientation

Private sector infrastructure providers, often relying on user fees from

customers for revenue, have a strong incentive to focus on providing superior

customer service. Moreover, as the asset is no longer managed by the public

sector, the public sector is able to concentrate more on ensuring the provider

maintains certain customer service levels.

In the case of accommodation PPPs, such as schools or defense facilities,

customer satisfaction metrics can be built into the contract to ensure a strong

customer orientation. In the United Kingdom, more than three-quarters of

end users reported their public-private partnership projects were performing

as expected or better than expected; one-quarter said that the facilities were

far surpassing expectations.

Innovation in customer service delivery helps to account for such high

satisfaction levels. Motorists using the Citylink private tollway in Melbourne,

Australia, for example, receive alerts when their account is low and can top

up their accounts from their mobile phone. A mobile customer service unit

traverses the city around the clock, visiting customers at work and at home,

helping to install tags and answer account questions. Dissatisfied customers

can file complaints with the City Link Ombudsman, an independent dispute

resolution service that investigates complaints and proposes ways to resolve

the issues. The private operator has also introduced a customer charter and

customer performance scorecard; by measuring City Link's performance

against charter targets and making the results public, the process has

increased transparency and accountability.

In the United States, the owners of the 91 express lanes in southern

California hold focus groups to learn more about how to please customers.

Enabling The Public Sector To Focus on Outcomes and Core Business

When they are properly structured, public-private partnerships enable

governments to focus on outcomes instead of inputs. Governments can focus

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leadership attention on the outcome based public value they are trying to

create. The destination, not the path, becomes the organizing theme around

which the project is built. School PPPs provide a powerful example of how

partnerships enable school officials to shift their focus to the core business of

learning. When school officials at the Montaigne secondary school near TheHague in the Netherlands needed additional school capacity, they could have

just chosen the usual route of getting bids from several contractors to build a

school. Instead, they concluded that what they really wanted to buy was a

quality learning environment and not just a physical assetin this case a

school building. To that end, they entered a PPP with a consortium of private

firms that provide cleaning, care taking, security, grounds maintenance and

information technology, leaving school teachers and officials free to spend all

their time on the core mission, teaching children.

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E) CONCLUSION

The infrastructure challenge before governments today may seem overwhelming.

The historical boom-and-bust spending cycle has created huge infrastructure

deficits around the world, the consequences of which are significant for bothcitizens who have to deal with decrepit facilities or long delays before new

infrastructure is delivered, and governments fighting to stay competitive in todays

flat world. Slowly governments are realizing that inaction is simply not an option.

PPPs alone are not a panacea. Rather, they are one tool governments have at their

disposal for facilitating infrastructure deliverya tool that requires careful

application. By making the best use of the full range of delivery models that are

available and continuing to innovatelearning from failure instead of retreating

from it the public sector can maximize the likelihood of meeting its

infrastructure objectives and take PPPs to the next stage of their development. This

development, in turn, will enable this relatively new delivery model to play a far

larger role in closing the infrastructure gaps bedeviling governments across the

world.

Ever since India embarked on its first phase of Reform in early 1990s,

infrastructure development has remained the top priority of the Government.

Unfortunately the infrastructure growth has not been commensurate with the

demands made on it by an economy that was growing at more than 6% p.a. This

period also witnessed a consistent move towards fiscal discipline that further

curtailed room for accommodating increasing government funding of major

infrastructure projects. The pressures of globalization further accentuate the

infrastructure gap in the country.

With the economy now clocking a growth rate of over 8%, it is estimated that US$320 billion would be required by the infrastructure sectors put together over the

next 5 years. A significant percentage of this investment should come from the

private sector. Public Private Partnerships (PPP) present the most attractive option

of meeting the above targets, not only in providing resources to an extent but also

in upgrading the standards of delivery through greater efficiency.

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Government has attempted to bring out several innovative schemes aimed at

leveraging its position to the fullest given its various commitments, which at times

could seem mutually conflicting. Whereas to attract the private sector

commercially viable projects should be on offer and to inculcate the discipline of

user pay principle provision of these services should be based on payment oftariff, Government must fulfill its commitment to inclusive growth which makes it

obligatory to fix the tariffs based on the capacity of the common man to pay. Due

diligence is also essential given the substantial contingent liability that could

devolve on the State in such projects.

While encouraging PPPs, the govt. clearly perceives broadly four constraints:

a) Weakness in enabling policy and regulatory framework. Substantial work need

to be done in making sector policies and regulations PPP friendly. A large number

of these projects are in the States and without the active participation of the States

it would not be possible to achieve satisfactory results. the long-term equity and

debt financing needed by infrastructure projects.

b) The market presently does not have adequate instruments and capacity to meet

c) There is also a lack of shelf of credible, bankable infrastructure projects, which

could be offered for financing to the private sector. Some initiatives have beentaken both at the central as well as the states level to develop PPP projects these

tend to be isolated cases and have demonstrated a marked lack of consistency.

d) There is also lack of capacity in public institutions and officials to manage the

PPP process. Since these projects involve long term contracts covering the life

cycle of the infrastructure asset being created, it is necessary to manage this

process to maximize returns to all the stakeholders.

Government has taken measures to create enabling framework for PPPs by

addressing issues relating to policy and regulatory environment. Progressively

more sectors have been opened to private and foreign investment, levy of user

charges is being promoted, regulatory institutions are being set up and

strengthened, fiscal incentives are given to infrastructure projects, standardized

contractual documents including the Model Concession Agreement are being

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notified, approval mechanism for PPPs in the Central sector had been streamlined

through setting up of PPPAC and a website exclusively devoted to PPPs has been

launched to serve as a virtual market place for PPP projects. To address financing

needs of these projects, various steps have been taken like setting up of India

Infrastructure Finance Company and launching of a new Scheme to meet ViabilityGap Funding (VGF) of PPP projects. Setting up of infrastructure funds are also

being encouraged and multilateral agencies such as ADB have been permitted to

raise Rupee bonds and carry out currency swaps to provide long term debt to PPP

projects. Recently, Citigroup and IDFC have joined together to launch a US$ 2

billion infrastructure equity fund and I am assured that it would be fully

subscribed before 31 March 2007. An infrastructure debt Fund of US$ 3 billion is

also under consideration of the same combine. Blackstone has also shown interest

in putting together another large infrastructure Fund for India and are in

discussion with the officials of the Ministry of Finance. Merchant Bankers and

multilateral agencies are also being encouraged to provide credit enhancement

services for raising cheaper money from market, ECB norms have been eased and

the overall limit raised to $22 billion annually. Indian FIs are also being

encouraged to develop an appetite for financing instruments such as take-out

finance. To meet the capacity building requirements in the sector, Technical

Assistance from World Bank and ADB has been received and necessary measuresare being taken to implement various schemes like assisting the State

Governments and Central Ministries in hiring consultants, preparation of a manual

on PPPs to guide the users and undertake training programmes for public officials.

The opportunities for private investment in infrastructure projects are immense. As

the reach of PPP increases across the sectors, the capacity in the private sector to

manage these projects over their entire life cycle of 20 to 30 years would also have

to be enhanced. Government of India now permits FDI in most infrastructure

sectors to the extent of 100%. It is time that the foreign strategic investors begin to

take greater interest in project development and management activity in India. I

am happy to note that in this international conference organized by the World

Bank in collaboration with the Finance Ministry, several major private sector

players from abroad are also taking part. They would, in addition to sharing with

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the participants the best practices from around the world they will also take back

with them a sense of what is happening in India and the excitement of an

economy on the upswing.

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F) REFERENCES

Department Of Economic Affairs (DEA)

Ministry Of Finance GOI

Asian Development Bank (ADB)

Deloitte Research Study

The World Bank

International Finance Corporation

PPIAF- Public Private Infrastructure Advisory Facility

Price Waterhouse Cooper ( PWC) Research

www.infrastructure.gov.in

www.pppinindia.com

Department Of Planning and Planning Commission
http://www.infrastructure.gov.in/http://www.pppinindia.com/http://www.pppinindia.com/http://www.infrastructure.gov.in/

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